Principal Issues: [TaxInterpretations translation] Where a specific application provision may apply to a situation where subsection 246(1) may also apply, should the Minister use subsection 246(1) as the sole basis for assessment or as an alternative basis for an assessment under the specific application provision?
Position: It is recommended that assessments be made under the specific application provision and that subsection 246(1) be used subsidiarily.
December 4, 2009
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L'Estrie-Mauricie Tax Services Office |
Headquarters André Gallant 2009-034499 |
Subsection 246(1) and the Massicotte judgment
This is in response to your email of October 21, 2009 in which you asked for our opinion on the above subject regarding the situation described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
More specifically, you described a situation where Mr. X is the sole shareholder of Holdco, which in turn is the sole shareholder of Opco. Mr. X and four employees of Opco all receive reimbursements from Holdco and Opco, respectively, for personal expenses. You asked us to assume that the reimbursements are taxable benefits to the employees pursuant to either paragraph 6(1)(a) or subsection 246(1), and to Mr. X pursuant to either subsection 15(1) or subsection 246(1).
You wish to know whether subsection 246(1) can be used as the sole basis for assessment, or whether it is preferable to use it as a subsidiary argument to the arguments based on paragraph 6(1)(a) and subsection 15(1). You also wish to know our position on the deductibility of reimbursement expenses incurred by Holdco and Opco.
Our Comments
On the one hand, subsection 246(1) is generally a provision of subsidiary application since it must be shown that the value of the benefit is not otherwise included (for example, by virtue of paragraph 6(1)(a) or subsection 15(1)) in computing the taxpayer's income under Part I of the Act. On the other hand, in Massicotte v. The Queen, 2008 FCA 60, the Federal Court of Appeal recently held that the Minister of National Revenue may assess a taxpayer solely on the basis of section 246 despite the fact that paragraph 6(1)(a) could have been argued by the Minister.
Under subsection 246(1), the Minister may include the value of a benefit that a person confers at any time, directly or indirectly, in any manner whatever, on a taxpayer, to the extent that it is not otherwise included in computing the taxpayer's income or taxable income earned in Canada by under Part I.
Thus, while the Minister may invoke subsection 246(1) as the sole ground for assessment, we believe it is preferable that the assessment refer - if the facts of the situation are appropriate - to the provisions of specific application. In your case, therefore, we believe that the assessment should rely on paragraph 6(1)(a) and/or subsection 15(1) as the main grounds, leaving subsection 246(1) as a subsidiary basis for assessment.
If subsection 246(1) were the only statutory provision pleaded and did not find application in the courts, paragraph 6(1)(a) and subsection 15(1) could generally not be invoked at trial, although this was the case in Massicotte before the Tax Court of Canada. In general, if the Minister is unable or unwilling to vary the grounds for a reassessment within the time limits provided for that purpose, the Tax Court of Canada must confine itself to the grounds relied on by the Minister. To this end, we refer you to the reasons of the Federal Court of Appeal in Pedwell v. Canada, [2000] 4 F.C. 616, at paragraphs 16 to 19.
From Holdco and Opco’s perspective, expenses relating to employee benefits are generally deductible to the extent that it is shown, inter alia, that such expenses are incurred or made for the purpose of earning income from a business and that such expenses are reasonable in the circumstances. Conversely, shareholder benefit expenditures are not (see paragraph 14 of IT-432R2, Benefits Conferred on Shareholders).
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
If you have any questions regarding this request, please do not hesitate to contact us.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.