February 2016 issue - Canadian Tax Foundation

c a n a d i a n
t a x
Editor: Alan Macnaughton, University of Waterloo
([email protected])
fo c u s
Volume 6, Number 1, February 2016
looks instead at the loss from the business’s perspective:
“where a business is defrauded by an employee or a third
party . . . the issue becomes whether the resulting loss is reasonably incidental to the income-earning activities” (Hammill
v. Canada, 2005 FCA 252). The amount of the loss must also
be reasonable in the circumstances (Ruff v. The Queen, 2012
TCC 105).
The folio follows those legal principles in part, suggesting
that the loss of trading assets (such as inventory or cash)
through theft or embezzlement is normally deductible in
computing income from a business if the loss is an inherent
risk of carrying on the business and the particular loss in question is reasonably incidental to the normal income-earning
activities of the business. Such deductible losses are distinguished from losses that represent “withdrawals of capital” or
are “sustained outside the normal income-earning activities of
the business,” which are more like shareholder benefits and
are traditionally non-deductible to the business because they are
not for the purpose of earning income. For example, if a sole
shareholder uses his keys to enter the store and then steals
proceeds from the day’s receipts after business hours, it is
difficult to appreciate why the company should be permitted
to deduct the resulting loss as a business expense. This is also
the case if a partner improperly withdraws funds from a business’s bank account for personal purposes without authority
or without the other partners’ input.
The folio also acknowledges an exception in the jurisprudence by referring to Parkland Operations Limited v. The Queen
(90 DTC 6676 (FCTD)), where deductions were permitted in
respect of embezzlement by two of the taxpayer’s officers with
indirect minority interests in the taxpayer. The CRA notes that
the embezzled funds in that case were taken not in the officers’
capacity as shareholders or by their exercise of overriding
control over the business, but rather while they were dealing
wrongfully with the operating funds in the normal course of
the business.
Where the folio and CRA audit practice depart from the
guiding legal principles is in their focus on the thief ’s position
in the business’s hierarchy rather than on the actual details of
Theft by Owners or Senior Employees:
Deductibility of Losses
The CRA’s policy on theft by principals of a business is that
“[i]n most cases” (of theft by the business’s owners) or “frequently” (in cases of theft by senior employees), the resulting
loss should be considered a non-deductible withdrawal of
capital or a loss sustained outside the business’s normal incomeearning activities (as set out in Income Tax Folio S3-F9-C1,
“Lottery Winnings, Miscellaneous Receipts, and Income (and
Losses) from Crime”). This concept of taxation based on the
thief ’s position in the business is easy to administer and seems
to be frequently applied by CRA auditors, but it is not congruent with legal principles.
Virtually all theft is committed for the thief ’s personal gain.
Therefore, one could argue that no amount should be deductible in respect of a theft because the amount does not represent
an outlay or expense made or incurred for the purpose of
gaining or producing income from the victim’s business. However, exposure to theft is a commercial reality, and thus the law
IN THIS ISSUE
Theft by Owners or Senior Employees: Deductibility
of Losses
1
Alberta To Continue To Run Its Own Corporate
Income Tax
2
Another Reason To Avoid Shareholder Benefits
3
Tax Engagement Letter’s Liability Limit Upheld
4
Clause 95(2)(a)(ii)(D) Recharacterization: The CRA’s
Position Explained
5
Thin Cap: Currency Fluctuations Not a Problem
5
Functional Currency Election Not Available to Branches
6
Principal-Residence Tax-Deferral Election May Be
Inadvisable7
What Are the Core Characteristics of a Debt?
7
Quelles sont les principales caractéristiques d’une dette? 8
Large Corporations: Concerns About Notices of Objection 9
Grandes sociétés : Préoccupations concernant les
avis d’opposition
10
Rental Investors: The GST Rebate Mixup
10
Deliberate Triggering of Subsection 55(2)
11
Supreme Court Docket Update
12
Dossiers portés en appel devant la Cour suprême —
Mise à jour
13
EDITOR’S NOTE
This issue marks a significant milestone for Canadian Tax
Focus—five years of publication, beginning in 2011. Thanks
are due to the contributors, to their firms, and to the Young
Practitioners chapters across Canada that have fostered this
enterprise by recruiting many new authors for each issue.
Alan Macnaughton
Editor
1
©2016, Canadian Tax Foundation
Pages 1 – 14
how the theft occurred. If a deduction is allowed when a
stranger steals money from a store’s cash register, why should
it be disallowed when one of the business’s partners walks into
his own coffee shop, distracts the employee at the till, and
pockets a handful of cash? Similarly, when a shareholder is an
active employee in a business and regularly incurs business
expenses for which he claims reimbursement, why should the
fact that he is also an owner lead to the denial of the reimbursed
expenses for tax purposes when some expenses prove to be
fraudulent?
Only by considering the entire context can one make a
proper determination of the deductibility of losses from theft
or fraud. If one extrapolates from the jurisprudence, considerations such as the following should be taken into account:
currently in force is the Alberta royalty tax credit; other uniqueto-Alberta capital taxes and income tax credits were repealed
by the Klein government more than 10 years ago.
The TRA seldom audits or engages with most corporate
taxpayers, owing to its reliance on the CRA to assure the correct
computation of taxable income. Further, Alberta’s corporate
income tax assessments and reassessments typically follow the
federal assessments and reassessments. This avoidance of
duplication of effort clearly saves money for taxpayers and
decreases taxpayer compliance costs. However, in view of the
TRA’s reduced role in administering the Alberta Corporate Tax
Act (ACTA) and the few unique-to-Alberta rules, one might
wonder why Alberta would not seek to enter into a TCA with
Ottawa. The authority for doing so already exists in ACTA section 55.01, so no legislative action should be required.
A TCA between Alberta and the CRA could take a form similar
to the Memorandum of Agreement Concerning a Single Administration of Ontario Corporate Tax (MOA) (signed on October
6, 2006), which took effect for taxation years ending after 2008.
Under such a TCA, the CRA would administer the general
provincial corporate income tax and small business deduction
at no cost to the province, and it would administer the Alberta
royalty tax credit, the qualifying environmental trust credit, and
the SR & ED tax credit on a cost-recovery basis. The federal government would pay Alberta all amounts assessed as provincial
corporate income tax; interim payments would be made twice
a month. On the surface, it appears that having another level of
government collect the provincial corporate income tax essentially for free would represent a cost saving. At a time of fiscal
restraint, this should be an alternative worth considering.
In the e-mail noted above, the TRA’s stated reasons for retaining Alberta administration are as follows:
1) whether the stolen assets were actively used in the business’s operations, or whether they are better seen as
proceeds of completed business activity;
2) whether the thief committed the theft in the way that a
lower-level employee or a customer might have done,
or whether his actions specifically reflected his role as
a business owner or executive; and
3) the extent to which the thief actually exercised control
over the activities that led to the fraud as a principal of
the business, rather than merely whether he had the
capacity to exercise such control.
For further discussion of tax issues relating to theft and
fraud, see Hugh Woolley, “Income from a Business or Property:
Current Taxation Issues,” in the 2014 Conference Report, especially at 6:15-17.
Mark Tonkovich
Baker & McKenzie LLP, Toronto
[email protected]
Administering corporate income tax provincially gives Alberta
the ability to vary its own regime and to make policy changes
as the province deems appropriate. . . . [G]overnment is able to
collect penalties and interest; businesses do not have to file
provincially if they are not taxable; businesses have the ability
to claim different discretionary deductions for federal and
provincial purposes in the year (i.e., losses, resource expenditures, and capital cost allowance); businesses can take advantage
of different programs offered federally and by Alberta to minimize their federal and Alberta CIT; and small businesses do
not have to pay installments [of Alberta corporate income tax].
Alberta To Continue To Run Its
Own Corporate Income Tax
Alberta and Quebec are the only provinces that still administer
their provincial corporate income taxes. Quebec’s reasons for
this are obvious, but it is less clear why Alberta has not pursued
a tax collection agreement (TCA) with the federal government.
