PDF Format - Canadian Tax Foundation

c a n a d i a n
t a x
Editor: Alan Macnaughton, University of Waterloo
([email protected])
Volume 3, Number 3, August 2013
Wasting Freezes Now Less
Attractive in Ontario
redeem that portion of the freezor’s freeze shares in any
given year so that the freezor’s lifestyle can be maintained,
subject to the company’s own cash requirements. In this
way, as the years go by, the freezor slowly reduces (“wastes”)
his or her interest in the company, resulting in less (or,
ideally, no) tax arising under subsection 70(5) on his or her
death because the freeze shares will have been fully redeemed. In the case of a company that is a CCPC earning
investment income, such a wasting freeze has for the last
several years been accretive to the overall family asset base,
since the dividend refund to the corporation under subsection 129(1) would, in many cases, exceed the personal
income tax owed by the shareholder on the deemed dividend arising as the result of the redemption of the freeze
shares.
In 2011, before the imposition of the “high earner” surtax
in Ontario, the tax on a taxable dividend other than an
eligible dividend at the highest marginal rate applicable to
an individual was 32.57 percent. Accordingly, the family
as a whole would have been better off redeeming the frozen
shares, since an amount equal to 33.33 percent of the
dividend would have been refunded to the company (assuming that the company had investment income earning
RDTOH).
However, changes in the tax rates may have changed the
assumptions underlying the classic wasting freeze. For a
taxpayer in Ontario who pays tax at the highest marginal
rate for 2013 (that is, a person earning more than $509,000
in income), the tax on the deemed dividend arising on a
redemption of the freeze shares will be 36.57 percent,
whereas the corporation will receive a dividend refund of
only 33.33 percent. The situation for 2014 is even worse:
the combined federal-Ontario personal tax rate on noneligible dividends for taxpayers who are in the second-highest
bracket (those who earn between approximately $137,000
and $518,000 in taxable income) will be 34.9 percent,
putting a number of additional taxpayers (not just the socalled high earners) into a position where the tax on the
Increases to Ontario tax rates have made it less attractive
in some estate freeze situations to withdraw corporate value
through share redemptions (rather than on death, as a capital gain).
In a typical estate freeze, the holder of a private corporation’s common shares (the freezor) exchanges the shares on
a tax-deferred basis for non-participating, redeemable,
retractable preferred shares of the corporation having a
redemption amount equal to the FMV of the common
shares immediately before the exchange (the freeze shares).
New participating shares (the growth shares) are then
subscribed for by the freezor’s children, for example.
Although the corporation will usually have the ability
to pay dividends on the freeze shares, in many cases it will
In This Issue
Wasting Freezes Now Less Attractive in Ontario
1
CFA Suppression Election: Potential Risks
2
Regulations: An Outmoded Idea?
3
Budget Dampens Ficek Relief for Tax Shelter Investors
3
Adviser Penalties Revived by FCA
4
Gwartz: Subsequent Legislative Amendments
and GAAR
5
L’affaire Gwartz : Modification législative
subséquente et RGAE
5
Relief from Debt-Forgiveness Inclusions: The Basics
6
FA Dividends Must Be Pro Rata
7
Work Space in Home and Elsewhere
7
Bureau à domicile et à l’extérieur
8
Post Mortem Pipeline Potentially Upset by FCA
9
Trusts and Estates Proposals: Little Consultation
but More Information
10
Disability Insurance Benefits and Non-Residents
10
Les prestations d’assurance invalidité et les
non-résidents11
QCCA Opens Door to Planning To Avoid
Quebec Payroll Taxes
12
Tax Deferral for Mining Prospectors and Grubstakers 12
Pre-Production Mine Development Expenses:
Budget Proposals
13
©2013, Canadian Tax Foundation
fo c u s
With this issue, we announce the appointment of Timothy
Fitzsimmons, a partner of Dentons Canada LLP in Toronto, as
editorial adviser to Canadian Tax Focus. Tim is the former chair
of the Steering Committee of the Toronto Young Practitioners
chapter and a former contributing editor of Canadian Tax Focus.
1
Pages 1 – 15
shares in CFA 3 is $200. On the liquidation of CFA 2,
CFA 2’s shares in CFA 3 are deemed to be disposed of for
proceeds equal to $200 (paragraph 88(3)(a)). Without a
subsection 88(3.3) election, Canco 1 would realize a gain
of $100—proceeds of $200 less ACB of $100 (paragraph
88(3)(d)). However, the suppression election can reduce
the taxpayer’s deemed proceeds to $100, thereby eliminating
an immediate gain on Canco 1’s disposition of its shares
in CFA 2.
dividend exceeds the refund to the corporation. For those
who pay tax at the highest marginal rate, the rate will be
38.6 percent, more than 5 percent more than the corporation will receive as a refund.
Accordingly, there is now material leakage associated
with redeeming freeze shares in this way. Although each
family’s situation is unique, it may make sense in certain
cases not to waste the freeze and pay tax on the capital gain
arising upon the death of the freezor. Of course, the freezor
will still need income to fund personal expenses, and a mix
of salary and dividends may need to be considered.
The Problem
The suppression election is limited by the conditions in
subsection 88(3.4). Paragraph 88(3.4)(a) prevents a taxpayer from electing proceeds of disposition greater than
would otherwise be determined under subsection 88(3).
Paragraph 88(3.4)(b) limits the suppression election to the
capital gain that would otherwise be realized on the shares
of the disposing affiliate, thus preventing a taxpayer from
producing a loss on the disposition of its shares in the FA.
A problem arises when a taxpayer incorrectly computes
the ACB of its shares in the disposing affiliate. ACB is a Canadian tax concept and can sometimes be particularly difficult
to compute for an FA. A miscalculated ACB of the disposing
affiliate that results in an amount higher than its actual
ACB should not jeopardize the taxpayer’s ability to make
the suppression election. However, a too-low ACB could
overstate the potential capital gain and suppression election
amount, invalidate the suppression election, and trigger an
unexpected capital gain on the windup of the FA.
For example, if Canco 1’s ACB in its shares in CFA 2 were
actually $101 instead of $100, then an election to suppress
the proceeds of CFA 2 shares to $100 would be overstated.
This would fall afoul of paragraph 88(3.4)(b) and cause
Canco 1 to realize a gain of $99 (proceeds of $200 - ACB
of $101) rather than the desired deferral.
This invalidation of the suppression election is in contrast
to other gain deferral sections, such as subsection 85(1).
Under paragraph 85(1)(c.1), if the parties have elected to
transfer property at an amount below the property’s ACB
or fair value, whichever is lower, the minimum elected
amount is automatically adjusted upward to the lesser
amount, thus allowing the taxpayer to preserve the deferral
of any accrued gains in the transferred property.
Jesse Brodlieb
Dentons Canada LLP, Toronto
[email protected]
CFA Suppression Election:
Potential Risks
Subsection 88(3.4) can nullify a subsection 88(3.3) suppression election made in the context of a subsection 88(3)
windup of taxpayer’s foreign affiliate (FA) (these new provisions received royal assent on June 26, 2013). The conditions
in subsection 88(3.4) must be carefully managed: if the
subsection 88(3.3) elected amount is even a dollar over
the permitted amount, the election is invalid.
