Be Careful with Sensitive Tax Information!


The Federal Court’s recent decision in Atlas Tube Canada ULC v MNR[1] showcases an important advantage that lawyers bring to multi-disciplinary teams working on corporate transactions, namely solicitor-client privilege.  The case instructs that, wherever appropriate, arrangements should be made to protect communications and other documents as legal advice.   We recommend consulting with a tax lawyer to determine where and how this can be achieved.

The case concerned a due diligence report (the “Report”) prepared by an accounting firm for Altas Tube Canada ULC (“Altas”) in respect of a  transaction that occurred in 2012.

In the course of auditing Altas for its 2012 taxation year, the Minister of National Revenue (the “Minister”) relied on subsection 231.1(1) of the Income Tax Act (the “Act”) to request a copy of the Report. Atlas refused and the Minister applied to the Federal Court for a compliance order under subsection 231.7(1) of the Act.

At the time the Report was commissioned, Atlas’s U.S. parent corporation was in the process of acquiring two corporations. The purpose of the Report was to describe and explain the tax attributes of the target corporations.

The Federal Court observed that paragraph 231.7(1)(b) of the Act requires that before issuing a compliance order for a document, a court must be satisfied that the document is not protected from disclosure by solicitor-client privilege. Holding that, among other things, the Report was not protect by solicitor-client privilege, the Federal Court decided in favor of the Minister.

The Federal Court relied on the test for solicitor-client privilege set out in Solosky v Canada[2], which established that a communication will be subject to solicitor-client privilege if it is a communication (i) between solicitor and client; (ii) seeking or giving legal advice; and (iii) intended to be confidential by the parties.

Reviewing the evidence, the Federal Court found that while the Report was commissioned for two purposes – the business purpose of assessing whether to proceed with the acquisition and the legal purpose of determining how to structure the transaction – ultimately the business purpose was dominant. The Federal Court concluded that the legal purpose was merely ancillary.

In addition, the Federal Court noted that Redhead established that solicitor-client privilege can extend to communication with a third party where the communication is “in furtherance of a function essential to the solicitor-client relationship or the continuum of legal advice provided by the solicitor”[3], but cannot be extended to communications in which a third party such as an accountant provides an opinion.  The Federal Court found that the Report included an explanation of material tax exposures, an assessment of the probability that filing positions would be challenged, and an evaluation of whether appropriate reserves had been taken.  In other words, the Report provided accounting opinions and as result could not draw upon Redhead’s extension of solicitor-client privilege.

Finding that the legal advice provided in the Report was ancillary to the Report’s business purpose and finding that the Report provided an accounting opinion, the Federal Court concluded that the Report was not protected by solicitor-client privilege.  Accordingly, the Federal Court was able to issue a compliance order requiring Atlas to provide the Report to the Minister.

This case serves as a reminder that, wherever appropriate, arrangements should be made to protect communications and other documents as legal advice.  Taxpayers involved in corporate transactions including sensitive tax information should consult with their tax lawyer to determine what can be protected and how to do so.

[1] 2018 FC 1086.

[2] [1980] 1 SCR 821.

[3] Redhead Equipment Ltd v Canada, 2016 SKCA 115, at para 45.


Canada Introduces New Accelerated Capital Cost Allowance Incentives


On November 21, 2018, the Department of Finance Canada (“Finance”) released the 2018 Fall Economic Statement (the “Statement”). In a clear response to the lowering of the corporate tax rate (and other corporate tax measures) in the United States, Finance introduced new measures that will lower the corporate tax otherwise payable by some corporations in Canada. However, Finance did not lower corporate taxes by lowering the actual tax rates. Rather, the proposed changes will allow corporations to accelerate the tax depreciation of certain capital investments, thus lowering the effective corporate tax rate (at least in the earlier years).

Finance proposed changes that will allow businesses to: (i) immediately write off the cost of machinery and equipment used for the manufacturing or processing of goods; (ii) immediately write off the full cost of specified clean energy equipment; and (iii) rely upon an accelerated investment incentive (the “AII”), which will allow all businesses, making capital investments, to claim an accelerated capital cost allowance (i.e. a business will be permitted to deduct larger amounts of depreciation expenses sooner rather than later).

