Case law update

Characterization of financial derivative (capital vs income). Objective analysis.

Taxpayer pledged BNS shares under credit facility with TD Bank which required a forward contract, which tp put in place with TD Securities.

165,000 BNS shares in forward contract. Was cash settled. He would have to pay if price went up. Tp ended up paying $10MM. He tried to deduct. He said “I was speculating, not hedging a capital asset”. CRA: This is capital. Reference asset was capital asset (BNS).

TCC. Tp wins because he was speculating (said TCC). Doesn’t matter that underlying asset was capital.

FCA reversed. Intention to hedge not enough. Here there was a hedge, and so was capital. What is a hedge defined.

SCC aff’d. Principles:

1. What is a derivative. Contract whose value is based on the value of another thing. Options and forward contracts
2. Why used? Hedge or speculate.
3. If hedge -> character depends on character of the underlying thing.
4. If speculative -> don’t look at underlying thing.
5. How to determine whether hedge or speculative. Look at contract’s purpose to determine whether speculative vs hedge. Subjective intention might be relevant but does not determine. Analysis is objective. Look at linkage and underlying item. The stronger the link, then more likely it is hedge.
6. Two step: a. Identify underlying asset. b. How strong link.

Para 22.

Can have hedge even where what is being hedged is mere ownership.

Cash settlement does not mean that the derivative is speculative.

Atlantic Packaging transferred assets to sub and sold shares. Tried to rely on 54.2. FCA: 54.2 did not apply because not all or substantially all dropped down.

TP tried to argue that general principles should be applied too. FCA said: too late to raise this.

3 conditions for UPR (unnamed person requirement): 1. Judicial order. 2. Ascertainable group. 3. Obtained because of suspected noncompliance.

Before 1996 two additional conditions.

Until 2013 UPR made ex parte. Matters for standard of proof.

CRA wins at Federal Court. $20,000 sales threshhold made group ascertainable. Yes re compliance issue. Did not matter that an active audit was not ongoing.

FCA: Standard of review was palpable and overriding error.

Don’t need to balance privacy rights. Just look to UPR conditions in ITA.

Don’t need inquiry into tax liability of specific persons.

Some discussion of proper delegation.

Fishing expedition? Hydro-Quebec 2018 FC 622. FCA in Roofmart: That case was looking only at ascertainability in that case. Doesn’t matter that Roofmart might have to provide a lot of information or that it might include customers who weren’t commercial customers.

Hydro-Quebec: Need an audit. FCA Roofmart: No you don’t.

Standard of proof: Absolute candour and full disclosure? No because now this application is not ex parte.

Corporation failed to remit source deductions. The director, Colitto, transferred assets to wife. Does transferee liability only when conditions for director’s liability met?

FCA: Liaiblity arises when remittances not made not when conditions met.

Loblaws established foreign bank in Barbados. Loblaw group put capital in bank. Bank invested. US short-term debt. Cross-currency swaps. Loans to independent drivers of Weston bakery. Before years in issue, money came from group. In the years in issue, capital was from retained earnings.

FAPI: Income from investment business. EXCEPT regulated foreign bank. But latter doesn’t apply if bank deals mainly with arm’s length entity.

TCC: Regulated foreign bank BUT bank did business with non-arm’s length parties. Look at receipt and use of funds. Here bank received funds from non-arm’s length parties and didn’t compete for that money. GAAR: Found there was tax benefit, and there was a abuse. But 2d condition not met because there were good business reasons.

FCA: Rev’d.

“Bank” is elusive, and look to formal, institutional approach. That reads in a unlegislated requirement for competition. Latter might relevant for GAAR.

Bank was managing its own money not money of its shareholders.

Was bank dealing with arm’s length parties? Look at its income-earning activities. Most of those were from arm’s length counter-parties.

Yes there was oversight by Loblaw parent, but that can’t matter too much. para 73. para 86.

CRA has sought leave.

GAAR case. No tax benefit from tower structure.

GST case. Exempt financial services.

Zomaron was taxpayer. Zomaron provided tech to connect merchants with credit card processors. Zomaron gets some of credit card fee for doing this.

Zomaron solicited merchants, gathered info, negotiated fees

“financial service” includes “arranging for” other financial services but excludes prepatory and promotional

Zomaron says its an intermediary and so exempt. Crown: merely promotional and prepatory.

TCC: Services were exempt.

1. Acquirers/processors were providing exempt financial services. Parties agreed.
2. Zomaron provided a single supply. Parties agreed.
3. Predominant purpose of single supply? Zomaron was intermediary. Not promotional in fact (even though agreements had some unhelpful language).
4. Arranging threshhold is low. (Contra CRA). Just need to bring together. Don’t need to get into the guts of the relationshipo.
5. Predominant was arranging.

Para 93. Zomaron was involved in guts.

Didn’t cover this.