Nevertheless, Alberta Tax and Revenue Administration (TRA),
a component of Alberta Treasury Board and Finance, has said
in an e-mail to me that the Alberta government “has reviewed
the implications of consolidating corporate tax administration
and has determined that provincial administration delivers a
financial benefit to Alberta.”
It is understood that the rationale for separate administration was the anticipated enactment of tax deductions and
credits unique to Alberta—part of what later became known
as “the Alberta advantage.” However, the only material credit
Volume 6, Number 1
The last four items are minor costs to Alberta businesses
joining the TCA system, although they represent an increase
in compliance costs or an effective provincial corporate income
tax rate increase for some affected corporations. The second
item in the list (collection of penalties and interest) is a cost to
the Alberta government—provincial governments joining a TCA
no longer receive penalties and interest—but the tax assessed
is paid to Alberta on time and without any risk of non-payment
by the corporation, so the two factors may cancel each other out.
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February 2016
Thus, we are left with just the first item as a material reason
not to enter into a TCA: if Alberta joined the TCA system, would
it be more difficult for the province to enact any possible future
special taxes or tax incentives (even though there are few such
enactments now)? The published criteria (MOA, annex B) state
that the federal government will consider the following principles in deciding whether or not to administer a new tax
measure:
from entry into a TCA suggests that pursuing an agreement is
not likely to be a political priority in the near future, absent a
very large transitional payment from the federal government.
H. Michael Dolson
Felesky Flynn LLP, Edmonton
[email protected]
Another Reason To Avoid
Shareholder Benefits
1) the tax measure should not alter the common tax base;
2) the tax measure should not impede the flow of capital,
labour, and goods and services outside of provincial
borders; and
3) the tax measure should be consistent with Canada’s
international obligations.
Taxpayers rarely, if ever, intentionally trigger a subsection 15(1)
or 15(2) shareholder benefit: given that there is no deduction
to the corporation and there is a taxable amount to the shareholder, payment in the form of either a salary or a dividend
gives a better tax result. However, there is a further reason to
avoid shareholder benefits: Parihar v. The Queen (2015 TCC 52),
reinforcing Bleau v. The Queen (2006 TCC 36), and TI 20100354691I7 (January 27, 2010) demonstrate that a shareholder
benefit potentially subjects the taxpayer to a subsection 160(1)
assessment, which could result in personal liability for unpaid
corporate tax. The result could be an effective tax rate of more
than 100 percent on the shareholder benefit.
The CRA can apply subsection 160(1) in circumstances
where (1) the transferor is liable for a tax debt at the time of
the transfer; (2) a transfer of property occurs; (3) the transferee
is a spouse or common-law partner, a person under the age of
18, or a person not at arm’s length; or (4) there is inadequate
consideration for the transfer. If these conditions are satisfied,
the transferee is jointly liable with the transferor for the transferor’s tax debt, to the extent that the value of the transferred
property exceeds the consideration paid by the transferee.
The application of subsection 160(1) in a corporationshareholder context was demonstrated in Bleau, in which the
shareholders received $53,244 in subsection 15(1) and subsection 15(2) benefits and then had to pay that amount in unpaid
tax of the corporation that provided the benefits. The recent
Parihar case concerned a similar situation, but the amount in
question was $100,000. Of course, subsection 160(1) would
not have applied if the shareholder had been at arm’s length
with the corporation.
To see the cash flow implications, consider a top marginal
rate (48 percent) Alberta taxpayer who receives a subsection 15(1)
benefit of $100 and then, as a result, is later subject to a subsection 160(1) assessment of $100 in unpaid corporate tax. There
will be a tax of $48 on the benefit and a required repayment of
$100, so the end result is a negative cash flow of $148 on the
$100 benefit—essentially, an effective tax rate of more than
100 percent. A similar result can arise from a shareholder loan
that is taxable under subsection 15(2). Perhaps this result can
be said to be reasonable if the corporation has a sole shareholder,
because the unpaid tax is the result of the shareholder’s decisions
Alberta’s recent preference for a broad tax base with low rates
means that these restrictions should not represent a material
impediment in advancing provincial policy.
I suspect that the real issue is whether there would be a
significant net saving for all Alberta taxpayers as a result of not
using the TRA to collect Alberta corporate income tax. Regarding the costs of the current system, the TRA’s e-mail states that
“Alberta Treasury Board and Finance does not provide a breakdown of the costs of administering specific tax programs.
However, Minister Ceci did recently provide an estimate of the
costs incurred for collecting corporate taxes—approximately
$10 million annually.” This statement seems reasonable: the
TRA’s total operating costs were $34 million in Alberta’s most
recent fiscal year. The TRA is also responsible for administering
the province’s fuel tax, tobacco tax, and tourism levy, and it
would continue to do so after any TCA took effect.
Ontario realized a large part of its cost saving because, as a
result of the province’s adopting the HST and entering into the
TCA, the CRA became the employer of most of Ontario’s taxadministration employees. It is not clear whether Alberta’s
public service union would consent to such an arrangement
between Alberta and the CRA: Alberta’s wages and salaries per
government employee are approximately $10,000 per annum
higher than the federal government equivalent. In other words,
unless the CRA is willing to adopt different (higher) pay scales
for the former Alberta employees, it is possible that Alberta
would have to retain its more expensive employees and assign
them to new positions.
There is one factor that might entice Alberta to join the TCA
system. Ontario received cash payments totalling $400 million
(MOA, annex A) from the federal government for the purpose
of “ensuring a smooth transition” to a single administration of
corporate taxes, and it seems plausible that Alberta could negotiate a similar transitional payment.
In summary, the single administration of corporate income
tax in Alberta might be a good idea in the abstract. However, the
potential for a negative impact on provincial finances resulting
Volume 6, Number 1
3
February 2016
in controlling the corporation. However, the argument is less
persuasive for minority shareholders.
Could a taxpayer challenge the subsection 15(1) benefit on
the ground that there is effectively no benefit (by virtue of its
having to pay an equal amount to the CRA through subsection
160(1))? This argument is unlikely to be successful, since the
taxpayer did receive a benefit for a period of time.
Regarding subsection 15(2) benefits, a covenant to repay the
funds borrowed at a market interest rate and with suitable
collateral could be viewed as adequate consideration (provided
that there was a real intention to repay principal and interest),
which would remove such benefits from subsection 160(1). Of
course, the best evidence that the promise to repay is real is
that the loan is actually repaid in a reasonable time.
Finally, this double burden of tax may also apply to dividend
payments from corporations with a tax debt: when a corporation pays dividends, it does so for no consideration. Thus, the
shareholder could be liable for tax on the dividend and for the
amount of the dividend in a subsection 160(1) assessment
(Algoa Trust v. Canada, [1993] 1 CTC 2294 ( TCC)).
limitation-of-liability clause on the grounds of public policy
because professionals should be held to a high degree of diligence. (The trial judge had ruled [2013 BCSC 815] that the
limitation-of-liability provision was not unenforceable on
grounds of unconscionability, but this point was not challenged
on appeal.) The BCCA rejected the public policy argument,
concluding that it is largely confined to cases that are “compelling,” such as the manufacturing of baby formula with a toxic
compound, or “reckless,” such as the knowing provision of
defective material to be used in natural gas pipelines. Overall,
the court concluded (quoting from Loychuk v. Cougar Mountain
Adventures Ltd., 2012 BCCA 122):
I am not persuaded that an error in the giving of erroneous tax
advice in the circumstances of this case rises to the level that
is “so reprehensible that it would be contrary to the public interest to allow [the defendant] to avoid liability.”
