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Gwen BenjaminRob Martini

Robin MacKnight

WHAT HAPPENEDDURING TAX SEASON?

May 14, 2008

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Technical Interpretation

Meaning of “Vested Indefeasibly”

January 15, 2008

2007 – 0235171E5

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• Question: Whether property had vested indefeasibly in beneficiary despite the fact trustee had disposed of property before estate fully administered.

• Answer: Question of fact – depends on whether trustee was acting on behalf of beneficiary at time of property disposal.

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Comfort Letters

• April 2, 2008 to Investment Counsel Association of Canada and Pension Investment Association of Canada – proposed amendments to be recommended to Bill C-10 re registered pension plans, etc.

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Recent Cases of Interest

• Davis v. the Queen 2008 TCC 31-capital gain or employee benefit?

• Binder v. Saffron Rouge Inc. 2008 DTC 6112 (Ont. Superior Court of Justice) – rectification application – no common mistake

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More Recent Cases

• The Queen v. MacKay 2008 FCA 105 – GAAR

• Tolhoek v. the Queen 2008 FCA 128 – limited recourse debt and tax shelters

• Fenwick v. the Queen 2008 TCC 243 – litigation expenses in shareholder dispute

• Gestion Leon Gagnon Inc. v the Queen – English translation dated January 18, 2008 – shareholder benefit on issue of high-low shares

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More Cases• Cascades Inc. v. the Queen 2007 CCI 730,

English translation dated January 22, 2008 – stop loss rules

• QL Hotel Service Limited v. Minister of Finance – March 25, 2008 – RST exemption on intercorporate rollover

• The Queen v. Taylor – 2008 NSCA 5 – award of costs against “Crown”

• Lavie v. the Queen – 2006 CCI 655, English translation dated February 19, 2008 – Minister’s presumptions for assessment

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MacKay

• FCA overturns TCC decision that allowed taxpayer appeal

• Real estate transaction similar to OSFC

• Bank transferred mortgage into LP – preserved original cost of mortgage

• After sale of LP interests to investors, partnership wrote down inventory value to FMV to create loss

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MacKay

• TCC – looked to primary purpose of the overall series of transactions – to acquire, redevelop and hold shopping centre

• Good news for taxpayers – seemed to affirm The Duke

• FCA – have commentators over-reacted?

• Will the decision be appealed to SCC?

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Tolhoek

• Continuing saga of the Trafalgar software partnerships

• First issue was whether the the debt assumed by taxpayer was a “limited recourse amount” under 143.2

• Second issue – reassessed within time?

• Taxpayer lost at TCC and FCA

• Sloppy execution and implementation?

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Tolhoek

• Circular flow of funds among related parties• No “bona fide” arrangements to pay interest

or repay debt• Taxpayer could not demonstrate that interest

was paid within 60 days of year end• Second issue – since debt could become

LRA if 60 day period was ever missed, MNR had until debt was repaid to make the determination – therefore not statute barred

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Fenwick

• Family feud – sisters causing corporation to bring derivative action against brother for appropriation of corporate opportunity and excessive remuneration

• Brother claimed deduction for legal fees

• TCC disallowed

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Gestion Leon Gagnon

• Husband and wife owned Opco

• Opco received a bonus in the course of its business which it reported as income

• Individual shareholders wanted to creditor proof this bonus without current tax

• Opco capital amended to create High-Low shares

• GLG created to subscribe for them in 2000

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Gestion Leon Gagnon

• In 2001 shares were redeemed and GLG reported deemed dividend income

• CRA reassessed 2001 imputing shareholder benefit under 15(1) on basis issuance of share constituted a benefit

• “I find it hard to fathom the true reasons that led the Minister’s auditors to assess under ss. 15(1)”

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Cascades

• Complicated series of transactions to increase shareholder value of public corporation

• Three way merger was last step in series• Taxpayer realized a capital loss on sale of

shares to an intermediate company that was party to the merger

• CRA denied loss under 40(3.3), (3.4) and (3.5)

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Cascades

• Taxpayer said conditions for application of stop loss rules in 40(3.5)(c) did not apply, so (3.3) and (3.4) did not apply

• Since shares which would be the subject of the stop loss rules ceased to exist, condition not met = so taxpayer won

• Good discussion of 61 day bright line test

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QL Hotel Service

• Intercorporate exemption under ss. 13(3) of Regulation 1013 – where transferor “wholly owns” the purchasing corporation

• Transferor caused incorporation of purchaser corporation

• No shares issued to incorporator on organization of purchaser corporation

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QL Hotel Services

• Assets transferred to purchaser were intangibles and TPP

• Intangibles transferred first for common share

• TPP transferred next for special shares

• Taxpayer sought rectification order to separate directors resolutions to clarify

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QL Hotel Services

• Taxpayer argued that incorporator should be considered owner – rejected

• Court agreed that two step sale resulted in taxpayer “wholly owning” purchaser at time TPP was transferred

• Moral – be careful in drafting and issue a common share on organization

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Taylor

• Egregious conduct of CRA auditors (“bordering on gross negligence” and “willful blindness”) led criminal court trial judge to order costs against “the Crown”

• All charges ultimately dropped on eve of trial• NSCA overturned trial judge order – CRA,

like RCMP, is not “the Crown”• So what remedy is left for aggrieved

taxpayers?

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Lavie• CRA assessed taxpayer for unreported

income from cocaine sales• CRA presumptions based on hearsay and

circumstantial evidence• Taxpayer not charged with any offences –

although others were charged based on the same information CRA had

• CRA presumptions based on unreliable evidence and rejected

• Same issues arise in net worth assessments