According to Finance, the AII effectively triples the current first-year capital cost allowance rate for all tangible capital assets (and some intangible capital assets, including patents and other intellectual property). The AII applies to capital property, except property in class 53 (manufacturing and processing equipment), and classes 43.1 and 43.2 (clean energy equipment).[1] Instead, the new full expensing measures will apply to these classes (as discussed below). The AII will have two key implications.

First, the AII will “suspend” the half-year rule in respect of AII property. In the first year that a taxpayer uses an asset, the half-year rule generally provides that a taxpayer may only add half of the asset’s capital cost to the undepreciated capital cost of the asset’s class (the other half of the asset’s capital cost is added to the class in the following year). Instead, the AII provides that, in the first year of using an asset (i.e. an AII property), a taxpayer may add the full amount of the asset’s undepreciated capital cost to the asset’s class.

Second, the AII provides an enhanced allowance with respect to net additions to a class in a given year. In order to calculate the enhanced capital cost allowance, a taxpayer would apply a prescribed rate (for a given class) to an amount equal to one-and-a-half times the net addition to the class in the year (with the full cost of all new assets being added to the class – see suspension of half-year rule above). The taxpayer would then be able to deduct the enhanced capital cost allowance from the taxpayer’s income for the year.

While the AII permits a taxpayer to deduct a larger allowance in the earlier years of an asset’s lifecycle, the AII does not actually permit a taxpayer to claim a larger total capital cost allowance with respect to an asset. If a taxpayer deducts a larger capital cost allowance in the first year of an asset’s lifecycle, the undepreciated capital cost of the asset’s class will be reduced by the amount of the enhanced capital cost allowance (deducted in the first year). A taxpayer will, therefore, have to deduct lesser amounts of capital cost allowance in subsequent years.

If a taxpayer has a short taxation year, the AII will apply on a prorated basis – similar to the application of the current CCA rules to short taxation years. The current CCA regime also includes various rules that may restrict otherwise available deductions. The Statement emphasizes that, in addition to these restrictions (which remain in place), new restrictions will be placed on property eligible for the AII (these restrictions also apply to the first-year enhanced allowances provided under the full expensing measures – see below). In particular, the proposed rules will provide that property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer will be eligible for the AII only if both of the following conditions are met:

  • neither the taxpayer nor a non-arm’s length person previously owned the property; and
  • the property had not been acquired by the taxpayer on a tax-deferred “rollover” basis.

In addition to the AII, the proposed rules include full expensing measures for manufacturing and processing equipment (class 53) and clean energy equipment (classes 43.1 and 43.2). A taxpayer will be able to claim a first-year enhanced capital cost allowance with respect to assets under classes 43.1, 43.2, and 50, acquired after November 20, 2018 (and which become available for use before 2028). The first-year enhanced allowance will initially equal 100% of an asset’s cost, with such percentage being reduced throughout a phase-out period (which begins in 2024).

The Statement provides that the above changes will apply to qualifying assets acquired after November 20, 2018. However, the changes will be gradually phased out starting in 2024. The changes will no longer have effect after 2027.

Finance’s view is that the above changes will encourage businesses to invest greater amounts of after-tax profits in new capital assets (the Statement further provides that Canadian corporations’ after-tax profits are near record highs). For example, according to the Statement, the above changes will, respectively, promote: (i) the competitiveness of Canada’s manufacturing and processing sector, including competitiveness vis-à-vis the same sector in the United States; (ii) Canada’s clean technology sector and the shift to a “cleaner economy”; and (iii) businesses’ ability to quickly recover the initial costs of investments in capital assets which will, in turn, encourage greater amounts of investment, by businesses, in capital assets. The Statement further emphasizes that the above changes will lead to a reduction in Canada’s marginal effective tax rate from 17% to 13.8% – a rate that would be the lowest among G7 countries.

Canadian businesses that were considering making new investments, or shifting current investments, to the United States or other countries should take a closer look at the proposed accelerated CCA rules. Although temporary, these incentives should make capital investments in Canada more attractive, especially in the manufacturing, technology, telecommunications and clean energy industries.

[1] Other property that either already have additional allowances or are at the 100% rate are also excluded from the AII rules.


Proposed Changes to ITC Rules for Holding Corporations


On July 27, 2018, the Department of Finance announced draft legislation to amend the GST/HST holding corporation rules in section 186 of the Excise Tax Act (Canada) (“the ETA”), effective on and after July 27, 2018. This article summarizes the background, the  proposed rules, and related considerations for corporate groups that rely on the rules in section 186 to claim input tax credits (“ITCs”).


