A recent case out of the Federal Court is causing a stir in the tax community. In Canada (National Revenue) v. Revcon Oilfield Constructors Incorporated, 2015 FC 524, Mr. Justice Mosley made the following statements, which might suggest that a lawyer’s advice on tax planning matters is not subject to solicitor-client privilege:
Tax planning communications are not privileged. Also, facts that exist independently of a communication are not privileged: Belgravia, above, at paras 44-45.
Advice given by an accountant (or, I would add, by a lawyer for accounting or tax planning purposes) does not fall within the scope of solicitor-client privilege: Canada (National Revenue) v Grant Thornton, 2012 FC 1313 at para 22.
Read in isolation, these statements are alarming. Tax is an area in which clients often need extensive professional legal advice in order to understand and comply with the law. The Income Tax Act is the longest and most complex piece of legislation in Canada. While taxpayers are entitled to structure their affairs in order to minimize their tax obligations, running afoul of the requirements of Income Tax Act can result in severe penalties and even criminal charges.
Solicitor-client privilege has long been held to be an essential part of the Canadian legal system and is close to absolute. Special protection is afforded to communications between solicitors and clients to promote open communication between the lawyer and client, ensuring the client’s interests can be fully represented.
Despite initial appearances, the decision does not represent a radical erosion of privilege in relation to tax advice. When read in the context of the facts of the case and in light of the existing jurisprudence, there is no suggestion that a lawyer’s legal advice in relation to tax matters falls outside the scope of solicitor-client privilege.
As the judge in Revcon notes, a communication between a solicitor and a client is privileged where:
- legal advice is sought from a lawyer in her capacity as such;
- the communications relate to that legal advice; and
- the communications are made in confidence.
The “tax planning communication” referred to by the judge is an instance in which a lawyer gives accounting or business advice or deals with administrative transactional matters as opposed to giving legal advice. In this regard, it is useful to look at the facts and result in Revcon for clarity.
In the course of an audit, the CRA sought the production of documents from the taxpayer in relation to a corporate restructuring. The taxpayer refused to produce the documents, claiming solicitor-client privilege. The judge viewed the disputed documents for the purpose of determining whether they were privileged. While the judge held that the contents of a closing book (such as corporate board resolutions, shareholder agreements, and share purchase agreements) are not privileged as they are evidence of completed transactions as opposed to legal advice, he found that the following documents are protected by privilege:
- a series of emails between a lawyer and the client pertaining to legal advice;
- a letter from a lawyer to the client regarding income tax reporting requirements and tax consequences of the transactions;
- charts illustrating the corporate structure before and after the reorganization; and
- reporting letters from law firms containing advice relating to the tax obligations of the taxpayer’s directors and shareholders arising from the corporate reorganization.
Despite the judge’s statements that tax planning communications are not privileged, he did not conclude that any document containing legal advice was not privileged because it was a tax planning communication. His conclusions are exactly what one would expect in light of the well-established principles of solicitor-client privilege.
Thus, there is little cause for concern over the judge’s comments about tax planning. The case confirms that where a tax lawyer provides advice in relation to the tax consequences of a transaction or provides advice on the most tax efficient method of structuring a transaction –commonly referred to as tax planning advice – that advice will be privileged.
A recent amendment to British Columbia’s Provincial Sales Tax Act extends the requirement to register for, and collect, the 7% provincial sales tax (“PST”) to any business located outside BC that holds inventory in BC for sale to a person in BC.
The new section 172.1, which will start to apply on September 1, 2015, generally requires PST registration and collection by a person that:
- accepts purchase orders originating in BC;
- sells goods to a customer in BC for the customer’s use (not resale); and
- holds the goods in inventory in BC at the time of sale.
Any person caught by this rule who fails to register once the amendment is in force may be subject to a penalty equal to the PST not collected, plus an additional 25% penalty along with other penalties and interest.
We understand the change was designed primarily for non-resident sellers that hold inventory in third-party warehouses in BC for sale to BC consumers. We note, however, that the change applies to more than just consumer sales; for example, sellers of industrial goods, including those whose goods are being held in BC on consignment, may also be required to register and either collect PST or obtain the appropriate exemption certificates from their customers. Section 172.1 does not apply to a person that sells only tax exempt goods, such as food.
