1Canada — TaxMatters@EY September 2017

Canada — TaxMatters@EY

In this issue

Building a better working world means understanding your tax situation and how the ever-changing global tax landscape affects you. TaxMatters@EY is a monthly Canadian bulletin that summarizes recent tax news, case developments, publications and more.For more information, please contact your EY advisor.

10 Publications and articles

8Application of the general anti-avoidance rule following an intentional use of a trust attribution rule

7Low-rate tax trend continues as Canada waits for US to make a move: EY report

6 Worldwide Estate and Inheritance Tax Guide 2017

On 18 July 2017, federal Finance Minister Bill Morneau introduced draft legislation, explanatory notes and a consultation paper (the proposal documents) proposing to fundamentally overhaul the system of taxation for private companies, their shareholders and family members.

These proposals are broad based and primarily target Canadian-controlled private corporations (CCPCs), regardless of sector, industry or economic grouping. Every private corporation could potentially be impacted in some manner by the changes included in the proposal documents. Public input and comments on the proposal documents can be submitted to the Department of Finance until 2 October 2017.

The release of the proposal documents follows a statement in the Liberal party’s election platform and echoed in the 2017 federal budget that it wants to ensure “that CCPC status is not used to reduce personal income tax obligations for high-income earnersrather than supporting small businesses... particularly as high-income individuals use CCPC status as an income splitting tool.”

Many common tax planning techniques will no longer be available if the proposal documents are enacted as currently drafted, and the proposals will, therefore, generally result in increased tax liabilities. The proposal documents target primarily four tax planning strategies: income sprinkling, multiplying access to the lifetime capital gains exemption (LCGE), the reinvestment of after-tax corporate earnings in passive investments, and the conversion of income into lower-taxed capital gains.

Draft proposals include fundamental changes to private corporation taxationAlan Roth, Toronto

September 2017

Canada — TaxMatters@EY September 2017 2

Income sprinkling Income sprinkling refers, in this context, to a tax planning technique that shifts family business income from someone in a high-income tax bracket to individuals in a lower-income tax bracket (usually family members) to produce income tax savings. For example, you are the shareholder-manager of a private corporation and you are taxed at the highest marginal personal income tax rate. Your spouse and adult children (e.g., students attending post-secondary education) have no sources of income, but then subscribe for other classes of shares of the corporation. Instead of having the corporation’s after-tax earnings paid to you as dividends and taxed in your hands at the highest marginal tax rate, these earnings will be subject to lower rates of tax to the extent they are paid as dividends to your spouse and adult children1. The tax savings are progressively reduced if your spouse and/or adult children acquire other sources of income.

Existing legislation is already in place to limit dividend payments to minor children and to limit the ability to transfer investment-type income to a spouse. These rules are referred to as the “kiddie tax” (or the tax on split income), and the “attribution rules.” Income that is subject to the kiddie tax is taxed at the highest marginal personal income tax rate.

Effective in 2018, draft legislation included in the proposal documents limits the ability to share income within a family by expanding the base of people subject to the kiddie tax to include children 18 and over and other related adult individuals (including spouses, aunts, uncles, nieces and nephews). In addition, the types of income that are subject to the kiddie tax will be expanded.

The tax on split income will apply if the amounts received by related adult individuals are not “reasonable” in the circumstances. Under this test, a reasonable amount will be based on what an arm’s-length person would pay for

assets and labour contributed to the business. An even more restrictive test will apply to individuals aged 18 to 24.

As a simple example, if an adult child over the age of 24 is actively involved in the operations of the family business and the amount of dividends she receives is commensurate with what an arm’s-length shareholder would have received, the tax on split income will likely not apply. But the reasonableness test will depend on the facts of each case, and questions concerning the measurement of contributed value, or the evidence required to support such contributions, will not always be as straightforward.

The following are two examples of tax planning techniques which may be precluded by the proposals:

• ➢Anestatefreezewhereparentstransferthefuturegrowth in value of a business to the next generation. Dividends paid to an adult child who has not yet provided services or capital to the business will be subject to the highest marginal tax rate, regardless of their age.

• ➢Anewoperatingcorporationisownedequallybytwospouses. Dividends paid to one spouse that provides no capital or services to the business will be subject to the highest marginal tax rate.

The proposal documents do not apply to the ability of spouses to split eligible pension income on their personal income tax returns. They also do not prevent corporations from deducting reasonable salaries paid to employees who are family members.

1 Depending on the amount of dividends paid, portions may be subject to the highest marginal rate. However, for 2017 the amount of dividend income that may be earned without incurring income tax may be as high as $51,635 for eligible dividends and $33,310 for non-eligible dividends, depending on the jurisdiction.