The Basics
When specific conditions are met, subsection 88(3) allows
an FA’s property distribution on a dissolution to occur on
a rollover basis. The deemed proceeds of the distributed
property to the liquidating affiliate under paragraph
88(3)(a) or (b) affect the recipient’s cost of distributed
property under paragraph 88(3)(c), which in turn determines the recipient’s proceeds of disposition of the shares
of capital stock of the liquidating affiliate disposed of under
paragraph 88(3)(d). To the extent that the recipient taxpayer’s ACB in the shares of its liquidating FA is lower than
its deemed proceeds determined under paragraph 88(3)(d),
the taxpayer may realize a capital gain. (For more information, see Lockwood and Lopes, “Subsection 88(3): Deferring Gains on Liquidation and Dissolution,” International
Tax Planning feature (2013) 61:1 Canadian Tax Journal
209-28.) Subsection 88(3.3) allows the taxpayer to elect to
reduce or suppress the FA’s paragraph 88(3)(a) deemed
proceeds to an amount that reduces or defers the realization
of a capital gain to the taxpayer.
As a simple example, assume that Canco 1 owns all the
shares in CFA 2, which owns all the shares in CFA 3. Canco 1’s
ACB in its shares in CFA 2 is $100, and CFA 2’s ACB in its
Volume 3, Number 3
Clara Pham
KPMG LLP, Toronto
[email protected]
Alex Feness
KPMG LLP, Toronto
[email protected]
2
August 2013
Regulations: An Outmoded Idea?
Bill C-60, the first budget implementation act of 2013,
included the associated regulations. In contrast, regulations
that are not associated with the budget (or that are associated with the budget for which the legislation has already
been passed) follow the Cabinet process. Thus, the majority
of tax regulations still follow the Cabinet process — about
70 percent (by word count) from the beginning of 2007
to the present.
The use of two methods to pass regulations can make it
confusing to follow the legislative process; for example,
regulations passed by the Cabinet process appear in part II
of the Canada Gazette, while regulations passed by the
parliamentary process appear in part III. On the other hand,
it is perhaps more democratic and transparent to include
both statutes and regulations relating to a budget in one
place—the amending bill. Perhaps the preferred solution
would be to do away with the whole concept of regulations
and put all legislative details in the statute. While this
method would work for new legislation, few practitioners
are likely to welcome the extensive redrafting and renumbering that would be required for existing legislation.
The common understanding of the difference between the
Income Tax Act and the Income Tax Regulations is that
the Act is passed by Parliament—the House of Commons
and the Senate—while regulations are passed by Cabinet.
However, many regulations (and amendments to regulations) under the Income Tax Act are now passed by Parliament as part of bills amending their respective acts. The
same issue occurs with the Excise Tax Act. Perhaps the idea
of separating the statute from the regulations no longer
serves any purpose in the tax area.
The original justification for creating regulations (rather
than including all details of the regulation in a statute) was
that regulations included matters that needed to be amended frequently and with some speed. Thus, for the Income
Tax Act, section 221 provides general authority for regulations; the provisions of the Act for which details are to be
included in the regulations refer to those details by using
the word “prescribed” (subsection 248(1)).
Current Treasury Board of Canada policy requires that
draft regulations to be approved by Cabinet (the Cabinet
process) must be examined and approved by the Department of Justice and the Privy Council Office to ensure that
they meet the Statutory Instruments Act and the Cabinet
Directive on Regulatory Management. In contrast, regulations passed by Parliament (the parliamentary process) do
not have to follow this policy, although the two processes
may have some aspects in common.
The Department of Finance, principally through the Tax
Legislation Division of the Tax Policy Branch, drafts all
income tax regulations. While the department may recommend whether the regulatory amendments should follow
the Cabinet process or the parliamentary process, the final
decision is always made by the government. The current
policy is apparently to use the parliamentary process if, when
the regulation is ready, there is a bill available and that bill
relates to the substance of the regulation. The main reason
appears to be speed; the Cabinet process can take more
than a year, while tax bills—especially budget bills—move
more quickly. The budget bills introduced between 2007
and 2012 were all passed within approximately two months.
For example, Bill C-60 was introduced in Parliament on
April 24, 2013 and received royal assent on June 26, 2013.
Regulation changes associated with budgets have been
included in the associated budget implementation acts in
almost all years since 2007, the year in which the parliamentary process was initiated for tax regulations. For example,
Volume 3, Number 3
Xiao Jin Chen
Toronto
[email protected]
Budget Dampens Ficek Relief
for Tax Shelter Investors
The decision in Ficek v. Canada (Attorney General) (2013 FC
502) sets aside the CRA’s policy, announced on October 30,
2012, that it would delay the assessment of a taxpayer who
participated in a donation tax shelter until the tax shelter
itself was audited. However, some of the benefits that taxpayers might otherwise receive from this decision are to be
eliminated by proposals in the 2013 federal budget.
The issue in Ficek was the interpretation of the minister’s
duty to assess tax returns “with all due dispatch” (subsection
152(1)). Relying on previous decisions in Jolicoeur v. MNR
(60 DTC 1254 (Ex. Ct.)) and J. Stoller Construction Ltd. v.
MNR (89 DTC 134 (TCC)), the court noted that the phrase
“with all due dispatch” is the equivalent of “with all due diligence” or “within a reasonable time” and that there is no
fixed period for the performance of the duty to assess. Instead,
the purpose of the language is to provide the minister with
reasonable discretion in the timing of the assessment. However, that discretion is not unfettered; it must be reasonable
and for a proper purpose of ascertaining and fixing the
3
August 2013
Adviser Penalties Revived by FCA
taxpayer’s liability. In Ficek, the court ruled that the true
purpose of the new policy was to discourage participation
in tax shelters, and thus no delay in the issuing of an assessment could be justified.
One benefit that taxpayers might have received from the
Ficek decision is a reduction in the time that the CRA has
in which to reassess the taxpayer regarding a tax shelter.
Taxpayers could not be reassessed until the tax shelter was
audited and, with the early issuing of the notice of assessment, there might be only a relatively short time between
the completion of the audit and the expiry of the normal
reassessment period (for individuals, three years from the
date of mailing of the notice of assessment). However, the
budget proposed the extension of the normal reassessment
period for up to three years after the filing of certain information returns by the promoter of the tax shelter, if the
returns are not filed on time (paragraph 152(4)(b.1)). Any
such reassessment would be limited to the tax shelter (subparagraph 152(4.01)(b)(vii)).
A second benefit that taxpayers might have received from
Ficek is the earlier payment of refunds (with the notice of
assessment). However, another measure (enacted on June
26, 2013) permits the CRA to effectively take back part of
those refunds. Specifically, the CRA is allowed to collect
50 percent of the disputed tax, interest, or penalties in respect of the disallowance of a deduction or tax credit for a
tax shelter that involves a charitable donation (subsection
225.1(7)).
These two budget measures would apply to reassessments
in respect of taxation years ending on or after March 21,
2013.
The implications of Ficek extend beyond the tax shelter
issue and beyond the assessment of returns. Other notable
examples of the use of the phrase “with all due dispatch”
include the issuance of refunds (subsection 164(1)), reconsideration of an assessment upon receipt of a notice of
objection (subsection 165(3)), and consideration of an
application for an extension of time in which to object
(subsection 166.1(5)). In this regard, the Ficek case serves
as a source of welcome guidance on when the CRA can and
cannot justify a delay in carrying out its duties.
Last fall, the TCC made it very difficult for the government
to apply the adviser penalties under section 163.2 by ruling
that the penalties were criminal in nature and hence required proof beyond a reasonable doubt (see “Adviser
Penalties Derailed by TCC,” Canadian Tax Focus, November
2012). This decision has now been overturned on a jurisdictional issue, but with lengthy obiter challenging the
TCC’s views on the “criminality” of the section 163.2 penalties (Canada v. Guindon, 2013 FCA 153).
