Category Archives: Income Inclusion

Taxpayer Reliance on CRA Authorization

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Taxpayer Reliance on CRA Authorization

Szymczyk v The Queen, 2014 TCC 380

At issue was whether the CRA could retroactively reassess taxpayers on a different basis than an authorization issued by the tax authority, or whether the CRA was limited to adopting an approach different than a past authorization only on a going-forward basis.

The court held that where the law or the facts had materially changed, the Crown is not estopped from retrospectively assessing contrary to an authorization.

FACTS

The Appellant was a senior executive at General Motors Canada (“GM”) and has vehicles assigned to him.  This is part of GM’s product evaluation program.  This resulted in income inclusions for the automobile benefit consisting of a standby charge and operating expense benefits.

GM calculated the appellant’s benefit on the basis of a Taxation Authorization by Revenue Canada, permitting the benefit to be calculated using simplified method.  Approximately 28 years after the authorization, the CRA conducted the first in-depth audit of these benefits, concluding that the authorization was no longer valid due to changes in the circumstances.

The Appellant and others were reassessed, and the income inclusion for automobile benefits were increased.

ANALYSIS

The TCC began by reviewing the applicable ITA provisions.

The Standby Charge is imposed by paragraph 6(1)(e) and subsection 6(2), being calculated as a percentage of the cost of the automobile to the employer.  There is a reduction where the vehicle is used primarily for employment

The Operating Expense Benefit is imposed by paragraph 6(1)(k), and results in an income inclusion at a rate of $0.24 per personal kilometre (Regulations 7305.1) driven where the employer pays all or part of the operating expense of an automobile. But, where the automobile is primarily for employment, the ITA provides for an alternative calculation equal to to 1/2 of the Standby Charge.

The Appellants argued that the Crown is estopped from assessing contrary to the authorization.  There are two branched of estopple, as descried in Ryan v Moore , 2005 SCC 38, [emphasis added]:

4                 Estoppel by convention operates where the parties have agreed that certain facts are deemed to be true and to form the basis of the transaction into which they are about to enter (G.H.L. Fridman, The Law of Contract in Canada (4th ed. 1999), at p. 140, note 302).  If they have acted upon the agreed assumption, then, as regards that transaction, each is estopped against the other from questioning the truth of the statement of facts so assumed if it would be unjust to allow one to go back on it (G.S. Bower, The Law Relating to Estoppel by Representation (4th ed. 2004), at pp.7-8).

5                 Estoppel by representation requires a positive representation made by the party whom it is sought to bind, with the intention that it shall be acted on by the party with whom he or she is dealing, the latter having so acted upon it as to make it inequitable that the party making the representation should be permitted to dispute its truth, or do anything inconsistent with it (Page v. Austin (1884), 10 S.C.R. 132, at p. 164).

The court noted that estoppel cannot operate where the approval given by the CRA is contrary to law: MNR v Inland Industries Ltd., [1974] SCR 514.  Latitude should be given to the approval unless it is clearly not supportable by the law.

The authorization was NOT contrary to law when it was issued but rather was a reasonable assessment of the benefits to the employees given the difficulty in separating the personal and business elements. An authorization is valid unless there are material changes in the law or facts. Here, both the law and the facts materially changed, such that the MNR is not estopped from issuing assessments contrary to the authorization.

In 1993, paragraph 6(1)(k) was added to provide a specific rule for operating expenses, and this invalidated the authorization.   In addition, the program changes do what the vehicle turnover was now every three months or 12,000 km, compared to what is was (3 months or 5000 km).

However, the court noted that the Crown’s assumptions did not support the amounts assessed for standby charge inclusion.  The appellants were assigned four automobiles during the relevant period, and the ITA required that personal use be calculated separately for each period, but there was no assumption made as to personal use for each period.  Thus, the burden of proof shifts back to the Crown: The Queen v Loewen, 2004 FCA 146.

-Sas Ansari, JD LLM PhD (exp)

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Amount on Account of Income or Capital? – Henco Industries

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Amount on Account of Income or Capital?

Henco Industries Ltd v The Queen, 2014 TCC 192

At issue was whether a payment of over $15M by the Ontario Government to Henco was fully taxable as Income or non-taxable as a Capital receipt that was not an eligible capital amount.  The character of a few smaller payments were also at issue.

[A very lengthy decision that addressed a number of questions in depth, including: capital vs income; ECE vs other capital expenditure; being in business vs earning income from a business].

FACTS

Henco was in the business of land development and owned three parcels of land in Caledonia, ON.  After having done significant work and entering into contract in pursuit of developing these properties, First Nations groups began blockades and occupations of the first property to be developed.  Injunctions were issued by the Ontario Courts but the Police did not make any arrests or enforce the injunctions.

