SimpsonWigle Law LLP Tax News

Quotes

John Loukidelis — Tue, 31 Jan 2012 12:13:51 +0000

I’ve been quoted a couple of times recently in tax-related stories in The Lawyers Weekly, most recently in a story on Johnson v R, 2011 TCC 540, which I wrote about here.

Freeze share values

John Loukidelis — Fri, 27 Jan 2012 21:59:20 +0000

Bryan Walters has drawn my attention to an interesting CRA technical interpretation (2011-0404641C6 or CCH Window ¶10,832) in which the CRA states that the provisions of a shareholder agreement might reduce the value of freeze shares that otherwise have the “right” attributes for the purposes of a freeze (see “Freeze Shares“).

The CRA says that the following types of restrictions in a shareholder agreement could reduce the value of freeze shares:

1. The agreement restricts the ability of the freeze shareholder to redeem all of his or her shares at the same time.

2. A clause requires the freeze shareholder to obtain the the concurrence of all shareholders of the company before redeeming his or her shares.

3. The agreement forces a freeze shareholder to accept as payment upon a redemption of freeze shares a promissory note that pays interest at a rate below a reasonable commercial rate.

55(2)-land

John Loukidelis — Fri, 27 Jan 2012 21:43:33 +0000

I didn’t understand CRA technical interpretation 2011-0394191 at first, but I think I get it now.

A and B own 85% and 15% respectively of the voting shares of Opco. A and B deal at arm’s length, and each of them owns a different class of shares. B incorporates BCo and transfers his shares of Opco to BCo under section 85. Opco then pays a $400,000 dividend to BCo, which uses the money to buy all of A’s shares. The CRA was asked whether 55(2) would apply to the dividend paid to BCo, to which the CRA responded as follows:

It is possible that subsection 55(2) of the ITA would likely not apply in the hypothetical situation described above by reason of the application of paragraph 55(3)(a) of the ITA which provides that subsection 55(2) of the ITA does not apply to any dividend received by a corporation if, as part of a transaction or event or series of transactions or events as a
part of which a dividend was received, there was no disposition or increase in interest described in paragraph 55(3)(a) of the ITA.

Moreover, in general, it is the Agency’s position that section 84.1 of the ITA would not apply to a situation known as a ”leveraged buyout”. An example of a leveraged buyout transaction is described in paragraph four in Supplement 1 of Information Circular IC 88-2.

The position taken in the last paragraph is no surprise—it reflects a long-standing CRA view—but the first paragraph is odd. I don’t understand how the payment of a $400,000 dividend could fail to reduce the value of A’s shares. Leaving that aside, how does 55(3)(a) help BCo? B deal’s at arm’s length with Opco, and so one would think that one of the conditions in the 55(3)(a) would be met such that the exception would be unavailable. The trick, of course, is that BCo is the dividend recipient, and so it is not an unrelated person, per paragraph 55(3.01)(a). The unrelated persons in the scenario above, then, are Opco and A, which means that the exception in 55(3)(a) would appear to apply.

Goodwill and estate planning

John Loukidelis — Sat, 14 Jan 2012 15:35:21 +0000

Mark Brohman at Durward Jones Barkwell was kind enough to send to me a reminder in the form of a technical interpretation of a very important fact about goodwill and estate planning.

In technical interpretation 9704835 (CCH Window ¶5212), the CRA points out that the Income Tax Act provides for a rollover of goodwill at cost. The deceased’s estate cannot elect out of the rollover. As a result, the exemption cannot be used to increase the cost of goodwill for which the exemption might have otherwise been available during the deceased’s lifetime (eg farm quota).

The CRA states in the technical that it has referred the matter to the Department of Finance presumably for a possible legislative amendment. I’m sure Finance will be addressing the matter Real Soon Now.™

Corollary

John Loukidelis — Tue, 03 Jan 2012 18:07:45 +0000

In Vankerk v R, 2006 FCA 96 (which I wrote about here), the Court held that a taxpayer could not deduct a loss incurred in connection with an “investment” in a business that turned out to be a fraud. A taxpayer cannot deduct a loss where there is no source of income. The corollary appears to be that a taxpayer who realizes a gain where there is no source should not be required to include the gain in income for tax purposes. In Johnson v R, 2011 TCC 540, the taxpayer was one of the lucky few to receive more than she “invested” in a Ponzi scheme. The Tax Court held that the taxpayer’s gain should not be included in ~~the~~ her income for tax purposes because there was no source of income.

Donation tax shelter class action

John Loukidelis — Tue, 13 Dec 2011 12:39:10 +0000

For an article on donation tax shelter class actions, click here.

Tax protesters redux (ridiculous more like)

John Loukidelis — Tue, 13 Dec 2011 00:54:40 +0000

The CRA is warning Canadians to stay away from the tax protest movement, again. I can’t believe people are still falling for this crap given that, as the CRA release points out, “Canadian courts have repeatedly and consistently rejected all arguments made in these tax protester schemes.” That the arguments keep getting made must surely be fodder for a PhD thesis.

CRA News

John Loukidelis — Mon, 12 Dec 2011 18:24:11 +0000

The CRA issued a couple of interesting technical interpretations in the last few months.

Foreign Entity Classification

The CRA will no longer issue technical interpretations on foreign entity classification (CRA technical dated August 04, 2011, 2011-0415141E5) because whether the foreign entity is a trust, corporation or partnership is a “question of fact”. Is this CRA-sponsored FUD (fear, uncertainty, doubt) that is meant to discourage offshore planning?

Purification

In a technical dated August 22, 2011 (2011-0415161E5), the CRA reiterated that the asset tests for the capital gain deduction refer to the gross fair market value of the assets, and so it is not possible to “purify” a corporation by netting liabilities against certain assets or by making journal entries that have the same effect. If a corporation has excess cash, then, to purify it, the cash must be removed via legally-effective transactions (eg the payment of a dividend by resolution).

Fuzzy logic

John Loukidelis — Mon, 12 Dec 2011 17:51:10 +0000

Is a gain realized on a sale of real property a capital gain or must it be fully included in income, perhaps because the sale was in connection with an “adventure in the nature of trade”? One might think that the answer will be of the either/or variety: either the gain is capital in nature or it is not, in which case it will be an income gain the entire amount of which must be included in income. Von Realty Limited v R, 2011 TCC 345 is a good reminder that any particular gain might be on capital account for a portion of the gain and on income account for the remainder because the owner’s intentions with respect to a property can change during the time he or she owns it.

The Arnold Report

John Loukidelis — Fri, 25 Nov 2011 20:24:17 +0000

Brian Arnold maintains a blog of sorts over at the CTF website. I say “of sorts” not to denigrate what he does with his posts—which are always informative and often quite funny—but to point out that when you number your posts (“Posting: 22″, “Posting: 23″) it means you’re still not quite comfortable with the whole social media thing (or maybe you don’t want to be identified with it?).

Anyway, I quite liked his last post on the government’s efforts to make tax legislation clearer or at least “more less incomprehensible”.

Yes, this is a joke. Finance hasn’t hired Humpty Dumpty to work on the foreign affiliate rules. I think.