The decision of the FCA turned on Ms. Guindon’s failure
(both at the TCC and at the FCA) to notify the attorney
general and the provinces that the appeal involved a constitutional question — contravening the Tax Court of Canada
Act and the Federal Courts Act and causing both courts to
lack the jurisdiction to grant a remedy to the taxpayer.
In obiter questioning the TCC’s conclusions that the
penalties were criminal law, the FCA made the following
points:
1)The FCA concluded that section 163.2 is aimed at
maintaining discipline, compliance, or order within
a discrete regulatory and administrative field of endeavour rather than at redressing a public wrong done
to society at large (paragraph 42), and hence does
not attract Charter protection (applying Wigglesworth
([1987] 2 SCR 541)).
2) Section 163.2 prescribes a fixed formula for the
calculation of the penalty. In contrast, the offence
provisions of the ITA and the ETA require the judge
to determine the amount of a fine or the length of
imprisonment by assessing the moral blameworthiness or turpitude of the conduct, including any
mitigating circumstances (paragraphs 44-45).
3) The size of the penalty alone does not dictate whether
section 11 of the Charter applies. The court confirmed that sometimes administrative penalties must
be large in order to deter conduct detrimental to the
administrative scheme and the policies that it furthers
(paragraph 46).
The FCA also concluded that the concerns expressed by
commentators regarding the potential unfairness of section
163.2 are “overstated.” The court said that the jurisprudence
concerning section 163.2 is in an “embryonic state” and that
what “now appears to some to be uncertain and worrying
may later be addressed satisfactorily in the jurisprudence”
(paragraph 53). In the interim, the FCA pointed to the
taxpayer’s right to appeal to the TCC and the taxpayer’s
Simon Couvrette
Deloitte LLP, Ottawa
[email protected]
Volume 3, Number 3
4
August 2013
ability to request relief from penalties (including section
163.2 penalties) pursuant to subsection 220(3.1). The FCA
acknowledged that the granting of relief was subject to the
discretion of the minister of national revenue—the very
person who imposed the penalties in the first instance.
However, the FCA was confident that such discretion would
be exercised in a reasonable fashion, and “must not be fettered or dictated by policy statements” (paragraph 58) such
as those found in an information circular.
Although these comments were made in obiter and
therefore are not automatically binding on other courts,
obiter can be strongly persuasive. For example, the SCC has
recently stated that its obiter statements should presumptively be followed by lower courts unless there are cogent
reasons not to do so (see Prokofiew, 2012 SCC 49).
In an interesting twist, the FCA suggested at the conclusion of its decision that the section 12 Charter protection
against cruel and unusual punishment might be applied to
section 163.2, although only in exceptional cases.
The judge primarily considered the following issue: Can
a transaction be characterized as abusive if the legislative
provision that was wilfully avoided was subsequently
amended? He referred to three judgments in which a similar
issue was raised. In Water’s Edge Village Estates (Phase II)
Ltd. (2002 FCA 291), the provision (before being amended)
created a loophole used to abusively circumvent Parliament’s
true purpose. The CRA effectively used the amendment to
demonstrate the taxpayer’s original abusive intent. In Triad
Gestco Ltd. (2012 FCA 258) and 1207192 Ontario Limited
(2012 FCA 259), however, the court concluded that the
provisions subject to avoidance were not directed at the
essence of the transactions that were put into place.
According to the judge in Gwartz, those decisions demonstrate that a subsequent amendment to a section that
would have effectively defeated a tax-avoidance strategy
challenged under GAAR does not necessarily indicate that
the strategy is abusive. The amendment is only one of the
relevant aspects to be considered when ascertaining the
object and the spirit of the provision. In certain cases, a
subsequent amendment may suggest that the provision’s
object and spirit were circumvented by a loophole strategy;
in others, it may suggest that Parliament changed its mind
and now intends to prevent something that was not initially
intended to be captured by the provision. In this case, since
section 120.4 was drafted in simple terms, it was clear that
the purpose of the pre-amendment section 120.4 was not
to prevent capital gains splitting, and therefore GAAR did
not apply.
Amanda S.A. Doucette
Stevenson Hood Thornton Beaubier LLP, Saskatoon
[email protected]
Gwartz: Subsequent Legislative
Amendments and GAAR
Gwartz v. The Queen (2013 TCC 86) reiterates that GAAR
does not necessarily apply to tax plans established before
the legislative amendment of a section. In Gwartz, Forest
Hill Dental Management Inc. (FHDM) acted on behalf of
Dr. G’s dental practice. The Gwartz-Ludwig Family Trust
held all the common shares in FHDM. In 2003 and 2005,
FHDM paid a high redemption value and low paid-up capital stock dividend. In 2003, 2004, and 2005, the trust sold
75,000 shares to Dr. G in exchange for a promissory note.
In 2005, Dr. G sold his 225,000 shares to a company owned
by his wife (Spouseco) before they were redeemed by the
trust. The note issued to Spouseco against the deemed
dividend was used to reimburse the note held in favour of
Dr. G. Dr. G then extinguished the note in favour of the
trust. In 2003 and 2004, the trust allocated the capital gains
to Dr. and Mrs. G. In 2005, the trust divided the capital
gains between Dr. and Mrs. G’s minor children. In 2011,
section 120.4 was amended so that it applied to certain
capital gains. The CRA issued a notice of assessment to the
children wherein the capital gains were recharacterized as
dividends subject to a tax on split income (the kiddie tax).
Volume 3, Number 3
Alexandre Blouin
Groupe FEC, Quebec City
[email protected]
Jean-René Sénéchal
PricewaterhouseCoopers LLP, Quebec City
[email protected]
L’affaire Gwartz : Modification
législative subséquente et RGAE
Gwartz v. The Queen (2013 TCC 86) réitère qu’une
modification législative à un article n’entraine pas
nécessairement l’application de la RGAE aux
planifications fiscales mises sur pied avant celui-ci. Dans
Gwartz, Forest Hill Dental Management inc.
(« FHDM ») agit pour le cabinet dentaire du Dr G. La
Fiducie Familiale Gwartz/Ludwig détient toutes les
actions ordinaires de FHDM. En 2003 et en 2005, FHDM
5
August 2013
verse un dividende en actions à haute valeur de rachat et
à bas capital versé. En 2003, 2004 et 2005, la fiducie
vend 75 000 actions au Dr G en échange de billets à
demande. En 2005, Dr G vend ses 225 000 actions à une
société détenue par sa femme (« Femmeco ») avant que la
fiducie procède au rachat de celles-ci. Le billet émis à
Femmeco, en contrepartie du dividende réputé, sert à
rembourser le billet que Dr G détient envers elle. Dr G
rembourse ensuite le billet dû à la fiducie. En 2003 et en
2004, la fiducie attribue les gains en capital à Dr et
Mme G. En 2005, la fiducie répartit les gains en capital
aux enfants mineurs de Dr et Mme G. En 2011,
l’article 120.4 est modifié faisant en sorte qu’il s’applique
à certains gains en capital. L’ARC émet un avis de
cotisation aux enfants pour requalifier les gains en capital
de dividendes assujettis à l’impôt sur le revenu fractionné
(« kiddie tax »).