For the most part, the proposed changes focus on subsection 186(1) of the ETA, which generally allows a holding corporation to claim ITCs in respect of GST/HST expenses where the holding corporation and another corporation are “related” as defined in subsection 126(1) of the ETA (“the Related Test”), and the GST/HST expenses can reasonably be regarded as having been acquired for consumption or use in relation to shares or debt of the related corporation (“Purpose Test”). All or substantially all of the property of the related corporation must also be for consumption, supply or use exclusively in the course of its commercial activities (“Property Test”). While both the holding corporation and the related corporation must be corporations, only the holding corporation is required to be resident in Canada and registered for GST/HST.

Over the years, the Canada Revenue Agency (“the CRA”) interpreted the Purpose Test in a manner that significantly limited the scope of subsection 186(1). For example, the CRA’s view as expressed in GST/HST New Memorandum 8.6, “Input Tax Credits for Holding Corporations and Corporate Takeovers”, November 2011, example #3, was that if a parent corporation raises capital by issuing its own shares in order finance the purchase of additional shares in a related corporation, related expenses would be “for consumption or use in relation to HoldCo issuing shares of its capital stock (the first order of supply) and not for consumption or shares in relation to the shares of [the related corporation]” as required to claim ITCs under subsection 186(1).

Practitioners and taxpayers generally took a broader view of subsection 186(1) based on the jurisprudence, including the Tax Court of Canada’s informal decision in Stantec Inc. V.R., [2008] G.S.T.C. 137 (TCC). In the absence of a binding decision from the courts on the scope of this provision (the Tax Court of Canada’s Act provides that an informal procedure judgement is not to be treated as precedent in any other case), the scope of subsection 186(1) remained the subject of dispute.

Proposed Rules

While the proposed changes address some of these issues, they go beyond clarifying the scope of the Purpose Test, and essentially replace it with a detailed set of rules. If the proposed legislation is enacted in its current form, ITC eligibility will no longer turn on whether the inputs “can reasonably be regarded” as being in relation to the shares or debt of a related corporation, but on whether the detailed and specific requirements of paragraph 186(1)(a), 186(1)(b) and 186(1)(c) are met.

Operating Corporation Test

In each case, in order for GST/HST expenses incurred by a holding corporation to be recovered under subsection 186(1), the “operating corporation” test must be met. These requirements are also found in the current version of subsection 186(1), but are being moved into a new provision under the proposed rules.

Pursuant to new subsection 186(0.1) of the ETA, a particular corporation (“Subsidiary”) qualifies as an “operating corporation of another corporation” if the following conditions are met:
1. The Subsidiary is “related” as defined in subsection 126(2) of the ETA to another corporation (“ the Parent”), and 2. All or substantially all of the property of the Subsidiary is property that was last manufactured, produced, acquired or imported by the Subsidiary for consumption, use or supply by the Subsidiary exclusively in the course of its commercial activities.

The test for when two corporations are “related” for these purposes is defined in subsection 126(2) and looks to whether the corporations are related pursuant to subsections 251(2) to (6) of the Income Tax Act (Canada). As discussed further before, the Department of Finance has requested comments on whether this test should be changed to a “closely related” test instead.

For purposes of determining whether an input is for consumption, use or supply exclusively in the course of commercial activities, the CRA’s view, as summarized in New Memorandum 8.6, supra, is that “‘exclusively’ generally means 90% or more for non-financial institutions and 100% for financial institutions.”

Purpose Test

Under the proposed rules, the underlying expenses must also fall under one of new paragraphs 186(1)(a), 186(1)(b) or 186(1)(c) in order to qualify for ITCs. In brief, these provisions would allow ITCs to be claimed for expenses incurred in respect of a Subsidiary that meets the above Operating Corporation Test (“Qualifying Subsidiary”) in the following circumstances:

a) Proposed paragraph 186(1)(a) generally provides for ITCs on expenses incurred by the Parent to dispose of, obtain or hold, shares or indebtedness of a Qualifying Subsidiary, or on expenses incurred by a Qualifying Subsidiary to issue, redeem, convert or otherwise modify same.