This blog was co-written by Rosemary Anderson and Noah Sarna
In the recent decision of Samaroo v. Canada Revenue Agency, 2015 BCCA 116 (18 March 2015), the appeal court considered whether a party suing CRA for malicious prosecution must satisfy a threshold evidentiary burden of showing there is merit to the claim before being entitled to discovery. The court held, against the arguments advanced on behalf of CRA, that there was no such threshold in law and therefore no such basis upon which CRA may object to the discovery.
In Samaroo, the plaintiffs were charged with and acquitted of tax evasion. They sued CRA and the prosecutor for malicious prosecution and sought discovery. Discovery was resisted on the basis of R. v. Anderson, 2014 SCC 41, a criminal case in which an accused applied for a stay of proceedings on grounds that conduct of the Crown amounted to a violation of s.7 of the Charter and an abuse of process.
In Anderson, the court held that the exercise of prosecutorial discretion, which includes decisions such as the commencement or termination of criminal proceedings, can only be reviewed on the grounds of abuse of process. Further, where such an abuse of process application is advanced, it is appropriate for the court to require that the accused/applicant make a preliminary showing that there is an air of reality to the application, prior to the court entering into the Charter based application itself. Where the applicant fails to satisfy the threshold evidentiary burden, the right to proceed with the Charter application may be denied.
On the basis that the rationale in Anderson applies equally to discovery in cases of malicious prosecution, CRA argued that before the plaintiffs might be entitled to discovery, the court should require the plaintiffs to satisfy a threshold test of showing there is substance to their claim.
The appeal court rejected the argument that Anderson applies to civil proceedings on several grounds including that, Anderson was a criminal case; “the pragmatic considerations in criminal cases are different from civil cases”, and; “the reasons in Anderson do not evince any intention of diminishing the tort of malicious prosecution, which surely would be the effect of imposing a threshold evidentiary burden prior to discovery.”
In arriving at this result the court observed that in civil proceedings there are mechanisms for having meritless claims struck before trial. The court concluded:
If a threshold burden were imposed on the tort, it would virtually eliminate such claims, because the claimant would be unable to conduct examinations for discovery and discovery of documents to make out a case for malice. In most cases, if malice exists it will be found by probing the exercise of prosecutorial discretion through discovery. This is particularly important in exploring the prosecutor’s state of mind. The imposition of this additional burden would amount to the absolute immunity that was rejected in Nelles.
This result is surely correct and consistent with basic demands of fairness. While it may be that the tort of malicious prosecution will succeed only where conduct of the Crown has been egregious, that is distinct from whether CRA and the Crown should be subject to discovery. If, after discovery, there is no substance to a claim for malicious prosecution, a court hearing an application can strike the claim. However, there is no entitlement in law that CRA should be exempt from discovery and, as the Supreme Court of Canada in Nelles cautioned, rules should not be crafted which would in effect grant the Crown immunity.
Clarifying The Elements of, and Defending Against the Offence Of Failure to Comply with Requirements for Information
Section 231.2(1) of the ITA (and s.289(1) ETA) gives the Minister a broad power to compel the disclosure of information or documents. In language which imposes some but little restriction, the section provides that the Minister may “for any purpose related to the administration or enforcement of this Act…require that any person provide, within such reasonable time as stipulated in the notice” any information or document.
Section 238 of the ITA (326(1) ETA) makes it an offence to fail to comply with a Requirement.
Until the recent decision in R. v. Sedhu, 2015 BCCA 92 (03 March 2015) there has been inconsistency in decided cases with respect to whether, in a prosecution for non-compliance with a Requirement, Crown must prove beyond a reasonable doubt that the time stipulated in the notice was reasonable because the reasonableness of the stipulated time is an essential element of the offence.
In Sedhu the appellant was given 90 days to file tax returns for a corporate entity. The Requirements to file were not complied with. At trial the appellant argued, and the trial judge accepted that the time provided for compliance was not reasonable and an acquittal was entered on that basis. The trial judge held “because that period of time was not proved to be reasonable before the court, evidence is lacking on that one point, and there must be an acquittal as a result of a missing part of an essential element.”