The court in Felty noted that although British Columbia’s
Legal Profession Act (SBC 1998, c. 9) prohibits lawyers from
limiting their liability for negligence, a similar standard does
not exist in the Chartered Professional Accountants Act (SBC
2015, c. 1). A similar distinction between lawyers and accountants applies in Ontario. Section 22(1) of the Solicitor Act (RSO
1990, c. S-5) states that “[a] provision in any such agreement
that the solicitor is not to be liable for negligence or that he or
she is to be relieved from any responsibility to which he or she
would otherwise be subject as such solicitor is wholly void.” In
contrast, CPA Ontario confirms that the Chartered Accountants
Act, 2010 (SO 2010, c. 6, schedule C) and CPA Ontario’s bylaws,
regulations, and rules are silent on this point. (In 2014, when
CPA Ontario and CGA Ontario signed their unification agreement, they requested a new Chartered Professional Accountants Act from the province as soon as possible; however, no
new act has yet been released.)
If a limitation-of-liability clause is included in an engagement letter, the client may push back and decide to engage
another tax adviser who would agree to omit such a clause.
Each situation may have to be examined on its own merits,
and a client who wants to omit a limitation-of-liability clause
may have to pay higher fees to compensate for the increased
risk and the need to document all uncertainties in the work
done for the client. Some advisers feel that a limitation of
liability to the amount of the fees charged may be counterproductively strict, and may cause a client to feel aggrieved
enough by the lack of compensation to sue the adviser in the
event of an unfavourable outcome in a dispute.
Erica Hennessey
Bennett Jones LLP, Calgary
[email protected]
Tax Engagement Letter’s
Liability Limit Upheld
In Felty v. Ernst & Young LLP (2015 BCCA 445), a decision of the
Court of Appeal of British Columbia, an engagement letter’s
limitation of malpractice liability to the amount of the fees
charged was held to be enforceable. Although the transaction
in question resulted in a US tax liability of more than
US $540,000 that the taxpayer had not been warned about, the
adviser’s professional liability was limited to about $15,000;
the court did not determine what the liability would have been
in the absence of the clause. In light of this decision, advisers
who are not currently including strong liability limitations in
engagement letters might wish to begin doing so in jurisdictions where provincial legislation does not prohibit this
practice.
In Felty, the taxpayer’s lawyer sought advice from an accounting firm about the US tax consequences of a transfer of
shares as part of a proposed divorce settlement. The firm’s US
affiliate incorrectly advised that the transfer created no US tax
liability. (Negligence was effectively admitted by the firm at
trial.)
The tax engagement agreement limited professional liability
to the amount of fees charged, a provision that is perhaps at
the more restrictive end of such limitations. The taxpayer
argued on appeal that the courts should decline to enforce the
Volume 6, Number 1
Jamie Herman and Tracy Wu
Hennick Herman LLP
Richmond Hill, ON
[email protected]
[email protected]
4
February 2016
In the 2013 TI, the CRA determined that subclause II would
not apply to recharacterize interest income received by FA 1
on note 2 as active business income because FA 2 did not acquire EP shares. Rather, FA 2 acquired note 1 in consideration
for the issuance of note 2, and then contributed note 1 to the
capital of FA 3 without acquiring any new property. The CRA
interpreted subclause II as requiring that the “property acquired” be the EP shares. That is, subclause II will apply only
if interest income received from FA 2 relates to an amount
payable for property acquired by FA 2 for the purpose of earning
income from property, and the property acquired is EP shares.
In the 2014 TI, the CRA reversed its position with respect to
this fact situation: it accepted that subclause II would apply,
but it did not provide reasons. The CRA’s 2015 explanation for
this position is that subclause II, read in conjunction with
subclause III, requires that the purpose of the acquisition of a
property be to earn property income where the property is EP
shares. The property acquired does not have to be EP shares,
as long as the property has been acquired for the purpose of
earning income from EP shares.
In this case, the property acquired by FA 2 (note 1) was acquired for the purpose of earning income from shares of FA 3,
as of the time of the contribution of note 1 to FA 3, because the
contribution of note 1 to FA 3 enhanced the dividend-earning
capacity of FA 2 with respect to its existing shares of FA 3 (which
were EP shares). Therefore, the CRA concluded that interest
paid by FA 2 to FA 1 on note 2 would be recharacterized as
active business income of FA 1 under clause D.
The reversal represents a favourable result for taxpayers: it
broadens the scope of the CRA’s view of the clause D recharacterization rules. The new statement clarifies that subclause II
does not require the acquisition of EP shares, provided that the
property acquired by FA 2 is used in a manner that indirectly
increases the dividend-earning capacity of EP shares.
The CRA’s position provides taxpayers with some comfort
that clause D’s conditions may be satisfied in certain circumstances where property is contributed to a foreign affiliate
without the issuance or acquisition of shares of the affiliate.
This approach also eases the costs and administrative burden
for taxpayers that have foreign affiliates in jurisdictions that
levy administrative charges, taxes, or duties in connection with
the issuance of shares.
Clause 95(2)(a)(ii)(D) Recharacterization:
The CRA’s Position Explained
The CRA’s 2014 reversal (TI 2014-0519801I 7, September 16,
2014) of its controversial 2013 position on the clause 95(2)(a)
(ii)(D) recharacterization rule (TI 2013-0496841I 7, October 21,
2013) has been clarified. At the 2015 International Fiscal Association conference, the CRA explained its reasons for the new
position (2015-0581601C6, May 28, 2015).
The accompanying figure illustrates the corporate structure
contemplated in the 2013 TI. Canco owns all of the shares of
two foreign affiliates, FA 1 and FA 2. FA 2 owns all of the shares
of another foreign affiliate (FA 3), which are excluded property
of FA 2. FA 3, in turn, holds all the shares of another foreign
affiliate (FA 4). In step 1, FA 4 acquires from FA 1 the shares of
a foreign affiliate that carried on an active business, and in
return FA 4 issues an interest-bearing note (note 1) to FA 1 as
consideration. In step 2, FA 2 acquires note 1 from FA 1 by
issuing an interest-bearing note (note 2) to FA 1. In step 3, FA 2
transfers note 1 to FA 3 as a contribution of capital (without
the issuance of shares by FA 3).
Canco
Note 1
FA 1
FA 2
Note 2
Note 1
FA 3
Note 1
Shares
FA 4
Clause 95(2)(a)(ii)(D) generally benefits the taxpayer by recharacterizing what would otherwise be property income of a
foreign affiliate of a Canadian taxpayer (and thus generally
included in computing the affiliate’s FAPI) as active business
income. The point at issue is the conditions that must be present for this recharacterization to apply.
For the purposes of this discussion, the relevant conditions
in clause D are as follows:
Noah Bian
Ernst & Young LLP, Calgary
[email protected]
1) the property income is derived from amounts paid or
payable, directly or indirectly, to the foreign affiliate by
a second foreign affiliate on an amount payable for
property acquired for the purpose of earning property
income (subclause 95(2)(a)(ii)(D)(II)); and
2) the property is excluded property of the second foreign
affiliate that is shares of a third foreign affiliate (“EP
shares”) (subclause 95(2)(a)(ii)(D)(III)).
Volume 6, Number 1
Thin Cap: Currency Fluctuations
Not a Problem
At the CRA Round Table held at the Canadian Tax Foundation’s
2015 annual conference, the CRA announced a welcome change
to its policy on the thin capitalization rules applicable when
currency fluctuations occur after the indebtedness arises.
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February 2016
Postscript: The CRA has informed me that its views apply to
all foreign-currency debts and not just to those issued in the
circumstances described in the round table question.
In order to prevent the erosion of the Canadian tax base
through deductible interest charges, the thin capitalization
rules (subsections 18(4) through 18(8)) limit the amount of
interest-bearing financing that a Canadian business (corporation,
partnership, trust, or branch) can receive from a non-resident
that has a 25 percent or more (when aggregated with related
persons) interest in that business. If the amount of the debt
exceeds a 1.5:1 ratio of debt to equity, there will be a pro rata
denial of interest deductibility.
