Tag Archives: Canada

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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Five Fasken Martineau Partners make the 2017 Tax Controversy Leader’s list

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The 7th edition of the International Tax Review guide mentioned five partners of Fasken as leading tax dispute resolution lawyers in Canada. This prestigious recognition is based on their outstanding success in the past year and consistently positive feedback from peers and clients.

The five partners that made the Tax Controversy Leader’s list of 2017 are :

Congratulations to the listed partners!

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Cinq associés Fasken Martineau figurent dans la liste des chefs de file en litige fiscal

businessman-2056022_1920La 7e édition du répertoire International Tax Review fait mention de cinq associés de Fasken à titre de chefs de file dans le domaine du contentieux fiscal au Canada. Cette reconnaissance prestigieuse est basée sur leur succès remarquable au cours de la dernière année et des commentaires positifs de pairs et de clients.

Les cinq associés figurant dans la liste des chefs de file en litige fiscal de 2017 sont :

Félicitations aux associés nommés!

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Targeting Private Corporation Tax Planning: the Canadian Federal Government’s Proposal

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(The full version of this bulletin was originally published on Fasken.com – “The Federal Government’s Proposals Targeting Private Corporation Tax Planning” – August 3, 2017.)

On July 18, 2017 (the “Consultation Date”), the Minister of Finance (Canada), the Honourable William Morneau, released the Government’s proposals to address tax planning commonly used by private corporations and their owners in the form of a paper (the “Consultation Paper”) and draft legislation amending the Income Tax Act (Canada) (the “Tax Act”) to implement certain of the proposed measures.

The Government addresses three broad issues in the Consultation Paper:

  • sprinkling income using private corporations;
  • holding a passive investment portfolio inside a private corporation; and
  • converting a private corporation’s regular income into capital gains.

Selected proposals and tax measures are detailed below.

Details of the Proposed Tax Measures

Income Sprinkling

Background

The Consultation Paper notes that the Government has imposed a progressive personal income tax system with five marginal tax rates ranging between 15 percent and 33 percent that apply at different taxable income thresholds. The Government is concerned with arrangements that effectively transfer income that may otherwise be taxable in the hands of a high-income individual to a family member subject to lower tax rates resulting in lower tax receipts for the Government (“income sprinkling”).

The Tax Act currently has a number of provisions that deny or limit the potential benefits of income sprinkling, but the Government believes that additional measures are necessary with a particular focus on investments in private corporations.

Proposed Tax Measures

The measures proposed by the Government fall into three categories:

  1. extension of the tax on split-income (“TOSI”) provisions;
  2. restricting claims under the lifetime capital gains exemption (the “LCGE”); and
  3. new tax reporting obligations applicable to trusts and partnerships.

 

Continue reading to learn how the Canadian Federal Government’s announced target tax planning strategies affect private corporations.

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English vs French – Linguistic favoritism by Tax Court Judge : decision quashed by the FCA

 Fasken Martineau Tax bulletin

In Industrielle Alliance vs. Mazraani and MNR[1], the Federal Court of Appeal recently quashed a Tax Court of Canada decision on the basis that the trial judge violated the linguistic rights of both witnesses and counsel for Industrielle Alliance. The reasons for judgment can be found here in English and French.

The Tax Court of Canada decision

Before the Tax Court of Canada (TCC), Kassem Mazraani[2] appealed the Minister’s determination that he was not engaged in insurable employment while working for Industrielle Alliance between April and November 2012. Industrielle was an intervenor to the appeal and had taken the position that the Minister’s determination was correct since an independent contractor agreement had been concluded with Mazraani. The appeal was heard under the informal procedure before Justice Archambault and the hearing lasted 6 days. Mazraani filed his appeal in English, the Minister’s reply was in English also and Industrielle’ s intervention was in French.

In a massive 160 page decision, the TCC concluded that Mazraani was engaged in insurable employment.

Continue Reading »

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