Le juge s’est principalement penché sur la question
suivante : Peut-on conclure au caractère abusif d’une
transaction si la disposition législative qui a été
volontairement évitée à fait l’objet d’une modification
ultérieure? Il a retenu trois jugements dans lesquels un
questionnement semblable a été soulevé. Dans Water’s
Edge Village Estates (Phase II) Ltd. (2002 CAF 291), la
disposition visée par la modification présentait une
échappatoire, un moyen abusif de contourner l’intention
réelle du législateur. La modification a été utilisée
efficacement par l’ARC pour démontrer l’intention
abusive initiale du contribuable. Dans Triad Gestco Ltd.
(2012 FCA 258) et 1207192 Ontario Limited (2012 CAF
259), cependant, la Cour a conclu que les dispositions
sujettes à l’évitement ne visaient pas, à l’époque, l’essence
des opérations mises en place.
Selon le juge dans Gwartz, ces décisions démontrent
qu’une modification subséquente à un article, qui a
pour effet de mettre fin à une stratégie d’évitement
fiscal contestée en vertu de la RGAE, n’est pas forcément
un indicatif du caractère abusif de ladite stratégie.
La modification n’est qu’un des aspects pertinents
à considérer pour déterminer l’objet et l’esprit de
la disposition. Dans certains cas, une modification
subséquente pourrait suggérer que l’objet et l’esprit
de la disposition ont été contournés par la stratégie
d’évitement; dans d’autres, elle pourrait suggérer que le
législateur a changé d’avis et a maintenant l’intention
d’empêcher un aspect qui n’était pas initialement visé par
la disposition. Dans ce cas-ci, puisque l’article 120.4 était
rédigé simplement, il était clair qu’avant la modification,
l’article 120.4 ne visait pas à empêcher le fractionnement
Volume 3, Number 3
des gains en capital. La RGAE ne trouvait donc pas
application.
Alexandre Blouin
Groupe FEC, Québec
[email protected]
Jean-René Sénéchal
PricewaterhouseCoopers S.E.N.C.R.L., Québec
[email protected]
Relief from Debt-Forgiveness
Inclusions: The Basics
When a taxpayer cannot service debt because of financial
distress, a creditor may forgive all or a portion of the debt.
The debt forgiveness may trigger an income inclusion under
subsection 80(13), but a taxpayer in financial distress may
not be able to pay the tax on the inclusion. The purpose
of sections 61.2, 61.3, and 61.4 is to provide relief to certain
taxpayers facing subsection 80(13) income inclusions.
Section 61.2 provides a reserve on a subsection 80(13)
income inclusion if the debtor is an individual (other than
a trust) resident in Canada. The reserve, which is claimed
net of paragraph 80(15)(a) deductions, allows the subsection 80(13) income inclusion to be deferred to future years
when the taxpayer earns more income. The reserve begins
to decrease at a rate of 20 cents per $1 of income earned
in excess of $40,000. Therefore, the income inclusion will
never be taxed if the individual never earns income in excess
of $40,000, or if he or she dies in a taxation year in which
the reserve is still eligible to be claimed.
Section 61.3 provides an offsetting deduction to corporations resident in Canada (unless they are exempt from
part I tax) that limits the income inclusion to twice the
FMV of the corporation’s net assets. This offsetting deduction is aimed at ensuring that the corporation’s tax liability
from the income inclusion will not exceed the FMV of its
net assets. As is the case for many insolvent corporations,
a net asset value of zero will result in a deduction equal to
the full amount of the subsection 80(13) income inclusion.
Subsection 61.3(1) (for resident corporations) and subsection 61.3(2) (for non-resident corporations) function in
the same manner.
The rules in section 61.3 are subject to an anti-avoidance
provision. Subsection 61.3(3) restricts the deduction when
property transfers are made within the 12-month period
before the end of the year if it is reasonable to conclude
that the reason for the property transfer was to increase the
6
August 2013
or cancellation of a share of the corporation; or (3) distributions made on a qualifying return of capital in respect of a
share. These types of distributions are dealt with separately.
The new pro rata rule can present problems. For example,
a US LLC (which qualifies as an FA of a taxpayer) may have
only one class of units but maintain a separate “capital account” for unitholders. Distributions from the US LLC to
its unitholders may be made in relation to that particular
unitholder’s capital account and not in relation to its units.
Accordingly, distributions to unitholders on the units in
this manner cannot be made on a pro rata basis, will not
be considered to be dividends for Canadian tax purposes,
and will not receive the section 113 deduction. Instead,
the non-pro-rata distribution will be treated as income from
property—a subsection 15(1) shareholder benefit, according to paragraph 15(1)(a.1).
available deduction for the year under subsection 61.3(1)
or subsection 61.3(2). If subsection 61.3(3) applies, the
lender and the borrower referred to in the subsection are
jointly and severally liable for any tax liabilities arising from
a subsection 80(13) income inclusion (subsection 160.4(1)).
While sections 61.2 and 61.3 provide relief for financially
distressed Canadian-resident individuals or corporations,
section 61.4 allows a reserve to be claimed on a subsection
80(13) income inclusion if the debtor is any of the following (with some exceptions): (1) a non-resident person that
carried on business through a fixed place of business in
Canada, (2) a corporation resident in Canada, or (3) a trust
resident in Canada. The section 61.4 reserve also differs in
that the subsection 80(13) income is required to be included
in the corporation’s income at a minimum rate of 20 percent
per year. Therefore, the income inclusion will be brought
into income over a maximum five-year period.
Michael Gemmiti
Thorsteinssons LLP, Vancouver
[email protected]
Mike Ehinger
MNP LLP, Winnipeg
[email protected]
FA Dividends Must Be Pro Rata
Work Space in Home
and Elsewhere
By virtue of new subsections 90(2) and (5), effective August 19, 2011 (Bill C-48; royal assent June 26, 2013), some
amounts that are dividends under the law of the payer’s
(the FA’s) country will not be dividends for Canadian purposes. Therefore, the amount will effectively be taxable in
Canada to the FA’s parent company. This is a particularly
important issue for FAs that are US LLCs. In such cases,
taxpayers may wish to consider other means of repatriating
cash to Canada.
Dividends that are paid out of the FA’s exempt surplus
account normally trigger an income inclusion, which is
offset by a section 113 deduction. However, this outcome
depends on the amount paid having the status of a dividend
for Canadian tax purposes. In the past, the status of the
amount in the FA’s country was determinative; if it was a
dividend under foreign law, it was a dividend under Canadian law. This is no longer the case. On the basis of the
operation of subsections 90(2) and 90(5), an amount must
be a pro rata distribution on a class of shares of the capital
stock of the FA in order to be a dividend for the purposes
of the Act.
However, the following pro rata distributions are nevertheless not deemed to be dividends: (1) distributions made
in the course of a liquidation and dissolution of the corporation; (2) distributions made on a redemption, acquisition,
If a self-employed individual has a place of business in the
home and a place of business outside the home, which location is the principal place of business? Generally, the taxpayer
will prefer that the home office be considered the principal
place of business. However, some CRA and Revenu Québec
(RQ) opinions suggest that this choice might be challenged,
but it may be too early to say.
One benefit of having the home office as the principal
place of business is that it satisfies the test for the deduction
of home office expenses (subsection 18(12) of the ITA and
section 175.4 of Quebec’s Taxation Act (TA)). The only
other way to claim home office expenses is to establish that
the home office is used exclusively for business purposes
and is used regularly and continuously for meeting clients,
customers, or patients—a more difficult test to meet.