The result and the trial judge’s legal analysis on this point was overturned on summary conviction appeal and, on further appeal to the British Columbia Court of Appeal, the court held that reasonableness of the time given to comply with a Requirement is not an element of the offence that the Crown must prove. Instead, it is relevant to a defence that may be available to a person charged.
At the outset, the appeal court observed that “[t]his is a case of first instance…[and] [t]here is no settled jurisprudence on the actus reus of the offences in question or the onus of proof of reasonableness.”
After considering existing previously decided cases and principles of statutory interpretation the appeal court concluded:
In their grammatical and ordinary sense, the words used in these statutes suggest that the Minister is directed by Parliament, when making a demand, to stipulate a reasonable time for compliance. The offence, as described by the statute, is not failure to comply with a demand within a reasonable time… but, rather, failure to comply with the demand. It does not state the individual must comply with a notice that contains a reasonable time to comply, but rather within the time specified in the notice. It does not express that the individual has an entitlement to a reasonable time to respond to the notice.
Therefore, according to the appeal court, for there to be a conviction under these provisions in the ITA or ETA, Crown must prove beyond a reasonable doubt: (1) identity; (2) jurisdiction; (3) service of the notice, and; (4) failure to comply with the notice.
The court also addressed available defences. Because the offences are offences of strict liability, “an accused person must have an opportunity to demonstrate due diligence; that the time provided to comply with the requirement was unreasonable; or that the demand was not made for purposes related to the administration or enforcement of the Act.”
It is interesting and significant that the defence of due diligence is distinct from whether the time given for compliance is unreasonable. And, while according to the appeal court in Sedhu the reasonableness of the time requirement is to be determined objectively, the clear recognition of this as a defence will undoubtedly give rise to interesting litigation in relation to what is objectively reasonable on the facts of a given case.
Trial courts confronted with this interpretive task will undoubtedly be guided by Sedhu in which the appeal court noted that “the words used in these statutes suggest that the Minister is directed by Parliament, when making a demand, to stipulate a reasonable time for compliance” and that the “time requirements are not pre‑determined but are to be fixed with reference to the nature of the demand made when it is made.”
These passages suggest that in being directed to stipulate a reasonable time for compliance, the Minister will be required to consider factors which include, but are not limited to, “the nature of the demand”. And whether the Minister has considered appropriate factors or has stipulated a time period which is objectively reasonable will be the grist for future litigation.
The recent decision of the Tax Court of Canada (TCC) in Miedzi Cooper Corporation v. The Queen, 2015 TCC 26, should put to bed a needlessly ongoing debate with the Canada Revenue Agency (CRA) on the scope of input tax credit (ITC) entitlements of holding companies in connection with the commercial activities of their subsidiaries.
Miedzi is a holding company headquartered in Vancouver that carries on a mineral exploration business through several subsidiaries. It has no activities other than holding the shares of a Luxembourg company (Luxco), which in turn holds the shares of companies (Opcos) in Poland engaged directly in mineral exploration. Miedzi funded the operations of the Opcos by making loans to Luxco, which in turn made loans to the Opcos. The funds for the loans were raised by Miedzi undertaking a private placement. It incurred considerable expenses, such as fees for legal, accounting and consulting services as well as other miscellaneous costs. It then claimed ITCs in respect of all GST/HST it paid on those expenses.
The CRA denied a significant portion of the ITCs on the basis of its restrictive interpretation of section 186 of the Excise Tax Act (ETA). Miedzi had relied on a broad interpretation of section 186 in support of its ITC claim.
For the purposes of determining an ITC, subsection 186(1) essentially deems a holding company to have acquired certain property or services for use in the course of commercial activities of the company, which is the main ITC requirement under subsection 169(1). However, this deeming rule only applies to the extent the holding company can reasonably be considered to have acquired the property or services for use “in relation to” the shares or indebtedness of a related company that is engaged exclusively in commercial activities. Subsection 186(3) allows for the existence of an intervening holding company, such as Luxco, without limiting the claimant’s ITC entitlement.
The Crown argued that the phrase “in relation to” should be interpreted narrowly and that the provision should only apply to the extent the property or service is acquired for the holding company to do something in respect of the shares or indebtedness of the subsidiary, such as selling a portion of the shares. Corporate costs of the holding company that do not relate necessarily to the subsidiary are excluded. Regarding Miedzi, while certain of its expenses indeed related to the shares of Luxco, the Crown claimed that many did not.
