August 2015 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 5, Number 3, August 2015
of proof and therefore a higher probability that the penalties
will be applied in practice.
Most of the SCC’s decision is not concerned with the criminality issue at all, but rather with the procedural question that
formed the crux of the FCA result. Ms. Guindon’s counsel had
failed (at both the TCC and the FCA) to notify the attorney
general and the provinces that the appeal involved a constitutional question, thus contravening the Tax Court of Canada
Act and the Federal Courts Act. Because proper notice had
been given at the SCC, the court had the discretion to consider
and decide the constitutional issue of the criminality of section
163.2. Specifically, the question was whether Ms. Guindon was
a person “charged with an offence” who was entitled to the
safeguards provided for in section 11 of the Charter.
The court split 4-3 in favour of exercising the discretion to
consider the constitutional issue. While the minority refused
to comment on the criminality of section 163.2, the majority
opinion confirmed and further clarified the two-part test provided in Wigglesworth (1987 CanLII 41 (SCC)) and Martineau
(2004 SCC 81). Applying this test, the court considered the
following issues in determining that the section 163.2 process
is not criminal in nature and that the penalty is not a true penal
consequence:
SCC Upholds Third-Party Civil
Penalties
In Guindon v. Canada (2015 SCC 41), the SCC rejected a constitutional challenge of the section 163.2 third-party civil penalties provision. Counsel for Ms. Guindon had successfully
argued in the TCC (2012 TCC 287) that these penalties constituted a criminal offence, raising the standard of proof from
the civil “balance of probabilities” to the criminal “beyond a
reasonable doubt.” The FCA overturned the TCC decision on a
procedural question (2013 FCA 153), but in lengthy obiter challenged the finding of the TCC on the criminality issue. With
this issue now finally settled by the SCC, the CRA is free to
continue to assess these penalties on the basis intended when
they were introduced in the 1999 budget—as an alternative to
the section 239 criminal penalties, but with a lower standard
In This Issue
SCC Upholds Third-Party Civil Penalties
1
Reduction of RDTOH When Dividend Refund Is Denied
2
US Taxpayers and the Principal-Residence Exemption
2
The Budget Proposal on Alternative Arguments:
Too Broad?
3
Quirk in Definition of FA for Partnership Interest
Gives Rise to FAPI
4
Anomalie à la définition de SEA donnant lieu à du REATB
pour une participation d’une société de personnes
4
An Unpaid Amount Could Be an Upstream Loan
5
Interprovincial Tax Planning Using Trusts Upheld
6
CRA’s (Re)interpretation of Paragraph 55(5)(f )
7
L’ARC (ré)interprète l’alinéa 55(5)f )
7
Reorganization Strategies for Proposed
Paragraph 55(3)(a)
8
Rectification Not Permitted To Change Tax Planning
9
Le recours en rectification ne peut être utilisé pour
changer une planification fiscale
10
Laneway Houses: GST/HST Implications
10
Cross-Border Employees: Avoiding Double Pension
Contributions11
De Jure Control May Require “Dominant Influence”
12
Stock Option Deduction Is Available on Death
13
Supreme Court Docket Update
13
Dossiers portés en appel devant la Cour suprême —
Mise à jour
14
• The process leading to the imposition of the penalty under
section 163.2 is administrative in nature (in contrast to
the laying of an information or complaint for criminal
sanctions), and if the assessment is upheld and payment
is not made, the minister may only invoke civil collection
procedures under the Act (paragraph 67).
• The fact that the same conduct that could form the basis
of an administrative penalty could also lead to a criminal
conviction is irrelevant to the characterization of the administrative penalty (paragraph 68).
• Providing a due diligence defence or including a mental
element as a component of the penalty does not detract from
the administrative nature of the penalty (paragraph 72).
• The purpose of section 163.2 is to promote compliance
with the self-reporting scheme of the Act (paragraph 83).
The magnitude of the penalties under subsection 163.2(4)
is directly tied to this purpose because it takes into account
the penalty to which the other person (that is, the taxpayer
for whom the violator has made the false statement) would
be liable in respect of the false statement (paragraph 84).
The court rejected the argument of Ms. Guindon’s counsel
that an upper limit should apply to an administrative monetary
penalty. Although the court acknowledged the magnitude of
the penalty assessed (approximately $547,000), it found that the
penalty reflected the objective of deterring the type of conduct
1
©2015, Canadian Tax Foundation
Pages 1 – 16
engaged in by Ms. Guindon, which, for the penalty at issue in
this decision, consisted of signing donation receipts connected
to a “sham” tax shelter (paragraph 99). (Counsel for Ms. Guindon
had based the appeal to the SCC solely on the constitutional
and procedural questions, and did not dispute any questions
of fact.)
refunded, because subsection 129(2) would come into play
only when a corporation is entitled to receive a refund of
an amount. If a corporation’s dividend refund is nil due
to late filing, the minister will not apply any amount to
the corporation’s liability under subsection 129(2). Similar
reasoning was also set out in Presidential. This reasoning
directly contradicts the rationale provided by the CRA in
the ti.
•Miller J rejected the minister’s position that because the
RDTOH is a notional account, the components used to
calculate it are also notional. “Dividend refund” must refer
to the actual repayment of tax for integration to operate
properly.
•Miller J rejected the minister’s submission that the limitation period is rendered ineffective and meaningless if
the denial of the dividend refund is not coupled with a
reduction of the RDTOH in subsequent years. The loss of
the dividend refund in the current year already results in
double taxation when the payer corporation does not receive a dividend refund.
Amanda S.A. Doucette
Stevenson Hood Thornton Beaubier LLP, Saskatoon
[email protected]
Reduction of RDTOH When
Dividend Refund Is Denied
Subsection 129(1) provides that if a private corporation files its
tax return within three years after the end of the taxation year,
the minister will refund the lesser of one-third of the taxable
dividends paid by the corporation and the corporation’s RDTOH.
This dividend refund will be denied (that is, not credited to the
taxpayer) if the tax return is not filed within this time limit;
but, according to a CRA technical interpretation, the amount
denied should still reduce the corporation’s RDTOH account
(2012-0436181E5, October 18, 2012). This CRA position has
been called into doubt by two recent cases: Presidential msh
Corporation v. The Queen (2015 TCC 61) and Nanica Holdings
Limited v. The Queen (2015 TCC 85).
These two cases confirm the holding in Tawa Developments
Inc. v. The Queen (2011 TCC 440), which the CRA declined to
follow in its technical interpretation; it is not clear whether the
CRA will change its position now that the body of case law on
this issue has grown. Alternatively, as suggested by Graham J
in Presidential, it would help if “Parliament will see fit to fix
that drafting rather than leaving taxpayers to guess at the meaning of those subsections.” This way, taxpayers would not have
to go through the court system each time to have a dispute
resolved.
In Presidential, Graham J relied on the decisions in Tawa
Developments and determined that “dividend refund” in subsection 129(1) refers to the refund actually received by the
dividend payer. In addition, he pointed out that the goal of
punishing delinquent taxpayers is already achieved because
the taxable dividends paid by the corporation in the year permanently lose the ability to generate a dividend refund; reducing
the RDTOH would sacrifice the goal of integration in favour of
a greater level of punishment.
In Nanica, Miller J cited Presidential with approval, and provided further supportive reasoning:
Jin Wen
Grant Thornton llp, Markham
[email protected]
US Taxpayers and the PrincipalResidence Exemption
In most cases, the principal-residence exemption (pre) will
completely eliminate the capital gain for Canadian tax purposes
arising on the disposition of a taxpayer’s home in Canada.
However, US taxpayers (US citizens, green-card holders, and
US residents) are taxable on their world income, and the analogous provision to the PRE under the Internal Revenue Code is
more restrictive. Therefore, a US taxpayer may incur a US tax
liability on the sale of a Canadian home that cannot be fully
offset on the US return with a foreign tax credit (FTC).
Consider a single US taxpayer residing in Canada who incurs
a capital gain of $750,000 (all figures in this article are in US
dollars) on the sale of her principal residence. There is no Canadian tax liability on the sale, but for US tax purposes there is a
$250,000 limit on the amount of the capital gain that can qualify
for exclusion (IRC section 121). The US tax liability is approximately $119,000 ($750,000 − $250,000 exclusion × 23.8%, the
top US personal income tax rate on long-term capital gains).
The liability will be less for married taxpayers who file a joint
US income tax return; the exclusion is $500,000 in that case.