A second benefit of having the home office as the principal place of business is that travel expenses from the home
office to the other office (that is, commuting expenses) are
deductible from business income (see QRA Guide IN-155-V,
“Business and Professional Income,” paragraph 6.12.1; Interpretation Bulletin IT-521R, paragraph 24; and Mompérousse
(2010 TCC 172)).
In Jenkins v. The Queen (2005 TCC 167), the CRA had
denied the deductibility of home office expenses to a fisher
on the basis that his boat, not his home, was his principal
Volume 3, Number 3
7
August 2013
place of business. The court focused on the question of where
the business activities (invoicing, payroll, etc.) took place
and concluded that the boat was not a place of business,
much less the principal place of business. The implication
of this case appears to be that a home office could qualify
as a principal place of business even if some of the business’s
activities take place elsewhere. Paragraph 2 of Interpretation
Bulletin IT-514 supports this view and uses the examples
of a contractor and farmer who have home offices as principal places of business.
In CRA document 2011-0393331E5, the taxpayer did
most of her work in her home office; however, she met
80 percent of her clients in a rented office, which she used
to ensure confidentiality and to be closer to her clients. The
CRA’s opinion was that the rented office was a principal
place of business, and therefore travel expenses between her
home and the rented office were not deductible. In CRA
document 2008-0279741E5, a ship’s pilot wanted to deduct
travel expenses between his home and the boat’s embarkation point. The pilot was a partner in a partnership that
operated a business of piloting maritime transport. The
partnership’s office was used only by administrative staff;
the pilots received their assignments by telephone at home,
where they were carrying out preparatory work for navigational activities. The CRA concluded that the pilot’s home
could not be his “principal place of business.” Moreover,
the CRA stated that “[i]f a taxpayer has an office or a fixed
place of business elsewhere, the CRA generally concludes
that his home cannot be considered his principal place of
business.” (My translation.)
Similarly, in the January 2013 release of Guide IN-155-V
(cited above), RQ stated that “if you have an office or fixed
place of business other than your home, your home is usually not considered your principal place of business.” (My
translation.) (Three exceptions are cited in the guide, but
in all three cases the self-employed person has no other
fixed place of business.)
principal lieu d’affaires. Cependant, de nouvelles
politiques de l’ARC et de Revenu Québec (RQ ) suggèrent
que ce choix pourrait être contesté par les autorités
fiscales mais il est peut-être trop tôt pour le savoir.
L’un des avantages de qualifier le local de travail à
domicile de « principal lieu d’affaires » est que le
contribuable pourra déduire de ses revenus d’entreprise,
les dépenses autrement déductibles en vertu de la Loi
pour la portion de son domicile affectée à son lieu de
travail (paragraphe 18(12) LIR et article 175.4 Loi sur les
impôts du Québec (LI)). La seule autre façon pour le
travailleur autonome de réclamer ses frais de local de
travail à titre de déduction — que le local de travail serve
exclusivement pour tirer un revenu d’une entreprise et
pour rencontrer des clients ou des patients sur une base
régulière et continue dans le cadre de l’entreprise — est
généralement plus difficile à satisfaire.
Un second avantage de pouvoir qualifier le local de
travail à domicile à titre de principal lieu d’affaires est que
les frais de déplacement entre le domicile et les différents
lieux d’affaires (c’est-à-dire les dépenses de déplacements)
seront déductibles du revenu d’entreprise (Guide ARQ
IN-155-V, « Les revenus d’entreprises ou de profession »,
paragraphe 6.12.1; le Bulletin d’ interprétation IT-521R,
paragraphe 24; et Mompérousse (2010 CCI 172)).
Dans Jenkins c. La Reine (2005 CCI 167), l’ARC avait
refusé la déductibilité des frais de local de travail à
domicile d’un pêcheur, affirmant que le bateau
constituait plutôt son principal lieu d’affaires. La Cour
s’est penchée sur le lieu où se déroulaient les activités
« d’affaires » de l’entreprise (facturation, paie, etc.) et a
conclu que le bateau n’était pas un lieu d’affaires, et
encore moins le principal lieu d’affaires. Cette décision
semble permettre qu’un bureau à domicile soit considéré
comme le principal lieu d’affaires d’un travailleur, bien
que certaines activités de l’entreprise aient lieu ailleurs.
Le Bulletin d’interprétation IT-514, paragraphe 2, appuie
cette interprétation en donnant comme exemple un
entrepreneur et un agriculteur ayant un bureau à domicile
comme le principal lieu d’affaires.
Dans la lettre d’interprétation de l’ARC
2011-0393331E5, le contribuable effectuait la plus
grande partie de son travail dans un local de travail à
domicile, mais rencontrait 80 pour cent de ses clients
dans un bureau loué à l’extérieur de celui-ci dont elle se
servait pour préserver la confidentialité et se rapprocher
de sa clientèle. L’interprétation de l’ARC est à l’effet que
le principal lieu d’affaires de la contribuable était son
bureau loué, et que par conséquent, les frais de
Maude Caron-Morin
Joli-Coeur Lacasse LLP, Quebec City
[email protected]
Bureau à domicile et à l’extérieur
Lorsqu’un travailleur autonome bénéficie d’un local de
travail à domicile et d’un bureau à l’extérieur, la question
se pose à savoir lequel constitue son principal lieu
d’affaires. Habituellement, le contribuable préférera que
le bureau à son domicile soit considéré comme son
Volume 3, Number 3
8
August 2013
tax problem in the United States that would have resulted
from his inability to step up the basis of his shares of the
professional corporation.
The key issue was whether the extraction of the funds
triggered a deemed dividend under subsection 84(2). The
FCA stated that the language “in any manner whatever” in
subsection 84(2) was intended to encompass various ways
in which the funds of a corporation could come into the
shareholder’s hands. Applying a textual, contextual, and
purposive analysis of the provision, the court considered
(1) who initiated the winding up, discontinuance, or reorganization of the business; (2) who received the funds of
the business as a result of the transactions; and (3) the
circumstances in which the distributions took place.
The FCA concluded that the person receiving the funds
must be a shareholder at the time when the planning takes
place — not at the time when the funds are ultimately received. This finding is contrary to the reasoning of the TCC.
It did not matter that the taxpayer was a creditor, rather
than a shareholder, of the company when he received the
funds. Because the taxpayer had initiated the winding up
of his business while he was still a shareholder, and had set
various transactions in motion so that he could extract
funds from the business tax-free, the FCA concluded that
subsection 84(2) applied.
When implementing a post mortem pipeline strategy,
practitioners should ask the following questions:
déplacement entre son domicile et ce bureau n’étaient
pas déductibles. Dans la lettre d’interprétation ARC
2008-0279741E5, il s’agissait d’un pilote de navire qui
souhaitait déduire de son revenu ses frais de déplacement
encourus entre son domicile et le poste d’embarquement.
Les pilotes étaient associés d’une société de personnes qui
exploitait une entreprise de pilotage de transport maritime.
Les bureaux de cette société de personnes n’étaient
utilisés que par du personnel administratif alors que les
pilotes recevaient leurs affectations par voie téléphonique
à leur domicile, d’où ils effectuaient des travaux
préparatoires à l’exécution des activités de navigation. À la
lumière de tous les faits, l’ARC a conclu que le domicile
du pilote ne pouvait être considéré comme son « principal
lieu d’affaires ». D’ailleurs, dans cette lettre
d’interprétation l’ARC mentionne que « [s]i un
contribuable a un bureau ou un lieu d’affaires fixe ailleurs,
l’ARC est généralement d’avis que son domicile ne peut
être considéré comme son principal lieu d’affaires ».
