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Editor: Alan Macnaughton, University of Waterloo
([email protected])
Volume 4, Number 1, February 2014
A Subsection 55(2) Anomaly:
Using Safe Income Twice
appellant and (2) $500,000 of safe income earned or
realized by the appellant’s subsidiary (Subco).
• Following a series of transactions, the shares of Subco
were transferred to a new subsidiary of the appellant
(Newco).
• Newco declared and paid a stock dividend of $500,000
(dividend 2) to the appellant, with the safe income
attributable to the same $500,000 of safe income
earned or realized by Subco that was used in the calculation of dividend 1.
• The minister reassessed the appellant to recharacterize
dividend 2 as a capital gain pursuant to subsection
55(2).
Subsection 55(2) of the Act was designed to prevent the
conversion of capital gains into tax-free intercorporate
dividends (capital gains stripping) beyond the corporation’s
tax-paid retained earnings (safe income). However, D & D
Livestock Ltd. v. The Queen (2013 TCC 318) suggests that
a taxpayer could effectively use the safe income of a subsidiary twice. Although the decision has not been appealed,
caution is urged because the applicability of GAAR was not
addressed, and a legislative change is a possibility.
The complex series of transactions undertaken in D & D
can be summarized as follows:
At trial, the sole issue was whether the safe income of a
subsidiary is reduced by the amount of a dividend paid on
the shares of the subsidiary’s parent (that is, whether the
payment of dividend 1 reduced the safe income on hand
of Newco’s shares of Subco such that there was no longer
any safe income available when Newco declared and paid
dividend 2).
The parties agreed that both the safe income of the parent and the safe income of its subsidiaries are to be included
when one is calculating the safe income on hand of the
shares of the parent. However, the minister argued that to
allow the appellant to use the same safe income twice was
contrary to the purpose of subsection 55(2). In support of
her position, the minister argued that the phrase “could
reasonably be considered to be attributable” in subsection
55(2) was ambiguous and required a textual, contextual,
and purposive analysis such that the safe income on hand
of the appellant’s shares in Newco would be reduced by the
amount of safe income that had been used in dividend 1.
The appellant argued that although dividend 1 reduced
the appellant’s assets, it did nothing to reduce Subco’s assets;
therefore, there was nothing else to which the gain in the
appellant’s shares in Newco could be attributable other than
the safe income of Subco.
Despite the appellant’s admission that the safe income
was being used twice and a finding that what the appellant
had done amounted to capital gains stripping in a way that
defeated the purpose of subsection 55(2), the TCC agreed
with the appellant’s position and concluded that there was
no ambiguity in the wording of subsection 55(2) in determining whether the first $500,000 of the underlying gain
in the appellant’s shares in Newco was attributable to the safe
income earned by Subco. Dividend 1 did nothing to change
• The appellant declared and paid a stock dividend of
$1.5 million (dividend 1) to its parent corporation out
of safe income. At the time the stock dividend was
paid, the $1.5 million of safe income was made up of
(1) $1 million of safe income earned or realized by the
In This Issue
A Subsection 55(2) Anomaly: Using Safe Income Twice 1
US Taxpayers and Canadian Mutual Funds:
Reducing the Tax Risk
2
Corporate Partnerships: Deferral Still?
2
SCC: Rectification Possible Under Civil Law
3
Speculation on the Application of AES to
Common-Law Rectification
4
Deemed Timing of a Dividend Receipt by a Trust
Beneficiary5
Réception réputée d’un dividende par le bénéficiaire
d’une fiducie
5
The Canadian Tax Foundation’s Library:
Unique in Canada
6
Series of Transactions and GAAR
7
Série d’opérations et RGAE
7
A New Schedule for the T2 for 2013:
Internet Business Activities
8
Conocophillips Canada: The Jurisdictional Obstacle
Course9
FMV Sale to a Trust: Sommerer Invoked
10
Acquisition of a CCPC by a Public Company:
Dividend-Planning Issues
10
©2014, Canadian Tax Foundation
fo c u s
1
Pages 1 – 12
the fact that Subco’s safe income remained available to
protect dividend 2 from the application of subsection 55(2).
information required to make the election is often not
available from the fund. Further, the election normally
must be made in the first year of investment in the PFIC,
and awareness of the PFIC problem often arises much later.
A mark-to-market election causes unrealized gains or losses
to be realized each year for US tax purposes, but may result
in double taxation because of a poor alignment of Canadian
and US taxes for foreign tax credit purposes.
One practical strategy is to avoid the PFIC risk entirely
by investing in funds organized in the United States and
traded on a US stock exchange. For example, many ETFs
that have a global or other non-Canadian focus are also
listed in the United States, and the foreign exchange conversion fees incurred are likely to be small relative to the
tax and reporting costs resulting from PFIC status. Also,
direct investment in stocks or bonds generally does not
raise a PFIC concern.
Alternatively, if only one spouse is a US taxpayer, the US
spouse could consider loaning money to the non-US spouse.
The non-US spouse could then invest in mutual funds or
ETFs in his or her own name without raising a PFIC
concern.
The taxpayer could also take the filing position (not
entirely without risk) that investments held in an RRSP for
which a treaty election has been filed are not subject to the
PFIC rules.
Finally, the careful choice of a fund can help to limit a
taxpayer’s exposure to US taxes under the default (absent
the elections) PFIC regime, though the reporting requirements still remain. Investing in funds that have a stable
distribution history helps to reduce the risk that a portion
of the distribution will be considered an excess distribution.
