Tax 2 CAN
Chapter One: “Base case” 4
tax rate to be applied to corp’s income: 4
Gross-Up and Dividend Tax Credit 4
Inter-corporate dividends 5
Chapter 2: Classification of Corporations (for Special Rates and Rules) 5
Private corporation: 5
Canadian Controlled Private Corporation (CCPC) 6
s.251(5)(b): deeming rule re: legal control: 6
Silicon Graphics: de facto control 6
Transport Couture 6
Taber Solids TCC- Control in fact s.256(5.1) 6
Chapter 3: Special Rate for Active Business Income of a CCPC 7
Small business Rate: 7
Corporate Income that qualifies for the small business Rate 7
Lerric v. the Queen: 5 or more employees, not fractions. 8
S & C Ross Enterprises Ltd v. the Queen- PSB test. 8
489599 BC LTd: 5FT + 2PT= >5FT 8
Associated Corporations - note: can be related without being associated!! 9
Hughes Homes- no s.256(2.1) b/c had valid business purpose. 10
Related Persons - note: DISTINCT FROM ASSOCIATED CORPS!!!!!!! 10
Chapter 4: Special Refundable Tax System for Investment Income of Certain Private Corporations - RDTOH 11
Policy goals of refundable tax: 11
Investment Income Except Dividends from Other Canadian Corporations 11
Shamita Inc –income from active business test 11
Tax Rate that applies to CCPC’s Aggregate Investment Income: 11
Private Corporations that receive dividends from other Canadian Corporations 12
First Aspect of Part IV Tax: not connected 12
Second Aspect of Part IV tax: Connected Corps 13
Canwest Capital- s.129(2.1) test 13
Capital Dividend Account (CDA)- tax free portion of capital gains 13
Chapter 5: General Rate Income Pool (GRIP) and Eligible Dividends 14
GRIP and Eligible Dividend System 14
Excessive Eligible Dividend Designations 14
Chapter Six: Shareholder Benefits and Shareholder Loans 15
Computing value of benefit: not settled law 15
Hinkson: FMV outlay for cabin 15
Pillsbury: benefit on SH qua SH 15
Youngman FCA- equity rate of return/ cost of capital- fancy house. 15
Fingold FCA- florida condo: cost of capital 15
Franklin- bookkeeping error, no actual benefit 15
Shareholder Loan 16
Exceptions to loan inclusion 16
Meeuse, - succession of loans not series for s.15(2.6) 16
Deemed Benefit: Interest 16
Chapter 7: Share Capital and Deemed Dividend 16
Two calculations: 1) deemed dividend, 2) capital gain-less the deemed dividend 17
Exceptions to deemed dividends: 17
Some typical situations: 17
Chapter 8: Section 85.1 Share for Share Merger 18
s.85.1 Pre- Conditions: 18
s.85.1(1)(a) Effect of Exchange on Vendor/Transferor (Corp getting rid of old shares) 18
s.85.1(1)(b) Effect of Exchange on Purchaser (Corp issuing new shares) 18
Tax PUC of Purchasers (new) shares issued to Vendor: 19
Chapter 9: Section 85 Transfers: Transfer of Property to a Corporation 19
s.85(1) Preconditions: 19
Elected Amount 19
s.85(2.1): Computing PUC: 20
Indirect Benefits Rule 21
Freeze Transaction: 21
Chapter 10: Section 86 and 51 Share Exchanges 21
s.86 Exchange of shares by SH in course of Re-org of Capital 21
s.86(2.1): Computation of Paid-Up Capital 22
Deemed Dividend 23
s.86(2): Gift Portion Rule: 23
s.51(1) Convertible Property 24
Chapter 11: Amalgamation 24
s.87(1) Amalgamation 25
s.87(4) Shares of predecessor corp: 25
PUC 25
Exceptions to new corporation rule: 25
Anti Avoidance Rules: 25
Chapter 12: Liquidation 25
s.88(1) Winding-Up: 25
s.88(1)(b): Winding-up disposition (canceling) SubCo shares by ParentCo: 26
