SECTION 84.1 – NON-ARM’S LENGTH TRANSACTIONS?

In a June 14, 2016 French Tax Court of Canada case (Poulin et al. vs. H.M.Q., 2013-2554(IT)G, 2013-2555(IT)G), at issue was whether the taxpayers, P and T, who disposed of their shares in the Corporation, were acting at arm’s length such that the proceeds of sale would constitute a deemed dividend under Section 84.1 rather than a capital gain. 

The sales were in the context of a reorganization to implement the departure of P and the integration of H into the company. Simply,

• P sold his shares to TCo (owned by T);
• T sold his shares to HCo (owned by H); and,
• both P and T claimed the Capital Gains Exemption (CGE).

The Minister took the position the P and TCo, and T and HCo acted in concert and, therefore, were deemed not to have been acting at arm’s length (Paragraph 251(1)(c)). As such, they were subject to a deemed dividend under Section 84.1.

Taxpayer P wins
The Court found that P and TCo did not act in concert, but were acting at arm’s length. In this case there was a major conflict between P and T; it was in the interest of the Corporation that one of them leave. P and T reached an agreement after difficult negotiations. P wanted to sell his shares for the best price and terms. 

The Court also noted, however, that the fact that P and T organized the transaction so that P could benefit from CGE does not in and of itself demonstrate that the parties did not act at arm’s length.

Taxpayer T loses
On the other hand, the Court found that T and HCo acted in concert without separate interests. The transaction was undertaken to provide a tax benefit for T, with HCo simply accommodating T’s wishes. The transaction did not reflect normal commercial relations between parties acting in their own interest.

For further information see VTN Monthly Tax Update Seminar, Issue No. 420

UNREASONABLE BUSINESS LOSSES

In a June 8, 2016 Federal Court of Appeal case (Peach vs. H.M.Q., A- 406-14), at issue was whether the Tax Court was correct in denying the taxpayer’s rental and business losses for the 2009 and 2010 taxation years. 

Taxpayer wins, in part
The Federal Court found that the Tax Court erred in globally denying the expenses of the business under Section 67. The Court should have considered each particular expense and the explanation for them. Unreasonable expenses can be eliminated or reduced to make them reasonable.

For further information see VTN Monthly Tax Update Seminar, Issue No. 420

DONATION RECEIPTS – NON-CASH GIFTS

In a May 25, 2016 Tax Court of Canada case (Shahbazi vs. H.M.Q., 2015-5085(IT)I), it was determined that non-cash donations of household items valued at $20,000 in 2006 and $15,000 in 2007 were denied on the basis of inadequate donation receipts. Receipts were provided with assessed amounts, however, they failed to contain a description of the property donated. 

For further information see VTN Monthly Tax Update Seminar, Issue No. 419

ELECTION TO TREAT EXCESSIVE ELIGIBLE DIVIDEND AS AN ORDINARY DIVIDEND

In a May 13, 2016 Technical Interpretation (2016-0626371E5, Verlinden, Nicole), CRA opined that an election to treat an excessive eligible dividend designation (EEDD) as an ordinary dividend (Subsection 185.1(2)) must be made in respect of each eligible dividend paid in the year. In addition, the election only permits the corporation to elect up to the amount of the EEDD in respect of each eligible dividend paid. 

Currently, there is no prescribed form or manner for making this election. Therefore, administrative guidance is provided on the CRA website.

For further information see VTN Monthly Tax Update Seminar, Issue No. 419

PARTNERSHIP OR COST-SHARING ARRANGEMENT (CSA)

The 2016 Federal Budget proposed to extend the specified Partnership income rules in an attempt to curb the multiplication of the small business deduction. This change may potentially affect the business structures of many professionals. As a result, many professionals, or other businesses, may consider reorganizing to avoid being a Partnership. 

Whether or not a Partnership exists is fact-specific, prioritizing substance over form, and does not depend on how the parties characterize their relationship. Parties cannot contract out of being a Partnership if a Partnership exists in fact. A Written Agreement is not necessary to form a Partnership at law, however, as practitioners know, the resolution of disputes with CRA will be based on evidence; as such, agreements should be drafted with the desired relationship in mind. 

Partnerships are governed by provincial law, however, in most jurisdictions, a Partnership requires a business, carried on in common, with a view to profit. Those looking to avoid being deemed a Partnership should look at their individual circumstances in light of case law and their provincial Partnership Act. There are many indicia of a Partnership (the contribution to a common undertaking, a joint property interest, or a mutual right of control), but, in particular, most Partnership legislation deems the sharing of profits “proof, in the absence of evidence to the contrary, that that person is a Partner in the business.” 

For further information see VTN Monthly Tax Update Seminar, Issue No. 419