Subparagraph 18(4)(a)(i) requires that the taxpayer use “the
average of all amounts each of which is, in respect of a calendar
month that ends in the year, the greatest total amount at any time
in the month of the outstanding debts to specified non-residents”
in computing the debt portion of the thin capitalization calculation. The CRA’s position has been that if a loan was denominated
in a foreign currency, the taxpayer was required to compute
the amount of that loan for a month on the basis of the highest
Canadian-dollar value of the loan at any time in the month.
Therefore, a loan initially structured to come within the thin
capitalization safe harbour could go offside if the foreign currency subsequently appreciates against the Canadian dollar.
In particular, CRA document no. RCT 8031-5 (September 28,
1988) states that “foreign currency fluctuations could trigger
the application of ss. 18(4).”
At the round table, the CRA noted that subsection 261(2) provides that if a particular amount relevant to computing the
Canadian tax result is expressed in a foreign currency, the
amount is to be converted to an amount expressed in Canadian
currency using the relevant spot rate for the day on which the
particular amount arose. Provided that the taxpayer has not
made a valid functional currency election—in which case no
conversion to Canadian currency is required—the Bank of
Canada noon spot rate (generally, the “relevant spot rate” for
the purposes of section 261) at the time that the foreigncurrency-denominated loan is made should be used to convert
the loan to Canadian dollars. Therefore, future fluctuations in
the currency will not affect the thin capitalization analysis.
The question that was answered at the round table specifically concerned a situation in which the non-resident makes
a contribution in foreign currency in return for both shares
and debt. In this case, the PUC is denominated in Canadian
dollars at the time the shares are issued, effectively fixing the
equity amount for all time; yet, on the basis of the CRA’s previous
position, the amount of debt used in the debt-equity calculation
could change with foreign-currency fluctuations. However, it
appears that the CRA’s statement on the treatment of the debt
is not limited to fixing this anomalous situation of a simultaneous debt-equity investment. CRA document no. 2015-0610601C6,
which reports on the round table question and answer, does
not mention this specific context in its statement of principal
issues, position, and reasons. Further, the statutory authority
cited also makes no such reference. It appears that the phrasing
of the question was intended to highlight the policy inconsistency as a justification for the change in interpretation.
Volume 6, Number 1
Jesse Brodlieb
Dentons Canada LLP, Toronto
[email protected]
Functional Currency Election
Not Available to Branches
The functional currency election, which is an exception to the
normal rule that taxpayers must determine their Canadian tax
results in Canadian dollars, allows a taxpayer to report results
in the currency in which it maintains its records and books
of account for financial reporting purposes. (The election is
limited to the US dollar, the euro, the British pound, and the
Australian dollar.) However, subsection 261(3) makes the election available only to corporations resident in Canada; therefore,
a non-resident corporation that operates in Canada through a
branch is not eligible for the election.
The functional currency election allows taxpayers to avoid
recognizing income or losses for tax purposes because of
fluctuations in the Canadian dollar relative to the functional
currency. The election also reduces compliance costs in situations where a taxpayer converts its tax results to Canadian
dollars solely for the purpose of filing Canadian tax returns.
Other countries have similar regimes, and the election was
intended to enhance Canada’s international competitiveness.
However, that competitiveness is reduced because the election is not available to non-residents. By contrast, both Australia
(in section 960.70 of the Income Tax Assessment Act 1997)
and the United States (in certain circumstances—see Treas.
reg. section 1.985-1) permit non-residents carrying on business
to access their functional currency regimes. Although a nonresident carrying on business in Canada through a branch
could form a Canadian corporation to carry on business in
Canada, in many situations this solution is not feasible.
The gap in the rules is surprising, given that the foreigncurrency election is otherwise quite comprehensive. For example,
although the election is limited to corporations, if a particular
taxpayer that has made a functional currency election is a
member of a partnership, the partnership is essentially deemed
to use the same elected functional currency as the taxpayer
(subsection 261(6)). Also, any FAPI of a foreign affiliate of a
particular taxpayer that has made a functional currency election
is computed on the basis of the taxpayer’s elected functional
currency rather than the Canadian dollar (subsection 261(6.1)
and paragraph 261(5)(h)).
The inability of a non-resident corporation carrying on business in Canada to access the election can also produce strange
results. Assume, for example, that a corporation resident in
Canada has elected to use the US dollar as its functional currency,
but that same corporation has a US subsidiary that carries on
6
February 2016
Situation 1
business in Canada through a branch. In such a situation, the
taxpayer’s Canadian tax results will be determined in US dollars, and so too will any FAPI earned by the subsidiary; however,
the subsidiary’s Canadian tax results must be computed in
Canadian dollars. These are the very problems that the functional currency election is intended to solve.
If we assume that the client elects under subsection 45(3), the
home will not be deemed to be disposed of and reacquired at
the time she moves in. Therefore, the property is owned during
five taxation years (that is, C = 5), and the total gain reported
by the client is calculated as
Andrew Morreale
Grant Thornton LLP, Toronto
[email protected]
$600,000 − $600,000 × (1 + 3)/5 = $120,000
Situation 2
If we assume that an election is not filed under subsection
45(3) with respect to the change in use at the time that the
client begins to use the property as her principal residence,
the capital gain on the change in use is calculated as follows
(where the deemed proceeds are the $1.5 million purchase
price increased by half of the annual rate of price increase of
9 percent):
Principal-Residence Tax-Deferral
Election May Be Inadvisable
At first glance, many advisers are likely to see an election to
avoid a deemed disposition and thereby defer tax as obviously
beneficial to a taxpayer. However, the subsection 45(3) election,
which is available when a property that was acquired for gaining or producing income becomes a principal residence, is not
a slam-dunk. Even common rules of thumb (such as “make
the election only if the rate of the price increase is expected to
be higher after the change in use than before”) can lead an
adviser astray; the example given below of a steady rate of price
increase shows that each situation must be separately examined.
Careful analysis of this issue is even more important in light
of the recent dramatic growth in house prices in many cities.
The key point is that subsection 45(3) does not simply defer
taxing the gain accrued up to the change in use until the future
disposition of the principal residence; instead, it erases the
deemed disposition entirely and applies a formula to determine,
on the ultimate disposition of the property, the proportion of
the total capital gain that can be sheltered by the principalresidence exemption.
In simplified form, a taxpayer’s capital gain on the disposition of a principal residence is calculated as
$1,500,000 × 1.045 − $1,500,000 = $67,500
The gain on the final disposition of the property in five years
will be $532,500 ($600,000 less $67,500 already reported). This
amount will be sheltered by the principal-residence exemption,
so the capital gain is calculated as
$532,500 − $532,500 × (1 + 3)/4 = $0
The final result is that the client has a lower capital gain if she
chooses to pay tax up front ($67,500 versus $120,000); this
amount is more than enough to offset the disadvantage of
paying tax early. Effectively, the client has traded the risk of a
much larger tax bill in the future for a certain, but smaller,
amount of tax now.
James Painter
Grant Thornton LLP, Vancouver
[email protected]
A−A×B/C
What Are the Core Characteristics
of a Debt?
where A is the gain calculated without reference to the principalresidence exemption; B is 1 plus the number of taxation years
for which the property was designated as the principal residence; and C is the number of taxation years during which the
taxpayer owned the property.
Assume that a client buys a house for rental purposes in
late 2015 for $1.5 million. She moves into the house in early
2016, six months after acquiring it. The property increases in
value 40 percent over the next four years to $2.1 million (approximately 9 percent compounded annually). In 2019, four
years after the purchase, the client sells the property for a gain
of approximately $600,000 ($2.1 million less $1.5 million); and
the property is designated as the client’s principal residence
for the three years from 2017 to 2019. (The year 2016 is used
for the principal-residence exemption for another property.)