Also, investing in funds that maintain a high payout ratio
helps to limit the risk that the taxpayer will realize a large
capital gain when the fund is sold. Finally, maintaining a
short holding period will effectively limit the interest charge
if there is an excess distribution or capital gain.
Dane ZoBell
Felesky Flynn LLP, Edmonton
[email protected]
US Taxpayers and Canadian
Mutual Funds: Reducing the
Tax Risk
There is concern among tax and investment professionals
that many Canadian mutual funds and exchange-traded
funds (ETFs) could be considered passive foreign investment
companies (PFICs) for US tax purposes. Whether a particular
fund is considered a PFIC depends on its specific facts and
circumstances—information that may not be available to
most investors—and few Canadian fund companies have
provided investors with definitive guidance on this issue.
Because PFIC status can significantly reduce a fund’s aftertax return, investors who are US citizens, green-card holders,
and US residents (“US taxpayers”) need to consider practical
risk-avoidance strategies.
Absent certain elections described below, income and
capital gains derived from PFICs are generally characterized
as ordinary income for US tax purposes; the preferential
tax rates for qualified dividends and long-term capital gains
do not apply. In addition, some or all of the income or gain
derived from a PFIC may be considered an excess distribution—generally, the result of uneven distributions from a
PFIC or a capital gain when the fund is sold—which is
treated as having been earned equally over each year that
the taxpayer owned the investment, with interest charged
on the portion of the tax liability treated as having been
earned in a prior tax year.
When a US taxpayer receives a distribution from or
disposes of shares of a PFIC, an additional information
return must be filed for each PFIC. Final regulations issued
on December 30, 2013 introduce an annual filing requirement for PFIC owners beginning in 2013 if the value of all
PFICs owned by a taxpayer exceeds $25,000. These additional filings can significantly increase the cost of preparing
a US tax return.
In general, elections do not completely solve these problems. A qualified electing fund election causes the taxpayer
to be taxed on his or her pro rata share of the ordinary
income and capital gains earned by the PFIC (similar to the
flowthrough taxation of a partnership investment), but the
Volume 4, Number 1
Chris Watt Bickley
Deloitte LLP, Ottawa
[email protected]
Corporate Partnerships:
Deferral Still?
New section 34.2, stemming from the 2011 budget, addresses the issue of tax deferral, which can arise when a
corporation is a member of a partnership that has a fiscal
period that differs from the corporation’s tax year. For example,
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February 2014
entities on December 31. There should not be an ASPA
for the new corporate partners, on the basis that the
new corporate partners were not partners in the previous
fiscal period. Furthermore, there may not be an ASPA
for the former partners, provided that the former
partners have no entitlement to a share of income for
the partnership fiscal period that ends on the January 31
immediately following the reorganization year. Thus,
partnership income earned during the current stub
period may be subject to a one-year deferral.
if the former ends on January 31 and the latter ends on December 31, the pre-budget rule was that the tax on 11 months
of income could be deferred for an entire taxation year.
Many tax practitioners expected that deferral would now be
completely unavailable, but the new measure appears to limit
the deferral opportunity rather than eliminate it completely.
Subject to transitional relief not discussed here, the new
rules create an income inclusion to the corporation for the
adjusted stub period accrual (ASPA). The ASPA is an estimate
of the corporation’s share of the income from the partnership that is earned during the current corporate taxation
year but is not taxable until the subsequent corporate taxation year. More specifically, it is the income from the
partnership’s most recent T5013 slip multiplied by the ratio
of A to B, where A is the number of days in both (1) the
fiscal period of the partnership that begins in the current
corporate taxation year and ends in the subsequent corporate taxation year and (2) the corporation’s current taxation
year, and B is the number of days in the fiscal period of the
partnership that ends in the corporation’s current taxation
year. In the example above, the ratio of A to B is 334/365;
thus, the ASPA is approximately 11 months of income.
This ASPA may not completely eliminate the deferral in
some situations, such as the following.
Derek Smith
PricewaterhouseCoopers, Halifax
[email protected]
SCC: Rectification Possible
Under Civil Law
In Quebec (Agence du Revenu) v. Services Environnementaux
AES Inc. (2013 SCC 65), the SCC unanimously held in two
cases, per Lebel J, that the correction or amendment of
contracts was permitted in Quebec civil law. Taxpayers on
either side of the Ottawa River now have similar recourse
when errors have been made in executing tax-planning
documentation.
Revenu Québec argued that section 1425 of the Civil
Code of Quebec (CCQ), on which the Quebec Court of
Appeal (QCA) relied in granting the taxpayer’s request for
rectification, allowed courts to correct only clerical errors,
not the type of errors that occurred in the transactions in
question. Those errors were the amount of the ACB (in the
case of a section 86 reorganization by Services Environnementaux AES), and various particulars of a share sale
and subsequent amalgamation with a holding corporation
(in the case of Mr. Riopel and Ms. Archambault).
Borrowing the terms used by the QCA, the SCC made a
distinction between the negotium (the parties’ common
intention) and the instrumentum (the declared intention)
and reiterated that “[t]he agreement lies in the common
intention, despite the importance—as between the parties and
in relation to third parties—of the declaration, oral or written,
of that intention.” Lebel J also observed that the contract
belongs to the parties and that, subject to rights acquired
by third parties, they are free as between themselves to amend
or annul the contract and the document recording it.
The SCC confirmed the existence of a tax-planning
agreement where the parties, having in mind specific provisions of Quebec and federal tax legislation, had agreed to
undertake a transaction. The intended effect of the agreement
• Assume that a business conducted through a partnership
is in the early stages of its life cycle and is anticipating
income growth on an annual basis. Because the ASPA
calculation does not require an adjustment for anticipated growth beyond the most recent historical income
allocation, any annual growth in the partnership income
may still be subject to a one-year deferral.