The Ontario Government made a $650K payment to Henco, without requiring anything particular to be done or seeking anything in return from Henco. The Ontario Government and Henco, after negotiations, entered into several agreements with respect to the various assets of Henco.

ANALYSIS

The MNR argued that the $650K payment fell squarely within ITA 12(1)(x) and thus included in income as an amount that is a refund, reimbursement, contribution or allowance, or as assistance from government.  Henco, relying on R v Cranswick, [1982] 1 F.C. 813 (F.C.A.)., argued that the amount is a windfall.  The court stated that in order for an amount to fall within paragraph 12(1)(x):

  • it must be received by the taxpayer in the year “in the course of earning income from a business or property”
  • must be from a government
  • must reasonably be considered to be received as assistance in respect of an outlay or expense; and
  • must NOT be for the acquisition of the taxpayer’s business or property.

The Court pointed out that a taxpayer may be in business, but not be in the course of earning income from a business (as 12(1)(x) requires) and the focus is on the time period when the payment was received (para 121).   In this case, when the payment was received, Henco was still in business but not in the course of earning income from that business as it could not access the property, and therefore was cripples and sterilized, rather it was trying to preserve the business (para 125).  Additionally, given that there is no evidence of what the payment was received for or used for, and no requirement for accounting for the payment, it cannot be said that the amount was received “as assistance in respect of an outlay or expense” (para 126).

This amount was a windfall and not taxable.

The Court then turned to the question of Capital vs Income on the amounts paid for one property, and referred to the decision in Canada Safeway Ltd v R, 2008 FCA 24, where the relevant factors were laid out:

  • the boundary between income and capital gains is not easy to draw;
  • regard will have to be had to the circumstances and inferences will have to be drawn;
  • A primary or secondary intention to sell the property must have been present at the time of purchase so as to constitute an adventure in the nature of trade;
  • The intention for resale must be an operating and important consideration in the purchase of the property;

The evidence here did not favour one intention over the other (income over capital), and the taxpayer did not demolish the MNR’s assumptions – the court was bound to find that the amount in relation to this one property was on income account.

The second issue, the income or capital nature of the $15M payment was addressed last.  The MNR relied on the agreement that stated that the amount was for the sale of land.  The Appellant argued that the agreement did not reflect the true nature of the deal between them, and the payment was for the vaporization of Henco’s business.

Here, the agreement refereed not to consideration but compensation, and the quantum is determined by reference to a purchased asset (the court held that this was merely a mechanism to determine compensation for something difficult to value) (para 151).  The agreement refers to various assets, including intangibles,  and to a release of liability (which refers to the full $15M amount as consideration for the release) (paras 154-55).  Additionally there were other aspects that point to something more: requirement to cease business, set aside an injunction, and no valuations of assets were done.  The court went through a long list of factors (paras 159-60) that showed that the agreement did not reflect the true nature of the deal, and that the payment was not made for the land.

The court, though not required to, asked whether section 23 would apply (ceasing to carry on business), and stated that prior to the payment, by Ontario’s actions, the taxpayer did not have a business and was not in business.  The land was neither an investment not inventory as it was useless and worthless (para 167).

The payment was therefore not for land but for extinction of the right to sue Ontario – it could only be on Eligible Capital Amount.  However, because of the election to have the mirroring rules in 14(5) apply, the payment is not on account of ECP, but a non-taxable nothing.   Referring to the decision in T Eaton Co v R, 99 D.T.C. 5178 (FCA)., where it was said that payment for damage to income producing assets is on income account while payment for destruction of the income producing asset is on capital account, the payment was held to be on capital account. See also Pe Ben Industries Co. v R., [1988] 2 C.T.C. 120 (F.C.T.D.).; BP Canada Energy Resources Co. v. R., 2002 DTC 2110; and River Hills Ranch Ltd. v R., 2013 TCC 248.

In Toronto Refiners & Smelters Ltd. v R, 2002 FCA 476, four factors were set out to determine if an amount is an ECE:

  • Was the amount received as a result of a disposition?
  • Was the amount received in respect of the business carried on by the recipient of the payment?
  • What consideration did the recipient give for the payment?
  • If the recipient had made the payment for the same consideration that it had given to the payor (the mirror-imaging test), would that have been an eligible capital expenditure of the recipient?

Here, there was a disposition in respect of a business carried on, and the consideration was for goodwill (what is left over after amounts have been allocated to identifiable assets) (para 194-97).  Thus the amount was for ECE, but was non-taxable because of the mirror-imaging rule in 14(5).

– Sas Ansari, JD LLM PhD (exp)

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