Canada — TaxMatters@EY September 2017 3

Multiplying access to the LCGEThe draft legislation also proposes to apply this reasonableness test in order to limit access to the LCGE. The LCGE is an exemption available to all individual taxpayers, including minors, to exempt an otherwise taxable capital gain on the disposition of certain private companysharesand/orcertainfarmorfishingproperty2, provided certain conditions are met.

If shares of a private corporation are held by various family members and the shares are sold to an arm’s-lengthparty,eachfamilymembercanutilizehisorherLCGE on the sale. Family members need not own shares directly in the private corporation that is being disposed of; an indirect ownership and allocation of a taxable capital gain from a family trust is currently eligible for the LCGE. Effective for dispositions after 2017, it is proposed that the LCGE will no longer be available for taxable capital gains that are:

• ➢Realized,oraccruingintaxationyearsthroughoutwhich the individual was under 18;

• ➢Subjecttothetaxonsplitincomeundertheproposaldocuments; or

• ➢Realizedbyafamilytrust3 and allocated to the beneficiaries,oraccruingonapropertypriortoitsdistributionbyafamilytrusttoabeneficiary(i.e.,wheresuchgainsaresubsequentlyrealizedbythebeneficiary).

Therefore, the draft legislation may limit the ability of spouses and other adult family members from claiming the LCGE on gains where they are inactive shareholders or did not otherwise contribute a reasonable amount of capital or services to the business.

Transitional rules will apply to allow an individual or trusttocrystallizeaccruedgainsin2018(withcertainexceptions)andutilizetheLCGEwhereitmayotherwisenotbeavailablegoingforward,byfilingaspecialtaxelection, which in most cases will be due by 30 April

2019.Crystallizationincreasesthetaxcostoftheproperty, and ultimately reduces the capital gains tax incurred on a future disposition.

Planning for 2018The proposed rules are complex and, if enacted, will be far reaching. Therefore, it would be prudent to act now to plan ahead for the changes that are likely to come in 2018. For example:

• ➢Reviewalldividendsorotherincomepaymentstofamily members to determine the potential application of the newly proposed rules.

• ➢Evaluatewhatstrategiesshouldbeutilizedpriortothe end of 2017 to mitigate exposure to the new proposals.

• ➢Considermaximizingdividendpaymentstofamilymembers before the end of 2017, while the current rules are still in effect.

• ➢Reviewanddiscussallincomesplittingarrangementswith your EY advisor prior to making any future payments.

• ➢Ifyoucurrentlyhaveatrust(s)setupaspartofyourtax planning arrangements, consider any necessary changes that may need to be made (e.g., to weigh commercial reasons for using a trust against the ability to access the LCGE).

• ➢Determinewhetherusingthetransitionaltaxelectionregarding the LCGE proposals is advisable.

2 Qualified small-business corporation shares, and qualified farm or fishing property. The amount of the lifetime exemption is indexed for inflation, and currently is approximately $835,000 ($1,000,000 for qualified farm or fishing property) for gains occurring in 2017.3 Subject to certain exemptions, a spousal trust, common law partner trust or alter ego trust is generally excluded.

Canada — TaxMatters@EY September 2017 4

Corporate reinvestment in passive investmentsCorporate tax rates on active business income are lower than personal rates4. In the case of CCPCs that are eligible for the small-business tax rate, rates are significantlyless.Therefore,totheextentthatafter-taxearnings are retained in a corporation, a tax deferral is available. The amount deferred is eventually taxed when retained earnings are distributed to individual shareholders as dividends. Due to lower corporate rates, there is a greater amount of after-tax earnings available for reinvestment as compared to income earned personally. The government, as stated in the proposal documents, views this to be an unfair tax advantage not available to unincorporated individuals.

For example, Jim, who is subject to tax at the highest marginal tax rate, has an unincorporated business earning$200,000inprofitsoneyear.Thoseprofitswillbe subject to tax at a rate of approximately 50%, leaving Jim with about $100,000 to invest (or otherwise enjoy). Melissahasanincorporatedbusinesswhichalsorealizesprofitsof$200,000thatyear.SincethecorporationisaCCPCeligibleforthesmall-businesstaxrate,theprofitsare subject to tax at a 15% rate, leaving about $170,000 in the corporation available to be reinvested5.

