Taxpayers filed motions to strike out CRA’s assumptions in its replies to the notices of enchantment
In Preston Family Trust II v The Queen, the taxpayers have been a trust resident in Canada (the “Preston Household Belief”) and two non-resident beneficiaries of the belief, John and Monika Preston. Simply earlier than the twenty first anniversary (ed. notice: see the “21-year rule” of trusts in Canada) of the Preston Household Belief, John and Monika Preston turned sole shareholders of an Alberta Limitless Legal responsibility Company (“ULC”), to which they assigned their capital pursuits within the Preston Household Belief and to which the belief transferred all of its capital properties, consisting of shares of a holding firm and partnership curiosity.
The Canada Income Company (CRA) assumed the ULC by no means turned a beneficiary of the belief and that John and Monika Preston continued to be beneficiaries of the belief even after the project of their capital pursuits within the belief to the ULC. The CRA then assessed about $12 million in tax to the belief on the idea that it had realized positive aspects from the disposition, deemed to have been made at truthful market worth, of its capital property to non-resident beneficiaries in 2014.
The CRA additionally assessed the 2 beneficiaries in respect of sure dividends deemed to have been paid by the holding firm in 2014 for about $2 million in tax. The taxpayers then introduced motions to strike out sure assumptions of the CRA within the replies to the taxpayers’ notices of appeal made by the Division of Justice’s Canadian tax lawyer performing for the CRA.
The Tax Court docket sided with the taxpayers and dominated that the CRA ought to rephrase their reply as a result of the taxpayers solely had the onus of disproving the assumptions of reality made by the CRA, however not the onus to go additional and disprove the CRA’s conclusions of regulation or authorized components.
Subsection 49(1) of the Tax Court docket Guidelines governs the details set out within the Respondent’s (CRA’s) reply
Subsection 49(1) of the Tax Court docket Guidelines requires the Respondent’s reply to have two components. The primary half requires the Respondent to set out the details which embody assumptions of reality made by the CRA. This a part of the reply contains the details the Respondent admits, denies and of which the Respondent has no data and places it in concern. Within the second half, the Respondent is required to narrate the details to the regulation. On this half, the Respondent has a possibility to explain how the regulation applies to the details pleaded within the first a part of the Reply.
The Tax Court docket of Canada then reviewed case regulation and clarified that taxpayers solely have the onus of disproving the assumptions of reality made by the CRA however haven’t any onus to go additional and disprove the CRA’s conclusions of regulation or the authorized components of the CRA’s conclusions of combined reality and regulation. In Anchor Pointe Power Ltd. v R, the Federal Court docket of Attraction defined that:
- The pleading of assumptions offers the Crown the highly effective software of shifting the onus to the taxpayer to demolish the Minister’s assumptions. The details pleaded as assumptions have to be exact and correct in order that the taxpayer is aware of precisely the case it has to satisfy … the Minister ought to extricate the factual elements which can be being assumed in order that the taxpayer is instructed precisely what factual assumption it should demolish with the intention to succeed. It’s unsatisfactory that the assumed details be buried within the conclusion of combined reality and regulation.
Due to this fact, the CRA could not plead a conclusion of combined reality and regulation as an assumption of reality.
The onus shifts again to the CRA as soon as the taxpayer demolishes the CRA’s assumptions
In Hickman Motors Ltd. v R, the Supreme Court docket of Canada specified that when the taxpayer meets the preliminary onus to demolish the CRA’s assumptions of reality by making a prima facie case, then the onus shifts to the CRA to rebut the prima facie case. If the CRA adduces no proof, then the taxpayer is entitled to succeed. The time period “prima facie” case was outlined in Stewart v Minister of Nationwide Income by the Tax Court docket of Canada as one supported by proof which raises similar to diploma of likelihood in its favour that it have to be accepted if believed.
The Tax Court docket struck sure assumptions of reality from the CRA’s reply
The Tax Court docket discovered there have been sure paragraphs from the CRA’s reply that have been basically conclusion of combined details and regulation pleaded as assumptions of reality. The courtroom then dominated to strike off the next from the assumptions of reality:
- The reply talked about John and Monika Preston continued as beneficiaries of the Preston Household Belief even after having assigned their capital pursuits in that belief to the ULC. This was each a factual assumption and a authorized argument.
- Concerning who may or couldn’t have been beneficiaries of the belief, the reply talked about the appellant’s beneficiaries may solely be pure individuals and couldn’t be firms. The courtroom discovered that limiting the appliance of this authorized conclusion to the belief didn’t make it an assumption of reality.
- Concerning the extent of trustee discretion, the reply talked about the trustees didn’t have discretion to differ the phrases of the Preston Belief Deed or so as to add new beneficiaries of the appellant. This was a conclusion of regulation as an alternative of an assumption of reality.
- Concerning using the phrase “acquired … for the good thing about”, it indicated conclusion of combined details and regulation as a result of the CRA concluded that John and Monika Preston have been the beneficiary house owners of the property distributed by the belief.
- As for using sure deeming provisions of the Revenue Tax Act within the reply, the Tax Court docket discovered the impact of those deeming guidelines mirrored conclusions of combined reality and regulation.
- Concerning using “truthful market worth”, “adjusted price base”, “taxable capital achieve”, the courtroom dominated that the CRA arrived at a conclusion of combined details and regulation by making use of the authorized that means of those phrases.
- As for the CRA’s computation of the quantity of tax payable underneath the Revenue Tax Act, the courtroom discovered the this was neither an assumption of reality nor assertion of details. It merely mirrored the consequence and couldn’t be pleaded within the paragraph that set out assumptions of details.
The idea of reality shouldn’t be the place for the CRA to plead conclusions of regulation or combined details and regulation
Paragraph 49(1)(h) of the Tax Court docket Guidelines requires that each reply from the CRA embody the explanations upon which the CRA intends to rely, however the paragraph for the assumptions of reality shouldn’t be the place to insert these causes.
David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax regulation company regulation agency and is a Licensed Specialist in Taxation Legislation who has accomplished the CICA in-depth tax planning course. He seems frequently in print, radio and TV and blogs extensively.
With over 30 years of expertise as each a lawyer and chartered skilled accountant, he has helped start-up companies, cryptocurrency merchants, resident and non-resident enterprise house owners and firms with their tax planning, with will and property planning, voluntary disclosures and tax dispute decision together with tax audit illustration and tax litigation. Go to www.Taxpage.com and electronic mail David at email@example.com. Learn the original article on Taxpage. Photograph David Rotfleisch courtesy Rotfleisch & Samulovitch P.C.
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