Tag Archives: Canada

Canada Life: The Denial of Rescission is a Troubling Decision for Taxpayers and Professional Advisors

pexels-photo-936722On June 21, 2018, the Ontario Court of Appeal handed down a decision in the case of Canada Life Insurance Company of Canada v. the Attorney General of Canada and Her Majesty the Queen in the Right of Ontario. This is a very troubling decision for taxpayers and their professional advisors. The facts are briefly as follows. The Canada Life Insurance Company of Canada (“CLICC”) and certain of its affiliates carried out a series of transactions and events in December 2007. The purpose of the transactions was to realize a tax loss to offset unrealized foreign exchange gains accrued in the same taxation year. The Canada Revenue Agency (the “CRA”) disallowed the claimed loss in the reassessment of CLICC’s taxes for 2007. Asserting that it had proceeded on the basis of erroneous advice from its tax advisor, CLICC applied to the courts for an order setting aside the transactions and replacing them with other steps retroactive to the date of the original transaction.

The problem arose because the tax loss was to be triggered by the winding up of a limited partnership. The mistake was that the general partner of the limited partnership, CLICC GP, was also wound up at the same time that the partnership was wound up. This resulted in the limited partner, CLICC, carrying on the business of the limited partnership alone within three months of the dissolution of the partnership.

CLICC originally applied for an order rectifying the transaction so as to move the winding-up of the general partnership from December 31, 2007 to April 30, 2008. The taxpayer was successful in its application before the application judge. However, the Attorney General appealed the decision. While the appeal was pending, the Supreme Court of Canada, in the case of the Fairmont Hotels,[1] overruled previous decisions which permitted rectification. The change in law restricted the scope of the equitable remedy of rectification to the correction of written agreements. Continue Reading »

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MLI Implementation in Canada

new-york-690868_1920On May 28, 2018, nearly a year after Canada became a signatory to the OECD’s Multilateral Instrument (“MLI”), a notice of ways & means motion has been tabled by the Minister of Finance (Canada) in the House of Commons signalling the Canadian government’s intention to introduce legislation to ratify the MLI.  On June 20, 2018, Bill C-82, which will enact the MLI, received first reading in the House of Commons. The MLI has been signed by 78 countries including Canada.

When the MLI is ratified by Canada and the other signatories, existing bilateral tax treaties may be modified to apply certain agreed to minimum standards  on treaty abuse and improving dispute resolution that were endorsed by participating countries under the OECD /G20 Base Erosion and Profit Shifting (BEPS) Project.

Continue Reading »

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Selected Tax Measures in the Federal Budget 2018 – Canada

This update is intended for those seeking additional insights into the 2018 Federal Budget including its impact on both domestic and multinational enterprises.

The Minister of Finance (Canada), the Honourable Bill Morneau, presented the Government of Canada’s (the “Federal Government”) 2018 Federal Budget (“Budget 2018″) on February 27th, 2018 (“Budget Day”). Budget 2018 contains significant proposals to amend the Income Tax Act (Canada) (the “ITA”) and the Excise Tax Act (the “ETA”) while also providing updates on previously announced tax measures and policies.

Significant Budget 2018 proposals and updates include:

  • Introduction of simplified measures (compared to the July 2017 proposals) applicable to passive investment income in a private corporation that will: (i) limit access to the small business rate for small businesses with significant passive savings, and (ii) limit access to refundable taxes for larger Canadian-controlled private corporations (“CCPCs”).
  • Rules applicable to equity-based financial arrangements including synthetic equity arrangements and securities lending arrangements.
  • Rules to prevent tax-free distributions by Canadian corporations to non-resident shareholders through the use of certain transactions involving partnerships and trusts.
  • Modification of the foreign affiliate provisions so certain rules cannot be avoided through the use of “tracking arrangements”.
  • Updates on Canada’s participation in the Organisation for Economic Co-operation and Development (“OECD”) project on Base Erosion and Profit Shifting (“BEPS”).