The government is proposing to eliminate the perceived tax advantage by effectively increasing the tax rate

substantially on earnings from corporate after-tax income reinvested in passive investments (not related to the corporation’s active business). For example, after-tax earnings reinvested in a portfolio of dividend-paying stocks would be impacted. No draft legislation was included in the proposal documents, but, instead, the government outlined possible approaches for increasing the tax on earnings from such passive investments. Although the proposal documents state that the new rules would only apply on a go-forward basis, no details were provided on how passive assets currently owned by corporations would be grandfathered under the existing rules.

What’s nextThese proposals are subject to public input and comment until 2 October 2017, and draft legislation on corporate reinvestment in passive investments will only be released atsomepointaftertheconsultationperiod.Significantuncertainty remains on how the proposals may be implemented,andwhatfinalformthelegislationwilltake. While potential tax planning opportunities may remain or be prudent through the transitional period, theireffectivenessmaybecontingentonthefinalproposed legislation. The proposal documents state that atransitionperiodwouldbeprovided,oncethefinalrulesareproposed.Nospecifictimeframeforimplementationof the eventual draft legislation was outlined in the proposal documents.

4 On the first $500,000 of such income each year. The provinces and territories also have their own small business tax rates, with most jurisdictions also applying a $500,000 active business income limit. 5 Rates noted are an approximation, as actual rates vary by province and territory.

Canada — TaxMatters@EY September 2017 5

Converting income into capital gainsCapital gains tax rates are generally substantially lower for individuals than the rate of tax applied on salary or dividenddistributionsfromcorporations.Subjecttotheabove-described proposals on corporate reinvestment, the tax rate applicable to capital gains in a corporation when fully distributed to the shareholders also approximates the individual’s capital gains rate in some provinces.

An anti-avoidance tax measure currently exists to prohibit anindividualfromrealizingacapitalgainwhensellinga greater than 10% investment in shares of a particular corporation to another related corporation; in such circumstances,thegainonsalemayberecharacterizedas a dividend. However, the government has been concerned about the limitations of the current anti-avoidance rule. There are tax planning arrangements currently in place whereby corporate surplus is extracted from a corporation by shareholders and is taxed as a capital gain without having the current anti-avoidance rule apply. This includes distributing assets such as shares that would otherwise be subject to dividend tax on a distribution in the absence of any tax planning.

The proposal documents include draft legislation to extend the scope of the current anti-avoidance measure. The proposed measure will reduce the tax cost of shares transferred to a related corporation to the extent the tax costtothetaxpayerincludesgainsrealizedonpreviousdispositions of the shares by a related party. This rule will apply regardless of whether the related person reported and paid capital gains tax, or claimed the LCGE on the shares.Bynotrecognizingthetaxcostofthesharesarisingfromarelatedparty’sgain,therecharacterizeddividend under the existing anti-avoidance rule will be higher. Under this proposal, the same gain may be subject to both capital gains tax and then dividend tax upon the disposition of the shares to a related corporation.

The proposal documents also include a new anti-

avoidancerulethatwillrecharacterizeanydistributionfrom a corporation into a taxable dividend under certain broad and ambiguous circumstances, regardless of whether the distribution’s legal form may be a tax-free return of capital, tax-free capital dividend, or even potentially a repayment of a fully tax-paid loan. The proposed rule may apply if two criteria are met:

• ➢Anindividualreceivesanamountfromarelatedpartyas part of a transaction or series of transactions.

• ➢Therehasbeenadispositionofproperty(oranincrease or reduction of capital of a corporation’s shares) and one of the purposes of the transaction orserieswastoeffectasignificantreductionordisappearance of assets of a private corporation such that the tax otherwise payable on the amounts received is less than what would have been paid on the receipt of a taxable dividend.

Both proposed measures are effective as of 18 July 2017. However, the broad wording of the proposals in the draft legislation could result in their application to situations which may be unintended. For example, the new anti-avoidance rule could potentially be applied to transactions or a series of events that began prior to 18 July 2017, or to benign commercial transactions.

The extended anti-avoidance rule appears to also include the effect of related party gains arising at any time, including prior to 18 July 2017. This could potentially include a sale of shares by parents to the next generation in a succession planning context, where a transfer of shares subject to capital gains taxation occurred prior to 18 July 2017. Although the proposal documents outline andrecognizetheremaybechallengesinapplyingtheserules to intergenerational business transfers, the draft legislation did not address family succession planning, and instead the government has requested input and comment from the public.

The proposals could also adversely impact estate planning techniques that are designed to avoid double tax. These techniques allow the estate to pay tax at capital gains

rates on the appreciated share value, and then distribute theassetstobeneficiarieswithoutanyfurthertaxliabilitybeing incurred.

