2008, simpsonwigle law llp 1 1. ounpuu v h.m.q. 2009 dtc 1098 (tcc) 2. gelinas v h.m.q. 2009 dtc...

2008, SimpsonWigle LAW LLP 1

1. Ounpuu v H.M.Q. 2009 DTC 1098 (TCC)

2. Gelinas v H.M.Q. 2009 DTC 1091(TCC)

3. Tesainer v H.M.Q. 2009 FCA 33 (FCA)

4. Warren v The Queen 2009 DTC 1024(TCC)

5. OGT Holdings Ltd. 2009 DTC 5048 (Quebec Court of Appeal)

6. Dunlop v The Queen 2009 TCC 177 (TCC) (IP)

Tax Cases of InterestTax Cases of Interest June 3, 2009 June 3, 2009

Tax Cases of InterestTax Cases of Interest June 3, 2009 June 3, 2009

2008, SimpsonWigle LAW LLP

2

Ounpuu v. H.M.Q.Ounpuu v. H.M.Q.

• In 1998 T was a shareholder in LR Co.

• LR Co. was expanding operations outside of Canada

• T concerned LR Co. may one day not meet the tests of a QSBC share – 110.6(1)

• T completed the following planning:


3

Ounpuu v H.M.QOunpuu v H.M.Q

T

• T formed TCo – transferred his QSBC eligible shares to TCo for shares in TCo

• No election under s.85 – FMV of shares less than QSBC exemption

TCo

LR Co


4

Ounpuu & H.M.Q.Ounpuu & H.M.Q.

• s.69 – occurs at FMV - $207,257

• no 84.1 issue as T only received shares in TCo

• Capital gain $155,433 ($207,257 x 75%)


5

Ounpuu v H.M.Q.Ounpuu v H.M.Q.

• T completed the planning in 1998

• T did not file his return until 2001 and he did not report any capital gains in the filed return

• Minister subsequently denies QSBC exemption pursuant to s110.6(6) of ITA

• Subsection 110.6(6) of the Act in 1998 provided as follows:


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(6) Notwithstanding subsections (2) and (2.1), where an individual has a capital gain for a taxation year from the disposition of a capital property and knowlingly or under circumstances amounting to gross negligence

(a) fails to file a return of the individual’s income for the year within one year after the day on or before which the individual is required to file a return of the individual’s income for the year pursuant to section 150, or

(b) fails to report the capital gain in the individual’s return of income for the year required to be filed pursuant to section 150,

No amount may be deducted under this section in respect of the capital gain in computing the individual’s taxable income for that or any subsequent taxation year and the burden of establishing the facts justifying the denial of such an amount under this section is on the Minister.


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• Did T knowingly fail to file his 1998 return under circumstances amounting to gross negligence?

• Did T knowingly fail in his 1998 return under circumstances amounting to gross negligence to report the capital gain?

• TCC concludes that subsection 110.6(6) akin to subsection 163(2) of the Act and is a penal provision.


8


• TCC Minister needed to show that T intentionally (wilfully blind) failed to file his return in circumstances in which T was attempting to deceive to attain an economic advantage.

• T assumed not taxable on the gain and otherwise was to receive a refund for the 1998 year.

• T lacked culpable conduct to constitute gross negligence.

• T appeal allowed.


9

Gelinas v H.M.Q. (IP)Gelinas v H.M.Q. (IP)

• Application of the moving expense deduction set out in ss62(1) of ITA.

• G worked in Oshawa – part-time – hospital- general surgery

• G lived in Woodville – 65 kms from work

• G accepted a full time position at the same Hospital different department, different floor and different pay scale and benefits


10

Gelinas v H.M.Q.Gelinas v H.M.Q.

• G moved to Whitby

• G claimed $18,823.44 moving expenses with respect to an “eligible relocation”

• Minister denied the deduction – did not constitute an “eligible relocation”


11

Gelinas v H.M.Q. (IP)Gelinas v H.M.Q. (IP)

The definition of eligible relocation in section 248 of the Act reads as follows:

“eligible relocation” means a relocation of a taxpayer where

(a) the relocation occurs to enable the taxpayer

(i) to carry on a business or to be employed at a location in Canada (in section 62 and this subsection referred to as “the new work location”), or

(ii) to be a student in full-time attendance enrolled in a program at a post- secondary level at a location of a university, college or other educational institution (in section 62 and in this

subsection referred to as “the new work location”),


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Gelinas v H.M.Q.Gelinas v H.M.Q.(b) both the residence at which the taxpayer ordinarily

resided before the relocation (in section 62 and this subsection referred to as “the old residence”) and the residence at which the taxpayer ordinarily resided after the relocation (in section 62 and this subsection referred to “as the new residence”) are in Canada, and

(c) the distance between the old residence and the new work location is not less than 40 kilometres greater than the distance between the new residence and the new work location,

except that, in applying subsection 6(19) to (23) and section 62 in respect of a relocation of a taxpayer who is absent from but resident in Canada, this definition shall be read without reference to the words “in Canada” in subparagraph (a)(i), and without reference to paragraph (b).


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Gelinas v H.M.Q.Gelinas v H.M.Q.

TCC• Was G’s move to enable her to be

employed at the Oshawa hospital?

• Minister – G already employed and the move was not necessarily for her employment

• 4 elements – old work location, a new work location, an old residence and new residence (Bracken v MNR)


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Gelina’s v H.M.Q.Gelina’s v H.M.Q.