Our full analysis of selected proposals and tax measures can be found on Fasken.com.

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Canada’s Cannabis Taxation Regime

photo-1503262167919-559b953d2408There has been much speculation on how Canada will tax cannabis, which is expected to be legalized for retail sale in Canada by July 2018.  The much anticipated draft tax legislation was released by the Department of Finance on Friday November 10, 2017, and is out for consultation until December 7, 2017.

Proposed Tax Regime

Under the proposed cannabis tax regime, most supplies of cannabis will be subject to GST/HST (at rates currently ranging from 5-15% across Canada).  Cannabis, both for recreational or medical use, will also be taxed under the Excise Act, 2001 (Canada) (the “Act”), which currently imposes federal excise duty on spirits, wine and tobacco product made in Canada.  Both taxes on cannabis will be administered by the Canada Revenue Agency.

Similarly to the current GST/HST regime, the provinces and territories will be offered the option of joining the federal tax regime for cannabis taxation, in which case the excise duty on cannabis will be made up of the federal rate, plus an additional rate for the participating province or territory.  The division of tax revenues is currently under discussion between the federal government and the provinces, which will be responsible for controlling the distribution and retail sales of cannabis in each province.  In this regard, the federal government has indicated its goal of setting the maximum total excise duty rate at the greater of $1 per gram or 10 per cent of the sale price of the product.

Continue Reading »

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New Proposals on the Taxation of Private Corporations can result in Double Taxation

ottawa-815375_1920Much has been written regarding the proposals released by the Department of Finance on July 18, 2017 to limit income splitting and holding passive investments inside a private corporation.[1]  A third measure, namely, placing limits on the conversion of income to capital gains is aimed at preventing an individual selling shares of a corporation to a non-arm’s length person followed by a sale by the non-arm’s length person to a connected corporation.  The foregoing transaction would result in the individual realizing a capital gain based on the fair market value of the transferred share followed by the tax-free extraction of corporate surplus of the transferred corporation.  This is considered an inappropriate conversion of what would otherwise be a payment of dividend income into a capital gain.  The difference in tax rates is about 14%.

The problem is in the application.  Discussions with officials from the Department of Finance indicate that these proposals will prevent some normal post death tax planning aimed at preventing double taxation of the same economic gain (the “pipeline plan”).

The pipeline plan is illustrated in the following example:  Taxpayer A incorporates a company and invests $100 for shares of the company.  The company starts a business or buys investments for $100.  Ten years later the shares of the company are worth $5 million.  Taxpayer A dies, a capital gain of $4,999,900 is realized.  However, the cost of the assets or investments in the company remains at $100.  Thus, if the assets or the investments are sold for $5 million, there is a gain of the same $4,999,900, i.e., the same gain is taxed twice, once in the hands of the deceased taxpayer and once in the hands of the company.  To prevent this economic double taxation, the shares of the company are sold by the estate of Taxpayer A to a new corporation for the same $5 million which then is amalgamated with the company.  The tax result is that the cost base of the assets in the amalgamated company and paid-up capital of the shares of the amalgamated company is increased to $5 million.  This prevents double taxation of the same gain.

Yet, the Department of Finance officials have indicated that the pipeline plan is not available because the transfer of the shares from the deceased Taxpayer A to his estate is a non-arm’s length transfer that is caught by the new proposal.  It is a stretch to think of death as a “specific type of avoidance transaction”.

There is a procedure available to deal with the double taxation issue but there is a stringent time requirement which often causes such a procedure to not be available.[2]

The Minister of Finance should heed the words of Shakespeare “Striving to do better, oft we mar what’s well”.  At a bare minimum, the Minister should announce that these rules will not affect pipeline transactions.

 

[1]       See also our commentary on the proposal, “Targeting Private Corporation Tax Planning: the Canadian Federal Government’s Proposal“.

[2]       Namely, making an election pursuant to subsection 164(6).

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