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Corporate Taxation 4 – Canada Visa IN
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2021 Corporate Taxation Law Developments (Page 3)



DISCLAIMER The information provided here is of a general nature and may not apply to any specific or particular situation. It is not to be considered as a legal advice nor presumed to be indefinitely up to date.


Affiliated Person Rule and Trust


The scope of the affiliated persons rules will be clarified and expanded to expressly apply to trusts. After March 22, 2021, a trust will be affiliated with any beneficiary entitled to a majority of the trust income or capital and, generally, also with any person otherwise affiliated with such a beneficiary. In the case of a discretionary trust, this new rule will apply as if any discretion afforded to any person in respect of the trust had been fully exercised (or not exercised, as the case may be) in respect of each person who is a potential beneficiary of the discretion. In addition, two trusts will be affiliated provided certain conditions are met.


General Anti Avoidance Rule

It is proposed that, for greater certainty, GAAR will apply to a misuse or abuse of the provisions of the Act, the Income Tax Regulations, Income Tax Application Rules, 1971, a tax treaty or any other enactment that is relevant in computing tax or other amount payable by or refundable to a person under the Act. These amendments apply with respect to transactions entered into after September 12, 1988.


3. Recent Cases


Interest Deductibility


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In Gifford v. The Queen, the Supreme Court of Canada had the opportunity to consider the much litigated question of whether interest can be deductible as an expense in computing income. Gifford, an employee of an investment brokerage firm, borrowed $100,000 to acquire the client list from his retiring colleague. Although the case concerned the deductibility of the payment itself, the much anticipated question was whether interest on the borrowed funds was deductible as an income expense, based on their use.

The Court concluded that: (i) interest was not always a capital expense; (ii) the provisions of the Act dealing specifically with the deductibility of interest did not constitute, on their own, a complete code on the deductibility of interest; and (iii) in order to determine whether the interest payment was "on account of capital," it was only necessary to consider what the loan constituted for the borrower and that the use of the borrowed money was not a relevant factor. Therefore, if the loan constituted an addition to the financial capital of the borrower, the interest payments on that loan were "on account of capital." The Court recognized that in certain situations, such as those involving moneylenders, the interest payment would be not be on account of capital, such as where the loans were classified as inventories.

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General Anti Avoidance Rule


Imperial Oil Ltd. v. R. has been another opportunity for the FCA to reiterate its position, according to which, in order to apply the GAAR, it is necessary to identify a clear and unambiguous policy behind the relevant provisions of the Act.

In determining whether there was a clear and unambiguous policy, the FCA examined the views expressed by the CRA through technical news and roundtables on the applicability of GAAR and stated that the CRA views had no weight in determining whether there existed a clear legislative policy underlying the provisions of the Act.

More than ever, the determination of a "clear and unambiguous" policy has become, as well it might, a real challenge for the Minister, who did not seek leave to appeal to the Supreme Court of Canada.

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Safe Income Determination


In 729658 Alberta Ltd. v. R., the Tax Court of Canada rendered a decision that went against a long expressed position of the CRA regarding the calculation of safe income, according to which safe income must be proportionally reduced by capital gains realized on a share of a that had safe income in the amount of $1.9 million and a fair market value of $12.4 million. The shareholders transferred their respective shares to their holding corporations on a partial rollover basis, realizing a capital gain computed on an elected proceeds of disposition equal to the fair market value of the shares, less the safe income attributable to the shares. Afterwards, a dividend equal to the full amount of safe income ($1.9 million) was paid on the shares of the corporation. The shares were then sold to an arm's length party by the holding corporations.

The issue was to determine whether the meaning of "reasonably attributable" in the context of subsection 55(2) required that the safe income be proportionally reduced by the capital gain realized on the transfer of shares to the holding corporations. The Minister argued that this must follow, since part of the safe income was already reflected in the increased cost base of the shares following the partial taxable transfer to the holding corporations. This position had also been generally accepted by tax practitioners and has been reiterated by the CRA on several occasions. Nevertheless, the court concluded otherwise and held that the gain must first be allocated to "income earned or realized" and then, only if the dividend exceeded this amount, would the gain be allocated to "unrealized appreciation in the value of underlying assets." Consequently, since the dividend had first to be allocated to the "income earned or realized," the entire dividend was attributable to safe income and could not be recharacterized, in whole or in part, as proceeds of disposition.

This judgment is a departure from the general understanding shared by tax administrators and practitioners alike, so it was somewhat surprising that the Minister did not appeal.

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Prepared by: Richard W. Pound and Christian Meighen, Stikeman Elliott LLP