• Court held – 4 element test too rigid of an interpretation of what constitutes “new work location”

• Court held “new” defines work and not location and allowed the appeal.


15

Tesainer v H.M.Q.Tesainer v H.M.Q.

• T in 1988 purchased limited partnership units in FDLP for $100,000

• FDLP development and operation of commercial real estate

• FDLP – problems with Securities Act – partnership failed


16


• T other unit holders sued the lawyers retainer to advise Fenix on securities law

• T claimed lawyers were negligent

• T separate cause of action (“claim”) against the lawyers then that of FDLP promoters


17

Tesainer v H.M.Q.Tesainer v H.M.Q.• Lawsuit settled in 1995

• T received $98,300 as a settlement amount

• T treated the $98,300 as neither taxable as income or capital – “tax nothing”

• MNR reassessd and treated as a capital gain

• MNR – settlement should be treated as a distribution of capital (T had a negative ACB therefore resulting in a capital gain)


18


• Surrogatum Principle – tax treatment of a payment of damages or a settlement payment is considered to be the same as the tax treatment of whatever the payment is intended to replace


19


• TCC – Court concluded that although payment was not actually a distribution of partnership capital, it was intended to replace such distribution – capital receipt

FCA• Concluded payment was not a

distribution of partnership capital

• Settlement paid by the lawyers to individual partners not to the partnership


20

Tesainers v H.M.Q.Tesainers v H.M.Q.

• The fact that the T’s claim was quantified by reference to amounts invested in FDLP did not result in the characterization of the settlement payment as necessarily being a return of the invested amount or an amount paid in substitution for that amount

• Need to carefully analyze the legal relationships and the legal obligations before and after a settlement to determine the characterization of the payment

• Minister appeal to SCC


21

OGT Holdings Ltd.OGT Holdings Ltd.

Pre Sale

CCO(Quebec)

DCO(Quebec)

FCO FCO

BCO


22


CCO DCO

GCO(Ontario)

ECO FCO

BCO

-Quebec Election

- No Federal Election


23


• CCO and DCO formed GCO

• CCO and DCO transferred their ECO and FCO shares to GCO for shares in GCO

• Elect pursuant to s.518 Quebec Taxation Act (equivalent s.85 rollover provision)

• Federal purposes did not elect pursuant to s.85 of ITA

• Triggered federal capital gain


24


• Ontario purposes same as Federal – however CCO and DCO not resident of Ontario (ECO and FCO ACB = FMV)

• Classic Quebec Shuffle

• GCO sells ECO and FCO shares to buyer at no Ontario tax cost – eliminated provincial tax cost on the sale


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• Minister for Quebec applied GAAR

• Transfer of the ECO and FCO shares at a different price for Quebec and Federal purposes allowed T to avoid the payment of Quebec income tax on the transfer

• T argued – Ontario tax consequences of filing Quebec election and had an impact to Ontario but not to Quebec

• Court concluded – Quebec Shuffle was abusive tax avoidance transaction subject to Quebec’s GAAR provision


26


• Court offended that a T would use a provision whose purpose is to defer a tax obligation to eliminate that obligation completely

• Provincial GAAR provisions show their teeth


27

Warren v H.M.Q.Warren v H.M.Q.

• Ms. W married to Mr. W

• 1997 Mr. W owed $261,921 of tax

• 1997 Mr. W transferred his interest in matrimonial home to Mrs. W for following consideration:

(i) mortgage assumption of $90,000

(ii) new mortgage of $168,000


28


• CRA assessed Mrs. W – s.160

• Mrs. W argued that she had an initial interest in the matrimonial home by way of a “resulting trust”


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• Resulting and Constructive Trusts were created by the Courts of Equity to avoid injustice

• Resulting Trusts are based on the parties express or implied intention that property registered in the name of one be held in whole or in part for another

• Constructive Trusts may be imposed to prevent one party from being unjustly enriched at another’s expense without any evidence of intent in that regard


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• Does the tax Court have jurisdiction to make a finding of a Resulting trust or Constructive Trust?


31


• Court held – tracing history of previous properties that Mrs. W. had a resulting trust interest of 33% therefore what was transferred by Mr. W. was 67%

• Also held second mortgage proceeds part of the consideration for the transfer though technically occurred after the transfer

• Mrs. W did not assert her labour in the home, raising children etc. entitled her to a further interest by way of a Constructive Trust


32

David Dunlop v H.M.Q. David Dunlop v H.M.Q. (IP) (IP)

• s.163 penalty for a repeated failure to report employment income

• s.163(1) – provides that a person who has failed to report such an amount in any of the 3 preceding years, is liable to a penalty of 10% of the current’s unreported income (can be 20% if include Ontario provincial penalty)

• T in 2005 a university student

• T part-time jobs


33

David Dunlop v H.M.Q.David Dunlop v H.M.Q. (IP) (IP)

• T in 2005 did not report part-time employment income from Bulk Barn – did not receive T4 Slip

• T in 2006 – no T4 Slip from Bulk Barn accordingly estimated the employment income


34

David Dunlop v H.M.Q. David Dunlop v H.M.Q. (IP) (IP)

• 2006 reassessed increasing income from Bulk Barn and added 10% penalty federal and provincial on the amount of income not the tax on the income

• Is there a due diligence defence to s.163(1)?

• T cited 2006 Tax Guide – “What if you are missing information?” – note in T1 Return

• T not liable for penalty

2008, simpsonwigle law llp 1 1. ounpuu v h.m.q. 2009 dtc 1098 (tcc) 2. gelinas v h.m.q. 2009 dtc...

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