• Assume that a business is contemplating an acquisition
of the business assets of a target. The taxpayer might
consider structuring the acquisition through a new or
existing partnership. The corporate partners will have
a taxation year that differs from the partnership’s fiscal
period. The ASPA calculation does not require an adjustment for any acquisition-driven growth; therefore, it
may be possible to defer a portion of the income generated by the acquired assets during the first fiscal period
of the acquiring partnership for one taxation year.
• Assume that for business reasons, the corporate partners
of an operating partnership are contemplating the
transfer of their partnership interests to other corporate
entities within a controlled group of companies. The
partnership has a January 31 fiscal period-end, which
differs from the December 31 taxation year-end for all
of the corporate entities within the group. The interests
in the partnership are transferred to other corporate
Volume 4, Number 1
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February 2014
was to defer the tax payable, but errors were made in the
implementation of the tax planning. The court concluded
that the parties were allowed to correct the errors by amending the documents to restore the “integrity of their original
agreement.” Agreeing with the QCA, the SCC ruled that an
interpretation exercise under CCQ section 1425 could resolve the discrepancy between the parties’ common intention and the erroneously declared intention.
Some uncertainties remain. The SCC ruled that it was
proper in the circumstances to bring a rectification motion
before the Superior Court, since there was a dispute about
the nature of the parties’ common intention and since it
found no impediment to doing so under the Code of Civil
Procedure. Yet the SCC stated that there was no need to
rely on the “implicit powers of the Superior Court” to correct
the acts, because the correction of the acts resulted from the
actual will of the parties. This statement appears to suggest
that taxpayers may not necessarily be required to obtain a
rectification order from the Superior Court in order to
correct an error in a contract; but the court was silent as to
what, if any, other paths could lead to the same result.
Moreover, the SCC warned taxpayers not to consider
rectification as permission to enter into “bold tax planning”
on the assumption that if the tax consequences are not as
envisioned they can simply amend their contracts retroactively. Although the SCC speculated that such “bold tax
planning” would likely not be detailed enough to constitute
a common intention, the new and potentially vague concept
raises the question of whether certain types of tax planning
cannot be rectified.
In AES, the court refused to comment on the commonlaw rectification cases on the basis that the appeals in AES
were governed by Quebec civil law, and therefore it would
be inappropriate to consider the common-law doctrine of
rectification. Nevertheless, one can speculate about how certain
aspects of the judgment might be applied in the commonlaw context, although it remains to be seen how open courts
will be to drawing inferences from the principles set out in
AES and applying them to common-law rectification.
In AES, the court clearly accepted that the tax consequences of a transaction may be a fundamental aspect of
contract formation. This finding is helpful to taxpayers
inasmuch as common-law rectification requires the demonstration of a common, specific intention to accomplish
a particular result. If, as the AG argued, rectification has
been inappropriately extended in certain tax cases, then it
might be argued that a specific intention to achieve a particular tax result is an insufficient basis on which to grant
rectification when all other elements of the transaction have
been implemented properly. However, the court in AES was
satisfied that in the civil-law context, the tax consequences
of a transaction may be important enough to be considered
a fundamental element of the transaction. The same principle
should exist in common-law rectification cases (if it does
not already).
Another helpful aspect of the judgment is the court’s
comment that once an error is proved in accordance with
the rules of evidence, the court must note the error and
ensure that it is remedied. Thus, in civil law, tax authorities
do not have the right to benefit from an error made in
written instruments if it has been established that the documents relied on by the tax authorities are inconsistent with
the parties’ true intentions. Although the court’s focus was
on the civil law, the same principles should apply to errors
that have been shown to be capable of being rectified under
the common law. Indeed, the court appears to accept in
principle the application of rectification to tax cases, although
its boundaries are not limitless. In particular, the court made
it clear that a general intention to reduce tax, in and of itself,
does not “constitute the object of an obligation within the
meaning of [CCQ article 1373], since it would not be sufficiently determinate or determinable.” The court’s conclusion in this regard is consistent with common-law cases in
which rectification was not granted when, for example, the
parties did not contemplate a specific type of tax result at
the time they entered into the transaction.
Nathalie Perron
Barsalou Lawson Rheault, Montreal
[email protected]
Speculation on the Application of
AES to Common-Law Rectification
As described in Nathalie Perron’s article above, the SCC
recently affirmed in Quebec (Agence du Revenu) v. Services
Environnementaux AES Inc. (2013 SCC 65) that rectification
is available under the Civil Code of Québec (CCQ). The
Attorney General of Canada (AG) intervened in both appeals
and requested that the court consider and reject a commonlaw line of authority that has applied the doctrine of rectification in tax cases since Attorney General of Canada v.
Juliar ((2000), 50 OR (3d) 728 (CA)). The AG argued that
those cases are inconsistent with the conditions for rectification laid out by the SCC in non-tax cases (for example,
Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6).
Volume 4, Number 1
Joanne Vandale
Bennett Jones LLP, Calgary
[email protected]
4
February 2014
Deemed Timing of a Dividend
Receipt by a Trust Beneficiary
The timing difference between the dividend’s distribution by a trust and its deemed receipt by a beneficiary can
also trigger undesirable tax consequences. For example, if
Opco has a GRIP and the dividend paid to Holdco is designated under subsection 89(14), it will only be included in
Holdco’s GRIP in its taxation year ending on November
31, 2014. Thus, it will not be possible for Holdco to use
this GRIP to pay a designated dividend to its shareholder
during its taxation year ending on November 30, 2013.