Next stepsDue to the broad and ambiguous wording of the draft legislation, the tax community and other stakeholders will be providing detailed technical feedback by the 2 October deadline. In the meantime, contact your EY advisor to review any existing planning arrangements that you may have that could potentially be impacted by the proposed rules including, for example, arrangements where there are distributions from a corporation arising directly or indirectly from a capital gain.

ConclusionThe tax measures included in the proposal documents, if enacted, will impact many longstanding tax planning techniques used by private corporations and their shareholders.There’suncertaintyregardingthefinalwording of these measures, especially since no draft legislation has yet been issued for the proposals impacting corporate reinvestments in passive investments, and because the government will be reviewing and responding to the feedback it receives from stakeholders after the consultation period closes.

Nevertheless, given that some of these measures would be effective in 2018 (targeting income sprinkling), and some would already be effective (targeting conversion of income to capital gains), it is advisable to meet with your EY advisor to determine how these proposed rules may impact your corporation and its shareholders, and whether any planning can be done to mitigate the adverse effect of these measures, should they be enacted.

For more information listen to EY’s PCS webcast on this topic. u

6Canada — TaxMatters@EY September 2017

EY’s Worldwide Estate and Inheritance Tax Guide summarizestheestatetaxplanningsystems and describes wealth transfer planning considerations in 37 jurisdictions around the world, including Australia, Canada, China, France, Germany, Italy, the Netherlands, the UK andtheUS.

The guide is designed to enable internationally positioned individuals to quickly identify the estate and inheritance tax rules, practices and approaches in their country of residence. Knowing these various approaches can help you with your estate and inheritance tax planning, investment planning and tax compliance and reporting needs.

The guide provides at-a-glance information as well as details on the types of estate planning in each jurisdiction. It includes sections on the following:

• ➢Typesoftaxandwhoisliable • ➢Taxrates • ➢Variousexemptionsandreliefs • ➢Paymentdatesandfilingprocedures • ➢Valuationissues • ➢Trustsandfoundations • ➢Succession • ➢Matrimonialregimes • ➢Testamentarydocumentsandintestacyrules • ➢Estatetaxtreatypartners

You can view the complete 2017 Worldwide Estate and Inheritance Tax Guide at ey.com/estatetaxguide. u

Worldwide Estate and Inheritance Tax Guide 2017

6 Editor’s note: On 27 July 2017, the “Big Six” group of the Trump Administration and congressional negotiators issued a statement on tax reform which for the first time announced that the group will not be considering the House Tax Reform Blueprint’s controversial border adjustability proposal. Nevertheless, as the plan includes a goal to reduce tax rates as much as possible and other sweeping changes that will indirectly affect Canada, the point that US tax reform could have a significant impact on cross-border trade in both goods and services with the US remains valid.

7Canada — TaxMatters@EY September 2017

The global trend of the past few years towards a “low-rate, broad-base” business tax environment continues, as worldwide economic growth shows no signs of improving and countries introduce new or improved incentives to compete for business investment that will stimulate growth.

Canada isn’t immune to global trends, but its tax policy direction is hard to predict at the moment due to the uncertainty around tax policy reforms being considered intheUS.ThisisaccordingtotheEYOutlook for global tax policy in 2017, which combines insights and forecasts from EY tax policy professionals in 50 countries worldwide.

“TaxreformsemerginginEuropeandtheUSareputtingpressureongovernmentstofindcreativewaystocompeteforbusinessinvestment,”saysFredO’Riordan,EYCanada’sNationalAdvisor,TaxServices.“Canadahasimproveditsinternational tax competitiveness over a number of years, but it’s at risk of losing some of this ground, in particular iftheUnitedStatesgoesaheadwithataxreformpackagethatincludessignificantratereductions.”

Competition for investment globallyWith the implementation of the G20/Organisation for Economic Co-operation and Development (OECD) Base ErosionandProfitShifting(BEPS)recommendations,governments are now more compelled to compete with each other and attract investment through different tax changes. According to EY’s report, of the 50 countries surveyed, 30% intend to invest in broader business incentives to stimulate or sustain investment, and 22% plan to introduce more generous research and development(R&D)incentivesin2017.

But Canada is bucking the global trend of investment-stimulating policy. Here, the government has been more focused on the personal income tax side and redistributing the tax burden, so the highest income earners bear more and middle income earners bear less.

Tax reform in the United States may impact CanadaAnincreasedlikelihoodoftaxpolicyreformintheUSisstronglyinfluencingboththeCanadianandglobaltaxpolicyoutlook.WithaRepublicanpresidentandRepublicancontrolofbothhousesofCongress,theprobability of a reform package being implemented is higher than in previous years. As a result, Canada and many other countries are taking a “wait and see” approachuntilnewlegislationisadoptedintheUSbefore they commit to any reforms themselves.

