Category Archives: 161(1)

Look Back Renunciations for Flow-Through Shares

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Look Back Renunciations for Flow-Through Shares

Tusk Exploration Ltd v The Queen, 2016 TCC 238

At issue was whether a corporation making a look-back renunciation under subsection 66(12.66) has to pay Part XII.6 tax on the amount where the renunciations are invalid.

FACTS

The Appellant, a mineral exploration CCPC, issued flow-through shares to investors.  It renounces Canadian Exploration Expenses to these flow-through shareholders, many on a look-back basis pursuant to subsection 66(12.66) of the Income Tax Act.

The corporation and shareholder did not deal with each other at arm’s length in this case.

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ANALYSIS

Flow-through shares assist with the financing of exploration activities by allowing investors to claim tax deductions for expenses incurred by the corporation.  The ITA imposes a number of conditions on the issuance of flow-through shares (s 66(15)) and renunciation  of Canadian exploration expenses (s 66(12.6)).  Expenses that are renounced are deemed to have been incurred by the shareholder and not to have been incurred by the corporation (s 66(12.61). Usually, only expenses incurred on the effective date of the renunciation may be renounced.

ITA subsection 66(12.66) allows shareholders to take a deduction in the year PRIOR to the expenses being incurred, resulting in the corporation being deemed to have incurred the expenses on the last day of the year in which they are claimed IF all the statutory conditions are met.  One condition is that the corporation and shareholder deal with each other at arm’s length (ITA para 66(12.66)(d)).  The other conditions include that the flow-through share agreement be made in the year prior to the expenses being incurred, the consideration be paid before the end of the preceding year, the expenses qualifying as CEE or CDEs, and the renunciation be made in January, February, or March.

A corporation making a look-back renunciation must file a return and pay Part XII.6 tax (ITA section 211.91).  The tax is payable where the corporation has “purported to renounce” expenses. There is an additional tax of 10% on amounts purportedly renounced but not incurred by the end of the calendar year of renunciation.

The Court noted that subsection 66(12.66) is a deeming provision that operates when the listed conditions are met.  The tax under section 211.19 applies on amounts a corporation has “purported to renounce” (para 40).  The phrase has to be interpreted in a textual, contextual, and purposive manner (Canada Trustco Mortgage Co v The Queen, 2005 SCC 54 at paragraph 10, Placer Dome Canada Ltd v Ontario (Minister of Finance), 2006 SCC 20 at paragraphs 21-22).

The Court held that “purport” in this context must be taken to refer to the amount claimed to be renounced or intended to be renounced, whether or not the claim is true or not (para 42). This is supported by the french words that translate to “supposedly renounced” or “apparently renounced” (para 42).  Requiring effective renunciation would render the word used by Parliament redundant, making such an interpretation counter to the rule against tautology – Canada (Canadian Human Rights Commission) v Canada (Attorney General), 2011 SCC 53 at paragraph 38.

This interpretation is also supported by other provisions that contrast “purported” renunciations with amounts the corporation “can renounce” (paras 48-49), as well as those dealing with excessive renunciations (para 50).  Additionally, the purpose of Part XII.6 tax is to compensate the fisc for the acceleration of the deduction (para 53).

The Court recognized that this may be punitive to non-arm’s length shareholders, but this outcome in intentional in the ITA. No interest relief would be available to such shareholders under subsection 161(6.2).

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Timing of Arrears Interest in GAAR Assessments – Sas Ansari

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Timing of Arrears Interest in GAAR Assessments 

Quinco Financial Inc v The Queen, 2016 TCC 190

This was a Rule 58 Application under the Tax Court of Canada Rules (General Procedure).  The question to be determined was whether, where the Minister relies on a GAAR assessment to deny capital losses, does arrears interest payable under subsection 161(1) of the Income Tax Act accrue in respect to any period after the taxpayer’s balance due date and before the issuance of the reassessment?

In other words, the Court was asked to determine when arrears interest would start to accrue where GAAR is used to recharacterize the transaction.

ANALYSIS

Although GAAR is different than the provisions in the Income Tax Act, it is still a part of the Act and part of the other provisions of the Act.  A court must "to the extent possible, contemporaneously give effect to both the GAAR and the other provisions of the ... [Act] ... relevant to a particular transaction" (para 30) - Canada Trustco.  The ITA must be interpreted as a functional, coherent whole with respect to all statutory schemes engaged by the transaction.

The TCC held that "an assessment under GAAR [...] is not an assessment divorced from the other provisions of the Act [, rather,] GAAR is entirely dependent upon a textual, contextual and purposive analysis of the object, spirit or purpose of the very provisions which allegedly confer the tax benefit" (para 31).  The Minister nullifies the tax benefit through employing other non-GAAR provisions of the ITA, giving rise to tax consequences under those other provisions at the time of the transaction (para 33).

When engaging in tax planning, the taxpayer's advisors must weight the consequences of a GAAR reassessment like any other assessment (para 39).  A taxpayer possibly subject to GAAR could have filed by deducting the future-impugned capital loss, but calculated tax payable by applying GAAR (para 41).  If this was done, then upon a GAAR assessment interest would not accrue.  All taxpayers who are directly subject to GAAR assessments are required to consider and apply GAAR (para 42).  The taxpayer does not need to ask the Minister's permission to apply GAAR - STB Holdings Ltd.

Subsection 161(1) is the default provision governing interest accrual for all tax liability arising under an assessment or reassessment under the ITA.  The Court concluded that on a plain reading of the arrears interest provisions, a taxpayer is liable to arrears interest beginning on the day after the balance due date on a GAAR assessment (para 45).  This is because "tax payable" is fixed by an assessment or reassessment, subject to an appeal - ITA s 248(1) "tax payable".  Where taxes payable exceed the taxed paid before the balance due date, on the day after the balance due date, arrears interest applies.  A GAAR assessment fixes or adds to the tax payable of a taxpayer, causing (where there has not been a payment in anticipation of the denial of the tax benefit) the tax payable to exceed the taxes paid.

The Court found support for the imposition of arrears interest from the balance due date in the GAAR itself.  GAAR defines "tax benefit" to include any reduction of other amounts that would be payable under the ITA.  Were interest not charged until a GAAR assessment was issued, tax deferral is created during the period between the balance due date and the date of the GAAR assessment (para 53).  GAAR is meant to deny tax benefits not allow them.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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