In two recent technical interpretations, the CRA confirmed
that when a taxable dividend is distributed by a trust and
designated under subsection 104(19), the dividend is deemed
to have been received by the beneficiary at the end of the
trust’s taxation year in which the trust received the dividend.
In the context of a distribution to a corporate beneficiary,
this timing raises the possibility of deferring part IV tax.
However, the timing could also trigger undesirable tax consequences, such as an excessive eligible dividend designation.
When an inter vivos trust is integrated in a corporate
structure—for example, in an estate freeze—a holding
corporation is often named a beneficiary of the trust. One
advantage of this structure is the possibility of declaring
non-taxable intercorporate dividends, which can be useful
for asset protection purposes and for obtaining small business corporation status. In addition, for a corporation that
has an RDTOH balance, it allows the deferral of part IV tax
(based on the CRA’s opinion cited below).
Assume, for example, that Opco and Holdco are both
CCPCs with taxation years ending on November 30. The
shares of Holdco are held by Mrs. X and the common shares
of Opco are held by Trust, a discretionary inter vivos trust
of which Holdco is a beneficiary. Opco has an RDTOH
balance of $100. On November 30, 2013, Opco pays a
dividend of $300 on the common shares held by Trust.
The dividend is distributed by Trust to Holdco on the same
day, and a designation under subsection 104(19) is made
by Trust.
When a dividend received by a trust is distributed to a
beneficiary in a particular taxation year, a subsection
104(19) designation deems the dividend to be received by
the beneficiary. As the CRA has confirmed in a technical
interpretation (2012-0465131E5), when such a designation
is made by a trust, the beneficiary is deemed to have received
the dividend in its taxation year in which the particular
taxation year of the trust ends. In the preceding example,
Trust’s taxation year ends on December 31, 2013 (since it
is an inter vivos trust); therefore, Holdco is deemed to
receive the dividend in its taxation year ending on November 30, 2014. Because Opco paid the dividend on November 30, 2013, it is possible for Opco to claim a dividend
refund in the taxation year ending on that date, but the
part IV tax will be payable by Holdco in its taxation year
ending one year later. This result was confirmed by the CRA
in a technical interpretation (2013-0495801C6).
Volume 4, Number 1
Catherine Tremblay
PricewaterhouseCoopers LLP/SRL /SENCRL, Quebec City
[email protected]
Réception réputée d’un dividende
par le bénéficiaire d’une fiducie
Dans deux interprétations techniques récentes, l’ARC a
confirmé que lorsqu’un dividende imposable est distribué
par une fiducie et attribué conformément au paragraphe
104(19), le dividende est réputé être reçu par le
bénéficiaire à la fin de l’année d’imposition de la fiducie
au cours de laquelle celle-ci a reçu le dividende. Dans le
contexte d’une distribution à un bénéficiaire qui est une
société, ce moment réputé de réception du dividende
pourrait permettre le report de l’impôt de la partie IV.
Cependant, il pourrait aussi entraîner des conséquences
fiscales non souhaitées, par exemple une désignation
excessive de dividende déterminé.
Lorsqu’une fiducie entre vifs est intégrée à une
structure corporative, par exemple dans le cadre d’un gel
successoral, il est courant qu’une société de portefeuille
soit bénéficiaire de la fiducie. L’un des avantages de cette
structure réside dans la possibilité de déclarer des
dividendes intersociétés non imposables. Ceci peut
s’avérer utile dans un contexte de protection d’actifs ou
pour avoir le statut de société exploitant une petite
entreprise, et si la société qui paie le dividende dispose
d’un solde d’impôt en main remboursable au titre de
dividendes (IMRTD), de reporter l’impôt de la partie IV
(conformément à l’opinion de l’ARC).
Supposons, par exemple, que Sodex et SPOR sont
toutes deux des sociétés privées sous contrôle canadien
dont l’année d’imposition prend fin le 30 novembre. Les
actions de SPOR sont détenues par Mme X, et les actions
ordinaires de Sodex sont détenues par Fiducie, une fiducie
discrétionnaire entre vifs dont SPOR est bénéficiaire.
Sodex a un solde d’IMRTD de 100 $. Le 30 novembre
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February 2014
2013, Sodex verse un dividende de 300 $ sur les actions
ordinaires détenues par Fiducie. Le dividende est
distribué le même jour à SPOR, et une attribution en
vertu du paragraphe 104(19) est effectuée par Fiducie.
Lorsqu’un dividende reçu par une fiducie est distribué
à un bénéficiaire au cours d’une année d’imposition
donnée, une attribution en vertu du paragraphe 104(19)
fera en sorte que le dividende sera réputé reçu par le
bénéficiaire. Comme le confirme l’interprétation
technique 2012-0465131E5 de l’ARC, lorsque ce genre
d’attribution est effectuée par une fiducie, le bénéficiaire
est réputé avoir reçu le dividende dans son année
d’imposition au cours de laquelle prend fin l’année
d’imposition donnée de la fiducie. En conséquence, dans
l’exemple qui précède, puisque l’année d’imposition de
Fiducie prend fin le 31 décembre 2013, SPOR est réputée
avoir reçu le dividende dans son année d’imposition se
terminant le 31 novembre 2014. Étant donné que Sodex
a payé le dividende le 30 novembre 2013, elle peut
demander un remboursement au titre de dividendes dans
l’année d’imposition prenant fin à cette date, mais SPOR
paiera l’impôt de la partie IV dans son année
d’imposition prenant fin un an plus tard. Ce résultat a
été confirmé par l’ARC lors de la table ronde de 2013 de
l’APFF (Interprétation technique 2013-0495801C6).