The issue is whether this liability can be offset by the FTC
on the US return. The sale of the principal residence attracts
no Canadian tax, so no FTC can arise from that income. Excess
FTC might arise from the taxpayer’s other income, since the
Canadian tax on that other income is probably higher than the
similar US tax. However, gains on homes can be large relative
• It is the act of refunding that gives meaning to the phrase
“in this Act referred to as its ‘dividend refund’ for the year.”
Thus, if the minister does not refund an amount, then
the dividend refund is nil.
• Subsection 129(2) supports the position that “dividend
refund” in subsection 129(1) refers to an amount actually
Volume 5, Number 3
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August 2015
decision to be Canada v. Last, 2014 FCA 129; a similar issue
arose in Petro-Canada, 2004 FCA 158). Because the budget
proposal lacks detail, the Joint Committee is concerned about
the possible unintended reach of the proposal beyond the circumstances of these two cases.
In particular, large corporations are required to specify certain
matters in any notice of objection, and they are prohibited from
later appealing any assessment on the grounds of an issue that
is not included in that objection. It would be inappropriate for
any amendments to subsection 152(9) to permit the minister
to alter the basis for an assessment and then argue that the
taxpayer cannot appeal because it has not specified that issue
in its objection.
Currently, a taxpayer and the CRA or the Crown may enter
into a settlement agreement with respect to a particular issue
that is in dispute. Any amendments to subsection 152(9) should
not permit the minister to violate the form or spirit of such
agreements.
The Joint Committee has submitted that these existing restrictions should not be affected by the budget proposal:
to other income in the year, and thus the US tax on that gain
may not be fully sheltered by a us ftc.
A second problem is that the gain on the Canadian home
may not qualify for any US exclusion at all. In the five years
leading up to the disposition, the taxpayer must have both
owned and resided in the home for at least 24 months (not
necessarily the same months) (IRC section 121). A taxpayer
who has owned the home for less than two years fails the
ownership test, and a taxpayer whose child was the occupant
(rather than the taxpayer) fails the use test. The PRE is available
in both of these situations.
The capital gains on the Canadian home for US purposes
can be reduced by increases in the basis in the property—for
example, the cost of a fence, a new roof, new siding, built-in
appliances, and flooring and carpeting (see “Selling Your
Home,” irs Publication 523). Therefore, US taxpayers should
keep all receipts for improvements and for certain repairs in
order to reduce the future capital gain on disposition.
Further planning to mitigate US tax exposure may be available for spouses if one spouse is a US taxpayer and the other
spouse is taxable only in Canada. In that case, a couple can
consider an ownership structure in which the Canadian taxpayer
holds title to the property. This is a practical solution when a
property is first acquired; however, it may not be practical if
the property is already jointly owned. A gift of the US taxpayer’s
share in the property to the Canadian taxpayer is problematic
because US gift tax may apply.
1) subparagraphs 152(4)(a)(i) and 152(4.01)(a)(i) permit
the minister to reassess after the end of the normal reassessment period if the taxpayer has made certain
misrepresentations, but only to the extent that the reassessment relates to the misrepresentations;
2) subparagraphs 152(4)(a)(ii) and 152(4.01)(a)(ii) permit
the minister to reassess after the end of the normal reassessment period if the taxpayer has filed a waiver, but
only to the extent of the matters specified in the waiver;
and
3) subsection 152(5) prohibits the minister from reassessing a taxpayer after the expiration of the normal reassessment period by adding an amount in the computation
of income that was not included for the purposes of an
assessment prior to that expiration.
Bradley Jesson
Mowbrey Gil LLP, Edmonton
[email protected]
The Budget Proposal on Alternative
Arguments: Too Broad?
Subsection 152(9) allows the minister to advance an alternative
argument in support of an assessment at any time, even after
the relevant reassessment period has expired, provided that
the total amount of income from all sources does not increase
(Anchor Pointe Energy, 2003 FCA 294). The question is whether
the minister’s alternative argument can adjust amounts relating
to different sources of income up or down within that overall
limit. The 2015 federal budget proposes to allow such an adjustment. In view of the significant concern about the scope
of the budget proposal, the Joint Committee on Taxation of the
Canadian Bar Association and Chartered Professional Accountants Canada submitted a brief to the Department of Finance
on June 19, 2015, departing from its usual practice of waiting
for the release of the draft legislation.
The budget portrays the proposed amendment as restoring
a doctrine from longstanding jurisprudence that was upset by
an unnamed court decision (the Joint Committee assumes this
Volume 5, Number 3
One issue not addressed by the Joint Committee is the
burden of proof. In Anchor Pointe Energy, the FCA stated that
when the Crown raises a new argument in its reply, the onus
is on the Crown to prove the facts supporting that argument.
Perhaps the amendments to subsection 152(9) should be expanded to include a codification of the shifting burden of proof
in such instances.
Amanda S.A. Doucette
Stevenson Hood Thornton Beaubier LLP, Saskatoon
[email protected]
3
August 2015
Mr. A
Quirk in Definition of FA for
Partnership Interest Gives
Rise to FAPI
100%
Volume 5, Number 3
100%
Canco 1
Consider the situation of a Canadian-resident taxpayer that
effectively owns 10 percent or more of a foreign partnership
engaged exclusively in an active business. In a technical interpretation (2014-0546581E5, November 5, 2015), the CRA has
said that the sale of the foreign partnership may give rise to
FAPI, depending on how the ownership interest is structured.
This outcome appears to be contrary to the government’s policy intent and arises from a quirk in the calculation of the
10 percent factor in the definition of “foreign affiliate” (FA) in
subsection 95(1).
In the structure addressed in the ti (illustrated in the accompanying figure), Mr. a and Mr. b are unrelated. Forco is an FA
of a Canadian corporation (Canco 3) and a partner of a limited
partnership (lp), which is held 10 percent by Forco and 5 percent
by Canco 4, a sister corporation of Canco 3. Under paragraphs
(d) and (e) of the definition of “excluded property” in subsection
95(1), the lp is deemed to be a non-resident corporation having
100 shares of capital stock. Forco owns 10 percent of lp and
Canco 3 owns 50 percent of Forco, so Canco 3’s equity percentage
in lp is 5 percent (10% × 50%). Therefore, when one is determining whether lp is an FA of Canco 3, the requirement that
the equity percentage be at least 1 percent is satisfied (paragraph
(a) of the definition of “foreign affiliate” in subsection 95(1)).
The problem arises with paragraph (b) of the definition.
According to the CRA, Forco is the only partner of lp that is
deemed to own lp’s hypothetical shares for the purposes of
this paragraph of the definition. Canco 4’s interest in the lp
cannot be taken into account, presumably because the deeming rule referred to above applies only to a foreign affiliate that
has an interest in a partnership, and this is not the case for
Canco 4. The resulting equity percentage of 5 percent is below
the 10 percent threshold. As a result, the CRA concluded in the
ti that LP is not considered an FA of Canco 3.
The second question is whether the partnership interest can
be considered excluded property (as defined in subsection
95(1)) of an FA of a taxpayer where Forco is the FA and Canco 3
is the taxpayer. Paragraph (b) of the excluded-property definition refers to property that is a share of the capital stock of
another FA of the taxpayer. As shown above, the partnership is
not an FA of Canco 3, and thus cannot meet the definition. As
a result, any capital gain from Forco’s disposition of its partnership interest (or from a disposition of assets by the LP) will be
included in Forco’s FAPI and therefore in Canco 3’s income.
(The CRA’s conclusion is consistent with its comments in the
endnote to ti 2006-0168571e5, September 1, 2009, in which it
was asked whether a partnership interest was excluded property
in a different fact pattern.)
100%
Canco 2
5%
100%
Canco 3
50%
Canada
Foreign
country
Mr. B
Canco 4
50%
Forco
5%
10%
Other non-resident
non-related partners
LP
Active business
The CRA’s strict literal reading of the Act appears to be highly
restrictive from a purely economic perspective. Canco 3 and
Canco 4 (as a related group) together own, directly and indirectly, 10 percent of lp. If lp were a corporation instead of a
partnership, it would be an FA of Canco 3, and the issue of FAPI
would not arise. Finance could not have intended such a narrow application of the excluded-property deeming provision,
especially in light of its legislative modifications relating to
partnerships in a cross-border context.
The specific problem addressed in the ti could have been
avoided if Mr. b had not set up Canco 4 and instead had flowed
his entire 10 percent interest in lp through Canco 3. Still, tax
rules should not create traps for the unwary.