“A ‘border tax adjustment mechanism’ is currently proposedaspartofthetaxreformpackageintheUS,”saysO’Riordan.“Becauseourtwoeconomiesaresocloselyintegrated,thiscouldhaveasignificantimpacton cross-border trade in both goods and services with our closest neighbour. Any Canadian company doing businesswiththeUSdefinitelyoughttopayattentiontoupcomingchangesintheUS.”6

Corporate income tax ratesOf the 50 country respondents, 40 report no change or anticipated change to their national headline corporate income tax rate in 2017, but rates continue to decline in a number of jurisdictions, particularly in Europe. Canada is one of only two countries where the rate actually increased (the average combined federal-provincial rate increased marginally, by 0.2 percentage points). This in itself is unlikely to deter investment, but is still slightly out of step with global peers. u

Low-rate tax trend continues as Canada waits for US to make a move: EY report (Extract from 1 June 2017 press release)

8Canada — TaxMatters@EY September 2017

In Fiducie Financière Satoma c. la Reine, 2017 CCI 84, the Tax Court of Canada (TCC) examined the applicability of the general anti-avoidancerule(GAAR)toaseriesoftransactions involving a reversionary trust (the taxpayer).

When dividends were declared on shares the taxpayer held, the trust’s income in respect of the dividends was attributedtoacorporatebeneficiaryundersubsection75(2) of the Income Tax Act (the Act), but by operation of subsection 112(1), no tax was payable byeitherthecorporatebeneficiaryorthetaxpayer.

TheMinisterappliedtheGAARonthebasisthatsubsection 75(2) had been used intentionally to avoid tax on the dividends. The TCC upheld the Minister’s GAARassessment.

Factual backgroundGennium produits pharmaceutiques inc. (Gennium) isacorporationthatspecializedinthedistributionofgeneric drugs. The share capital of Gennium was owned by Louis Pilon and the Louis Pilon family trust (the family trust). Mr. Pilon wanted to diversify his activities into drug manufacturing, but wanted to keep this new activity separate from his distribution shareholdings because of the high risk of lawsuits in this new area of business. He sought advice from tax advisors how best to structure this new venture.

To carry out the plan, two corporations, 9134-1024 Québec Inc. (9134) and 9163-9682 Québec Inc. (9163) were created, with the only shareholder of

9134 being Mr. Pilon and the shareholders of 9163 being 9134 and Mr. Pilon.

Gennium distributed dividends to the family trust which then, in the year received, distributed those dividendstooneofitsbeneficiaries,9134.Thefamilytrust claimed the deduction provided by subsection 104(6) of the Act. As a result, the family trust paid no taxes on these dividends.

Then, 9134 included the dividends in its income pursuant to subsection 104(13) of the Act, and claimed the deduction provided by subsection 112(1) of the Act applicable to intercompany dividends on the basisthatsubsection104(19)allowsabeneficiarytoretain the character of the income for the trust (i.e., dividend income).

The taxpayer was settled by 9134, which is also a beneficiaryofthetaxpayer.9134thengave$100tothe taxpayer, who used this amount to acquire Class F shares of 9163. Because the shares of 9163 had been acquired with the $100 given to the taxpayer by 9134, any income from such shares would be attributed back to 9134 by the application of subsection 75(2) of the Act.

Subsequently,9134contributedtothecapitalof9163 with proceeds from the dividends that it received from the family trust by way of contributed surplus. 9163 then transferred the funds to the taxpayer by way of dividends.

The taxpayer did not have to include the dividends in its income, since 9134 had to include them in its income by the application of subsection 75(2) of the Act. However, 9134 claimed the deduction of subsection 112(1) and, as a result, did not pay any taxes on these amounts.

Application of the general anti-avoidance rule following an intentional use of a trust attribution ruleFiducie Financière Satoma c. la Reine, 2017 CCI 84 Maude Lussier-Bourque, Montréal

Canada — TaxMatters@EY September 2017 9

TheMinistersoughttohavetheGAARappliedinorderto include the dividend income attributed to 9134 in the taxpayer’s income.