Cette différence temporelle entre le moment de la
distribution du dividende par la fiducie et le moment de
la réception réputée par le bénéficiaire pourrait aussi
produire des conséquences fiscales non souhaitées. Par
exemple, si Sodex a un compte de revenu à taux général
(CRTG), et si le dividende payé à SPOR est désigné en
vertu du paragraphe 89(14), il sera uniquement inclus
dans le CRTG de SPOR au cours de son année
d’imposition se terminant le 30 novembre 2014. SPOR
ne pourrait donc pas utiliser ce CRTG pour verser un
dividende déterminé à son actionnaire au cours de son
année d’imposition prenant fin le 30 novembre 2013.
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Catherine Tremblay
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., Québec
[email protected]
The Canadian Tax Foundation’s
Library: Unique in Canada
The Canadian Tax Foundation’s library, officially known
as the Douglas J. Sherbaniuk Research Centre, is a valuable
resource for members because of the assistance available
from its three full-time staff and because of its extensive
Volume 4, Number 1
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February 2014
Reports (which has the full text of decisions), Tax Notes, and
Tax Notes International.
Without the debt-cleaning transactions, 3929 would
have acquired from Ford US a debt of $24.5 million for
$9.5 million. Greenleaf would have realized a gain of $15 million (partially as an income inclusion and partially as a loss
of tax attributes) on the forgiveness of a debt due to the
debt-parking rules.
The CRA relied on GAAR and argued that PAL had realized a gain on the debt forgiveness of $14,944,275 to which
section 80 should have applied.
PAL acknowledged that it had obtained a tax benefit, and
the TCC had to decide whether this benefit resulted from
an avoidance transaction or series of transactions and
whether the transaction or series was abusive. PAL argued
(1) that the debt-cleaning transactions between Ford US
and Greenleaf, as well as its purchase of the shares and the
debt, were not part of the same series of transactions giving
rise to a tax benefit, and (2) that the debt cleaning had been
imposed on it by Ford US. The evidence adduced by PAL
was considered insufficient, particularly because Ford US
had not testified. The judge held that the debt-cleaning
transactions were part of the same series of transactions,
and that they had not been imposed by Ford US.
PAL also claimed that the debt-cleaning transactions were
not avoidance transactions. It alleged that US tax considerations had motivated Ford US to enter into the transactions.
On the evidence, the TCC concluded that the debt-cleaning
transactions were avoidance transactions. The court also
held that the series of avoidance transactions was an abuse
of the debt-forgiveness rules. According to the TCC, the
series of transactions had clearly circumvented sections 80
and 80.01 (and, to a lesser degree, paragraph 80(2)(g)) in
order to thwart both the spirit and the purpose of the Act.
GAAR was therefore applied.
In obiter, the judge mentioned that the same series of
transactions would have been present even if Ford US had
imposed the debt-cleaning transactions (in order to realize
a capital loss when it disposed of the shares). Thus, transactions entered into for the seller’s own reasons may be
included in a purchaser’s series of transactions for the purposes of the Act.
Historical Tax Materials
The library, which was established in 1946, is a convenient
central repository for many historical documents and early
tax materials; in particular, members can access government
documents published before such information became
available on the Internet.
The Department of Finance’s website, for example,
contains all federal budget documents from 2000 on, and
selected budget documents going back to 1968. The library
fills in the gaps: it has budget documents dating to 1875
(in paper). Finance’s website also contains draft legislation
and explanatory notes going back to 1996, but earlier information is available through the library. Also, the library
has more than 100 editions of the Income Tax Act since
1917 issued by various publishers.
Some recent submissions to Finance by the CBA-CPA
Canada Joint Committee on Taxation are online, but the
CTF library has submissions in paper going back to 1946.
The library also has a hard copy of the CCH tax service
(Canadian Tax Reporter) as it stood at January 1, 1972, just
before the major tax reform that came into effect at that time.
Of course, the library holds a complete collection of CTF
publications, with subject indexes for the publications dating
back to 1945.
Andrew Morreale
Canadian Tax Foundation, Toronto
[email protected]
Series of Transactions and GAAR
Transactions aimed at avoiding the rules on debt forgiveness
were held to be abusive under the Act in Pièces Automobiles
Lecavalier inc. (2013 CCI 310), thereby causing GAAR to
be applied.
Ford US held 13,050,001 common shares of Greenleaf,
its Canadian subsidiary, and a debt of $24,369,439 owing
by Greenleaf. Ford US agreed to sell all of its shares and the
debt to 3929761 Canada Inc. (3929), a corporation with
which it was dealing at arm’s length (which was to become
Pièces Automobiles Lecavalier Inc. [PAL]).
However, Ford US and Greenleaf carried out two debtcleaning transactions prior to the sale. Ford US subscribed
for 1 million common shares in Greenleaf for $14,843,586, and
Greenleaf repaid part of its debt. After the repayment, the
balance of the debt was $9,465,163. Ford US then sold all of
its shares and debt to 3929 for $1 and $9,742,007, respectively.
Volume 4, Number 1
Louis-Pierre Morin
Raymond Chabot Grant Thornton SENCRL
Quebec City
[email protected]
Série d’opérations et RGAE
Des opérations afin d’éviter les règles de remise de dette
ont été jugées abusives à l’égard de la LIR dans Pièces
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February 2014
Automobiles Lecavalier inc. (2013 CCI 310) entrainant
ainsi l’application de la RGAE.