Raphael Barchichat
PSB Boisjoli llp, Montreal
[email protected]
Anomalie à la définition de SEA donnant
lieu à du REATB pour une participation
d’une société de personnes
Prenons le cas d’un contribuable résident du Canada qui
possède économiquement 10 pour cent ou plus d’une
société de personnes étrangère exploitant exclusivement
une entreprise active. Dans une interprétation technique
(2014-0546581e5, 5 novembre 2015), l’ARC a indiqué que la
vente de la participation de la société de personnes étrangère
pouvait donner lieu à un revenu étranger accumulé, tiré
de biens (REATB), selon le mode de détention. Ce résultat
semble aller à l’encontre de l’intention du législateur, et il
est attribuable à une anomalie dans le calcul du facteur de
10 pour cent dont fait état la définition de « société étrangère
affiliée » (SEA) édictée au paragraphe 95(1).
4
August 2015
Dans la structure dont il est question dans l’interprétation
technique (illustrée dans le tableau), M. a et M. b ne sont
pas liés. SETR est une SEA d’une société canadienne (Scan 3)
et un associé d’une société en commandite (SEC), détenue
à 10 pour cent par SETR et à 5 pour cent par Scan 4, une
société sœur de Scan 3. En vertu des alinéas d) et e) de la
définition de « bien exclu » au paragraphe 95(1), la SEC est
réputée être une société non résidente dont le capital-actions
est composé de 100 actions émises. SETR possède 10 pour
cent de SEC et Scan 3 possède 50 pour cent de SETR, de
sorte que le pourcentage d’intérêt de Scan 3 dans SEC est de
5 pour cent (10 % × 50 %). Par conséquent, lorsqu’il s’agit
de déterminer si SEC est une SEA de Scan 3, le critère du
pourcentage d’intérêt (au moins 1 pour cent) est rempli
(alinéa a) de la définition de « SEA » au paragraphe 95(1)).
Le problème provient de l’alinéa b) de la définition.
Selon l’ARC, SETR est le seul associé de SEC qui est réputé
détenir des actions hypothétiques de SEC aux fins de cette
définition. La participation que détient Scan 4 dans SEC ne
peut être prise en compte, parce que la règle déterminative
mentionnée ci-dessus s’applique seulement à une SEA qui
a une participation dans une société de personnes et ce qui
n’est pas le cas pour Scan 4. Il en résulte un pourcentage
de participation de 5 pour cent, qui est inférieur au seuil
de 10 pour cent statutaire. L’ARC a donc conclu dans
l’interprétation technique que SEC n’est pas considérée être
une SEA de Scan 3.
La deuxième question qui se pose est la suivante : la
participation dans la société de personnes peut-elle être
considérée un bien exclu (selon la définition du paragraphe
95(1)) d’une SEA d’un contribuable lorsque SETR est la SEA
et que Scan 3 est le contribuable? L’alinéa b) de la définition
d’un bien exclu fait mention d’un bien qui est une action
du capital-actions d’une autre SEA du contribuable. Tel
que mentionné, la société de personnes n’est pas une SEA
M. A
100 %
Canada
Pays
étranger
5%
Autres associés
non-résidents et non liés
Raphael Barchichat
PSB Boisjoli llp, Montréal
[email protected]
An Unpaid Amount Could Be an
Upstream Loan
Assume that Canco owns a foreign affiliate (FA). Both Canco
and FA have calendar taxation years. On January 1, 2015, FA
provides services to Canco in consideration for a fee. Canco
accrues an expense in respect of the fee and deducts the amount
from its taxable income in 2015. If the expense remains unpaid
for years, both subsection 78(1) and subsection 90(6) could
potentially apply, subjecting the fee to Canadian tax twice.
Subsection 78(1) generally applies if a deductible expense
(interest, fees, etc.) is not paid by the end of the taxpayer’s second
taxation year following the year in which the expense was incurred, and results in an income inclusion in the taxpayer’s
third taxation year. This inclusion can be avoided if the taxpayer
and the creditor file an agreement under paragraph 78(1)(b).
The upstream loan rules are designed to prevent Canadian
taxpayers from repatriating funds in an FA group by making
long-term loans (which would not be taxable in Canada) instead
of distributions that would be subject to Canadian tax. The
upstream loan rules require an income inclusion of a “specified
M. B
100 %
Scan 1
de Scan 3 et elle ne peut donc satisfaire à la définition.
Aussi, tout gain en capital résultant de la disposition par
SETR de sa participation dans SEC (ou d’une disposition
d’actifs par SEC) sera inclus dans le REATB de SETR et
donc dans le revenu de Scan 3. (La conclusion de l’ARC
concorde avec ses commentaires dans la note de bas de
page dans l’interprétation technique 2006-0168571e5,
1 septembre 2009, dans laquelle on demandait à l’ARC si une
participation dans une société de personnes était un bien
exclu dans des circonstances différentes).
L’interprétation strictement littérale de la Loi semble
extrêmement restrictive d’un point de vue purement
économique. Scan 3 et Scan 4 (en tant que groupe lié)
possèdent ensemble, directement et indirectement, 10 pour
cent de SEC. Si SEC était une société plutôt qu’une société
de personnes, elle serait une SEA de Scan 3, et la question
du REATB ne se poserait pas. Le ministère des Finances
ne peut avoir voulu une application aussi restrictive de la
présomption à la définition de bien exclu, en particulier au
regard des modifications législatives concernant les sociétés
de personnes dans un contexte transfrontalier.
Le problème précis abordé dans l’interprétation technique
pouvait être évité si M. b n’avait pas de détention à travers
Scan 4, mais détenait plutôt la totalité de sa participation de
10 pour cent dans SEC par l’entremise de Scan 3. Pourtant,
les règles en matière fiscales ne devraient pas créer de pièges
dans lesquels il est facile de tomber.
100 %
Scan 2
Scan 3
50 %
50 %
SETR
100 %
Scan 4
5%
10 %
SEC
Entreprise exploitée activement
Volume 5, Number 3
5
August 2015
amount” in Canada when an FA of a Canadian taxpayer makes
a loan to a person that is a “specified debtor” (which includes
the Canadian taxpayer) and the loan remains outstanding for
more than two years from the day that the loan was advanced
or the indebtedness arose. (Certain surplus and basis offsets
may be available to wholly or partially offset the amount of the
inclusion in Canada, but assume that for the purposes of this
example such offsets are not available.)
On January 2, 2017, if Canco has not settled its account
payable, the upstream loan rules could apply to include the
amount of the accrued fee in Canco’s 2015 income (unless the
indebtedness is considered to have arisen in the ordinary course
of the lender’s business). In 2018, if no paragraph 78(1)(b)
agreement is filed and the payable is still outstanding, Canco
may also be required to add the expense back into income
under subsection 78(1). (The CRA’s administrative position
that accrual-basis taxpayers are not subject to subsection 78(1),
set out in Interpretation Bulletin it-109r2, “Unpaid Amounts,”
April 23, 1993, paragraph 15(a), should be considered.) The
fee could then be subject to tax under both subsections 90(6)
and 78(1), albeit at different times.
It may be possible to prevent such a double inclusion of the
fee—for example, pursuant to subsection 248(28). Relief under
that provision is permitted “unless a contrary intention is evident.” The fact that subsections 78(1) and 90(6) have different
objectives (namely, preventing the deductibility of accrued
expenses that are not paid within a reasonable time, and preventing tax-free distributions in excess of tax attributes) might
be evidence of such a contrary intention and therefore that
double taxation is intended. However, the FCA in Holder v.
Canada (2004 FCA 188) seems to stand for the opposite conclusion: the starting point, prima facie, is no double taxation, and
different objectives do not automatically displace that presumption. In summary, double taxation does not seem probable, but
it remains a risk.
Another way to avoid the double inclusion is to file a paragraph 78(1)(b) agreement. However, it is not clear whether and
how subsection 90(6) will apply to the loan that is then deemed
to be made to the taxpayer (Canco) by the creditor (FA) on the
first day of the taxpayer’s third taxation year.
Thus, until the interaction between subsections 78(1) and
90(6) is clarified, taxpayers and their FAs in situations like the
one described above can avoid uncertainty and complexity by
ensuring that unpaid amounts owing to an FA are settled in a
timely manner.
Interprovincial Tax Planning
Using Trusts Upheld
Tax planning aimed at making a trust resident in Alberta in
order to take advantage of that province’s lower provincial
income tax has been validated in Discovery Trust v. Canada
(National Revenue) (2015 Canlii 34016), a decision of the
­Supreme Court of Newfoundland and Labrador, trial division.
The court held that the trust (Discovery Trust) was resident in
Alberta on the basis that the professional trustee was resident
there and had final control over the management of trust property; although requests were made to the trustee by the trust
beneficiaries (who were all residents of Newfoundland) and
their advisers, the trustee acted only after performing its own
due diligence with respect to these requests.
