It surpasses my imagination that anyone considers language such as this to be capable of an intelligent understanding, or that such language is thought to be capable of application to the events of real life, such as the sale of a business.

As all accountants know, motor vehicle expenses are low-hanging fruit for a CRA auditor. Clients rarely keep the much discussed but never seen Logbook that the CRA wants all business people who drive cars to keep. The CRA’s new approach is meant to relieve the burden associated with keeping a log. The post states that

The best evidence to support the use of a vehicle is an accurate logbook of business travel maintained for the entire year, showing for each business trip, the destination, the reason for the trip and the distance covered.

The new approach allows taxpayers to create a sample logbook. The post states that

The CRA would be prepared to afford considerable weight to a logbook maintained for a sample period as evidence of a full year’s usage of a vehicle if it meets the following criteria.

• The taxpayer has previously filled out and retained a logbook covering a full 12-month period that was typical for the business (the “base year”). The 12-month period is not required to be a calendar year.
• A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”).
• The distances travelled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year (the “base year period”).
• The calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.

Is it me, or is the CRA’s tone in this post less-than-enthusiastic about the sample method?

Some weeks ago I was rooting around looking for the Ontario legislation implementing the HST. I assumed that, as with personal and corporate income tax, I would find a federal statute imposing the 5% portion and a corresponding provincial statute imposing the 8% provincial portion of the HST. I expected that the provincial statute would incorporate the federal statute by reference and then delegate collection of the two taxes to the CRA.

I was wrong. Subsection 165(2) of Part IX of the Excise Tax Act imposes the provincial portion of the HST. That is, the HST is a single federal tax. The federal government, by agreement with Ontario, shares part of the HST revenue with it, but the tax itself is imposed only by federal legislation.

What does this mean practically speaking? Among other things, it means that a vendor need not obtain a new number from the CRA for the HST; the “old” GST number will suffice. Moreover, for section 167 elections, the GST44 continues to be the right form, and it is not necessary to file a separate form for the Ontario portion or use a special form that is applicable only in Ontario. The GST44 form used in Alberta will also be valid in Ontario because the same tax—the value-added tax imposed by Part IX of the Excise Tax Act—applies in both provinces. Only the rates differ.

Some things do differ from province-to-province with respect to the 8% portion, of course. For details on these points, please refer to the numerous online resources that are available.

Why have separate classes of shares in the capital of a corporation for new investors? Creating separate classes of shares creates its own problems both from a tax and non-tax perspective. Nonetheless, for tax purposes it is sometimes desirable to have different groups of investors subscribe for different classes of shares in the capital of a corporation.

Consider the position where Mike and John decide to form Opco to operate that lemonade stand business they’ve always wanted to run. On the incorporation of Opco under the Business Corporations Act (Ontario), each of Mike and John subscribe for 50 Common Shares in the capital of Opco at $1 per share. As a result, the tax cost and tax paid-up capital (”PUC”) of their shares is $100 in total.

Let’s move forward three years. Opco has been a success. Edgar, who is a friend of Mike and John, wants in. Mike and John are amenable—serving lemonade is hard work, and they could use the help and the extra capital—and so they agree to allow Edgar to subscribe for 50 Common Shares. Opco’s value, however, has increased so that its issued shares are worth $500 in total ($5 per share), and so it is only fair that Edgar pay more for his shares than $1 per share (the original subscription price paid by Mike and John). Edgar should pay $5 per share, or $250 in total, for his 50 Common Shares.

Let’s say that Edgar pays the required $250 in total for his 50 Common Shares. What are the tax consequences? The tax cost of Edgar’s shares is $250 in total or $5 per share, but their stated capital per share is only $2.33 because the stated capital of a share is the total stated capital of the class to which the share belongs divided by the number of issued shares of the class.

PUC is valuable because it can be returned to a shareholder tax free. The calculation of PUC begins with stated capital for corporate law purposes (not accounting purposes). If the stated capital of a class of shares issued by an Ontario corporation is $50, then, in general, the PUC will be $50 as well. Of course, the Income Tax Act (Canada) wouldn’t be the Income Tax Act (Canada) if it didn’t contain numerous rules that provide for adjustments to PUC to ensure that a taxpayer can’t artificially increase it. Nevertheless, if one is concerned only with subscriptions for shares, then stated capital and PUC are usually equal to each other.

The key point to note is that both stated capital and PUC are calculated by reference to a class of shares unlike tax cost or “adjusted cost base”, which is calculated by reference to the holder of the shares. PUC is averaged across all of the shares of a particular class rather than just all shares held by a particular individual. As a result, Edgar’s cost per share of his Common Shares in the capital of Opco is $5 ($250/50), but the PUC of each of his shares is only $2.33 (($250+$100)/150).

So what? This discrepancy is only likely to matter if Opco purchases Edgar’s shares for cancellation. On a sale to an arm’s-length third party, it is highly likely that the only relevant tax characteristic of Edgar’s shares will be their tax cost. He paid $250 for his shares. If he sells them for $500, he will realize a gain of $250. There’s no magic to that, and it’s the appropriate result. It’s what a rational person would expect.