Ford US détenait 13 050 001 actions ordinaires de sa
filiale canadienne, Greenleaf, et elle était créancière de
Greenleaf pour un montant de 24 369 439 $. Ford US a
convenu de vendre à 3929761 Canada inc. (« 3929 »), une
société avec qui elle n’avait pas de lien de dépendance
(qui allait devenir Pièces Automobiles Lecavalier inc.
(« PAL »)) la totalité de ses actions dans Greenleaf et la
créance détenue contre cette dernière.
Cependant, avant la vente, Ford US et Greenleaf ont
effectué deux opérations de « nettoyage de dette », soit la
souscription par Ford US de 1 000 000 actions ordinaires
de Greenleaf pour 14 843 586 $ et le remboursement par
Greenleaf d’une partie de sa dette. À la suite du
remboursement, le solde de la dette était de 9 465 163 $.
Ford US a ensuite vendu à 3929 la totalité des actions de
Greenleaf et la créance pour une contrepartie respective
de 1 $ et de 9 742 007 $.
N’eût été les opérations de « nettoyage de dette », 3929
aurait fait l’acquisition auprès de Ford US d’une créance
d’environ 24 500 000 $ pour une contrepartie d’environ
9 500 000 $. Greenleaf aurait réalisé un gain sur règlement
de dette d’environ 15 000 000 $ (en partie à titre
d’inclusion au revenu et en partie à titre de réduction des
attributs fiscaux) en vertu des règles de remise de dette.
Reposant sur la RGAE, l’ARC soutenait que PAL avait
réalisé un gain sur règlement de dette de 14 944 275 $
auquel aurait dû s’appliquer l’article 80.
PAL ayant reconnu qu’elle avait obtenu un avantage
fiscal, la CCI devait déterminer si cet avantage découlait
d’une opération ou d’une série d’opérations d’évitement
et si celle(s)-ci entrainai(en)t un abus.
PAL prétendait que les opérations de « nettoyage de
dette », effectuées entre Ford US et Greenleaf, ainsi que
l’achat des actions et de la créance par elle, ne faisaient
pas partie de la même série d’opérations donnant lieu à
un avantage fiscal. PAL soutenait également que le
« nettoyage de dette » lui avait été imposé par Ford US. La
preuve présentée par PAL fut jugée insuffisante en autre
parce que Ford US n’a pas témoigné. Le juge conclut que
les opérations de « nettoyage de dette » faisaient partie de
la même série d’opérations et que Ford US ne les avait pas
imposées.
PAL soutenait également que les opérations de
« nettoyage de dette » n’étaient pas des opérations
d’évitement. Elle prétendait que ces opérations avaient
été motivées par des objets véritables de la part de Ford
US, soit par des considérations fiscales américaines.
Volume 4, Number 1
Compte tenu de la preuve, la CCI conclut que les
opérations de « nettoyage de dette » étaient des
opérations d’évitement. De plus, la Cour statua que la
série d’opérations d’évitement entrainait un abus des
règles de remise de dette. Selon la CCI, cette série
d’opérations avait manifestement contourné l’application
des articles 80, 80.01 et, de façon secondaire, de l’alinéa
80(2)g) de manière à en contrecarrer l’esprit et l’objet. La
RGAE fut donc appliquée.
En obiter, le juge a mentionné que même si Ford US
avait imposé les opérations de « nettoyage de dette », la
même série d’opérations aurait été présente (afin de réaliser
une perte en capital lors de la disposition des actions).
Donc des opérations du vendeur pour ses propres fins
peuvent être comprises dans la « série d’opérations » pour
l’acheteur aux fins de l’application de la LIR.
Louis-Pierre Morin
Raymond Chabot Grant Thornton SENCRL, Québec
[email protected]
A New Schedule for the T2 for
2013: Internet Business Activities
A corporation is now required to file the one-page schedule 88,
“Internet Business Activities,” with the T2 return if it earns
income from one or more web pages or websites. The
schedule is applicable to the 2013 and subsequent taxation
years, so even taxpayers that have already filed their returns
are required to comply. This new schedule was apparently
posted on the CRA website in early December, and it is not
yet included in the commonly used Taxprep tax return
preparation software. While the disclosure requirements of
schedule 88 may not be very onerous, depending on a
corporation’s specific business use of the Internet, its application is broad, its rationale is uncertain, and its specific
disclosure requirements are unclear.
Who Must File?
Normally, if a corporation earns income from Internet
business activities, it must file schedule 88 because it has
its own web page or website. However, a corporation is also
required to file schedule 88 if it does not have a website
but has created a profile or other page describing its business on a website operated by others (a blog, auction,
marketplace, or any other portal or directory website) from
which it earns income. A corporation is considered to earn
income from such a web presence in several situations.
8
February 2014
• Goods and/or services are sold. The web page may
have a shopping cart and payment transactions may be
processed, either directly or through a third-party service.
• Customers submit purchases, orders, or bookings by
phone, e-mail, or a form (presumably on the basis of
information provided through the web presence, although
the form does not say this).
• The corporation earns income from advertising, income
programs, or traffic that the site generates—for example,
static advertisements placed on the corporation’s website
for other businesses, affiliate programs, advertising programs such as Google AdSense or Bing Ads (referred
to in the schedule as “Microsoft adCenter”), or other
types of traffic programs.