The parties’ positionsThetaxpayerarguedthattherewasnotaxbenefitatthisstageofthetransaction,sinceataxbenefitwouldoccuronlyifthetaxpayerdistributedtoitsbeneficiariesthe funds on which it had not previously been taxed. With respect to the avoidance transaction, the taxpayer didnotcontestthatthebenefitarosefromtheseriesoftransactions that led to the avoidance transaction if the TCCcametotheconclusionthattherewasataxbenefitin this case. However, with respect to the abuse or misuse of the Act, the taxpayer argued that it is unreasonable to consider that the series of transactions led to an abuse of the application of subsection 75(2) and 112(1) of the Act. The taxpayer submitted that it simply applied and complied with the provisions of the Act.

On the other hand, the Minister argued that the tax benefitwasevidentsincethetaxpayerreceivednon-taxable dividends by way of an intentional application ofthespecificanti-avoidanceruleofsubsection75(2)of the Act. With regard to the existence of an avoidance transaction, the Minister argued that the intentional use of subsection 75(2) of the Act to attribute dividends to a corporation which can claim a subsection 112(1) deduction amounted to tax avoidance, as provided by subsection 245(2) of the Act, since it led to a result where neitherthetrustnorthebeneficiariesweretaxedonthedividend income. Finally, with respect to the abuse or misuse of the Act, the Minister argued that the intentional use of subsection 75(2) resulted in an attribution of Gennium’s surplus that should have been taxed as a dividendinthehandsofindividualbeneficiariesofthetrust, whereas no tax was paid on this amount.

Tax Court of Canada’s decisionAspartofherGAARanalysis,AssociateChiefJusticeLucie Lamarre restated the principles established by the jurisprudencethat,fortheGAARtoapply,theremustbeataxbenefit,anavoidancetransactionandanabuseormisuse of the Act.

Withrespecttotheexistenceofataxbenefit,thejudgeconcludedthattherewasataxbenefit,sincetheplanning led to no tax being payable by the taxpayer or its beneficiaries.TheTCCconcludedontheevidencebeforeit that the taxpayer was created for the sole purpose of reducing to nil the tax impact of the transfer of funds from Gennium to the taxpayer. The TCC also stated that the tax benefitwastriggeredwhensubsection75(2)applied.

The taxpayer conceded that if the TCC found a tax benefit,therewasanavoidancetransaction;therefore,Associate Chief Justice Lamarre turned next to the question of whether there had been an abuse or misuse of the Act. The TCC held that it was clearly a situation wheretheinteractionbetweenaspecificanti-avoidancerule (i.e., subsection 75(2) of the Act) and a provision only applicable to corporations (i.e., subsection 112(1) of the Act) had been used to facilitate an abusive tax avoidance transaction. The tax planning was conducted inordertoprofitfromthetaxbenefitcreatedbytheinteraction between those two provisions, because Gennium was stripped of its surplus for the taxpayer’s benefitandnotaxwaspayablebyanytaxpayer.

The judge also outlined that the creation of a second trust, the taxpayer, was only done in order to obtain the tax benefit,becauseMr.Piloncouldhaveusedtheexistingfamily trust. However, in order for subsection 75(2) to apply, the trust needed to be a reversionary trust, and it was for that reason that the taxpayer was settled.

The TCC concluded that this situation was contrary to the object and spirit of these two provisions, and that the tax avoidance transactions were contrary to the purpose of theseprovisions.TheTCCreliedontheSupremeCourtof Canada’s decision in Lipson to conclude that this attribution rule had been intentionally used in order to reduce the tax payable and to facilitate an abusive tax avoidance transaction.

As a result, Associate Chief Justice Lamarre concluded that there was an abuse of subsections 75(2) and 112(1) of the Act.

The TCC maintained the Minister’s initial assessment, asitdeterminedthattheGAARappliedtotheseriesoftransactions to reattribute the dividend income from 9134 to the taxpayer.

Lessons learnedIt’s important to note that the Minister decided to assess thetaxpayeronthebasisoftheGAAR,asopposedtotaxing the taxpayer on the dividend income pursuant to the normal rules of taxation applicable to trusts. Further, although the Minister assessed the taxpayer, he did not reverse 9134’s income inclusion in respect of the dividends. Consequently, the Minister assessed both the taxpayer and 9134 in respect of the same income, even thoughthatiscontrarytotheCanadaRevenueAgency’s(CRA’s)interpretationbulletinIT-369R,Attribution of Trust Income to Settlor, which states that they will avoid double taxation situations. In the interpretation bulletin,theCRAstatesthat“anamountwhichhasbeen attributed to a person under subsection 75(2) is normally to be excluded from the income of a resident beneficiarytowhomitwaspaidorpayableintheyear,and from the income of the trust where it was not paid or payabletotheresidentbeneficiary.”

WhileitisunderstoodthattheCRA’sinterpretationbulletins do not have the force of law, taxpayers should be particularly mindful before relying on this statement.