As set out in Fundy Settlement v. Canada (2012 SCC 14), the
residence of a trust for tax purposes is determined in accordance with the central management and control test, which
looks at where the “real business” of the trust is carried on.
Thus, the issue in Discovery Trust was whether central management and control was exercised by the beneficiaries and
their advisers (in which case the trust would be resident in
Newfoundland) or whether central management and control
was exercised by the trustee (in which case the trust would be
resident in Alberta).
The CRA’s position paper supporting the reassessment
viewed the trustee as passive: “The only function(s) that [the
trustee] engaged in for Discovery Trust was administrative in
nature and mostly limited to the signing of documents” (paragraph 25). Indeed, the trustee generally accommodated requests made by the beneficiaries and their representatives.
However, the court’s analysis of several material transactions
showed that the trustee always conducted its own analysis of
whether the transactions requested by the beneficiaries would
in fact benefit them. Legal issues in implementing transactions
were identified, and amendments were suggested (for example,
those noted at paragraph 34). The trustee obtained sufficient
background information to make an informed decision.
In the court’s view, as long as these processes are carried
out, acquiescing to requests from beneficiaries does not amount
to delegation of management and control. Different views
(between the trustee and the beneficiaries) “can co-exist, even
be in conflict as independent positions, without engaging in
a diminution of the Trustee’s authority” (paragraph 47). Thus,
trustees may receive and grant requests by beneficiaries in
respect of transactions involving trust property without tainting
the residence of the trust as long as proper processes are in
place to ensure that the trustees fulfill their obligations under
the trust deed.
A second issue in the case was the CRA’s consideration of
the tax motives behind the trust’s residence. The court held
that although the purpose and motivation of the Discovery
Clara Pham
kpmg llp, Toronto
[email protected]
Volume 5, Number 3
6
August 2015
Trust’s residence in Alberta was to obtain tax benefits, the
minister’s investigation improperly focused on the economic
realities of the situation instead of applying the clear and unambiguous provisions of the Act to the legal transactions being
reviewed. In effect, the minister’s investigation ignored the
principle that a taxpayer is generally permitted to organize its
affairs in a manner that minimizes taxes payable. Thus, the
court’s conclusion was that the minister may not reassess on
the basis of perceived improper tax motives in respect of trust
residence unless the GAAR provisions of the Act are used, and
relying on such considerations in an investigation and report
can compromise the findings of the investigation.
February 6, 2012) stating that it would apply subsection 55(2)
only to the portion of a dividend that exceeds the safe income
on the shares, implicitly without the taxpayer making a designation. The rationale for this position may relate to the CRA’s
concern about the intentional use of subsection 55(2) to effect
surplus stripping. This plan generally involves the intentional
payment of a dividend in excess of safe income in order to
cause the entire amount of the dividend—including the portion
attributable to safe income—to be deemed to be a capital gain.
On a fully distributed basis, this may generally result in tax
savings by allowing for corporate surplus to be extracted at
capital gains tax rates rather than dividend tax rates. The CRA
has indicated that it could seek to apply GAAR if a taxpayer
either refuses to deduct the safe income from the taxable dividend subject to subsection 55(2) or if it self-assesses the full
amount of the dividend as a capital gain (see the documents
cited above, and see 2014-0522991c6, June 16, 2014). Such a
GAAR challenge would likely be based on what the CRA perceives to be the general policy against surplus stripping in the
Act (2012-0433261e5, June 18, 2013). The success of such a
challenge is far from certain for two reasons: (1) to date the
courts have refused to recognize such a general policy; (2) paragraph 55(5)(f ) explicitly confers a discretion on the taxpayer to
make a designation (or not to do so), and thus arguably to apply
dividend or capital gains treatment (see Descarries v. The Queen,
2014 TCC 75; Gwartz v. The Queen, 2013 TCC 86; and Copthorne
Holdings Ltd. v. Canada, 2011 SCC 63).
Colin Poon
Borden Ladner Gervais llp, Calgary
[email protected]
CRA’s (Re)interpretation of
Paragraph 55(5)(f )
Subsection 55(2) is an anti-avoidance rule that deems an
amount that would otherwise be a tax-free intercorporate dividend to be a capital gain, if certain conditions are met. The
circumstances in which subsection 55(2) applies would be
substantially altered by proposed modifications in the 2015
federal budget. However, a change that has received less attention is the CRA’s administrative reinterpretation of the “safe
income” exception to subsection 55(2)—specifically, the mechanics of paragraph 55(5)(f )—in a manner that arguably contradicts
both the wording of the Act and established case law.
Proposed subsection 55(2.1) sets out the conditions under
which subsection 55(2) applies. Generally, where all the other
conditions are met, if the amount of the dividend in question
exceeds the safe income that could reasonably be considered
to contribute to the pregnant capital gain on the share on which
the dividend is received, the entire dividend is deemed to be a
capital gain. Paragraph 55(5)(f ) provides some relief by allowing
the taxpayer to designate in its tax return for the year in which
it receives the dividend a portion of the overall dividend equal
to the safe income; that portion is then deemed to be a separate
taxable dividend that will not be subject to subsection 55(2).
The FCA’s decision in Nassau Walnut Investments Inc. v. r
([1998] 1 ctc 33) is the leading case on paragraph 55(5)(f ). In
that case, the court confirmed the all-or-nothing nature of subsection 55(2) and the need for the taxpayer to actually make a
designation in order to prevent the portion of a dividend that
reflects the safe income on the shares from being recharacterized as a capital gain (paragraph 7). The court further held that
a taxpayer is generally entitled to amend its returns to make
such a designation following a reassessment.
Despite this decision, the CRA has issued administrative positions (2011-0412091c6, October 7, 2011, and 2012-0434501e5,
Volume 5, Number 3
Adam Drori
Stikeman Elliott s.e.n.c.r.l., s.r.l./llp, Montreal
[email protected]
L’ARC (ré)interprète l’alinéa 55(5)f )
Le paragraphe 55(2) est une règle anti-évitement suivant
laquelle, lorsque certaines conditions sont réunies, ce
qui serait autrement un dividende intersociétés exonéré
d’impôt est réputé être un gain en capital. Des changements
proposés dans le budget fédéral de 2015 auraient pour
effet de modifier considérablement les circonstances dans
lesquelles le paragraphe 55(2) s’applique. Cependant,
un autre changement n’a pas autant retenu l’attention,
à savoir la réinterprétation administrative par l’ARC de
l’exception relative au « revenu protégé » dans le contexte
du paragraphe 55(2) — et plus précisément les détails de
l’alinéa 55(5)f ) — réinterprétation qui contredit sans doute à
la fois le libellé de la Loi et la jurisprudence établie.
Le paragraphe 55(2.1) proposé énonce les conditions
dans lesquelles le paragraphe 55(2) s’applique. De manière
générale, lorsque toutes les autres conditions sont réunies, si
le montant du dividende concerné excède le revenu protégé
dont on pourrait raisonnablement considérer qu’il contribue
au gain en capital latent à l’égard de l’action pour laquelle
7
August 2015
Gwartz c. La Reine, 2013 cci 86 et Copthorne Holdings Ltd. c.
Canada, 2011 csc 63).
le dividende est reçu, la totalité du dividende est réputée
être un gain en capital. L’alinéa 55(5)f ) prévoit un certain
allégement en permettant au contribuable de désigner, dans
sa déclaration fiscale de l’année au cours de laquelle il reçoit
le dividende, une fraction du dividende total équivalant au
revenu protégé, fraction qui est ensuite réputée être un
dividende imposable distinct qui ne serait pas assujetti au
paragraphe 55(2).
La décision de la CAF dans Nassau Walnut Investments
Inc. v. r ([1998] 1 CTC 33) est l’arrêt qui fait jurisprudence
en ce qui a trait à l’alinéa 55(5)f ). Dans cet arrêt, la Cour
a confirmé que le paragraphe 55(2) ne fait pas de demimesure et que le contribuable devait véritablement faire
une désignation pour éviter que la fraction du dividende
qui reflète le revenu protégé relatif aux actions ne soit
requalifiée à titre de gain en capital (par. 7). La Cour a en
outre déterminé qu’un contribuable a généralement le
droit de modifier ses déclarations pour effectuer une telle
désignation après l’établissement d’une nouvelle cotisation.