In Conocophillips, the taxpayer argued that it had not
received a notice of reassessment that was allegedly mailed
by the CRA until it was provided to the taxpayer’s representatives several years after the date on the reassessment.
Subsequently, the taxpayer filed a notice of objection to the
reassessment, which the CRA rejected on the basis that it
was filed after the limitation period (90 days from the date
of the reassessment: see section 165 of the Act). Further,
the CRA rejected the taxpayer’s request for an extension of
time to file the objection because it was made outside of
the applicable statutory limitation period (90 days plus one
year from the date of the reassessment: see section 166.1).
The taxpayer filed an application in the FC for judicial
review of the minister’s decision to deny its objection. The
minister took the position that the taxpayer should have
appealed to the TCC and “demonstrated the validity” of the
notice of objection in that forum. The FC decided in favour
of the taxpayer and overturned the minister’s decision.
Although the taxpayer in Conocophillips won its appeal
to the FC, it was an administrative win at best. The FC did
not make any determination on the merits of the objection
because it had no jurisdiction to do so: such exclusive jurisdiction belongs to the TCC. Thus, the case serves as a
warning of the difficulties that may arise when one is navigating the jurisdictions of the TCC and the FC. It would
be helpful for Canadian taxpayers if there were a one-stop
shop for dealing with various tax matters, which could
eliminate or reduce the potential confusion, delays, and
costs encountered by both taxpayers and the Crown. In
Conocophillips, the taxpayer sought relief (initially) in the
FC. If it is not successful on its objection, the taxpayer may
need to appeal to the TCC to resolve the dispute. The FC
in Conocophillips appeared to be hinting that divided jurisdiction was causing problems when it stated that the taxpayer had “no other access to justice besides the filing of
the present Application.”
Ironically, the taxpayer in Conocophillips could find itself
back in the FC again with respect to the very same assessments. If the taxpayer is unsuccessful in its appeal on the
merits of the objection, it will face the issue of accrued
interest on the balance outstanding on its tax account. The
only way it can obtain relief from payment of this interest
is by making an application to the minister through the
taxpayer relief program, which is subject to judicial review—by the FC.
The filing requirement does not say whether the corporation’s Internet business activities must be directed at Canadian
or foreign customers; any taxpayer that is required to file
a T2 is caught in the net if it has an income-earning web
presence anywhere in the world. The filing requirement
also does not say whether the Internet business activities
must be carried on throughout the year, so a business that
temporarily participates in a crowdfunding portal would
have to file. The schedule does not say whether a not-forprofit corporation must file.
Required Disclosure
The corporation must specify the number of web pages or
websites used, the URLs of the five pages or sites with the
most Internet income, and the percentage of the corporation’s gross revenue generated from the Internet (which
presumably means generated from the web, as opposed to
e-mail). One important question about this section of the
schedule is whether the calculations of Internet income and
gross revenue are to be done on an average basis across years
or whether they are specific to the particular taxation year.
Audrey Chan
KPMG LLP, Vancouver
[email protected]
Conocophillips Canada: The
Jurisdictional Obstacle Course
The FC recently decided in favour of the taxpayer on a
judicial review application in Conocophillips Canada (2013
FC 1192). This decision illustrates the uncertainty facing
taxpayers in Canada due to the potentially overlapping
jurisdiction of the TCC and the FC.
Volume 4, Number 1
Amanda S.A. Doucette
Stevenson Hood Thornton Beaubier LLP, Saskatoon
[email protected]
9
February 2014
FMV Sale to a Trust: Sommerer
Invoked
The Kern decision is helpful in that it confirms that the
minister generally accepts the Sommerer decision regarding
the application of subsection 75(2). Kern provides additional comfort when one relies on Sommerer in respect of
an FMV sale to a trust. The decision also leaves open the
possibility of intentionally invoking subsection 75(2) in
situations where there is no FMV sale to a trust. Whether
such planning is subject to GAAR remains a question to be
answered by the courts.
In Sommerer, the TCC (and ultimately the FCA) found that
subsection 75(2) does not apply where assets are sold to a
trust for FMV consideration. This conclusion was accepted
by the minister, and then by the court, in Brent Kern Family
Trust v. The Queen (2013 TCC 327).
Subsection 75(2) is an anti-avoidance provision, but in
this case the taxpayer was apparently using it as a tool to
achieve tax savings. The CRA has generally expressed concern with this technique (see, for example, CRA document
nos. 2011-0401951C6, 2011-0412131C6, and 20120433261E5). It commonly attacks such plans by using GAAR
(and it was successful in Lipson v. Canada, 2009 SCC 1).
This was the CRA’s initial approach in Kern, but the situation changed as the case progressed because of the release
of the FCA’s decision in Sommerer (2012 FCA 207).
In the Kern case, Mr. Kern intended to invoke subsection
75(2) by having a corporate beneficiary (Opco) sell property
(Holdco) at FMV to the Brent Kern family trust. Because
Opco was both a contributor to and a beneficiary of the
trust, subsection 75(2) was meant to apply such that any
dividend income realized by the trust on the shares of
Holdco would be attributed to back to Opco. Opco would,
in turn, claim an intercorporate dividend deduction pursuant to subsection 112(1), leaving cash from the dividend
in the trust with no taxable income. The cash could then
be distributed to Mr. Kern, who was a beneficiary of the
trust, as a tax-free distribution of the trust’s capital.