De même, dans la version de janvier 2013 du guide
IN-155-V (cité ci-dessus), RQ stipule également que « [s]i
vous avez un bureau ou un lieu d’affaires fixe ailleurs qu’à
votre domicile, votre domicile n’est habituellement pas
considéré comme votre principal lieu d’affaires ». RQ fait
également mention de trois cas d’exception, mais dans les
trois cas, le travailleur autonome ne bénéficie d’aucun
bureau de travail fixe à l’extérieur de son domicile.
Maude Caron-Morin
Joli-Coeur Lacasse S.E.N.C.R.L., Québec
[email protected]
• Is a Canadian-resident corporation involved?
•Is the corporation winding up, discontinuing, or
reorganizing?
• Is there a distribution or appropriation of the corporation’s funds or property in any manner whatever?
• Is the distribution or appropriation to or for the benefit
of the shareholders?
Post Mortem Pipeline Potentially
Upset by FCA
If the answer to all of these questions is yes, then subsection 84(2) may apply to deem the shareholder to have
received a dividend.
In the past, favourable rulings have been granted for
pipeline strategies where the following conditions are met
(CRA document no. 2011-0401861C6):
In Canada v. MacDonald (2013 FCA 110, rev’g. 2012 TCC
123), the FCA ruled against a surplus-stripping transaction that was very similar to a typical post-mortem
pipeline strategy used in estate planning. Given the uncertainty created by the decision, tax practitioners may want
to consider obtaining a ruling from the CRA before they
implement pipeline strategies for their clients.
In MacDonald, a heart surgeon who was moving to the
United States was able to alter his interest in his Canadian
professional corporation from that of a shareholder to that
of a creditor by selling his shares of the corporation to a
non-arm’s-length party in exchange for a promissory note.
By doing this, he essentially avoided the potential double
Volume 3, Number 3
1) the transaction does not involve a cash corporation;
2) the business is continued for at least one year following the implementation of the pipeline structure;
and
3) the one-year period is followed by a gradual distribution of the corporation’s assets over an additional
period.
9
August 2013
It remains to be seen whether the CRA will continue to
issue rulings in such situations, given that the legal basis may
have been undercut by the FCA’s decision in MacDonald.
For more details on MacDonald, see Ian Pryor, “FCA To
Rule on Post Mortem Pipeline Planning,” Canadian Tax
Focus, August 2012, and Nick Moraitis and Manu Kakkar,
“Stopping the Pipeline—In Any Manner Whatever,” Tax
for the Owner-Manager, July 2013.
• Quarterly tax instalments are required for testamentary
trusts and flat top-rate estates, where applicable.
• The basic exemption of $40,000 for alternative minimum tax afforded to grandfathered inter vivos trusts,
trusts created by will, and flat top-rate estates is
eliminated.
• Trusts created by will and flat top-rate estates are no
longer allowed to have off-calendar year-ends.
• Trusts created by will and flat top-rate estates are no
longer exempt from part XII.2 tax under subsection
210(2).
• Trusts created by will and flat top-rate estates are no
longer able to flow out investment tax credits to their
beneficiaries.
• Changes are proposed to current administrative policies
that ordinarily would apply only to individuals but
administratively were extended to testamentary trusts.
Eunice Jang
Grant Thornton LLP, Vancouver
[email protected]
Trusts and Estates Proposals: Little
Consultation but More Information
The consultation paper on graduated taxation for trusts
and estates, which was promised in the 2013 budget, was
released on June 3. It contains several new details on the
budget proposals. Comments are invited until December 2,
2013. However, there is no list of questions or any indication of the topics on which Finance is seeking comments;
the measures seem clearly defined as they stand.
Certain estates and trusts created by will (testamentary
trusts) and inter vivos trusts created before June 18, 1971
(grandfathered inter vivos trusts) compute federal income
tax on taxable income using the graduated tax rates applicable
to individuals (subsection 104(2)). Other trusts (ordinary
inter vivos trusts) are subject to flat top-rate taxation—that
is, they pay federal tax at a flat rate of 29 percent, which is
the highest federal tax rate for individuals (subsection
122(1)). The budget proposed eliminating the tax benefits
that arise from taxing at graduated rates grandfathered inter
vivos trusts, trusts created by will, and estates (after a reasonable period).
The consultation paper provides several new details:
As was apparent from the budget, the intention of the
proposed measures is twofold: (1) to discourage the use of
testamentary trusts for tax planning and (2) to remove any
legislative or administrative advantages that were previously
extended to testamentary trusts. Specific plans targeted by
this measure, as reported in the budget, are the settling of
multiple testamentary trusts on the death of an individual,
delaying the windup of the administration of an estate, and
avoiding the Old Age Security Recovery Tax. The consultation paper provides no further details about these perceived
abuses.
One would have hoped for more details on why Finance
wants to remove the grandfathering of the 40-year-old
group of grandfathered inter vivos trusts created in 1971
and previous years. Ironically, the present tax treatment of
trusts stems from that time; the 1966 report of the Royal
Commission on Taxation (vol. 4, ch. 21, p. 157) proposed
measures “to impose tax on trusts at equitable rates and to
prevent the use of trusts to avoid or defer payment of tax,”
a project that seems to be continuing today.
• The new rules will apply to existing and new arrangements for the 2016 and later taxation years. This
unexpected delay for new arrangements is taxpayerfavourable, but the lack of full grandfathering of
existing arrangements is a surprise.
• There will be no changes to the preferred beneficiary
election, the trust rules for minor children, or the rollover
on the death of a spouse or common-law partner.
•The “reasonable period” after which estates will be
subject to flat top-rate taxation is 36 months after the
individual’s death. A deemed year-end occurs at that
time. An estate in existence after that time will be called
a flat top-rate estate.
Volume 3, Number 3
Riaz S. Mohamed
Moodys LLP, Calgary
[email protected]
Disability Insurance Benefits
and Non-Residents
The recent decision by the FCA in Price (2012 FCA 332)
substantially clarifies the tax treatment of benefits earned
in Canada under a private disability insurance plan and
paid to a non-resident.
10
August 2013
Les prestations d’assurance
invalidité et les non-résidents
In Blauer (2007 TCC 706), the court was faced with the
question whether such benefits were taxable under part I
of the ITA through the application of subsection 2(3), paragraph 6(1)(f ), and subsection 115(1). The TCC held that
the disability benefits were not so taxable. The judge added
in obiter that such benefits might be taxable as pension
benefits under section 212 of part XIII; however, because
that issue was not raised by either party, the implication
(at least for that particular taxpayer) was that such payments
were not subject to any Canadian tax.
In Price, the section 212 argument was not raised. The
court explicitly reversed Blauer and found that part I applied. The case concerned an Air Canada pilot who earned
income both inside and outside Canada. The determination
of the portion of the disability benefits relating to income
earned in Canada (and thus taxable under part I) was not
at issue.
Price has implications for taxability, withholding, and
reporting on tax slips. The implication of taxability under
section 115 is that non-residents who receive disability
benefits must file a tax return. (The tax in part I, unlike the
tax in part XIII, is not a final tax directly withheld by the
payer.) Payers must also withhold under section 153 because
the disability benefits are employment income and therefore
fall within the definition of “salary or wages” in subsection
248(1). The calculation of the withholding is set out in
regulation 102(1), which applies because the disability
benefits are remuneration (as defined in regulation 100(1))
and the employee is deemed to report for work at the establishment of the employer from which the remuneration
is paid (regulation 100(4)). Payments to the CRA are reported
on a T4A slip, which is the same form that residents use.