Malgré cette décision, l’ARC a publié ces dernières années
des positions administratives (2011-0412091c6, 7 octobre
2011, et 2012-0434501e5, 6 février 2012), dans lesquelles elle
précise qu’elle appliquera le paragraphe 55(2) seulement à la
fraction d’un dividende qui excède le revenu protégé relatif
aux actions, implicitement sans que le contribuable ne fasse
de désignation. Cette position s’explique peut-être par le fait
que l’ARC craint que l’on utilise intentionnellement le
paragraphe 55(2) pour effectuer un dépouillement de
surplus. Cette opération consisterait généralement à verser
intentionnellement un dividende en excédent du revenu
protégé pour que le montant total du dividende — y compris
la fraction attribuable au revenu protégé — soit réputé être
un gain en capital. Si les dividendes sont entièrement
distribués, il peut généralement en résulter des économies
d’impôt parce que le surplus de la société peut être extrait aux
taux des gains en capital plutôt qu’aux taux des dividendes.
L’ARC a indiqué qu’elle pourrait chercher à appliquer la RGAE
lorsqu’un contribuable refuse de déduire le revenu protégé du
dividende imposable visé par le paragraphe 55(2) ou lorsqu’il
produit sa déclaration de revenus en traitant le montant total
de dividendes comme s’il s’agissait d’un gain en capital (it
précédemment citées; voir aussi 2014-0522991c6, 16 juin
2014). Cette application de la RGAE serait vraisemblablement
fondée sur ce que l’ARC perçoit être la politique générale de la
Loi à l’égard du dépouillement des bénéfices (2012-0433261e5,
18 juin 2013). Il est loin d’être certain que cette application
soit acceptée, d’abord parce que les tribunaux ont refusé
jusqu’à présent de reconnaître cette politique générale, et
aussi parce que dans ce cas précis l’alinéa 55(5)f ) accorde
explicitement une latitude au contribuable qui peut faire ou
non une désignation et donc, vraisemblablement, opter pour
un traitement à titre de dividende ou à titre de gain en
capital (voir par exemple Descarries c. La Reine, 2014 cci 75,
Volume 5, Number 3
Adam Drori
Stikeman Elliott s.e.n.c.r.l., s.r.l. / llp, Montréal
[email protected]
Reorganization Strategies for
Proposed Paragraph 55(3)(a)
The 2015 budget proposals affecting section 55 have forced
advisers and taxpayers to rethink many standard corporate
distributions and reorganizations. The proposals are effective
as of budget day (April 21, 2015). Although draft legislation
has been released, many details are still under discussion between the government and tax practitioners. For non-pressing
matters, the prudent strategy may be to defer action. However,
because waiting may not be an option for some, this article
discusses alternative means by which assets may be moved
within a related corporate group on a tax-deferred basis.
Consider a corporate group comprising Parentco, Parentco’s
subsidiary Holdco, and Holdco’s subsidiary Opco. The group
intends to transfer one of Opco’s existing business lines to
Newco, a new subsidiary of Holdco, in a way that results in a
clean structure (such that Holdco is the only owner of shares
or debt of Newco). The key goal of the structuring is to ensure
that all dividends arise under subsection 84(3), so that proposed
paragraph 55(3)(a) applies to exclude the transactions from the
uncertainty associated with the application of proposed subsection 55(2). Thus, the series of transactions that includes
one of the alternatives below must not include a triggering
event involving a person unrelated to the dividend recipient.
The transfer can be accomplished using the following steps:
Alternative 1
1) Holdco forms Newco.
2) Opco transfers the relevant assets to Newco on a taxdeferred basis pursuant to subsection 85(1) in exchange
for shares of Newco. (Preferred shares rather than common shares are typically used, largely to avoid valuation
issues.)
3) Newco redeems the shares transferred to Opco in step
2 in exchange for a note.
4) Opco redeems a portion of its shares (with a value equal
to the value of the Opco assets transferred to Newco in
step 2) and transfers the Newco note to Holdco as an
in-kind redemption payment.
5) Holdco transfers the Newco note to Newco in exchange
for shares or as a capital contribution (thereby cancelling
the note).
Before the budget, step 4 may have consisted of Opco declaring a dividend in kind of the Newco note to preserve Holdco’s
8
August 2015
ACB of the Opco shares. This is no longer an effective strategy,
however, because dividends in kind do not fall under the protective cover of proposed paragraph 55(3)(a).
If the redemption of the Opco shares will result in a capital
gain (that is, if the ACB is less than the PUC), Opco may want
to take the steps necessary to reduce the PUC in respect of those
shares so that the ACB is greater than or equal to the PUC.
Before doing so, Opco may want to exchange the shares that
it will redeem for shares of a different class (for example, exchanging common shares for preferred shares pursuant to
section 51, 85, or 86).
Some practitioners might consider another way of implementing the transfer, which differs in steps 3 through 6:
Rectification Not Permitted
To Change Tax Planning
In two cases decided under the Civil Code of Québec, the
Quebec Court of Appeal (qca) has ruled that mistakes in taxplanning strategy are not eligible for rectification.
In Mac’s Convenience Stores Inc. c. Canada (Procureur général)
(2015 qcca 837), the court dismissed the taxpayer’s appeal
from an unfavourable trial decision; in Canada (Attorney General) c. Groupe Jean-Coutu (pjc ) inc. (2015 qcca 838; the taxpayer has sought leave to appeal to the SCC), the court overturned
a favourable trial decision. In both cases, the qca concluded
that in contrast to the SCC decision in Québec (Agence du Revenu)
v. Services Environnementaux AES inc. (2013 SCC 65), there was
no discrepancy between the transactions as presented and
agreed to by the taxpayers and their implementation, and that
rectification was therefore unavailable.
In Mac’s, the taxpayer contracted a loan in 2005 with a US
related entity and deducted the interest expense. The taxpayer
and related entities of the group undertook a series of transactions in 2006; one of the transactions involved the payment
of a dividend by the taxpayer. That payment triggered the application of the thin capitalization rules, thereby limiting the
taxpayer’s interest deduction with respect to the 2005 loan. The
taxpayer sought the remedy of rectification to replace the dividend payment with a reduction of the stated capital.
In pjc, the taxpayer acquired drugstores in the United States.
A fluctuation in exchange rates affected the value of the US
investments in the taxpayer’s financial statements. In order to
prevent this result, the taxpayer undertook a series of transactions involving intragroup loans; unexpectedly, however, the
interest income paid on the loans triggered the FAPI rules. The
taxpayer therefore sought to retroactively rectify the operations
so that the interest payable would be reduced to zero, thereby
avoiding the application of the FAPI rules.
In aes, the SCC had distinguished between “bold tax planning” (for which no rectification should be granted) and a
mistake that had been made in the structuring of the planning
rather than in its implementation. Although in Mac’s the qca
did not expressly restrict the rectification remedy to mechanical
or technical errors, it limited the remedy to “legitimate corporate transaction[s]” and appeared to restrict its use to fairly
common tax-planning structures such as rollovers and corporate reorganizations.
In pjc, the qca concluded that the evidence must show that
the error was made in the implementation of the planning and
not in the structure of the planning itself, while warning taxpayers that the SCC in aes did not sanction a “general license
to travel back through time with the benefit of hindsight to
reverse or correct unintended tax consequences.” The court
also mentioned that the SCC had approved rectification in situations where there was no mistake in the transaction itself, but
rather a mistake in the way it was put in place.
Alternative 2
1) Holdco forms Newco.
2) Opco transfers the relevant assets to Newco on a taxdeferred basis pursuant to subsection 85(1) in exchange
for shares of Newco. (Preferred shares rather than common shares are typically used, largely to avoid valuation
issues.)
3) Holdco transfers shares of Opco (with a value equal to
the value of the Opco assets transferred to Newco in
step 2) to Newco in exchange for shares of Newco on a
tax-deferred basis.
4) Newco redeems the shares that it issued to Opco in step
2 and issues a note to Opco as an in-kind redemption
payment for the redeemed shares.
5) Opco redeems the shares that Newco received in step 3,
and issues a note to Newco as an in-kind redemption
payment for the redeemed shares.
6) The notes issued in steps 3 and 4 are offset and
cancelled.
The two alternatives differ in their final outcomes with respect to Holdco’s ACB of the Newco shares:
• In alternative 1, the ACB is the fmv of the Newco note
(plus the nominal incorporating amount).
• In alternative 2, the ACB is Holdco’s ACB of the Opco shares
that Holdco transferred to Newco in step 3 (plus the nominal incorporating amount).
The two ACB amounts could be the same, but in most circumstances the first amount will be greater. Accordingly, it is
likely that alternative 1 will be the preferred approach.
Carla Hanneman
kpmg Law llp, Toronto
[email protected]
Volume 5, Number 3
9
August 2015
Relying on Shell Canada Ltd. v. Canada ([1999] 3 SCR 622),
in which the SCC ruled that taxpayers were entitled to be taxed
on what they actually did and not on what they could have done,
the qca concluded in both Mac’s and pjc that taxpayers must
be taxed on the basis of the transactions that they undertook and
not on the basis of the transactions that they would have preferred to undertake given the unintended tax consequences.
opérations rétroactivement pour ramener à zéro les intérêts
à payer, et éviter ainsi l’application des règles REATB.