Finally, it is important to point out that the taxpayer appealed Associate Chief Justice Lamarre’s decision on 21 June 2017. The appeal should be heard in 2018. u

Canada — TaxMatters@EY September 2017 10

Tax Alerts – CanadaTax Alert 2017 No. 29 — Finance addresses tax planning with private corporations

On 18 July 2017, federal Finance Minister Bill Morneau released for consultation a paper and draft legislative proposals addressing tax planning arrangements using private corporations. It is the government’s view that these changes are necessary to close perceived tax loopholes and improve the fairness of the Canadian income tax system. These proposed measures represent themostsignificantamendmenttothetaxationofprivatecorporations in Canada since the tax reform in 1972.

Tax Alert 2017 No. 30 — Alberta “auditing“ InsuranceAct charges

The Province of Alberta has taken the unusual step of authorizingitsTaxandRevenueAdministration(TRA)to audit insureds for charges payable under section 61 of the provincial Insurance Act. The Insurance Act is a regulatorystatutebuttheTRAappearstobeattemptingto administer it like a tax statute.

Tax Alert 2017 No. 31 — Ontario seeks input on LTT proposals

On 14 July 2017, the Ontario Ministry of Finance posted aconsultationdocumentontheRegulatoryRegistry,setting out proposals to facilitate compliance with section 3 of the Land Transfer Tax Act, which imposes provincial land transfer tax (LTT) on unregistered dispositions ofbeneficialinterestsinland.Theministryhasinvitedfeedback and will consider all comments submitted on or before 28 August 2017 electronically or in writing.

Tax Alert 2017 No. 32 — Disputes delayCETA implementation

While Canada and the European Union have approved the necessary implementing legislation for the provisional application of the Comprehensive Economic and Trade Agreement, the agreement is still not in force on a provisional basis for those areas under the EU Commission’s control (e.g., tariffs).

Tax Alert 2017 No. 33 — Private Company insights:federal tax reform

On 18 July 2017, federal Finance Minister Bill Morneau introduced draft legislation and a consultation paper proposing to fundamentally overhaul the system of taxation for private companies and their shareholders and family members. These proposals are broad based and primarily target closely held Canadian-controlled private corporations, regardless of sector, industry or economic grouping. Many of the proposed measures may not extend to public companies or foreign-controlled private businesses.

Tax Alert No. 34 — Saskatchewan now acceptingSCII applications

Applications are now being accepted for the SaskatchewanCommercialInnovationIncentive(SCII),which was outlined in EY’s Tax Alert 2017 No. 22. This incentive effectively reduces the general corporate income tax rate to 6% on an eligible corporation’s taxableincomeearnedfromthecommercializationofqualifyingintellectualpropertyinSaskatchewanforaperiod of 10-15 years. It will be delivered in the form of a tax rebate, which will be effective retroactive to 1 January 2017.

Publications and articles

EY’s Worldwide Estate and Inheritance Tax Guide 2017

EY’s Worldwide Estate and Inheritance Tax Guide summarizestheestatetaxplanningsystemsanddescribes wealth transfer planning considerations in 37 jurisdictions around the world, including Australia, Canada, China, France, Germany, Italy, the Netherlands, theUKandtheUS.

Worldwide Corporate Tax Guide 2017

Governments worldwide continue to reform their tax codes at a historically rapid rate. Chapter by chapter, fromAfghanistantoZimbabwe,thisEYguidesummarizescorporate tax systems in 166 jurisdictions.

Worldwide R&D Incentives Reference Guide 2017

ThepaceatwhichcountriesarereformingtheirR&Dincentives regimes is unprecedented. This EY guide summarizeskeyR&Dincentivesin44jurisdictions,andprovidesanoverviewoftheEuropeanUnion’sHorizon2020 program.

2016-17 Worldwide transfer pricing reference guide

The proliferation of transfer pricing rules and regulations around the world, and the huge increase in focus on the subject by the world’s tax authorities, require practitioners to have knowledge of a complex web of country tax laws, regulations, rulings, methods and requirements.Thisguidesummarizesthetransferpricingrules and regulations adopted by 118 countries and territories.

Impact of US policy reforms on Canadian companies

Canadian businesses today face unparalleled uncertainty as the public policy landscape is shifting dramatically, both at home and abroad. This thought leadership examines how these changes are creating a climate of uncertainty that may have potentially serious competitive implications for Canadian businesses.

EY Outlook for global tax policy 2017

Global tax reforms and sustained weak economic growth continue to disrupt the competitive landscape in tax across the globe. EY’s Outlook for global tax policy in 2017 combines insights and forecasts in 50 jurisdictions across the globe.