This approach was neatly rejected by Paris J. based on the decisions of the TCC and the Federal Court of Appeal (FCA) in Stantec Inc. v. The Queen, 2008 TCC 400 and 2009 FCA 285. Paris J. maintained that subsection 186(1) was intended by Parliament “to be a look-through rule”, which was intended to avoid a loss of ITCs where a commercial activity is conducted through a holding company structure; consequently, subsection 186(1) should not be interpreted narrowly. He reasoned that everything Miedzi did could be said to have been done “in relation to” the shares or indebtedness of Luxco. Consequently, it was entitled to full ITCs.
In the past, the CRA has asserted that its restrictive interpretation was correct in spite of Stantec. The TCC’s decision in that case was made under the court’s Informal Procedure (and therefore is generally not binding on the court as precedent) and was upheld by the FCA on other grounds. Although the decision in Miedzi was also made under the Informal Procedure, it nonetheless affirms yet again a broad judicial interpretation of section 186, which it is hoped the CRA will finally accept.
British Columbia is contemplating yet another change to its sales tax. The Province reverted from a federally collected Value Added Tax to a provincial sales tax (“PST”) on April 1, 2013. While the new PST is very similar to the tax that had been in place between 1948 and 2010, the PST taxes more services and intangible property and is much more complicated than its predecessor.
Residents in the Greater Vancouver Regional District (“GVRD”), which encompasses some but not all municipalities in the lower mainland of the Province, are now contemplating a proposal to add .5% to the existing 7% PST for transactions within the GVRD as a method of providing additional funding for public transit and roads. If passed, we understand that this new tax would be implemented on April 1, 2016.
The proposed tax referred to as the Metro Congestion Improvement Tax (“MCIT”) is to be “harmonized” with the PST although the details on its application have not yet been released. For example, it is not clear how the MCIT will apply to construction materials, mobile equipment, software and legal services purchased within the GVRD for use outside of the region or vice versa. The Province estimates that 40% of the current PST is paid by businesses on their inputs and have indicated that the most common audit assessment involves failure to self-assess the PST on taxable purchases made outside of the Province.
Although originally planned as a separate tax, it has recently been announced that the MCIT will not need to be separately identified on receipts or invoices which will help some retailers but it will make it much more difficult for business to determine if the correct amount of tax has been paid, particularly for taxpayers with locations both inside and outside of the GVRD. An additional concern is whether this change implies that a regional sales tax model will be adopted by other regions in the Province.
Unfortunately, there is no question that implementing a regional tax on top of the already complicated PST will not be easy. Residents of the GVRD will be able to vote on the proposal using a mail in ballot between March 16 and May 29, 2015.
This blog was co-written by Rosemary Anderson and Noah Sarna.
In the CRA’s long-standing view, proceeds realized on a hedge contract cannot be on capital account if there is no sale (or proposed sale) of the underlying item being hedged. Such could be the case if a hedge is entered into to protect the consolidated balance sheet equity of a corporate group. In George Weston Limited v. The Queen, 2015 TCC 42, the Tax Court of Canada said that the CRA’s view has no legal basis (paragraph 97). The correct principle is this: proceeds realized from a hedge will be on capital account if the item being hedged is a capital item. In George Weston, a public company entered into swaps to stabilize (hedge) the value of the group’s investment in US business assets, which was exposed to a currency risk in the company’s consolidated balance sheet (paragraph 77). As such, the swaps hedged a capital investment (paragraph 89). Furthermore, the swaps were terminated not to profit from the derivatives market, but rather because the risk exposure had decreased (paragraph 90). Accordingly, the $317 million gain on termination of the swaps was a capital gain, not ordinary business income.
On February 19, 2015, the federal government released proposed amendments to the Income Tax Regulations which would generally allow for accelerated capital cost allowance (“CCA”) treatment in respect of certain property used in connection with liquefying natural gas. The proposed amendments are of principal significance to those in the liquefied natural gas (“LNG”) industry.