b) Proposed paragraph 186(1)(b) generally provides for ITCs in relation to expenses incurred by the Parent to raise capital to the extent the proceeds are transferred for shares or debt to a Qualifying Subsidiary for use exclusively in the course of its commercial activities. The amount claimed under this provision would need to be pro-rated as appropriate if only a portion of the proceeds raised are transferred to a Qualifying Subsidiary or the Qualifying Subsidiary does not use the proceeds exclusively in the course of its commercial activities.

c) Proposed paragraph 186(1)(c) generally provides for ITCs in relation to expenses incurred by the Parent for the purpose of carrying on its activities if all or substantially all (generally understood to mean at least 90%) of Parent’s property is shares, or indebtedness of, Qualifying Subsidiaries unless (i) the expenses were incurred for activities that primarily relate to investments in entities other than Qualifying Subsidiaries, or (ii) the expenses relate to the making of an exempt supply by Parent, other than the financial services that are listed in clauses 185(1)(c)(ii) (A) to (E). The enumerated financial services generally include dealings in shares or debt of a Qualifying Subsidiary or Parent, guarantees in respect of same, the payment or receipt of related dividends or similar amounts, as well as underwriting of shares or indebtedness of a Qualifying Subsidiary.


Section 186 is an important provision, as businesses commonly operate through multiple legal entities, and Canada’s GST/HST regime does not have tax grouping or VAT grouping unlike other jurisdictions. In the absence of section 186 (and other relieving provisions), businesses that operates through multiple legal entities (and incur expenses in respect of non-GST/HST registered subsidiaries that engage in commercial activities outside Canada, for example) would routinely incur unrecoverable GST/HST.

The draft amendments are helpful in resolving long-standing disputes on certain types of costs, including expenses incurred by the Parent to raise its own capital to in turn invest in shares or debt of its subsidiary. At the same time, the proposed rules include new Purpose Test requirements, which raise new questions. For example, while proposed paragraph 186(1)(b) allows ITCs in relation to expenses incurred by the Parent to raise capital, this is only to the extent that the proceeds are transferred for shares or debt to a Qualifying Subsidiary for use exclusively in the course of its commercial activities. It is not clear in what timeframe this transfer of proceeds must occur, and what will be sufficient to meet the requirement that the proceeds be for use by the Subsidiary exclusively in the course of commercial activities.

Other Potential Changes to Section 186

Concurrent with the release of the proposed rules, the Department of Finance announced that it is considering whether the long-standing “related” test currently included in proposed subsection 186(0.1) of the ETA should be replaced with a “closely related” test, consistent with other GST/HST rules that require two corporations to be “closely related” to be treated as one person. This change would require 90% common ownership instead of 50% common ownership under the current rules and would significantly reduce the scope of subsection 186(1).

Also, the rules in section 186 currently only apply where both the parent and related person are corporations. The Department of Finance is considering whether these rules should be expanded to partnerships and trusts.


Cameco Corporation Wins Monumental Sham / Transfer Pricing Tax Case


The Tax Court of Canada has ruled in favour of Cameco in its massive tax dispute with the Minister of National Revenue.  The Court held that the Minister was wrong to include $483.4 million earned by Cameco’s Swiss subsidiary in the mining giant’s income for its 2003, 2005, and 2006 taxation years and ordered the amounts be reversed out.  Also, approximately $98 million and $183.9 million were added back in computing Cameco’s resource profits for its 2005 and 2006 taxation years, respectively.

Had the Court upheld the reassessments, Cameco would have been liable for $11 million in taxes, plus interest and penalties, for those years.  Further, subsequent taxation years with the same issues would have resulted in Cameco being liable for a staggering $2 billion in taxes, plus interest and penalties.

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Canada Without Poverty v. Attorney General of Canada

jonathan-denney-103328-unsplashOn July 16, 2018, the Ontario Superior Court of Justice delivered a major victory to Canadian charities that devote all or a portion of their resources to non-partisan political activities.

In Canada Without Poverty v. Attorney General of Canada, the Court held that non-partisan political activities constitute charitable activities for the purposes of the Income Tax Act (Canada) (the Act), provided that they are carried out in furtherance of an organization’s charitable purposes. Accordingly, a registered charity may devote significantly more than 10% of its resources to such activities, contrary to long-standing Canada Revenue Agency (CRA) policy.

This decision is of particular interest to registered charities that have been the object of increased audit activity from the CRA for having engaged in political activities. Depending on the specific circumstances at issue, the decision may forge a path to a successful outcome for those involved in administrative audits with the CRA or legal proceedings before the courts.

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