Publications and articles

Canada — TaxMatters@EY September 2017 11

Publications and articles

Worldwide VAT, GST and Sales Tax Guide 2017

Thisguidesummarizesthevalue-addedtax(VAT),goodsandservicestax(GST)andsalestaxsystemsin122jurisdictions, including the European Union.

EY Worldwide digital tax guide 2017

This guide provides known and emerging tax and law issues of nexus, indirect taxation and the landscape createdbytheOECD’sBaseErosionandProfitShiftinginitiative, insights and opportunities for approximately 120 countries.

Board Matters

The June issue of Board Matters Quarterly looks at how leadingboardsarerecognizingthatwhenitcomestogrowth and innovation, the risks and rewards associated withanorganization’stalentmaybethemostcriticalareaof all.

Operationalizing global transfer pricing

InthisfinalinstallmentofEY’s2016-17TransferPricingSurvey,weexaminetheworkneededtorespondtotheseismic shifts taking place in the world of global taxation. Weexaminethefindingsofwhat623respondentsin36jurisdictions across 17 industries have to say regarding forging a practical response to so much change — or as thisreportreferstosuchmatters,operationalizing.

EY’s Global Capital Confidence Barometer 16th edition June 2017

CangeopoliticaluncertaintyandrecordM&Acoexist?Despite political uncertainties, companies are giving the green light to deals in the search for growth.

EY Trade Watch

This quarterly publication outlines key legislative and administrative developments for customs and trade around the world. In this issue, we report as the UK triggers the process of leaving the European Union and the Trump Administration issues NAFTA renegotiation letters and requests public input. In the Americas, we hearfromArgentina,CanadaandtheUnitedStates;inAsia-PacificfromJapanandThailand;andinEMEIAwereport on the Gulf Cooperation Council, the European Union,Nigeria,SwitzerlandandUganda.

Websites

EY Law LLP

Ournationalteamofhighlyqualifiedlawyersandprofessionals offers comprehensive tax law services, business immigration services and business law services. Servingyouacrossborders,oursector-focused,multidisciplinary approach means we offer integrated and comprehensiveadviceyoucantrust.Visiteylaw.ca.

Focus on private business

Because we believe in the power of private mid-market companies, we invest in people, knowledge and services to help you address the unique challenges and opportunities youfaceintheprivatemid-marketspace.Seeourcomprehensive private mid-market Webcast series.

Online tax calculators and rates

Frequentlyreferredtobyfinancialplanningcolumnists,our mobile-friendly calculators on ey.com/ca let you compare the combined federal and provincial 2016 and 2017 personal tax bills in each province and territory. ThesitealsoincludesanRRSPsavingscalculatorandpersonal tax rates and credits for all income levels. Our corporate tax-planning tools include federal and provincial tax rates for small-business rate income, manufacturing and processing rate income, general rate income and investment income.

Tax Insights for business leaders

Tax Insights provides deep insights on the most pressing taxandbusinessissues.Youcanreaditonlineandfindadditional content, multimedia features, tax publications and other EY tax news from around the world.

Learn moreTo subscribe to TaxMatters@EY and other email alerts, visit ey.com/ca/EmailAlerts.

For more information on EY’s tax services, visit us at ey.com/ca/Tax.

For questions or comments about this newsletter, email Tax.Matters@ca.ey.com.

And follow us on Twitter @EYCanada.

CPA Canada Store

EY’s Complete Guide to GST/HST, 2017 (25th) Edition

Editors: Dalton Albrecht, Jean-Hugues Chabot, Sania Ilahi, David Douglas Robertson

Canada’sleadingguideonGST/HST,includingGST/HSTcommentaryandlegislation,aswellasaGST-QSTcomparison.Writteninplainlanguagebyateamof EY indirect tax professionals, the guide is consolidated to 15 July 2017 and updatedtoreflectthelatestchangestolegislationandCRApolicy.

EY’s Federal Income Tax Act, 2017 Edition

Editors: Alycia Calvert, Fraser Gall, Murray Pearson

Complete coverage of Canada’s Income Tax ActandRegulations.Includedwiththis edition: interactive online features. Purchase of a print book includes access to an online updated and searchable copy of the federal Income Tax Act, as well as the pdf eBook. This edition contains amendments and proposals from the 22 March2017federalbudget(specialbudgetsupplement),BillC-29(SC2016,c. 12), Budget Implementation Act, 2016, No. 2, the 3 October 2016 notice of waysandmeansmotion,andthe16September2016legislativeproposals.

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This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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