s.88(1)(c): Cost of Property received by Parent: 26
THE BUMP: s.88(1)(d): Addition to cost of capital property acquired by parent (“the bump”): 26
Vertical amalgamation: 26
Chapter 13: Capital Gain Exemption for QSBC Shares 27
(a) 90% asset test: 27
(b) 2 Year hold test: 27
(c) 50% asset test: 27
Anti-stacking rule WRT 50% asset test s.110.6(1)(d) 28
What if excess cash is “used” in an active business? 28
Steps to consider before a sale, so can use capital gain exemption: 28
s.110.6(14)(a): FIFO and Option Time 28
Hudon- Active business perimeters 28
Chapter 14: s.84.1 Individual Share Gains deemed to be dividends 29
s.84.1(1): Non arm’s length Sale of Shares à Christian: #1 cause of insurance claims by lawyers, accountants 29
s.84(1) (b) Deemed dividend: 29
s.84(1)(a) PUC Reduction: 29
s.84.1(2)(a) and (a.1): 29
Anti-avoidance Rule: Not at arm’s length 30
Queen v. McLarty (SCC) 2008- arm’s length test 30
Chapter 15: Acquisition of Control Rules and Use of Corporate Losses 30
Ordinary rules on use of losses: 30
Loss Utilization Rules: 30
Acquisition of Control: Only legal control 30
Effect of Acquisition of Control on Losses (and other rules) 31
CANNOT Carryover of Net Capital Losses 31
Carry-over of Non-capital losses 31
Depreciable Property 31
Effect on GRIP/LRIP: 31
Amalgamation (losses) 32
Wind up 32
Chapter 16: s.55 Inter-corporate dividends deemed to be Gains 32
s.55(2): 32
s.55(3) : Exceptions 32
Internal Corporate Reorg fits within exception in s.55(3): 32
s.55(2) Exception “Safe Income”: - safe income is consolidated 33
729 AB v. 729 AB 33
VIH Logging 33
Chapter 18: Butterfly Transactions: 34
Butterfly Requirements 35
Butterfly Anti-Avoidance Rules 35
Continuity test: 36
Chapter One: “Base case”
tax rate to be applied to corp’s income:
“Base case” tax rate to be applied to the corporation’s taxable income to arrive at the tax owing by the corporation / % / Section references and notesstart with (historical) federal tax rate / 38 / 123(1)(a) - most recent, but still historical, base federal rate
subtract the federal “general rate reduction” / 11.5 / 123.4(2) - this gives us the current base federal rate of 28% before making “room” for the provincial and territorial taxes - assume here the corporation’s income is basic “full rate taxable” income
subtract the “provincial abatement” / 10 / 124(1) – makes “room” for the provinces and territories to impose their own tax rate on the corporation’s “taxable income earned in a province” – this gives us the net current federal rate of 18% where the corporation’s income is subject to provincial or territorial tax
add the base case provincial tax rate on the corporation’s income earned in the province / 10 / the provincial rate here is the base rate of 10.5% in subsection 14(2) the “BC Act”
thus, the total tax “base case” tax rate on the corporation’s taxable income in Canada is / 26.5 / the base corporate tax will vary across Canada
Base case for individual at top tax bracket:
29% (federal rate) s.117(2)(c) + 14.7% (provincial rate) s.4.1(1)(e) in BC Act = 43.7% combined fed-prov tax rate.
Gross-Up and Dividend Tax Credit
Policy: individual SH is given some credit for corp tax that is assumed to have been paid. Avoids double taxation. Corp’s taxes imputed to SH as if they had paid them, tax credit equal to the gross-up.
