Category Archives: Analysis

Analysis, Canada

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

On 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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Analysis, Canada, Cross-border (Canada/US)

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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Analysis, Canada, Quebec

Quebec to tax the digital economy… and more

ecommerce-2607114_1920In March of 2018, the province of Quebec introduced a proposal to vastly expand the requirements for non–residents of Quebec to collect and remit the Quebec Sales Tax (“QST”) on sales of services and intangible property.  Although no draft legislation has yet been released, these proposals would require both Canadian and non–Canadian suppliers of intangible property or services, whether delivered through a digital platform or not, to register as a collector of the Quebec Sales Tax, and to collect, report and remit such tax on all such sales to unregistered Quebec residents.

These proposals follow the OECD recommendations designed to address the tax challenges associated with the digital economy globally, and appear to be directed primarily at B2C transactions, such that only non–residents of Quebec that make sales to unregistered Quebec resident consumers will be subjected to these new rules.  Further, Quebec has indicated that there will be a $30,000 threshold (calculated on a rolling basis over the previous 12–month period), below which registration will not be required.

Although there are many layers of complexity that will need to be dealt with as the legislation is drafted, Quebec has already made it clear that the tax collected under this new system, as well as those collecting such tax, will not be treated the same as the traditional amounts of QST or the traditional QST collectors.  For example, collectors under this new regime will not be entitled to recover any of their own QST costs by way of input tax refund.

Further, it appears that Quebec will also require certain digital intermediaries (e.g. a third party that provides the digital platform to enable supplies of intangibles) to register and collect the QST on such taxable supplies.  This imposition of a compliance burden on such third party intermediaries, appears similar to similar compliance burdens placed on intermediaries in other value added tax jurisdictions (e.g. in Brazil, credit card companies are obligated to collect, report and remit certain sales taxes on payments made by resident Brazilians to non–resident suppliers of intangibles and services).  Although we note that the Quebec proposals appear to exempt payment processors from such compliance obligations, we questions whether Quebec (and possibly Canada) will continue to move in this direction in order to more fully tax the digital economy.

As can be imagined, there will be many difficulties faced by Quebec in the implementation of this new form of QST, not the least will be ensuring compliance by non–residents.  Although it is likely that Quebec will effectively be able to force compliance by Canadian suppliers that do not otherwise carry on business in Quebec, there will likely be significant challenges in enforcing such registration requirements of non–Canadian suppliers.  Similarly, there will likely be significant challenges faced by such non–resident suppliers in determining whether they are making sales to consumers that are actually subject to this tax.

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Analysis, Canada

Search warrant’s validity does not need to be confirmed for CRA to examine items seized as part of criminal investigation

Originally published on Fasken’s White Collar Post blog, under the title “CRA Can Examine Items Seized During Criminal Investigation Before Validity of Search Warrant Confirmed“.

By Jenny P. Mboutsiadis and Anastasia Reklitis

The Canada Revenue Agency (“CRA”) can examine and make copies of items seized by the Royal Canadian Mounted Police (“RCMP”) pursuant to search warrants issued during a criminal investigation without having to wait for a determination of whether the warrants were valid.  This was confirmed by the British Columbia Supreme Court in Canada Revenue Agency v. Royal Canadian Mounted Police, 2016 BCSC 2275.  The CRA has not appealed the decision.

In this case, the CRA applied to the court under subsection 490(15) of the Criminal Code, RSC, 1985, c. C-46, for access to items obtained by search warrants.  The search warrants had been issued based on the belief that those named in the warrants (“Named Persons”) had committed criminal offences, such as laundering proceeds of crime, possession of property obtained by crime, and importing and trafficking in a controlled substance.  The items seized included large amounts of cash, numerous documents and computers, and other electronic devices and media containing business, accounting, and tax records.

The CRA argued that it was permitted access because it is a person “who has an interest in what is detained”, thereby satisfying the applicable Criminal Code provision.  The Named Persons opposed the CRA’s application on numerous grounds.  The RCMP took no position.

The Named Persons’ first argument was that a determination that the seizure is lawful is a pre-condition to the CRA’s entitlement to access any materials.  The Named Persons had already commenced the process in the Provincial Court that could possibly lead to the quashing of some or all of the search warrants and argued that, therefore, the CRA’s application should be adjourned until the validity of the warrants is determined from that process.  The court rejected this argument and explained that the warrants were presumptively valid and the Named Persons have the burden to establish otherwise.  A mere challenge with vague possibilities was not enough to satisfy the court that the warrants were invalid.

The Named Persons’ second argument was that the CRA’s application should fail because it did not have an interest in the seized items.  The court found to the contrary:  the CRA did have an interest because the items could be relevant to various tax investigations in which it was involved, which were independent of the RCMP investigations.  In particular, the items were relevant to determining potential tax offences involving some or all of the Named Persons, including tax evasion and the filing of false tax returns.

The Named Persons’ third argument was that any order allowing the CRA access should contain specific restrictions relating to privacy, privileged material, and relevance.  The court refused to place any restrictions as it did not find it appropriate to limit the examination of the evidence.

The CRA’s application was allowed and access to the seized items was granted.  In doing so, the court stated that there is nothing inherently wrong with law enforcement officials cooperating and sharing legally-obtained information.  Preventing the CRA from accessing the RCMP gathered information would delay the CRA’s investigation, thereby prejudicing its effectiveness and the likelihood of charges arising from it.  The court’s view was that it is in the public interest that the RCMP and CRA investigations proceed concurrently as they concern offences arising from the same search warrants.

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Analysis

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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