Volume 6, Number 1
In Barejo Holdings ULC v. The Queen (2015 TCC 274; under appeal), a motion that proceeded under rule 58 of the Tax Court
of Canada Rules (general procedure), the TCC provided an
extensive examination of the substantive elements to be considered when one is determining whether an instrument is to
be characterized as debt. The TCC found in favour of the CRA:
the hybrid instruments in question were indeed debt because
they possessed most of the requisite elements of debt. This
decision, which is part of a broader debate on the applicability
of the section 94.1 offshore investment fund rules, provides
interesting guidelines for taxpayers to take into consideration
when drafting hybrid instruments.
7
February 2016
Barejo Holdings offers an interesting analysis of such instruments in its in-depth examination of the agreement’s core
characteristics.
Barejo held shares in GAM, a non-resident open-ended investment company with assets made up primarily of interests
in hedge funds or mutual funds. In 2002, GAM undertook a
reorganization that was apparently intended not to fall within
the scope of the proposed offshore investment fund rules and
sold its assets to two non-resident affiliates of Canadian banks.
GAM used the funds from the sale to purchase a note from
each of the two affiliates. During the course of the reorganization, GAM changed its name to St. Lawrence Trading Inc. (SLT).
The rate of return on the notes (which could be negative) purchased by SLT was linked to a notional reference portfolio of
assets. The amount payable to settle the notes was equal to the
underlying value of the notional reference portfolio at the time
that the notes were to be repaid. Furthermore, the notes ranked
equally with the other obligations of the two non-resident affiliates, were issued for a principal amount, were guaranteed
by the Canadian banks, and had no stipulated interest rate.
Boyle J acknowledged that “debt” and similar words (such
as “indebtedness,” “debtor,” and “debt obligation”) could have
different meanings, depending on the context and the words’
particular use in various provisions of the Act. He also said
that given Canada’s bijural legal system, the characterization
of an obligation as debt could differ depending on whether
common law or Quebec civil law is being applied.
In analyzing hybrid instruments such as the notes held by
SLT, Boyle J reiterated the need for the courts “to look to and
weigh the language chosen by the parties, the parties’ intentions, the surrounding circumstances, and the legislative régime” in order to identify the criteria that would tilt the balance
in favour of one characterization over another. After a thorough
examination of the case law and various provisions of the Act
relating to the meaning of debt and indebtedness, the court
concluded that the essential qualities of a debt are that
Victor Perrault
KPMG LLP, Montreal
[email protected]
Quelles sont les principales
caractéristiques d’une dette?
Dans Barejo Holdings ULC c. La Reine (2015 TCC 274; portée en
appel), la CCI, statuant sur une requête ayant procédé en vertu
du régime de l’article 58 des Règles de la Cour canadienne de
l’impôt (procédure générale), propose un examen approfondi
des éléments substantiels à considérer afin de déterminer si
un instrument doit être traité comme une dette (bien que la
version française de l’article 94.1 parle plutôt de « créance »).
La CCI conclut en faveur de l’ARC : les instruments hybrides en
question se qualifiaient à titre de dettes, car ceux-ci possédaient
la plupart des caractéristiques requises. Cette décision, qui
s’inscrit dans le cadre d’un débat sur l’application des règles
relatives aux fonds de placement non-résidents de l’article 94.1,
fournit aux contribuables des directives intéressantes à
considérer dans la rédaction d’instruments hybrides.
Barejo détenait des actions de GAM, une open-ended
investment company non-résidente dont les actifs étaient
constitués principalement d’intérêts dans des fonds
spéculatifs ou des fonds communs de placement. En 2002,
GAM entreprit une réorganisation dont le but apparent était
de ne pas entrer dans le champ d’application des règles sur
les fonds de placement non-résidents, et vendit ses actifs à
deux filiales non-résidentes de banques canadiennes. GAM
utilisa le produit de cette vente afin d’acheter une note de
chacune des filiales. Dans le cadre de la réorganisation, GAM
changea son nom à St. Lawrence Trading Inc. (SLT). Le taux
de rendement des notes achetées par SLT (qui pouvait être
négatif ) était lié à un portefeuille d’actifs notionnel de
référence. Le montant payable en règlement des notes était
égal à la valeur sous-jacente du portefeuille notionnel de
référence au moment où les notes devaient être repayées. De
plus, les notes occupaient le même rang que les autres
obligations des filiales non-résidentes, étaient émises pour
un principal, étaient garanties par les banques canadiennes
et n’avaient aucun taux d’intérêt convenu.
Le juge Boyle n’exclut pas la possibilité que le terme
« dette » et des mots similaires aient un sens différent selon
le contexte et l’usage particulier de ces mots à travers la loi.
Il fit également remarquer qu’en vertu du bijuridisme
canadien, la qualification d’une obligation à titre de dette
pouvait différer selon l’application de la common law ou du
droit civil québécois.
1) an amount or credit is advanced by one party to another;
2) an amount is to be paid by the other party upon demand
or in the future in satisfaction of the advance;
3) the amount to be paid is fixed or determinable or will
be ascertainable when payment is due; and
4) there is an implicit, stipulated, or calculable interest rate
(which can be zero).
Boyle J concluded that the notes in question possessed a
number of the qualities of a debt—notably, their designation
as “notes”; the payment obligation at maturity that relates,
albeit in complex fashion, to the amount for which they were
issued; and the fact that they were ranked equally with other
debt obligations. However, he did not address in significant
detail the fact that SLT’s notes could have a negative rate of
return and that the ultimate payment obligation could possibly
have been nil.
The BEPS initiatives undertaken by the OECD will affect the
use of hybrid instruments; nonetheless, the TCC’s decision in
Volume 6, Number 1
8
February 2016
Dans le cadre de l’analyse d’instruments hybrides tels que
les notes détenues par SLT, le juge Boyle réitéra le besoin
pour les tribunaux de considérer le langage, l’intention des
parties, le contexte factuel et le régime législatif afin d’identifier
les critères faisant pencher la balance en faveur d’une
certaine qualification plutôt qu’une autre. Suite à un examen
approfondi de la jurisprudence et des dispositions de la Loi
référant au sens de « dette » et de « créance », la Cour conclut
que les éléments essentiels d’une dette étaient les suivants :
favouring another taxpayer in similar circumstances could be
used to their benefit. Thus, the rules limit a corporation’s
freedom to change the basis of its appeal after it files a notice
of objection: the rules require that the notice of objection describe each issue and the amounts sought as relief, together
with supporting facts and reasons.
The issue for the taxpayer was the deductibility of payments
made to employees as consideration for the surrender of their
stock options. The taxpayer had argued in its notice of objection
that the payments were deductible under subsection 9(1).
Perhaps as a consequence of Imperial Tobacco (2010 TCC 648;
aff ’d. 2011 FCA 308), the taxpayer submitted additional representations to the CRA’s Appeals Division, arguing for deductibility on the basis of paragraphs 20(1)(b) and (e) instead. The
minister then issued a notice of confirmation of the notice of
assessment, noting that the alternative arguments submitted
by the taxpayer were treated as part of the objection. The taxpayer appealed, citing these new arguments. The minister filed
a motion to strike various parts of two notices of appeal because
they did not comply with the rules governing large corporations
under subsections 165(1.11) and 169(2.1), thereby implying
that they could not be considered in court.
The FCA denied the motion, holding that the parts of the
notices of appeal relating to the paragraphs cited above could
be raised before the TCC. Although there is no provision in the
Act authorizing a large corporation to amend the issues raised
in its notice of objection, it was contrary to the spirit of the Act
to not allow these issues to be raised. After all, “the Minister
explicitly accepted that the issue related to paragraph 20(1)(b)
of the Act was part of the objection.”
The Devon Canada decision may not be of much help to
other taxpayers. The minister can end the objection stage at
any time by issuing a notice of confirmation or notice of reassessment, so there may be no opportunity to submit additional reasons at a later date.
The most concerning aspect of the decision is that it appears
that if the taxpayer had not submitted additional representations to the Appeals Division, the parts in the notices of appeal
related to paragraphs 20(1)(b) and (e) would have been struck.