Under the current rules, equipment and structures used for natural gas liquefaction are generally included in Class 47, which carries a CCA rate of 8%. Other commercial buildings located at a facility that liquefies natural gas are generally entitled to a 6% CCA rate (the standard 4% rate applicable to Class 1 assets plus an additional 2% allowance for a building which is substantially used for a “non-residential use”).
The draft regulations (link here) would allow an additional 22% CCA claim for “eligible liquefaction equipment” (“ELE”), thereby bringing the total annual CCA rate to 30%. In general, ELE would include equipment – other than “excluded equipment” – used in connection with the liquefaction of natural gas that:
- is acquired after February 19, 2015 and before 2025;
- was not used or acquired for use for any purpose before it was acquired by the taxpayer; and
- is used as part of a liquefaction facility (i.e., a self-contained system – including buildings, structures, and equipment – that is used for the purpose of liquefying natural gas).
As such, liquefaction equipment acquired prior to the release of these proposed amendments will not be eligible for the accelerated CCA claim.
“Excluded equipment” generally means the following properties:
- pipelines (other than pipelines used to transport LNG or natural gas within a liquefaction facility during the liquefaction process);
- regasification equipment; and
- electrical generation equipment.
A separate proposed amendment will bring the CCA rate for commercial buildings that are part of liquefaction facilities up to 10%.
The new CCA rates will continue be calculated on a declining-balance basis. In addition, the usual rules regarding CCA, such as the “available for use” and “half-year” rules, will continue to apply in respect of property entitled to either of the accelerated CCA rates.
One critical aspect of the proposed amendments is that the additional CCA allowances may only be claimed against income attributable to “eligible liquefaction activities.” That term generally encompasses income that either:
- in the case of natural gas owned by the taxpayer at the time it enters their liquefaction facility, arises from the sale of LNG; or
- in any other case (e.g., where the taxpayer liquefies natural gas owned by a third party), is reasonably attributable to liquefaction services provided.
Special rules may apply if the taxpayer carries on more than one business (e.g., one business of liquefying natural gas and another business of extracting, transporting, or distributing LNG).
The proposed amendments have yet to be tabled in Parliament, but are undoubtedly welcome news to members of the LNG industry.
In 2014-0529981I7, the CRA Rulings Directorate considered a case where partnership interests and a debt obligation (Particular Note) owed by a partnership were sold mid-year. No portion of the partnership’s loss for the year was allocated to the selling partners. On audit, the local Tax Services Office (TSO) proposed to reallocate a pro rata portion of the partnership’s loss to the selling partners under s. 96(1.01) and s. 103. The TSO also proposed to treat the sale of the Particular Note as engaging the debt-parking rules in s. 80.01. The Rulings Directorate disagreed with the TSO on both accounts.
- With respect to the reallocation of the partnership’s loss, s. 96(1.1) does not require any particular allocation method. The allocation is governed by the partnership agreement, as contemplated by s. 96(1). In rejecting the proposed assessment under s. 103, the Rulings Directorate cited a 1985 CRA Roundtable Answer where the CRA said that s. 103 should not apply “…in bona fide situations – that is, where a partner is acquiring an interest with a view to becoming an ongoing member of the partnership”.
- The Rulings Directorate further said the debt-parking rules in s. 80.01 were not engaged because at no time did the various owners of the debt obligation deal at arm’s length with the debtor (i.e., the Partnership). Further, at both times that the Particular Note was acquired by another person the other person was related to the holder of the Particular Note.
In Repsol Canada Ltd. v. The Queen, 2015 TCC 21, the Tax Court of Canada found that a deep water pier and plant (Facility) in New Brunswick qualified as a processing asset included in Class 43 for the 2007 taxation year. The Facility was used for receiving, unloading, and storing liquid natural gas (LNG), and re-gasifying the LNG into methane (having required specifications) for sale into a transmission pipeline system. This activity was sufficient to constitute “processing”. The Facility was not included in Class 1(n), as part of a gas distribution system, because the activities at the Facility were conducted prior to the methane entering into a transmission/distribution pipeline system. The capital cost allowance regulations were subsequently amended to include LNG plants in Class 47, depreciable at 8% per annum. Deep water piers are specifically excluded from Class 47. Presumably such piers remain processing assets included in Class 43 based on the reasoning in Repsol Canada Ltd.