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
From David Nathanson, “Tax Liens and Constructive Trusts” 26:8 Canadian Tax Highlights (Aug 2018):
Thus, if a constructive trust is recognized, for income tax purposes the legal owner of the property in dispute is generally regarded by the CRA as having disposed of it at FMv when the court so orders in favour of the property’s rightful owner.
Unless the OCA decision in Trang v Nguyen [2012 ONCA 885] is overruled by the SCC, the interest of an aggrieved spouse claiming and establishing a constructive trust in property, legal title to which is held by the other spouse, appears to rank ahead of a lien registered by the CRA against the latter spouse’s property when the constructive trust came into existence and not when the constructive trust’s existence is recognized in the court’s judgment.
But, given the latter principle (that the constructive trust is not created by the court declaration but as the contribution is made that is the subject of the trust)
…then the administrative pronouncement in the document [CRA technical interpretation 9812527 (October 21, 1998)] quoted above is wrong: a constructive trust established by a
judicial determination does have retroactive effect. The legal owner of the property in dispute is generally viewed as having disposed of the property at FMV when the right of action arose, and that may be in a year for which the normal reassessment period has expired.
From Henry Shew, “Safe Income May Vary Within Shares of the Same Class” 8:3 Cdn Tax Focus (August 2018):
Assume that Holdco purchases 100 shares of Opco for $10 (“the old shares”). These shares earn $1 per share of safe income per year. Therefore, at the end of year 1, Holdco has $100 of safe income on hand. at the beginning of year 2, Holdco purchases another 100 shares of Opco (“the new shares”) for $10. These shares also earn $1 per share of safe income per year. Therefore, at the end of year 2, Holdco should have $300 of safe income on hand in total ($100 of safe income earned in year 1 plus $200 of safe income earned in year 2).
Opco then proceeds to pay an intercorporate dividend of $1.25 per share, for a total dividend of $250 (200 × $1.25). It might seem that subsection 55(2) will not apply because the dividends are less than the safe income ($250 < $300), but this is not the case. for the old shares, Holdco has $200 of safe income (100 × ($1 + $1)) and $125 of dividends (100 × $1.25). On the new shares, however, Holdco has the same $125 (100 × $1.25) of dividends, but only $100 of safe income (100 × $1). Therefore, subsection 55(2) applies to recharacterize $25 of the dividends on the new shares.
Craig Burley has written a helpful article about a technicality relating to the $25,000 limit for informal procedure appeals to the Tax Court of Canada. He refers to Maier v R, 1994 CarswellNat 3242,  T.C.J. No. 1260 (TCC), in which the Court held that the limit on relief applies to the amount in issue in each assessment under appeal and not to the total amount in dispute in the appeal as such.
The general rule on the dissolution of a partnership is that all partnership property is disposed of at fair market value (s 98(2)). The Income Tax Act (Canada), however, contains a number of rules providing for a rollover.
- 85(3)—No bump if outside basis is higher than inside basis. Partner does not realize a capital gain, even if outside basis is less than inside basis.
- 98(3)—Permits a bump if outside basis is higher than inside basis. Partner realizes a capital gain if outside basis is less than inside basis. Tax deferral for all former partners. Each partner must receive a proportionate undivided interest in each partnership property. Does not apply if 85(3) or 98(5) applies (per 98(4)).
- 98(5)—Permits a bump if outside basis is higher than inside basis. Partner realizes a capital gain if outside basis is less than inside basis. Tax deferral only for the partner that continues to carry on the business.
Consider a partnership, the partners of which are Parentco and Subco. They want to carry on the partnership business through a corporation. They amalgamate. The conditions in 98(3) and 98(5) will not be met because amalco is a “new corporation” for tax purposes, and there is no continuity rule for the purposes of the subsections. Amalco is not a former partner that carries on the partnership business or that has acquired an undivided interest in the partnership property. A winding-up of Subco into Parentco, however, would ensure that 98(5) will apply.
Summary of Paul Cormack and Janette Pantry, “Partnership Reorganizations” 26:6 Canadian Tax Highlights (June 2018).
A payment of an amount pursuant to a settlement can be subject to HST. What happens where the settlement agreement is silent on whether the amounts payable under it include HST? In Automodular Corporation v. General Motors of Canada Limited, 2018 ONSC 1640, the Court considered whether the payment of HST as an additional amount was an implied term of the settlement agreement. The Court held that a settlement agreement is just another contract. The Court applied the ordinary rules of contract law for reading in implied terms. The Court held that, in the particular circumstances before it, it was not an implied term of the settlement agreement that HST be payable as an additional amount. See summary by R. G. Kreklewetz and Steven Raphael, “When a Settlement is Silent on GST/HST” 26:6 Canadian Tax Highlights (June 2018).
Manu Kakkar, Alex Ghani and Boris Volvofsky, in “Corporate Attribution: Refreeze May Cause Unsolvable Corporate Attribution Problem” 18:3 Tax for the Owner-Manager (July, 2018), argue that a refreeze at a lower value does not reduce the outstanding amount for the purposes of section 74.4 of the Income Tax Act (Canada). As a result, if the re-freeze shares are later redeemed, there is a “phantom” outstanding amount on which a 74.4 deemed income amount must be calculated. The corporate issuer, however, can no longer pay dividends to the freezor to reduce or eliminate the deemed income.