This conclusion seemingly limits the scope of the very notion
of “issue” because it does not consider the objection as a whole,
including the reasons submitted by the taxpayer in support of
its position, and it does not appear to distinguish clearly between the issue and the legislative provisions and reasons in
support of the objection. (For prior decisions, see Bakorp
Management Ltd. v. Canada, 2014 FCA 104, and Ford Motor
Company of Canada Limited v. The Queen, 2015 TCC 39.) Must
a large corporation now set out in its notice of objection (and,
pursuant to subsection 169(2.1), its notice of appeal) every
provision on which it might rely in support of its position?
1) un montant ou crédit est avancé par une partie à
l’autre;
2) un montant doit être payé par l’autre partie sur
demande ou dans le futur, afin de satisfaire l’avance;
3) le montant à être payé est fixe ou déterminable, ou il
sera vérifiable lorsque le paiement est dû; et
4) il y a un taux d’intérêt implicite, stipulé ou calculable
(qui peut être zéro).
Le juge Boyle statua que les notes en question possédaient
bon nombre des caractéristiques d’une dette — à savoir leur
désignation en tant que « notes », l’obligation de paiement à
maturité liée — bien que de façon complexe — au montant
pour lequel elles ont été émises, et le fait qu’elles occupaient
le même rang que les autres créances. Cependant, il
n’aborda pas en détail le fait que les notes pouvaient avoir un
taux de rendement négatif, et que l’obligation de paiement
pouvait potentiellement être nulle.
Les initiatives BEPS entreprises par l’OCDE risquent
d’affecter le recours aux instruments hybrides; néanmoins,
la décision de la CCI dans Barejo Holdings fournit une
analyse intéressante de ce type d’instrument à travers un
examen poussé des caractéristiques fondamentales de ce
type de contrats.
Victor Perrault
KPMG s.r.l./S.E.N.C.R.L., Montréal
[email protected]
Large Corporations: Concerns
About Notices of Objection
In Devon Canada Corporation v. Canada (2015 FCA 214), the
FCA clarified the rules that apply to large corporations with
respect to notices of objection, finding in favour of the taxpayer
on the basis of actions that had been taken at the CRA’s Appeals
Division. However, the decision may indicate a general tightening of the rules. Thus, the 90 days allowed after the receipt of
a notice of assessment to file a notice of objection may put even
more time pressure on practitioners, since the notice may now
need to be more specific and complete.
The rules in question address the government’s concern
that large corporations might object to tax assessments in order
to keep past tax years open in the hope that a court decision
Volume 6, Number 1
Rachel Robert
Couzin Taylor LLP, Montreal
[email protected]
9
February 2016
ait aucune disposition de la LIR permettant à une grande
société de modifier les questions en litige soulevées dans
son avis d’opposition, il était contraire à l’esprit de la loi que
les nouveaux arguments ne puissent pas être soulevés. Après
tout, « [traduction] le ministre avait expressément accepté de
considérer la question liée à l’alinéa 20(1)b) de la LIR comme
faisant partie de l’opposition ».
La décision Devon Canada pourrait être désavantageuse
pour d’autres grandes sociétés. Puisque le ministre peut
mettre à tout moment un terme au processus d’opposition
en émettant un avis de confirmation ou un avis de nouvelle
cotisation, il est possible qu’il n’y ait aucune opportunité
pour soumettre ultérieurement des motifs supplémentaires.
L’aspect le plus préoccupant de cette décision est qu’il
s’avère que si le contribuable n’avait pas soumis de
représentations additionnelles à la Division des appels, les
parties des avis d’appel liées aux alinéas 20(1)b) et e) auraient
été radiées. La conclusion à laquelle en arrive la CAF semble
restreindre la portée de la notion même de « question à
trancher » puisqu’elle ne considère pas l’ensemble de
l’opposition, dont les motifs soumis par le contribuable au
soutien sa position, et ne semble pas faire une distinction
claire entre, d’une part, la question à trancher et, d’autre part,
les dispositions législatives et motifs au soutien de
l’opposition. (Pour des décisions antérieures, voir Bakorp
Management Ltd. c. Canada, 2014 CAF 104 ainsi que Ford du
Canada Limitée c. La Reine, 2015 CCI 39.) Doit-on conclure de
ce passage qu’une grande société devra dorénavant spécifier
dans son avis d’opposition (et conformément au paragraphe
169(2.1), dans son avis d’appel) toutes les dispositions
susceptibles de s’appliquer au soutien de sa position?
Grandes sociétés : Préoccupations
concernant les avis d’opposition
Dans la décision Devon Canada Corporation v. Canada (2015
FCA 214), la CAF a clarifié les règles relatives aux grandes
sociétés pour les avis d’opposition, statuant en faveur du
contribuable sur la base d’actions prises au stade de la
Division des appels de l’ARC. Bien que le résultat de cette
décision soit favorable au contribuable, celle-ci semble
indiquer un resserrement desdites règles. En effet, il est
possible que le délai de 90 jours alloué pour produire un avis
d’opposition suite à la réception d’un avis de cotisation soit
une contrainte de temps de plus pour les praticiens puisqu’il
pourrait maintenant être nécessaire que les avis d’opposition
soient plus précis et complets.
Les règles en question ont été proposées suite à une
préoccupation gouvernementale voulant que les grandes
sociétés puissent s’opposer aux cotisations fiscales afin de
laisser leurs années d’imposition antérieures ouvertes en
espérant qu’une décision favorable à un autre contribuable
dans des circonstances similaires puisse être utilisée à leur
avantage. Dès lors, lesdites règles limitent la liberté d’action
d’une grande société à changer le fondement de son appel
suite à la production de son avis d’opposition : les règles
exigent que l’avis d’opposition précise pour chaque question,
le redressement demandé ainsi que les faits et les motifs sur
lesquels la société se fonde.
La problématique du contribuable concernait la
déductibilité des paiements en espèces versés à ses employés
en contrepartie de la cession de leurs options d’achat
d’actions. Dans son avis d’opposition, le contribuable avait
soumis que le montant des paiements était déductible en
vertu du paragraphe 9(1). Possiblement à cause de la décision
Imperial Tobacco (2010 CCI 648; confirmée par 2011 CAF 308),
le contribuable avait fait des représentations additionnelles à
la Division des appels de l’ARC soumettant que le montant
des paiements pouvait être déductible en vertu des alinéas
20(1)b) et e). Le ministre avait donc émis un avis de
confirmation de l’avis de cotisation en spécifiant que les
arguments subsidiaires soumis par le contribuable avaient
été traités comme faisant partie de l’opposition. Le
contribuable avait interjeté appel en alléguant les nouveaux
arguments. Le ministre a déposé une demande afin de faire
radier diverses parties des deux avis d’appel déposés par le
contribuable au motif que ces parties n’étaient pas conformes
aux règles relatives aux grandes sociétés prévues aux
paragraphes 165(1.11) et 169(2.1) et qu’elles étaient dès lors
inadmissibles en cour.
La CAF a rejeté la demande du ministre statuant que les
parties des avis d’appels liées aux alinéas mentionnés ci-haut
pouvaient faire l’objet d’un débat devant la CCI. Bien qu’il n’y
Volume 6, Number 1
Rachel Robert
Couzin Taylor s.r.l., Montréal
[email protected]
Rental Investors: The GST
Rebate Mixup
Investors who buy new residential real estate for rental purposes may be paying too low an amount on closing, because
the developer’s price typically reflects a credit for a GST/HST
rebate to which they are not entitled. The correct approach,
which avoids the incurring of interest and penalties, is to
(1) pay the purchase price plus full GST/HST on closing and
(2) separately apply to the CRA for a rebate (of a different type).
New condominiums, townhouses, and houses are subject
to GST (or HST in HST provinces). Partial rebates for the tax (up
to $30,300 in Ontario) are available if the property is purchased
for use as the buyer’s or a relative’s primary place of residence
(new housing rebate, ETA section 254). There is also an equal
10
February 2016
rebate for new properties purchased for long-term rental (rental
rebate, ETA section 256.2), which is intended to put rental
housing in the same position as owner-occupied housing.