For Quebec provincial income tax purposes, disability
insurance benefits paid to a non-resident are taxable under
section 26 of the Taxation Act (TA) if the recipient was
working in Quebec when the employer paid the insurance
premiums. In such cases, payers must withhold tax under
section 1015 of the TA. There does not appear to be any
exemption or deduction available to reduce the disabled
employee’s tax under either the TA or the ITA. Finally, such
disability benefits are not subject to source deductions for
payroll taxes such as the QPP, the Quebec parental insurance plan, and employment insurance. Payments to Revenu
Québec are reported on relevé 1, which (as is the case for
federal purposes) is the same form that residents use.
Le récent jugement Price (2012 CAF 332) rendu par la
Cour d’appel fédérale clarifie considérablement le
traitement fiscal des prestations gagnées au Canada en
vertu d’un régime privé d’assurance invalidité versées à
un non-résident.
Dans Blauer (2007 CCI 706), la Cour canadienne de
l’impôt devait déterminer si de telles prestations étaient
imposables en vertu de la partie I de la LIR au moyen
du paragraphe 2(3), de l’alinéa 6(1)f ) et du paragraphe
115(1). La CCI a conclu que les prestations n’étaient pas
imposables. En obiter, le juge a ajouté que de telles
prestations pouvaient être imposables à titre de prestation
de retraite selon l’article 212 de la partie XIII. Toutefois,
puisqu’aucune des parties n’avait soulevé cet argument, le
résultat a été que de tels paiements n’étaient pas assujettis
à l’impôt au Canada (du moins pour ce contribuable).
Dans Price, où il s’agissait d’un pilote d’Air Canada
qui avait gagné un revenu au Canada et à l’extérieur du
Canada, l’argument relatif à l’article 212 n’a pas été
soulevé. La Cour a explicitement renversé l’affaire Blauer
et a conclu que la partie I s’appliquait. La détermination
de la portion des prestations d’invalidité relative au
revenu gagné au Canada (et donc selon le jugement,
imposable en vertu de la partie I) n’était pas en cause.
Price a des conséquences sur l’imposition, la retenue et
les formulaires fiscaux. Pour ce qui est de l’imposition en
vertu de l’article 115, les non-résidents qui reçoivent des
prestations d’invalidité doivent produire une déclaration
d’impôt. (Contrairement à l’impôt de la partie XIII,
l’impôt de la partie I n’est pas un impôt final directement
prélevé par le payeur.) Les payeurs doivent aussi effectuer
une retenue en vertu de l’article 153, car les prestations
d’invalidité sont considérées comme du revenu d’emploi
et elles sont comprises dans la définition de « traitement
et salaire » au paragraphe 248(1). Le calcul des retenues
est prévu à l’article 102(1) du Règlement, lequel
s’applique aux prestations d’invalidité, puisqu’elles
constituent de la « rémunération » (tel que défini à
l’article 100(1) du Règlement) et que l’employé est
réputé se présenter au travail à un établissement de
l’employeur où la rémunération lui est versée (article
100(4) du Règlement). Les retenues d’impôt versées à
l’ARC sont déclarées sur le formulaire T4A, qui est le
même que celui utilisé pour les résidents.
Jean-Philippe Thériault
SSQ Financial Group, Quebec City
[email protected]
Volume 3, Number 3
11
August 2013
Under the Act Respecting the Régie de l’assurance maladie du Québec and the Act Respecting the Québec Pension
Plan and the Act Respecting Labour Standards, an employer
with an establishment in Quebec is required to pay contributions in respect of the wages paid to an employee.
“Employer” is defined for this purpose as a person that pays
wages; “wages” is defined as including stock option benefits;
and the wages that an employer “pays” are deemed to include any wages that the employer “pays, allocates, grants
or awards.” The QCCA concluded that UTC should be seen
as the employees’ “employer” because it had “allocated” or
“granted” the stock option benefit realized. Thus, PWC was
not liable for contributions under the statutes.
A key element in the court’s reasoning was that UTC had
made the decision to set up the SOP and allow PWC’s
employees to participate. In addition, the committee determined which employees would receive options and how
many. Finally, and seemingly of particular importance, UTC
alone bore all of the costs associated with the SOP.
The QCCA’s decision in Pratt reverses the decision of the
Court of Québec (Pratt & Whitney Canada Cie. c. Québec
(Sous-ministre du Revenu) (2010 QCCQ 13779)) and is the
opposite of the decision that the QCCA previously reached
in Merck Frosst Canada & Co. c. Québec (Sous-ministre du
Revenu) (2007 QCCA 1075). The QCCA distinguished Merck
Frosst on the basis that the taxpayer in that case had made
a payment to its parent corporation in order to compensate
it for granting stock options to its employees. Interestingly,
however—and unlike the court in Merck Frosst—the court
in Pratt did not appear to consider the absence of any formal
agreement between PWC and UTC in respect of the SOP to
be of particular relevance.
Au Québec, les prestations d’assurance invalidité versées
à un non-résident sont imposables selon l’article 26 de la
Loi sur les impôts du Québec (LI) si le bénéficiaire était
employé au Québec au moment où l’employeur a payé
les primes d’assurances. Dans un tel cas, les payeurs
doivent retenir l’impôt à la source selon l’article 1015 LI.
Il nous semble qu’aucune exemption ou déduction n’est
disponible pour réduire l’imposition de l’employé
invalide, et ce tant en vertu de la LI que de la LIR. Enfin,
les prestations d’invalidité ne sont pas soumises aux
retenues à la source relatives aux diverses charges sociales
telles que le régime des rentes du Québec, le régime
québécois d’assurance parentale et l’assurance-emploi.
Les retenues d’impôt versées à Revenu Québec sont
déclarées sur le formulaire Relevé 1 lequel est le même
formulaire que celui utilisé pour les résidents.
Jean-Philippe Thériault
SSQ Financial Group, Québec
[email protected]
QCCA Opens Door to Planning To
Avoid Quebec Payroll Taxes
A recent Quebec Court of Appeal (QCCA) decision has
implicitly validated tax-planning arrangements in which
certain payroll taxes on stock options are avoided by having
the stock options issued by a company with no establishment in Quebec (Pratt & Whitney Canada Cie c. Agence du
Revenu du Québec (2013 QCCA 706)). It remains to be seen
whether Quebec will amend its provincial payroll taxes (as
Ontario has, for example) in order to prevent other taxpayers from benefiting from such planning opportunities.
United Technologies Company (UTC) was a public corporation resident in the United States. UTC had a stock
option plan (SOP) pursuant to which all employees of UTC
and its subsidiaries (including Pratt & Whitney Canada
(PWC)) were eligible to receive options to buy shares. There
was no formal agreement between UTC and PWC with
respect to the SOP, and PWC was not required to reimburse
UTC for the costs of maintaining the SOP in respect of its
employees. UTC created a committee to administer the
SOP. Each year, the committee determined which of its
subsidiaries’ executives would be granted options under the
SOP, and the number of options that they would receive.
The subsidiaries recommended which non-executive employees should receive options and how many, based on a
list of criteria established by the committee. Although the
subsidiaries’ recommendations were not binding, UTC
followed them 95 percent of the time.