Ordinary dividends: Taxable dividends that aren’t eligible for the enhanced dividend tax credit.the corporation’s tax on the $100 at the base rate of 28% is / $28.50
the actual dividend paid to the shareholder, being the $100 less the $28.50 is / $71.50
“gross-up” the dividend by ¼ of the actual dividend, or $17.88, for a total amount included in the shareholder’s income of / $89.38
shareholder tax at the top federal-provincial tax rate of 43.7% / $39.06
deduct the “dividend tax credit”, being the 83.67% of the $17.88 gross-up, or / $14.96
net shareholder tax / $24.10
the total $52.60 of tax on $100 of income translates to an effective tax rate of 52.6%, or rounded to / 53%
Eligible dividends: Taxable dividends paid from corp income taxed at the “base case” (GRIP) are eligible for higher dividend tax credit.
the corporation’s tax on the $100 at the base rate of 28.5% is / $28.50
the actual dividend paid to the shareholder, being the $100 less the $28.50 is / $71.50
“gross-up” the dividend by 44% of the actual dividend, or $31.46, for a total amount included in the shareholder’s income of / $102.96
shareholder tax at the top federal-provincial tax rate of 43.7% / $44.99
deduct the “enhanced dividend tax credit”, which is equal to 94.26% of the gross-up, or / $29.65
net shareholder tax / $15.34
the total $43.84 of tax on $100 of income translates to an effective tax rate of 43.84%, or rounded to / 44%
So with enhanced dividend tax credit the SH pays at 44% instead of at 53% absent the enhanced credit.
Dividend received by individual shdr must be included in shdr income by reason of:
· 12(1)(j) – include in income dividends paid by resident Can corp (as required by subdivision h)
Subdivision h:
· 82(1)(a) – include in income taxable dividends [see (b)(i) below: also include gross-up]
· 82(1)(a.1) – include in income eligible dividends [see (b)(ii) below: incl. gross-up]
82(1)(b)(i) – for ordinary dividends [paid out of income taxed at low rate], include an additional amount equal to:
· ¼ (25%) of the dividend
· Then deduct a tax a credit of 83.67% of this gross-up amount
82(1)(b)(ii) – for “eligible dividends” [paid out of income taxed at base rate 28.5% (formula for GRIP determines amount in this pool s.89(1)], include an additional amount equal to:
· 44% of the dividend
· Then deduct a credit of 94.26% of this gross-up amount
NOTE: Individual shdr with no other source of income (p.12)
· Low rate of income tax applies
· Can receive up to approx $38,600 of dividends and pay no tax (fully credited, due to both personal tax credit, and fed & prov. tax credits)
Inter-corporate dividends
tax-free b/w corporations: corp must include the dividend in income s.82(1)(a), but is entitled to a deduction equal to that amount s.112(1).
Policy: there has already been corporate tax on the income, so to then tax the corporate SH would be “corporate double taxation.”
Chapter 2: Classification of Corporations (for Special Rates and Rules)
Private corporation:
· s.89(1): resident in cda, not public corp, not controlled by one or more public corps.
· a) resident in Canada: s. 250(4) and s.250(5.1): corp deemed to be resident where: incorporated in Cda after 1965 or cont’d into Cda after July 1994 from another jurisdiction.
· “resident” common-law: for corp incorporated outside of cda can be resident if its central management and control abides in Cda. The place where the directors meet and guide the business, not necessarily where day to day business is run or where SH live.
· s.250(5) even if resident under common-law test will be deemed not to be if deemed resident in another jurisdiction under tax treaty.
· b) Public corporation: s.89(1): resident in cda, any class of it shares is listed on a designated stock exchange. It has elected to be a public corp, it used to be a public corp and hasn’t elected not to be.
· c) Not controlled by one or more public corps: Legal “de jure” control generally is control over affairs and fortunes of the corporation by owning that number of shares that carries with it the right to elect the board of directors (usually 50%, varies by articles of corp.)
Canadian Controlled Private Corporation (CCPC)
· s.248 and s.125(7): any private corp that is a “Canadian corporation”
other than:
· a corp that has any class of its shares listed on a designated stock exchange;
· a corp that is controlled directly or indirectly in any manner whatever (factual control) by: one or more non-residents, one or more public corps; one or more corps with shares on stock exchange any combination of these or
· a corp that would be controlled (legal control) by one fictional person, if that person owned all shares of the corp that are in fact owned by a non-resident, public corp or listed corp (the consolidation rule).
