Jin Wen and Michelle Dickinson, “Are Shares Tainted Forever Under Subsection 84.1(2.1)?”, 8:4 Cdn Tax Focus (Nov 2018), discusses the rule in subsection 84(2.1), which grinds PUC as if a vendor had claimed the capital gain exemption but never does, if the vendor claims a reserve the transfer (see CRA document 2015-0594461E5 (May 20, 2016) and the CRA’s response to the STEP Roundtable, question 17). The authors suggest deliberately disqualifying shares as qualified small business corporation shares to avoid the application of s 84.1(2.1).
The taxpayer in Canaada (National Revenue) v Stankovic, 2018 FC 462, had held a bank account in Switzerland that French authorities disclosed to the CRA under the French treaty. The French authorities, it appears, had obtained the information about the account in contravention of French law.
The taxpayer tried to oppose a compliance order on Charter grounds on the basis that the CRA inquiry related to the taxpayer’s potential criminal liability and that the information from the French authorities had been obtained illegally.
After applying the Jarvis (2002 SCC 73) factors, the Court held that the CRA inquiry was civil in nature so that the Charter did not protect the taxpayer. Moreover, the Court held that the CRA had obtained the information in question legally. That the French authorities might have obtained the information illegally did not violate the Charter because it applies only to Canadian state actors.
Anthony Sylvain, “The CRA’s Win Against Undisclosed Offshore Accounts” 8:4 Cdn Tax Focus (Nov 2018).
Landbouwbedrijf Backx BV v R, 2018 TCC 142, considered the residence of corporation under the laws of the Netherlands whose director was resident in that country but whose only shareholders were resident in Canada.
In respect of Backx BV’s place of residence, the TCC noted that central management and control generally resides with a company’s board of directors. However, if significant management decisions are made by parties independently of the company’s directors, the jurisdiction of residence of those parties may determine the residence of the company.
In order to establish that persons other than the directors controlled the company, there must be cogent evidence demonstrating that management decisions were made independently by those other persons. In the case at hand, the TCC held that the shareholders had essentially been instructing the director on how to perform her duties, and that she was otherwise performing only administrative and clerical functions. Furthermore, the TCC found that the director had no experience in dairy farming, received little remuneration for her work, and had not even been copied on correspondence with accountants and tax advisers.
Daniel Shiff, “Treaty Benefits and Corporate Residence Determined by Location of Control” 8:4 Cdn Tax Focus (Nov 2018).
In Laliberté v R, 2018 TCC 186, the Tax Court considered whether the controlling shareholder of Cirque du Soleil had received a $38 million shareholder benefit for a trip he took to the International Space Station that was paid for by his corporation. The Court analyzed the facts in detail and concluded that the trip was primarily personal in nature (it was a trip the founder would have taken regardless of the business done during the trip). Nora Fien, “Shareholder Benefit for Space Trip” 8:4 Cdn Tax Focus (Nov 2018).
In E Hamelin, “Surplus Stripping: A New Approach?” 18:4 Tax for the Owner-Manager (October 18, 2018), the author notes that the Court in Pomerleau v R, 2018 FCA 129 seemed to treat the one-half portion of a capital gain that is “tax free” as an amount that is untaxed for the purposes of a section 84.1 purpose analysis. Mr Hamelin writes
Will this new approach have an impact on the surplus-stripping operations currently accepted by the tax authorities or validated by the courts that involve, directly or indirectly, capital gains? Examples include two-step pipeline transactions, either post mortem or inter vivos, for the purpose of distributing a corporation’s surplus through the realization of a taxable capital gain (sale of shares to an individual to trigger a taxable capital gain before a subsequent sale to a corporation), and gains such as those realized in Gwartz v. The Queen (2013 TCC 86).
In Rocco Gagliese Productions Inc. v R, 2018 TCC 136, the corporate taxpayer employed an individual who wrote and recorded music on an active and continuous basis. The taxpayer received royalty income from SOCAN for this work. The CRA took the position that the “legal character” of the income (royalties) meant that the taxpayer was carrying on a “specified investment business” for the purposes of the small business deduction provisions. The Tax Court disagreed. It held that the principal purpose of the taxpayer’s business was to earn income from writing and recording music. See D Morrison, “Specified Investment Business Income Does Not Include Royalties” 18:4 Tax for the Owner-Manager (October 18, 2018).
In Bonnybrook Industrial Park Development Co. Ltd. v. Canada (National Revenue), 2018 FCA 136, the taxpayer failed to file tax returns for multiple years, which meant that it was beyond the three-year deadline for claiming a dividend refund. The taxpayer applied under the relief provisions for an extension of time to file the returns and then claim the refund. The Court overturned the CRA’s refusal to grant the relief. The CRA took the position that it did not have the legal authority to grant an extension and the refund. The Court decided that the CRA did have that authority and returned the matter to the CRA for a decision on that basis. See L Gilbert and R Potter, “Judicial Review Allowed: FCA Extends Application of Subsection 220(2.1)” 18:4 Tax for the Owner-Manager (October 18, 2018).
In A Ghani, M Lee and M Kakkar, “The Passive Income Rules: New Ways To Grind the SBD” 18:4 Tax for the Owner-Manager (October 18, 2018), the authors note that
[R]egardless of whether a corporation has had multiple year-ends, these new passive income rules will aggregate all of the adjusted aggregate investment income of all of the taxation years ending in the preceding calendar year to compute the small business limit reduction.
In R v 594710 British Columbia Ltd., 2018 FCA 166, the Court held that GAAR applied to a complicated series of transactions in which profits of a limited partnership were allocated to a corporation with tax shelter where the economic benefits of those profits ended up with the original partners (minus a deal fee).
Interestingly, the Court also found that a stock dividend and a subsequent redemption of the shares issued in satisfaction of the dividend together were the equivalent of a cash dividend for the purposes of section 160 of the Income Tax Act (Canada) (as per Algoa Trust v R, 93 D.T.C. 405,  1 C.T.C. 2294 (TCC), which held that a dividend was a transfer of property without consideration for the purposes of section 160). See ¶¶110–116.
Far be it for me to question the Federal Court of Appeal, but is that right? I understand that a cash dividend paid on, say, common shares, is not paid in return for anything that the holder of the shares does to earn the dividend. As was pointed out in Algoa Trust, the holder gave consideration for the shares but the holder does not give any further consideration for the dividends. On the redemption of shares, however, the holder of the shares is surrendering the bundle of rights against the corporation and its assets that make up the shares. If the fair market value of the share is equal to the payment made to the holder for its surrender, hasn’t the holder given consideration?
In Atlantic Packaging Products Ltd. v R, 2018 TCC 183, the taxpayer sold one of its divisions (the “Tissue Division”) to an arm’s length purchaser. In connection with the sale, it sold 68% of the assets of the division to a subsidiary for Common Shares. The taxpayer sold the remaining assets of the division and the Common Shares of the subsidiary to the purchaser. The CRA reassessed on the basis that s 54.2 of the Income Tax Act did not apply to the sale of the Common Shares and that the sale was on income account. The Tax Court upheld the reassessment. Continue reading