Dans aes, la csc avait fait une distinction entre des
planifications fiscales audacieuses (pour lesquelles aucune
rectification ne devrait être accordée) et une erreur commise
dans la structure de la planification plutôt que dans sa
mise en œuvre. Bien que dans Mac’s, la caq n’ait pas
expressément limité le recours à la rectification aux seules
erreurs mécaniques ou techniques, elle a limité ce recours à
des « transaction[s] corporative[s] légitime[s] », et elle semble
avoir limité son utilisation aux structures de planification
fiscale relativement courantes comme les roulements et les
réorganisations de sociétés.
Dans pjc, la caq a conclu que les éléments de preuve
doivent montrer que l’erreur a été faite dans la mise en
œuvre de la planification et non dans la planification même,
tout en prévenant que la csc, dans aes, ne donnait pas
l’autorisation générale de revenir en arrière, et en tirant
profit de connaissances ultérieures, d’annuler ou de corriger
des conséquences fiscales inattendues. La Cour a aussi
mentionné que la csc avait approuvé la rectification dans
des circonstances où il n’y avait pas d’erreur dans l’opération
elle-même, mais où il y avait une erreur dans la façon dont
elle avait été mise en place.
S’appuyant sur l’arrêt Shell Canada Ltée. c. Canada ([1999]
3 rcs 622), dans lequel la Cour a jugé que les contribuables
avaient le droit d’être imposés en fonction de ce qu’ils
avaient fait et non pas de ce qu’ils auraient pu faire, la caq a
conclu, à la fois dans Mac’s et dans pjc, que les contribuables
doivent être imposés à l’égard des opérations qu’ils ont
réalisées et non des opérations qu’ils auraient préféré
réaliser étant donné les conséquences imprévues.
Nathalie Perron
Barsalou Lawson Rheault senc, Montreal
[email protected]
Le recours en rectification ne
peut être utilisé pour changer une
planification fiscale
Dans deux causes jugées en vertu du Code civil du Québec,
la Cour d’appel du Québec (caq) a déterminé que les
erreurs dans les stratégies de planification fiscale ne sont pas
admissibles à la rectification.
Dans Mac’s Convenience Stores Inc. c. Canada (Procureur
général) (2015 QCCA 837), la Cour a rejeté l’appel du
contribuable relativement à une décision de première instance
défavorable; dans Canada (Attorney General) c. Groupe
Jean-Coutu (pjc ) inc. (2015 qcca 838; demande d’autorisation
d’appel déposée par le contribuable à la CSC), elle a renversé
une décision de première instance favorable. Dans les deux
cas, la caq a conclu qu’à la différence de la situation décrite
dans la cause Québec (Agence du revenu) c. Services
Environnementaux AES Inc. (2013 CSC 65) rendue par la csc, il
n’y avait pas d’écart entre les opérations telles qu’elles avaient
été présentées et approuvées par les contribuables et leur mise
en œuvre, et que la rectification n’était donc pas permise.
Dans Mac’s, le contribuable avait contracté, en 2005, un
emprunt auprès d’une entité américaine liée et il avait déduit
les frais d’intérêts. Le contribuable et les entités liées du groupe
avaient procédé à une série d’opérations en 2006; l’une de ces
opérations visait le paiement d’un dividende par le contribuable.
Ce paiement avait entraîné l’application des règles sur la
capitalisation restreinte, et limitait de ce fait la déduction des
intérêts associés à l’emprunt de 2005. Le contribuable a tenté
de recourir à la rectification afin de remplacer le paiement de
dividende par une réduction du capital déclaré.
Dans pjc, le contribuable avait acquis des pharmacies aux
États-Unis. Une fluctuation des taux de change affectait la
valeur des investissements aux États-Unis présentée dans
ses états financiers. Pour éviter ce résultat, le contribuable
a procédé à une série d’opérations comportant des prêts
intragroupes; cependant, de manière inattendue, le revenu
d’intérêts généré par les prêts a déclenché l’application
des règles sur le revenu étranger accumulé, tiré de biens
(REATB). Le contribuable a donc tenté de rectifier les
Volume 5, Number 3
Nathalie Perron
Barsalou Lawson Rheault senc, Montréal
[email protected]
Laneway Houses: GST/HST Implications
Vancouver is promoting affordable housing through densification: a single-family lot may now include the main house and
a detached laneway house, which is usually constructed in the
backyard of the main house and usually opens onto the back
lane. Hundreds of laneway houses have already been constructed, principally as a way to generate some rental income
to offset high mortgage payments. Other cities with high real
estate prices are considering similar changes to zoning rules.
The gst/hst issues associated with laneway housing—
which are often missed and, when discovered, trigger a frantic
search for past receipts—depend on whether the first user of
the laneway house is (1) a long-term tenant or (2) a short-term
occupant. (The income tax implications of laneway houses are
described here.)
10
August 2015
Long-Term Tenant
not available to him or her. However, the owner is entitled to
claim ITCs for GST/HST on construction costs and ongoing
operating costs, and for this reason he or she will want to become a GST/HST registrant.
Rent paid in this situation is subject to GST/HST (unlike
rent paid by long-term tenants, which is exempt). GST/HST
will apply on resale if the laneway house is being used to provide
short-term accommodation at the time of sale.
GST/HST implications are more complex in situations that
alternate between long-term tenants and short-term occupants.
This situation is described in detail in gst/hst Info Sheet
GI-168, “The gst/hst Implications of the Construction of
Secondary Housing Units (Laneway Housing),” June 2014.
Suppose that the homeowner who contracts for the building
of the laneway house on his or her property is not registered
for GST/HST. (This is the typical situation.) If the first use by
the owner of the laneway house is to rent the house to an arm’slength party for a continuous stay of longer than 60 days, the
owner
Matt Beck
Grant Thornton llp, Vancouver
[email protected]
• must self-assess GST/HST on the fair market value of the
laneway home and the land associated with it;
• is entitled to claim ITCs for the amounts of GST/HST paid
on the construction of the laneway house (subject to the
usual ITC claiming rules);
• may also be able to claim a GST/HST rebate for new residential rental property in respect of the laneway house if
the laneway house’s land and building value (often estimated by capitalizing rent) is less than $450,000; and
• may also be able to claim a BC provincial new-housing
rebate if any portion of the construction was performed
before April 1, 2013.
Cross-Border Employees: Avoiding
Double Pension Contributions
Cross-border employers may be aware of employee withholding
obligations under the Act, but contributions to cpp are sometimes overlooked. Double contributions may arise because an
employee is subject to CPP and also to a pension system of
another country in respect of the same employment. This
problem may be solved by a social security agreement (SSA)
between Canada and the foreign jurisdiction. Canada has an
extensive SSA network: 57 agreements are in force, and 5 are
in various stages of ratification and negotiation.
Employers must deduct CPP from employee remuneration
and make corresponding employer contributions for “pensionable employment” as defined in the Canada Pension Plan act
and regulations thereunder. Generally, employment that takes
place in Canada should be considered pensionable employment regardless of whether the employee or employer is a
resident or non-resident of Canada, unless an exemption applies. (However, employment by non-resident employers with
no “establishment” in Canada [a concept similar to “permanent
establishment”] is generally exempt unless the employer applies to have the employment subject to CPP.) Pensionable
employment may include employment outside Canada if the
employee is a resident of Canada and is paid at or from an employer’s establishment in Canada, or if the employee ordinarily
reports for work at an establishment in Canada.
In some situations, the same employment may be pensionable employment for the purposes of the CPP and subject to a
pension system in another country. This can occur, for example,
if a non-resident employer assigns a non-resident employee to
work at its office in Canada, or if a resident employee is assigned
to work outside Canada. Concurrent contributions to both
pension systems will increase costs to both the employee
(double deductions from remuneration) and the employer
(double contributions), and could result in the employee contributing to a pension system he or she is not eligible to benefit
from. SSAs can potentially alleviate these consequences.
The rules above apply because the homeowner is considered
the builder of the laneway house for GST/HST purposes. (Note
that the homeowner is not considered a builder if he or she
purchases a property that already includes a laneway house.)