Most purchase and sale agreements for new real property
assume that the buyer is eligible for the housing rebate and
include the rebate in the stated purchase price. This inclusion
is enabled by rules that allow the seller to credit the rebate
against the tax due on closing. Builders are thus at a marketing
advantage because they can advertise and sell properties at a
lower (net-of-rebate) price than they otherwise would. The
rebate application is typically submitted through the builder
at closing, which means that the two-year application deadline
will always be met.
Most investors who buy for rental are at a disadvantage.
They are ineligible for the new housing rebate because they
lack the requisite intention to use the property as their primary
place of residence. They may qualify for the rental rebate, but
there is no equivalent rule that allows the seller to credit the
rebate at closing. As a result, the buyer must pay more than
the stated purchase price on closing in order to cover the full
tax, must apply separately for a rebate within two years, and
must wait for the application to be processed. This process can
create significant cash flow problems, especially for an individual investor.
What happens if a rental investor wrongly claims the new
housing rebate? Even though the investor would have qualified
for the rental rebate, the CRA can assess for the inappropriately
claimed new housing rebate plus interest. The rental rebate can
still be claimed within two years after the end of the month of
closing, but the taxpayer may learn about the issue only through
a CRA new housing rebate audit several years after closing.
One may ask why the CRA does not simply offset the rental
rebate against a wrongly claimed new housing rebate—a solution that seems fair, since the rebate amounts are equal. Indeed,
the CRA is expressly required to offset credits and rebates
against assessments of net tax (subsections 296(2) and (2.1))
notwithstanding normal limitation periods. However, a rebate
application technically does not result in a net tax assessment
or an assessment of an unpaid amount, and so it is not entirely
clear whether offset is required.
also applies if one of the purposes is to reduce the FMV of the
shares or to increase the cost of property. In addition, the proposed subsection may also apply to cash dividends paid to
related parties, which has not previously been the case. This
broad scope, which normally would be to the disadvantage of
the taxpayer, may be beneficial if the goal is to extract funds
from a corporate group. Deliberately triggering the subsection
converts what would otherwise be a dividend into a capital gain,
possibly lowering the total amount of corporate and personal
tax paid. But this plan is aggressive, and the CRA might resist it.
Consider the following corporate structure. The ownermanager, Ms. A, owns all of the issued and outstanding shares
of Holdco, which in turn owns all of the issued and outstanding
shares of Opco. Opco shares have nominal ACB and PUC, and
Opco has no safe income on hand (SIOH). Ms. A would like to
extract $10,000 from the corporate group. The calculations
below use 2016 federal (per the December 7, 2015 Notice of
Ways and Means Motion To Amend the Income Tax Act) and
Ontario rates.
One option is for Opco to redeem $10,000 worth of shares
owned by Holdco, resulting in a deemed dividend of $10,000.
Proposed paragraph 55(3)(a) provides that proposed subsection
55(2) will not apply in the case of a dividend that is received
on a redemption of a share if there was not at any time the
involvement of an unrelated party. As a result, Holdco will
receive a $10,000 tax-free intercorporate dividend. The further
distribution of a dividend from Holdco to Ms. A (assuming
that the dividend is a non-eligible dividend and Ms. A is subject
to the highest marginal tax rate on this type of income, which
is about 45 percent) will create about $4,500 in personal tax.
The total corporate and personal taxes will be $4,500 (nil corporate tax, $4,500 personal tax).
Another option is for Opco to pay a $10,000 cash dividend
to Holdco. The purpose test in proposed clause 55(2.1)(b)(ii)(A)
may be met if there is a significant reduction in the FMV of the
shares. Further, because there is no SIOH, all of the $10,000
dividend will be deemed to be a capital gain, resulting in a taxable amount of $5,000. The relevant corporate tax rate is about
19.5 percent (the 50.2 percent corporate tax rate on investment
income less the 30.7 percent dividend refund), resulting in
corporate tax of about $1,000. Holdco can pay Ms. A the remaining $9,000 as dividends: $4,000 as a non-eligible dividend and
$5,000 as a capital dividend. (The CDA definition excludes
deemed capital gains arising from both stock dividends [proposed subclause 52(3)(a)(ii)(A)(II)] and deemed dividends as a
result of an increase in PUC [subparagraph 53(1)(b)(ii)], but
includes deemed capital gains arising from cash dividends.)
The result is that Ms. A will pay about $1,800 ($4,000 × 45%)
in personal tax, for a total corporate and personal tax of $2,800,
which is $1,700 less than under the redemption option.
The example assumed that the SIOH balance is zero, but the
same strategy can be applied when SIOH is non-zero but less
than the desired amount of cash to be extracted. In that case,
Simon Thang
Thorsteinssons LLP, Toronto
[email protected]
Deliberate Triggering of
Subsection 55(2)
The broader application of proposed subsection 55(2) relative
to the existing legislation has caused widespread concern. In
particular, while the existing provision applies if the purpose
of the dividend is to reduce a capital gain that would have been
realized on a disposition of shares, the proposed subsection
Volume 6, Number 1
11
February 2016
the taxpayer should ensure that the full amount of the dividend
is deemed to be a capital gain by not making the paragraph
55(5)(f ) designation. (If this designation is made, the amount
of the dividend up to the SIOH balance will remain a dividend.)
However, the strategy may be considered more aggressive in
this circumstance.
Would GAAR apply to this strategy? At both the 2015 APFF
conference (2015-0595641C6(F), October 9, 2015) and the Canadian Tax Foundation’s 2015 annual conference (at the CRA
Round Table), the CRA said that it would not apply GAAR to
the deliberate triggering of subsection 55(2) in order to increase the CDA balance (although the strategy described in
the questions involved share redemptions rather than cash
dividends).
The CRA said that it has expressed its concerns about that
type of tax planning to the Department of Finance.
2016. This case pertains to a motion for rectification and
to what extent a taxpayer can retroactively revisit documentation giving effect to a series of transactions when
unforeseen tax consequences have resulted following the
SCC’s decision in Quebec (Agence du revenu) v. Services
Environnementaux AES inc. (2013 SCC 65). A short summary of the case is available here.
• Attorney General of Canada v. Fairmont Hotels Inc., et al.
(from 2015 ONCA 441). Leave was granted on December
10, 2015. The tentative date for the hearing is May 18, 2016.
This case pertains to a motion for rectification granted in
favour of the taxpayer based on the test in Attorney General
of Canada v. Juliar (2000 CanLII 16883 (ONCA)) and the
taxpayer’s continued tax intention. The Crown argues that
the Juliar test was misapplied and that to allow rectification solely on the basis of the taxpayer’s tax intention
would be to sanction impermissible retroactive tax planning. A short summary of the case is available here.
Jin Wen and Vicky Liu
Grant Thornton LLP, Toronto
[email protected]
[email protected]
Leave Sought by the Department of Justice
None.
Supreme Court Docket Update
Leave Sought by the Taxpayer
Awaiting Judgment
• Mac’s Convenience Store Inc. v. Attorney General of Canada,
et al. (from 2015 QCCA 837). Leave was sought by the
taxpayer on December 18, 2015. This case pertains to a
motion for rectification sought by the taxpayer which was
denied on the basis that a taxpayer is obliged to pay tax
arising from the transaction it effected—not from the
transaction that it would have preferred to have effected
given the benefit of hindsight regarding unintended tax
consequences.
• Humane Society of Canada for the Protection of Animals and
the Environment v. Minister of National Revenue (from 2015
FCA 178). Leave was sought by the taxpayer on October
16, 2015. This case pertains mainly to whether personal
benefits conferred on a director of a charitable organization may result in the loss of registration.
• Minister of National Revenue v. Duncan Thompson. The
case was heard on December 4, 2014, and a webcast is
available. This case is an appeal from Thompson v. Canada
(National Revenue) (2013 FCA 197) and pertains to the
issue of whether a lawyer subject to enforcement proceedings can claim solicitor-client privilege over his accounts
receivable. A short summary of the case is available here.
