WHAT HAPPENED
DURING TAX SEASON?
May 14, 2008
Gwen Benjamin
Rob Martini
Robin MacKnight
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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.
3
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.
4
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
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