The application of subsection 75(2) was essential for the
plan in Kern to work as intended. At the initial hearing,
however, the minister did not challenge the application of
subsection 75(2), and instead argued that the series of transactions in issue was subject to GAAR. Interestingly, while the
TCC was deliberating after the initial hearing, the FCA’s
decision in Sommerer was released. On the basis of this change
in law, the minister in Kern applied to the TCC for an opportunity to present additional submissions. The TCC granted
the minister’s request, and further submissions on the application of subsection 75(2) to the facts in Kern were heard.
In his decision in Kern, Bocock J found that Sommerer
was applicable and that the TCC was obligated to follow
and apply the statements of law handed down therein. As
a result, Bocock J concluded that subsection 75(2) was not
applicable in Kern, since there was an FMV sale of the shares
of Holdco to the Brent Kern family trust. As a result of the
court’s finding that subsection 75(2) did not apply, the
application of GAAR was not considered.
Volume 4, Number 1
Nathan Wright
Cadesky & Associates LLP, Toronto
[email protected]
Acquisition of a CCPC by a Public
Company: Dividend-Planning
Issues
In the context of the purchase and sale of shares of a CCPC
to a public company, it is important to consider the timing
of the various steps in the transaction and the related periods that they create. The specific dates of execution can
trigger significant tax implications, some of which may be
unexpected.
The first period to consider is the time up to the date
on which the target and the purchaser sign the purchase
and sale agreement (PSA). In this period, the target may
intend to distribute excess cash to its shareholders, subject
to safe income, in the form of a dividend. Because there
are no specified ordering provisions for CCPCs between
eligible and ineligible dividends, and because both trigger
a dividend refund from the RDTOH account, the target can
choose to distribute the cash as an eligible dividend rather
than pay ineligible dividends to the extent that it has a GRIP
balance.
The second period to consider commences at the time
the target and purchaser sign the PSA. In this case, the terms
of the PSA give the purchaser the right, contingent or otherwise, to acquire all the shares of the target. The right will
be deemed to be exercised for the purposes of determining
whether a corporation is a CCPC at the time that the PSA
is signed, even if the sale is not completed until a future
date. As a result, the target company ceases to be a CCPC
at the time that the PSA is signed, triggering a deemed taxation year-end.
The triggered year-end and the loss of CCPC status have
numerous tax implications, one of which is the requirement
to compute an opening LRIP balance. In this computation,
it is possible for a substantial LRIP balance to be recognized
10
February 2014
even if the target has not previously had undistributed
low-rate earnings. This outcome can have a significant
impact, because dividends paid in this period are now
subject to ordering rules. Specifically, a corporation with
an LRIP balance must pay ineligible dividends to the extent
of the balance before it pays eligible dividends, and therefore
it no longer has the choice that it had in the first period.
Because ineligible dividends are subject to higher tax rates,
one should consider paying eligible dividends before signing
the PSA in order to ensure that they can be designated as
eligible and subject to lower tax rates.
The final period to consider is the period that commences
after the transaction closes. In this period, it is possible that
issues may arise from the purchaser’s perspective when the
acquired target now has an LRIP balance. Specifically, if it
is the target’s intention to distribute future earnings to its
new parent in the form of dividends, the dividends must
first be paid as ineligible dividends as a result of the target’s
LRIP balance. If the parent receives eligible dividends from
other wholly owned subsidiaries, the payment of ineligible
dividends by the target may create an LRIP balance in the
Volume 4, Number 1
parent, thereby tainting the dividends being paid from the
other subsidiaries. If this is the case, the parent will now
be subject to the ordering provisions and will first be required to pay ineligible dividends to the extent of the LRIP
balance. Therefore, the purchaser may want to consider
having an additional shareholder acquire shares of the target
so that the ineligible dividends can be paid to a separate
corporation. This strategy would permit the parent to pay
eligible dividends first if desired. At some point, however,
ineligible dividends will still have to be paid to shareholders
in order to distribute the earnings of the target.
In summary, careful planning is needed in this type of
situation with respect to the timing of various events and
the related periods in the transaction so as not to create an
unexpected result for the vendor or the purchaser when it
comes to a company’s GRIP and LRIP.
Craig A. Dale
Grant Thornton LLP, Vancouver
[email protected]
11
February 2014
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 February 2014 issue, we thank Timothy Fitzsimmons, editorial adviser,
and the following contributing editors:
Halifax:
•Sean Glover ([email protected])
•Dawn Haley ([email protected])
Quebec City:
•Amélie Guimont ([email protected])
Montreal:
•Marie-Hélène Tremblay ([email protected])
Ottawa:
•Mark Dumalski ([email protected])
•Amanda Hachey ([email protected])
Toronto:
•Nicole K. D’Aoust ([email protected])
•Brent Pidborochynski ([email protected])
Winnipeg:
•Greg Huzel ([email protected])
•Sheryl Troup ([email protected])
Edmonton:
•Tim Kirby ([email protected])
Calgary:
•Nicolas Baass ([email protected])
•Bernice Wong ([email protected])
Vancouver:
•Trevor Goetz ([email protected])
•Laura Jeffery ([email protected])
Copyright © 2014 Canadian Tax Foundation. All rights reserved. Permission to reproduce
or to copy, in any form or by any means, any part of this publication for distribution must
be obtained in writing from Michael Gaughan, Permissions Editor, Canadian Tax Foundation,
Suite 1200, 595 Bay Street, Toronto, ON M5G 2N5. E-mail [email protected].
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 represent the opinions of the individual writers and are not necessarily endorsed by
the Canadian Tax Foundation or its members. Readers are urged to consult their professional
advisers before taking any action on the basis of information in this publication.
ISSN 1925-6817 (Online). Published quarterly.
Volume 4, Number 1
12
February 2014