• Attorney General of Canada, et al. v. Chambre des notaires
du Québec, et al. The case was heard on November 3, 2015.
A motion for leave to intervene, filed by the Canadian Bar
Association, the Federation of Canadian Law Societies,
the Advocates’ Society, and the Criminal Lawyers Association, was granted on June 17, 2015. This case is an appeal
from Canada (Procureur général) c. Chambre des notaires
du Québec (2014 QCCA 552). Leave was sought by the Department of Justice and was granted with costs on December 18, 2014. This case pertains to whether subsection
231.2(1) and section 231.7, together with the exception set
out in the definition of “solicitor-client privilege” in subsection 232(1), are unconstitutional vis-à-vis notaries and
lawyers in Quebec on the basis that the provisions are
contrary to the Canadian Charter of Rights and Freedoms.
A short summary of the case is available here.
Leave Dismissed
• Eleanor Martin v. The Queen (from 2015 FCA 95). Leave
was dismissed with costs on October 29, 2015. This case
pertains to the TCC’s discretion to award costs in excess
of the relevant tariff amount pursuant to the Tax Court of
Canada Rules (general procedure) in respect of, among
other things, the CRA’s conduct prior to the appeal. A short
summary of this case is available here.
Leave Granted
Marie-France Dompierre
Deloitte Tax Law LLP, Montreal
[email protected]
• Jean Coutu Group (PJC) inc. v. Attorney General of Canada
(from 2015 QCCA 838). Leave was granted on November
19, 2015. The tentative date for the hearing is May 18,
Volume 6, Number 1
12
February 2016
décision Attorney General of Canada v. Juliar (2000
CanLII 16883 (ONCA)) et de l’intention fiscale continue
du contribuable. La Couronne argumente que le test de
Juliar fut mal appliqué et que se baser uniquement sur
l’intention fiscale du contribuable constitue de la
planification fiscale rétroactive. Un court sommaire du
dossier est disponible ici.
Dossiers portés en appel devant la
Cour suprême — Mise à jour
En attente de jugement
• Ministre du Revenu national c. Duncan Thompson (de
2013 CAF 197). L’appel a été entendu le 4 décembre
2014. Une diffusion Web de l’audition est disponible ici.
Cet arrêt se rapporte à la question de savoir si un avocat
qui est visé par des procédures d’exécution peut
invoquer le secret professionnel de l’avocat à l’égard de
ses comptes à recevoir. Un court sommaire de l’arrêt est
disponible ici.
• Procureur général du Canada, et al. c. Chambre des
notaires du Québec, et al. (de 2014 QCCA 552). Cet appel
a été entendu le 3 novembre 2015. Une requête en
autorisation d’intervention faite par l’Association du
Barreau canadien, la Criminal Lawyers’ Association, la
Fédération des ordres professionnels de juristes du
Canada et l’Advocates’ Society a été accueillie. Demande
d’autorisation déposée par le ministère de la Justice
accueillie avec dépens le 18 décembre 2014. Cet arrêt se
rapporte à la question de savoir si le paragraphe 231.2(1)
et l’article 231.7 ainsi que la définition de « privilège des
communications entre avocats et clients » au
paragraphe 232(1) de la LIR sont inconstitutionnels, en
ce qui concerne les avocats et notaires au Québec,
puisqu’ils seraient contraires à la Charte canadienne
des droits et libertés. Un court sommaire de l’arrêt est
disponible ici.
Demande d’autorisation déposée
par le ministère de la Justice
Aucune.
Demande d’autorisation déposée
par le contribuable
• Dépanneurs Mac’s c. Procureur général du Canada, et al.
(de 2015 QCCA 837). Demande d’autorisation déposée
par le contribuable en date du 18 décembre 2015. Ce
dossier porte sur une requête pour jugement
déclaratoire (rectification) déposé par le contribuable et
refusé par les instances inférieures au motif qu’un
contribuable doit payer les impôts qui découlent de la
transaction effectuée—et non pas celle, qu’avec du
recul, il aurait préféré avoir effectuée compte tenu des
conséquences fiscales inattendues de ladite transaction.
• La Société de prévention canadienne pour la protection des
animaux et de l’environnement c. ministre du Revenu
national (de 2015 CAF 178). Demande d’autorisation
déposée par la contribuable en date du 16 octobre 2015.
Ce dossier porte principalement sur la question de
savoir si des avantages personnels conférés à un
directeur de l’organisme peuvent résulter en la
révocation de l’enregistrement de la contribuable à titre
d’œuvre de bienfaisance.
Demande d’autorisation accueillie
• Le Groupe Jean Coutu (PJC) inc. c. Procureur général du
Canada, et al. (de 2015 QCCA 838). Demande
d’autorisation accueillie le 10 décembre 2015. Une date
tentative pour l’audition a été fixée pour le 18 mai 2015.
Ce dossier porte sur une demande de rectification et les
balises appropriées à appliquer suite aux décisions de la
Cour suprême du Canada en la matière dans Québec
(Agence du revenu) c. Services Environnementaux AES inc.
(2013 CSC 65). Un court sommaire du dossier est
disponible ici.
• Attorney General of Canada c. Fairmont Hotels Inc., et al.
(de 2015 ONCA 441). Demande d’autorisation accueillie
le 19 novembre 2015. Une date tentative pour l’audition
a été fixée pour le 18 mai 2016. Ce dossier porte sur une
demande de rectification accueillie en faveur du
contribuable compte tenu du test contenu dans la
Volume 6, Number 1
Demande d’autorisation rejetée
• Eleanor Martin c. La Reine (de 2015 CAF 95). Demande
d’autorisation par la contribuable, rejetée avec dépens le
29 octobre 2015. Ce dossier porte sur la discrétion du
juge de la Cour canadienne de l’impôt d’adjuger des
dépens à la contribuable au-delà du tarif prescrit par les
Règles de la Cour canadienne de l’impôt (procédure
générale), notamment pour des frais encourus à l’égard
du comportement des autorités fiscales avant l’appel.
Un court sommaire du dossier est disponible ici.
Marie-France Dompierre
Droit fiscal Deloitte S.E.N.C.R.L./s.r.l., Montréal
[email protected]
13
February 2016
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of Canadian Tax Focus, Alan Macnaughton ([email protected]), or to
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For each issue, contributing editors from Young Practitioners chapters across
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the February 2016 issue, we thank Timothy Fitzsimmons, editorial adviser, and the
contributing editors shown in the list below. In Montreal, an editorial board works
together in preparing articles. We thank the board chair, Olivier Fournier (olfournier
@deloittetaxlaw.ca), and Raphael Barchichat ([email protected]); Stéphanie
Jean ([email protected]); Jean-Philippe Latreille ([email protected]); Nathalie
Perron ([email protected]); Rachel Robert ([email protected]); Victor
Perrault ([email protected]); and Joel Scheuerman ([email protected]).
Halifax:
• Dawn Haley ([email protected])
• Lori Messenger ([email protected])
Quebec City:
• Alex Boisvert ([email protected])
Ottawa:
• Mark Dumalski ([email protected])
• Leona Liu ([email protected])
Toronto:
• Nicole K. D’Aoust ([email protected])
• Melanie Kneis ([email protected])
Edmonton:
• Tim Kirby ([email protected])
Calgary:
• Marshall Haughey ( [email protected])
• Corinne MacCarthy ([email protected])
Vancouver:
• Matthew Turnell ([email protected])
• Aliya Rawji ([email protected])
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obtained in writing from Michael Gaughan, Permissions Editor, Canadian Tax Foundation,
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In publishing Canadian Tax Focus, the Canadian Tax Foundation and Alan Macnaughton are
not engaged in rendering any professional service or advice. The comments presented herein
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ISSN 1925-6817 (Online). Published quarterly.
Volume 6, Number 1
14
February 2016