On the other hand, if the first use by the owner of the laneway
house is to allow a related person (as that term is defined in
the Income Tax Act) to live in the laneway house as his or her
primary place of residence for a continuous stay of longer than
60 days, the consequences are different:
• the owner is not required to self-assess GST/HST;
• the owner cannot claim ITCs on construction costs;
• rebates of equal value to those described above in the
arm’s-length situation are available; and
• if the owner subsequently decides to rent the property to
an arm’s-length party, he or she will not have to self-assess
the value of the laneway house and associated land, because the status of the property will have changed to a
used residential complex.
Thus, the first occupancy of a laneway house by a related
person provides the best outcome for the owner because, for
rental to an arm’s-length party, the self-assessment on the land
value will often create a significant GST/HST liability; the selfassessment on the building value will be approximately cancelled
out by the associated ITC claim for the building construction.
Short-Term Occupant
In the less common (hotel-like) case, where the property is
repeatedly rented for periods of less than one continuous month,
the homeowner need not self-assess, and the two rebates are
Volume 5, Number 3
11
August 2015
Under an SSA, an employee is generally subject only to the
pension system of the country in which he or she works. However, the employee may be exempt from that country’s system
if the employee is subject to a pension system in his or her
home country and is assigned to work for the same employer
in the other country for a temporary period (from 24 to 60
months, depending on the specific SSA). For example, if an
employee who normally works in the United States and is
subject to the US pension system is assigned to work in Canada
at the employer’s place of business for a period not expected
to exceed 60 months, the Canada-us ssa may exempt the
employment from CPP. The Canada-us ssa provides that this
exemption may also apply when the employee is legally employed by an affiliate during the temporary assignment.
Employers should maintain a certificate of coverage to evidence that the employee is subject to his or her home pension
system. Certificates of coverage may be requested from the CRA
or the appropriate pension authority in the other country.
If the CPP contribution rate is lower than the rate in the employee’s home pension system, it may be beneficial from a cash
flow perspective to contribute to the CPP while the employee is
on temporary assignment to Canada. This advantage must be
weighed against any disadvantages to the employee—for example, if benefits are calculated according to the employee’s
higher earning years under his or her home pension system.
Note that employment in Quebec is subject to the qpp instead of the CPP. Quebec negotiates separate SSAs in respect
of the qpp.
49 percent, respectively, of the corporation’s shares. The issue
was whether the taxpayer was associated with Kruger by virtue
of de jure or de facto control.
The TCC examined the applicable provisions regarding
control, and cited Duha Printers (Western) Ltd. v. Canada (1998
Canlii 827 (scc)) as a leading authority for determining control
of a corporation. In citing Duha, the court held that for the
purposes of ascertaining whether there is de jure control,
1) one determines whether a person has “effective control”
of the corporation at any time in the year, and
2) in doing so, one is limited to the consideration of only
the share ownership (the share register); the governing
statute and constating documents of the corporation;
and any unanimous shareholder agreement (usa).
In the case at hand, the usa provided that Kruger was entitled to elect the majority of the directors. Nevertheless, the
court found that significant restrictions in the usa on the powers
of the individual directors prevented Kruger from having effective control. Accordingly, Kruger was found not to have de
jure control over the taxpayer.
The TCC reasoned that “effective control” (as described in
Duha) of a corporation can be diminished if, pursuant to a usa,
decisions are required to be unanimous. For instance, even if
one shareholder has a majority of the voting shares and elects
the majority of the directors, if he or she does not have the ability
to exert a “dominant influence” over the management, direction,
or orientation of the future of the corporation, that shareholder
does not have “effective control” of the corporation. Essentially,
Kruger was found not to have control because it did not have
the ability to make strategic decisions that would change the
direction of the company; such decisions required the unanimous agreement of the directors or shareholders. The court
did not inquire into the actual operations of the company; instead, it relied on the content of the shareholders’ agreement.
The court highlighted the distinction between strategic and
operational decisions included in the usa. For example, the
court held that decisions relating to budgets, business plans,
and the mission of the company were strategic, while those
relating to the management of production operations, policies
relating to the operations and implementation of the mission,
and parameters for negotiating labour agreements were considered operational.
After a review of the relevant facts, the court determined
that Kruger also did not have de facto control of the taxpayer.
Kyle Lamothe
Thorsteinssons LLP, Toronto
[email protected]
De Jure Control May Require
“Dominant Influence”
Consider a situation in which CCPC status for a non-resident
corporation is the desirable outcome. One way to achieve this
outcome is to bring in a Canadian shareholder who has voting
control. However, because the non-resident may want to maintain effective control over its operations, restrictions may be
put on the powers of the Canadian shareholder through a
shareholders’ agreement—for example, the requirement for a
unanimous board decision on strategic matters relating to the
company. Kruger Wayagamack Inc. v. The Queen (2015 TCC 90;
under appeal)—although the case was decided in a different
context and the parties might have had a different intention—
suggests that this strategy may not be effective: the non-resident
may be held to have de jure control, and therefore the company
may not be considered a CCPC. More broadly, this case adds
new content to the concept of de jure control.
In Kruger Wayagamack, the taxpayer corporation had two
shareholders, Kruger and sgf, which owned 51 percent and
Volume 5, Number 3
Jennifer Leve and Nathan Wright
jgw Business and Tax Law llp, Toronto
[email protected]
[email protected]
12
August 2015
is about the qualifying person promising not to take a deduction for “a payment” relating to the transfer or disposition of
the taxpayer’s rights under the stock option agreement. Perhaps the wording can encompass a deemed disposition on
death, and so the making of an election would qualify the
taxpayer for the paragraph 110(1)(d) deduction (see Robert Lee,
“Death of a Taxpayer: Employee Stock Option Benefits,” Tax
for the Owner-Manager, April 2013). On the other hand, the reference to a “payment” (of which there is none in this situation)
may prevent this. In any event, the new technical interpretation
states that the CRA will allow eligibility for this deduction, regardless of the legal merits of the alternative views.
The amendments introduced by the 2010 budget were intended to prevent double deductions—one by the employer
and one by the employee. With respect to a deemed disposition
on death, there is no possibility of a deduction by the employer.
Thus, allowing the paragraph 110(1)(d) deduction through the
subsection 110(1.1) election appears to be an appropriate policy
result.
Stock Option Deduction
Is Available on Death
An employment benefit in respect of unexercised employee
stock options that arises on death is eligible for the paragraph
110(1)(d) deduction through the use of a subsection 110(1.1)
election, according to a new CRA technical interpretation (20130484181e5, May 4, 2015). The CRA states that eligibility will be
allowed “on an administrative basis,” implying that the legal
basis for eligibility is at least unclear and possibly non-existent.
This eligibility has been at issue since subparagraph
110(1)(d)(i) was added to the Act (as a result of the 2010 budget)
for a completely different purpose; an employment benefit on
death was clearly eligible before. (The question relates only to
the paragraph 110(1)(d) deduction; the paragraph 110(1)(d.1)
deduction does not apply to unexercised options.)
Employee stock options may be cancelled on death as a term
of a stock option contract; such a cancellation is not a taxable
event. However, if exercise of the option continues to be possible for a period of time, paragraph 7(1)(e) deems the employee
to have received an employment benefit in the year of death
equal to the fair market value of unexercised stock options
owned less the amount paid to acquire such options. The
similar benefit in a pre-death situation is computed under one
of paragraphs 7(1)(a) through 7(1)(d.1).
Provided that the requirements in paragraph 110(1)(d) are
met, a taxpayer is entitled to a deduction of one-half of the
employment benefit arising from employee stock options. Effectively, since only one-half of the benefit is taxed, the result
is that the benefit is taxed at a rate similar to the one applied
to capital gains, as opposed to being taxed at the same rate as
employment income.
The 2010 budget added an extra condition that must be met
for a taxpayer to qualify for the paragraph 110(1)(d) deduction.
Under subparagraph 110(1)(d)(i), a deduction is permitted only
where securities are acquired by the taxpayer under the stock
option agreement (or by a person not dealing at arm’s length
with the taxpayer in circumstances described in paragraph
7(1)(c), which relates to a cashout situation, and does not apply
here). No securities are acquired under the deemed disposition
on death, because the stock options have not yet been exercised.
Thus, at this first stage in the analysis, a deemed disposition
on death does not qualify for the paragraph 110(1)(d) deduction
(CRA document nos. 2009-0327221i7, December 21, 2012, and
2011-0423441e5, December 11, 2012).
A point not addressed in these technical interpretations is
that the taxpayer can be exempted from the requirement in
subparagraph 110(1)(d)(i) if an election is made under subsection 110(1.1). This election involves a qualifying person (normally, the company that issued the stock option) filing the
election with the CRA and the taxpayer attaching the election
to his or her return. It appears that the wording was never
intended to apply to the deemed disposition on death, since it
Volume 5, Number 3
Andrew Morreale
Grant Thornton llp, Toronto
[email protected]
Supreme Court Docket Update
Awaiting Judgment
• Minister of National Revenue v. Duncan Thompson. The
case was heard on December 4, 2014, and a webcast is
available. This is an appeal from Thompson v. Canada
(National Revenue) (2013 FCA 197). This decision 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.