Volume 3, Number 3
Marie-Soleil Landry
McCarthy Tétrault LLP, Montreal
[email protected]
Tax Deferral for Mining
Prospectors and Grubstakers
Staking promising claims and selling them to mining companies is the goal of most individuals engaged in mineral
exploration and development activities in Canada (prospect­
ors). When the right offer comes, prospectors need to be
aware of the highly favourable special rules in section 35
that apply to the disposition of mining properties (or interests) to corporations in exchange for the corporation’s shares.
A prospector must be an individual (Kay v. MNR, 71
DTC 5085 (Ex. Ct.)). He or she must have performed some
exploration activity; merely staking ground is not enough
12
August 2013
(Cramond v. MNR, 72 DTC 1172 (TRB); R.A. Sherman v.
MNR, [1971] Tax ABC 29; R. Black v. MNR, [1971] Tax ABC
866; and MNR v. J. Karfilis, [1966] CTC 498 (Ex. Ct.)). It is
and Irwin v. MNR, 72 DTC 1201 (TRB)). Although the
arrangement does not have to be in writing, the parties’
expectations and obligations must be clear (see Irwin and
The Queen v. W. Boychuk, [1978] CTC 451 (FCTD)). An
employer of the prospector can also qualify under this
provision.
necessary to show that the prospector studied maps, studied
geological records, and inspected the property with the intention of making a discovery (D.T. Winchell v. MNR, [1974]
CTC 177 (FC); aff ’d. [1974] FCJ no. 913 (FCA) (“Winchell ”);
and Geophysical Engineering Ltd v. MNR, [1974] CTC 867
(FCA)). The mere promotion of a particular mine prospect
is not sufficient.
When a prospector disposes of a mining property acquired through exploration efforts to a corporation in
exchange for shares of the corporation, favourable tax rules
apply. The value of the shares received does not reduce the
prospector’s cumulative Canadian development expense
(CCDE) account. In addition, there is a significant tax
deferral: no income inclusion occurs at the time of disposition of the mining property, and taxation is deferred to
the year in which the shares are sold or exchanged. In that
future year, there are two tax consequences:
Olga Koubrak
Buset & Partners LLP, Thunder Bay
[email protected]
Pre-Production Mine Development
Expenses: Budget Proposals
Companies operating in the Canadian mining and metals
industry are facing falling resource prices, cost inflation,
and a shrinking of available capital. Changes announced
in the federal budget released on March 21, 2013 will
further affect mining and metals companies by lowering
the writeoff rate for certain expenses that previously qualified as Canadian exploration expenses (CEEs).
Defined in subsection 66.1(6), CEE includes exploration
expenses and pre-production mine development expenses.
Exploration expenses are generally costs incurred by a
taxpayer to determine the existence, location, extent, or
quality of a mineral resource. In the context of mining,
such expenses include prospecting, geological or geophysical
surveying, surface stripping, drilling, trenching, and preliminary sampling. Additionally, paragraph 66.1(6)(g)
defines CEE to include pre-production mine development
expenses that are (1) incurred to bring a new mine into
production in reasonable commercial quantities, and (2) incurred before the time that production reaches such quantities. These costs include expenses such as clearing or
removing overburden, stripping, and sinking a mine shaft.
The tax treatment of costs included in the CEE pool is
preferential—subject to certain restrictions, they are deductible in full by a taxpayer in the year incurred, or they can
be carried forward indefinitely for use in future years. The
budget proposes that amounts that would have previously
qualified for CEE treatment as pre-production mine development expenses under paragraph 66.1(6)(g) will instead
be phased out and included in the Canadian development
expenses (CDE) pool, for which the maximum decliningbalance writeoff rate is 30 percent. This treatment will apply
to amounts incurred after March 20, 2013 (subject to
transitional provisions), with a phase-in starting in 2015
and ending in 2018, as shown in the accompanying table.
• There is an inclusion in division B income of the lesser
of the FMV of the shares at the time of receipt and the
FMV at the time of disposition or exchange (paragraphs
35(1)(d) and 81(1)(l)). A deduction is available for
one-half of the inclusion (paragraph 110(1)(d.2)), provided that the included amount is not exempt from tax
in Canada by reason of a provision in a tax treaty with
another country that has the force of law in Canada.
The combined effect of these provisions is essentially
the equivalent of capital gains treatment for a sale of the
mining property with a zero ACB, although the amount
is not characterized as a capital gain under the Act.
• Any increase in the value of the shares after their acquisition by the prospector will be treated as a capital
gain (since the amount included in division B income
is the ACB: subsection 52(1)).
The tax consequences described above could be less
favourable if the mining property is exchanged for both
share and non-share consideration (CRA document 20120452841E5, July 9, 2012).
The tax rules for prospectors also apply to an individual
(or a partnership of individuals) who advances money to a
prospector or covers some exploration expenses (commonly
referred to as a grubstaker). (The rules may differ for a
grubstaker that is another type of entity.) The arrangement
must be in place before the prospecting occurs (Winchell;
Shultup Mgmt. & Inv. Ltd. v. MNR, [1972] CTC 2655 (TRB);
Volume 3, Number 3
13
August 2013
Ratio of CEE to CDE (Percent)
the taxpayer, and the costs of these projects should not be
eligible for CEE treatment. Because CEE is deductible in
full in the year incurred, the deduction of costs that create
an enduring benefit seems inconsistent with the general
theme of the Act.
The potential economic effects on the mining and metals
industry are obvious. Corporations that are in the process
of developing a mine may seek to accelerate their development plans in order to continue to qualify for the favourable
treatment of CEE. Further, exploration companies will see
a reduction in the CEE pool eligible to be renounced via
flowthrough shares. Although CDEs are also eligible to be
renounced via flowthrough shares, they are not immediately
deductible by the investor and are not eligible for investment tax credits. With less CEE eligible for renunciation,
flowthrough shares may be less attractive to investors, and
firms may need to rely on more traditional forms of financing, which could prove significantly more expensive.
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100:0
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100:0
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80:20
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60:40
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30:70
After 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0:100
The 2011 budget announced that the treatment of oil
sands pre-production development expenses will be aligned
with the treatment of similar expenses incurred in the
conventional oil and gas industry. One of the stated goals
of the 2013 budget documents is the alignment of the tax
treatment of intangible mining expenses with the treatment
of similar oil and gas expenditures. This goal is evidently
part of a gradual strategy of aligning the tax treatment of
intangible expenses throughout the resource sector.
The policy rationale appears to be that CEE treatment
should apply only to the expenses incurred to discover and
validate the existence of a resource. The clearing of land,
removal of overburden, or sinking of a mine shaft effectively
creates some type of infrastructure or enduring benefit for
Volume 3, Number 3
Adam Power
Ernst & Young LLP, Halifax
[email protected]
14
August 2013
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editor of Canadian Tax Focus, Alan Macnaughton ([email protected]),
or to one of the contributing editors listed below. Content must not have been
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For each issue, contributing editors from Young Practitioners chapters across
Canada suggest topics and assist authors in developing ideas for publication.
For the August 2013 issue, we thank the following contributing editors:
Halifax:
•Sean Glover ([email protected])
•Dawn Haley ([email protected])
Montreal:
•Marie-Hélène Tremblay ([email protected])
Quebec City:
•Amélie Guimont ([email protected])
Ottawa:
•Mark Dumalski ([email protected])
•Amanda Hachey ([email protected])
Toronto:
•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])
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ISSN 1925-6817 (Online). Published quarterly.
Volume 3, Number 3
15
August 2013