· Canadian corporation: s.89(1) resident in Canada and incorporated in Canada
· Controlled in…whatever: s.256(5.1): if a person or group has any direct or indirect influence that, if exercised, would result in control in fact of the corporation. Exceptions: franchiser and arrangements whereby the main purpose is to govern the manner in which a business is conducted.
s.251(5)(b): deeming rule re: legal control:
· if person has an absolute or contingent right to acquire shares that person is deemed to own those shares in ascertaining whether the corp is a CCPC.
· Same with contingent or absolute right to control or reduce votes or redeem, acquire or cancel shares.
· CRA has administration exception for SH agreements that contain a shot-gun or right of first refusal clause.
Silicon Graphics: de facto control
Facts: CCPC prior to 1990, but then issued shares to US residents. Alias was a corp publicly traded in US and relatively widely held, no SH held more than 13% of its shares, but more than 50% of its shares held by non-resident persons with no evidence of any common connection among them. TP wanted to be a CCPC for SR&ED tax credits (plus small business subsidies)Held: in order for SH to be in control there must be coordinating their activities in some way, not just a numerical majority of foreigners. Thus, the definition is looking for someone who is actually legally controlling the corporation.
R: de facto control requires the ability to effect a significant change in the BOD or its powers, or to influence in a very direct way the SH who otherwise have the ability to else the board.
à shareholders who have no ties to each other cannot do this, must be some connection/agreement/common mind
à merely >50% not good enough, MUST HAVE MORE
Elements of factual control: 1) clear direct influence to effect a significant change in BOD 2) influence powers of directors 3) influence SH who would chose directors.
** NOTE: overruled by s.248(1)(c). “mythical person” created that holds all non-resident shares, regardless of connection between.
Transport Couture
- Old Mr. Couture liked trucks, started a company to play with trucks (TC1)- His kids liked business, and started a huge enterprise. (TC)
- Minister argued that TC controlled TC1 as TC1 was TC’s only customer, and was in effective (de facto) control
o Because TC was entirely economically dependent on TC1, there was control à like a pornography test, very subjective “you know it when you see it” type of test.
Held: Factual control found because of (1) economic dependence (2) operational control and (3) family relationship between the shareholders.
Taber Solids TCC- Control in fact s.256(5.1)
Facts: Taber solids reorganized into old Taber and Taber. B held all shares in OT, and K all shares in T. Previously equally owned Taber. Post-reorg, companies were split one rented the equipment from the other and one-let equipment to customers. Shares split between spouses accordingly. Court upheld Minister's finding that companies were associated corporations 40% of rent owed by new taber went back to old taber. Said separated the two businesses out to protect themselves from liability and protect some of their assets. Also said trust planning and there was tax advantage. They said would have done it or not whether there was tax advantage or not. Ct accepted that purpose wasn’t to get the tax advantage.Key Issue: person has control if they have the ability to (if they choose to exercise it) affect control of the company
TEST: Control factors: (rolled Transport Couture test into Silicon Graphics test)
· operational control, (not the power to affect board powers, but the potential to make board decicions)
· family relations and econ independence to determine whether there is ability to effect a significant change in BOD.
· Don’t need to find evidence that influence was exercised just need to find that there was potential for influence of exercise.
· Also just has to be some influence at some time in the year, doesn’t need to be throughout the yr.
Held: Post-reorg, Ken, through Taber, still had direct and actual influence that resulted in control of OT, based on Ken's expertise with respect to the operational side of the business. Moreover, Ken could have carried on the equipment rental business through Taber w/o any need to rent equipment from OT due to his expertise. The converse was not true. OT was entirely economically dependent on Taber and the two companies were inextricably linked by family and contract.
Chapter 3: Special Rate for Active Business Income of a CCPC
Small business Rate:
Arrived at through entitlement to “small business deduction”: