Simon Webber et al., “Blockchain and Distributed Ledgers – Another Wave of Challenges to Tax and Transfer Pricing From the Digital Economy,” Bloomberg Law, June 10, 2019.
The authors discuss distributed ledger technologies, how they operate, what they might become, and questions they raise.
Topics covered:
- What is Blockchain?
- Industry Development and Value Drivers
- Unique Features and Associate Tax Consequences
- Key Intangible Assets in Blockchain and Tax Planning Opportunities
Recent cases involving insurance proceeds; excess contributions tax and more
Intro sentence:
One recent tax-related case involved certain insurance proceeds not being subject to the deemed trust provisions in ss. 227(4) and (4.1) of the Income Tax Act (ITA); while another case dealt with whether there should be interest on a line of credit paid after a business ceases to exist. Here is a summary of these decisions and more:
1. Attorney General of Canada v. Nortip Development Corporation, 2019 NLCA 34 (CanLII); ITA: 224(1.3) security interest, 227(4), 227(4.1); ITR: 2201
This is an appeal from a decision of the Newfoundland and Labrador Supreme Court (the applications judge), which had determined certain insurance proceeds were not subject to the deemed trust provisions in ss. 227(4) and (4.1) of the ITA.
In May 2014, property owned by the tax debtor (Elite) was subject to fire loss. The mortgagee (Nortip) had provided financing to Elite and had taken a mortgage over the property. The insurer filed an originating application to determine priority among competing claims from Elite, Nortip, and the Crown with respect to the insurance proceeds. The Crown argued that Elite was indebted to it for unremitted payroll and related amounts for 2012 and 2013 and that $43,277.19 was deemed to be held in trust for the Crown pursuant to its “super priority” found in ss. 227(4) and (4.1) of the ITA.
At issue was whether the applications judge erred in concluding the insurance proceeds payable pursuant to the standard mortgage clause were not subject to the deemed trust in s. 227(4.1) and were therefore payable to Nortip. Specifically, at issue was whether:
- the standard mortgage clause gave rise to a “security interest” pursuant to s. 224(1.3) and for the purposes of the deemed trust in s. 227(4.1) and
- the applications judge erred in concluding the insurance proceeds payable pursuant to the standard mortgage clause were not “proceeds of property of the tax debtor” for the purposes of s. 227(4.1)
The Newfoundland Court of Appeal dismissed the Crown’s appeal and held that:
- the standard mortgage clause created a separate and distinct contract of insurance between Nortip and the insurer and the proceeds were payable directly to Nortip; therefore the insurance proceeds were not the property of Elite and the standard mortgage clause did not create a security interest under the ITA because it did not confer on Nortip an interest in the specific property of Elite
- since Elite was never entitled to receive the proceeds, they could not be said to be proceeds of property of the tax debtor for the purposes of s. 227(4.1)
2. Moras v. The Queen, 2019 TCC 111; Official English Translation; Whether interest on line of credit paid after business ceased to exist deductible; ITA: 20.1(2)(c)
From 2002 to 2007 the taxpayer operated a business as a sole proprietor providing accounting services. He ceased to operate this business personally in 2007, when he formed a corporation to pursue his commercial activities. From March 26, 2002 to December 2, 2005 the taxpayer paid his business expenses through a line of credit secured by a mortgage on his home. This line of credit was also used to pay the interest charged by the bank on the line of credit from December 3, 2005 to December 31, 2014 after the taxpayer’s sole proprietorship had ceased to exist.
The Minister refused the interest expense deduction for 2013 and 2014 on the ground that it had not been incurred in connection with a commercial activity.
In allowing the taxpayer’s appeal, Favreau J. found that under paragraph 20.1(2)(c) of the ITA, the unpaid balance of borrowed money which is outstanding after a taxpayer’s business has ceased to exist is deemed to have been used by the taxpayer to earn income from that business; therefore, the interest expense was therefore justified under paragraph 20.1(2)(c).
3. Connolly v. Canada (National Revenue), 2019 FCA 161; RRSPs; Whether taxpayer subject to excess contributions tax; ITA: 204.1(1); Argued by Thorsteinssons
The FCA upheld hat decisions of the Federal Court which dismissed the taxpayer’s application for judicial review from a decision of the Minister’s delegate where the delegate declined to grant relief in respect of income tax on over-contributions to the taxpayer’s RRSPs and declined to waive the associated interest and penalties for the 2003 to 2010 taxation years.
Case background: The taxpayer was assessed penalties under section 204.1 of the ITA in respect of excess contributions made to his RRSP. He had made such contributions following third party advice, while unaware of his RRSP contribution limit for the years at issue. He requested but was denied administrative relief from such penalties for the 2003 to 2010 taxation years, on the basis that he had failed to demonstrate “reasonable error” and that the excess contributions had not, as required, been withdrawn “as quickly as possible”.
The taxpayer applied for judicial review of that denial, but his application was dismissed. In further dismissing the taxpayer’s application, the Federal Court held that:
while sympathetic to the taxpayer’s circumstances, persons who participate in a deferred income plan such as an RRSP are expected to demonstrate a certain level of knowledge related to that investment, and that the reasonable taxpayer must exhibit the qualities of due diligence
the jurisprudence indicates that the Court has consistently refused to acknowledge any concept of waiver of taxes, penalties or interest based on the conduct of third parties and that there is no such doctrine as a “reasonable mistake of law”
the Minister’s decision could not be characterized as unreasonable, or as containing an error in law or being based on erroneous findings of fact and was not made in a procedurally unfair manner
however, given the significant and exceptional financial losses sustained to the retirement finances of the taxpayer and his spouse, the Court held that an order for costs was inappropriate
In further dismissing the taxpayer’s appeal, the FCA concluded that even though the ministerial delegate applied an unreasonable interpretation of ss. 204.1(4) of the ITA, the delegate reached the only conclusion that was reasonable in the circumstances. Accordingly, there was no basis for interfering with the delegate’s conclusion in respect of the taxpayer’s ss. 204.1(4) request.