Leave Granted
• Attorney General of Canada, et al. v. Chambre des notaires
du Québec, et al. Scheduled to be heard on November 3,
2015 (tentative date). 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. This is an appeal
from Canada (Procureur général) c. Chambre des notaires
du Québec (2014 qcca 552). Leave sought by the Department of Justice and granted with costs on December 18,
2014. This decision 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 these provisions are
contrary to the Canadian Charter of Rights and Freedoms.
A short summary of the case is available here.
13
August 2015
Leave Sought by the Department of Justice
with costs on April 23, 2015. This case pertains to the refusal by the minister of a charitable registration to the
taxpayer; procedural fairness; and sections 2(a), 2(b), and
15 of the Charter. A short summary of the case is available
here.
•None.
Leave Sought by the Taxpayer
• The Jean Coutu Group (pjc ) Inc. v. Attorney General of
Canada, et al. (from 2015 qcca 838). 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). (See the article by Nathalie Perron elsewhere in this issue.)
• Eleanor Martin v. The Queen (from 2015 FCA 95). 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.
• Paul Matthew Johnson v. The Queen (from 2015 FCA 52 and
2015 FCA 51). Leave sought on April 23, 2015. This case
pertains to the dismissal of a judicial review application
made by the taxpayer on the alleged misconduct of the
minister in assessing and collecting net tax under the
Excise Tax Act. The case also pertains to the decision by
the TCC to strike certain paragraphs from the taxpayer’s
notice of appeal pertaining to this alleged misconduct.
• ConocoPhillips Canada Resources Corp. v. Minister of National Revenue (from 2014 FCA 297). Leave sought on
February 13, 2015. This case pertains to a dispute between
the taxpayer and the CRA with regard to whether a notice
of reassessment was mailed to the taxpayer, the subsequent
presumed late filing of a notice of objection, and whether
the proper forum for such a debate is the TCC or the fc.
Marie-France Dompierre
Deloitte Tax Law llp, Montreal
[email protected]
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 ces créances. Un court sommaire de l’arrêt est
disponible ici.
Demande d’autorisation accueillie
• Procureur général du Canada, et al. c. Chambre
des notaires du Québec, et al. (de 2014 qcca 552).
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 concernent 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. 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. Cet appel
sera entendu devant la Cour suprême du Canada le
3 novembre 2015 (date tentative).
Leave Dismissed
• Lyrtech rd Inc. v. The Queen (from 2014 CAF 267). Leave
sought by the taxpayer, dismissed with costs on July 9,
2015. This case pertains to the denial of sr & ed tax credits
because of the loss of CCPC status as per paragraph
125(7)(a) and on the basis of de facto control. A short
summary of the case is available here.
• Attorney General of Canada v. Jean-Marc Poulin de Courval,
in His Capacity as Trustee in Bankruptcy of Sylvain Girard
(from 2014 qcca 358). Leave sought by the attorney general of Canada, dismissed with costs on April 30, 2015.
This case pertains to whether, in the context of bankruptcy, a notice of assessment constitutes a proceeding
in view of recovery of a provable claim pursuant to sections
69.3 and 69.4 of the Bankruptcy and Insolvency Act. A
short summary of the case is available here.
• Humanics Institute v. Minister of National Revenue (from
2014 FCA 265). Leave sought by the taxpayer, dismissed
Volume 5, Number 3
Demande d’autorisation déposée
par le ministère de la Justice
•Aucune.
Demande d’autorisation déposée
par le contribuable
• Le Groupe Jean Coutu ( jpc ) Inc. c. Procureur général
du Canada, et al. (de 2015 qcca 838). Demande
d’autorisation déposée le 29 juin 2015. Ce dossier
14
August 2015
porte sur une demande de rectification et les balises
appropriées à être appliquées suite à la décision de la
Cour Suprême du Canada en la matière dans Québec
(Agence du revenu) c. Services Environnementaux AES
inc. (2013 CSC 65). (Voir l’article par Nathalie Perron
ailleurs dans ce numéro.)
• Eleanor Martin c. La Reine (de 2015 FCA 95). Demande
d’autorisation déposée le 15 juin 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 avant l’appel.
• Paul Matthew Johnson c. La Reine (de 2015 CAF 52
et 2015 CAF 51). Demande d’autorisation déposée
le 23 avril 2015. Ce dossier porte sur une demande
de contrôle judiciaire rejetée par la Cour fédérale
en lien avec la présumée inconduite du ministre du
Revenu national quant aux mesures de cotisation et
de recouvrement employées par ce dernier en vertu
de la Loi sur la taxe d’accise. Elle porte également sur
la décision de la Cour canadienne de l’impôt de radier
certains paragraphes de l’avis d’appel du contribuable
en lien avec l’inconduite reprochée par le contribuable.
• ConocoPhillips Canada Resources Corp. v. Minister
of National Revenue (de 2014 FCA 297) Demande
d’autorisation déposée le 13 février 2015. Ce dossier
porte sur un litige entre le contribuable et l’ARC en
lien avec la mise à la poste et la réception d’un avis
d’opposition dans les délais prescrits ainsi que le forum
approprié pour un tel débat, soit la Cour canadienne de
l’impôt ou la Cour fédérale.
69.4 de la Loi sur la faillite et l’insolvabilité. Un court
sommaire de ce dossier est disponible ici.
• Humanics Institute c. Ministre du Revenu national (de
2014 CAF 265). Demande d’autorisation déposée par le
contribuable, rejetée avec dépens le 23 avril 2015. Ce
dossier porte sur le refus par le ministre de permettre
l’enregistrement du contribuable comme organisme
de bienfaisance en vertu de la Loi de l’impôt sur le
revenu. Il porte également sur des questions d’équité
procédurale, les paragraphes 2(a), 2(b) et l’article 15 de
la Charte canadienne des droits et libertés. Un court
sommaire de ce dossier est disponible ici.
Marie-France Dompierre
Droit Fiscal Deloitte s.e.n.c.r.l./s.r.l., Montréal
[email protected]
Demande d’autorisation rejetée
• Lyrtech rd Inc. c. La Reine (de 2014 CAF 267) Demande
d’autorisation déposée par le contribuable, rejetée
avec dépens le 9 juillet 2015. Ce dossier porte sur un
refus de crédit de RS&DE en lien avec la perte par le
contribuable de son statut de « société privée sous
contrôle canadien » au sens de l’alinéa 125(7)a) de la Loi
de l’impôt sur le revenu et en fonction d’une analyse du
contrôle de facto. Un court sommaire de ce dossier est
disponible ici.
• Procureur général du Canada c. Jean-Marc Poulin de
Courval, en sa qualité de syndic de faillite de Sylvain Girard
(de 2014 qcca 358). Demande d’autorisation déposée
par le Procureur général du Canada, rejetée avec dépens
le 30 avril 2015. Ce dossier porte sur la question à savoir
si un avis de cotisation constitue, dans un contexte
de faillite, une procédure « en vue de » recouvrir une
réclamation prouvable en vertu des articles 69.3 et
Volume 5, Number 3
15
August 2015
Potential authors are encouraged to send ideas or original submissions to the editor
of Canadian Tax Focus, Alan Macnaughton ([email protected]), or to one of
the contributing editors listed below. Content must not have been published or submitted elsewhere. Before submitting material to Canadian Tax Focus, authors should
ensure that their firms’ applicable review policies and requirements for articles
bearing the firm’s name have been met.
For each issue, contributing editors from Young Practitioners chapters across
Canada suggest topics and assist authors in developing ideas for publication. For
the August 2015 issue, we thank Timothy Fitzsimmons, editorial adviser, and the
following contributing editors:
Halifax:
• Sean Glover ([email protected])
• Dawn Haley ([email protected])
Quebec City:
• Alex Boisvert ([email protected])
• Amélie Guimont ([email protected])
Montreal:
• Stephanie Jean ([email protected])
• Alexandre Laturaze ([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:
• Jean-Philippe Couture ( [email protected])
• Bernice Wong ([email protected])
Vancouver:
• Matthew Turnell ([email protected])
• Aliya Rawji ([email protected])
Copyright © 2015 Canadian Tax Foundation. All rights reserved. Permission to reproduce
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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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before taking any action on the basis of information in this publication.
ISSN 1925-6817 (Online). Published quarterly.
Volume 5, Number 3
16
August 2015