A rational person will have a much harder time with a purchase for cancellation of shares that have attributes like Edgar’s. On a purchase for cancellation, the Act deems a shareholder to have received a dividend and proceeds of disposition. The deemed dividend is calculated first, and it is equal to the purchase price paid for the shares minus their PUC. If Edgar were to turn around and sell his shares back to Opco for the amount he paid ($250), he would be required to include in income a deemed dividend! The amount of the deemed dividend would be equal to $133.33 (50*($5 – $2.33)).

As for Edgar’s proceeds of disposition, the Act reduces them by the amount of the deemed dividend he received, so that on the purchase for cancellation he is deemed to receive proceeds equal to $2.33 per share ($5 – $2.66). That is, Edgar is deemed to realize a capital loss on the purchase for cancellation of his shares in an amount equal to the deemed dividend. The capital loss, however, cannot be used to reduce or eliminate the deemed dividend. Economically, when Edgar’s shares are purchased by Opco for $5 per share, he is simply receiving his money back. For tax purposes, he is treated as having received income![1]

The results described above are perverse. An experienced and intelligent Justice lawyer of my acquaintance once attempted to provide a policy justification for these rules. She didn’t convince me; I’m not sure she convinced herself. In any case, rational or not, these are the rules.

Issuing separate classes of shares will avoid this problem. If Edgar, instead of subscribing for Common Shares in the capital of Opco, subscribes for Class 1 Common Shares (common shares of a different class), and no one else subscribes for shares of that class, then the tax cost and PUC of his shares will be equal to his purchase price. If, therefore, Opco repurchases Edgar’s shares immediately after he paid for them, he will not receive a deemed dividend or realize proceeds of disposition, and all will be right with the world.[2]

Issuing multiple classes of common shares has its own problems, however. If the different classes have different rights to dividends or liquidation amounts, then a shareholder agreement might be necessary to protect the minority shareholders. If the classes have identical rights, then the issue becomes whether the classes really are separate classes such that their stated capital and PUC can be computed separately (see blog.simpsonwigle.com/2007/10/classes-of-shares/). A cautious tax adviser, who decides to insert, say, a liquidation preference to ensure that classes can be distinguished, will need to consider the implications under Parts IV.1 and VI.1 of the Act. In short, the decision to issue multiple classes to avoid the complexities associated with Edgar’s circumstances will create their own complexities. The tired tax adviser, who is confident that Opco will never repurchase Edgar’s shares, might content herself with allowing him to subscribe for ordinary Common Shares in the capital of that corporation.

[2] All is not lost even if multiple shares weren’t used but it becomes necessary to repurchase shares. Extra steps, such as the incorporation of a holdco for the seller, can be taken to ensure that the shareholder doesn’t end up in Edgar’s predicament.

I wish Professor Alarie luck with this enterprise. I remember wanting to create something like this at the Toronto law firm where I began my career in the mid-90s. My idea was stillborn because the tools didn’t exist to create a wiki, and HTML hacking was too much overhead for a busy associate.

I remember trying to start a mailing list on tax issues among young tax lawyers in Toronto. The participation was minimal. I think the lawyers were too busy, and, if one were to spend time sharing knowledge, it was better done through an article for the OBA or the CTF. I think the latter is still true, by the way. For all our talk about Web 2.0, Twitter, blogs and wikis, something printed on dead trees still seems to matter most.

Usenet (now Google Groups) has had a Canadian tax forum for some time, but its discourse tends to be dominated by kooks. The last time I visited, some serious questions were asked and sometimes serious answers were given. But a lot of the air was taken up by those peddling conspiracy theories about the illegality of our current tax regime.

Wikis have certain technical advantages over a Google group or a blog for that matter. I hope the tax wiki succeeds. I wonder, however, who will contribute to it. My experience suggests that it won’t be busy tax professionals when the prestige for sharing still comes from articles published in traditional media.

x = (10y – z)/9

where

x is the value of the bad assets to be removed from the corporation;

y is the value of the bad assets before anything is removed from the corporation; and

z is the value of all assets of the corporation before anything is removed from it.

All in all, I am unable to conclude that there is a link between the interest paid by the Appellant and an income-earning purpose. While in 2005, 2006 and 2007 she paid interest on the line of credit pursuant to a legal obligation to do so, that obligation is traceable to the equalization arrangements under the Separation Agreement rather her use of that money to earn income from a business in her own right. The interest paid was on borrowed money used, not by her, but by her former spouse to purchase shares in his Bakery business. Accordingly, the criteria under subparagraph 20(1)(c)(i) are not satisfied and the appeals must be dismissed.

[17] Contrary to the position taken by the Appellant, the Federal Court of Appeal in Stephens v. The Queen [[1988] DTC 1170 at 1171] has held that there is no prescribed form for a notice of assessment issued under the Act:

Subsection 152(2) requires the Minister to “send a notice of assessment” to the taxpayer. Nowhere in the Act do we find prescriptions relating to the form of that notice. It follows, in our view, that the form of the notice does not matter and that the subsection merely requires that the notice be expressed in terms that will clearly make the taxpayer aware of the assessment made by the Minister.

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