The deficits being generated by the emergency measures that the federal and provincial governments have implemented since March 2020 are a reminder of the magnitude of our governments’ pre-crisis deficits. This situation will inevitably lead to a greater tax burden for businesses and individuals at some point. Despite the unprecedented nature of these circumstances and the difficult financial situations that organizations find themselves in, steps can be taken now to mitigate repercussions. For several years, there has been increasing speculation about the capital gains inclusion rate being increased. Rumours also abound about the potential creation of an inheritance tax, which would undoubtedly be accompanied by a gift tax and a wealth tax. In this context, it is becoming ever more plausible that the federal government will finally increase the capital gains inclusion rate and tax the value of inheritances and gifts as early as the next budget, which has been postponed because of the ongoing crisis. An annual wealth tax on high net worth individuals could likewise be in the pipeline. As is now customary, the measures would apply as of midnight the night before the budget is tabled, closing the door to most tax planning strategies to reduce the impact of such measures. In the face of this situation, several steps can be taken as of now as, for instance: Crystallization of unrealized capital gains using a business corporation, partnership or trust; Gifts of money or property to family members or trusts; Termination of Canadian tax residency in favour of a lower-tax jurisdiction. The majority of tax planning strategies aiming to reduce or postpone the impact of such measures can be reversed should the anticipated measures not be adopted. In the event that governments do not increase the tax burden straightaway or opt for other, difficult-to-predict measures, well-planned transactions, such as realizing an accumulated gain on certain assets, making a direct gift, or making a gift through a trust, will ensure that additional taxes need not be paid. If you would like more information, our taxation team is available to help you.
- Québec, 1993
Éric Gélinas is a member of the Business law group in Lavery’s Montréal office. He assists businesses with complex tax reorganizations and the tax aspects of national and cross-border mergers and acquisitions. He is also interested in the tax aspects of estate planning and inter-generational transfers of businesses.
Mr. Gélinas’s main areas of expertise are corporate tax planning, taxation of corporation reorganizations, and the tax aspects of mergers and acquisitions.
Mr. Gélinas is also a tenured professor in the tax department of the École de gestion de l’Université de Sherbrooke, where he teaches the taxation of corporate reorganization in the master’s (M. Fisc.) program. He is frequently called upon to speak and write articles on the subject of taxation.
Publications and lectures
- Mise à jour et Revue des règles relatives à l'alinéa 55(3)(a) de la Loi de l'impôt sur le revenu (Canada), APFF, 2014 Annual convention
- Règles sur les biens évalués à la valeur du marché détenus par les institutions financières: comment s'y retrouver? Revue de l'APFF, vol.33
- Aspects fiscaux du décès de l'associé, Colloque sur l'impôt au décès, CCH, June 2013
- Sociétés en situation d'insolvabilité - Aspects fiscaux à considérer, Revue de l'APFF, vol. 32
- L’Article 55 et les réorganisations papillons, CCH, 2012
- Développements récents sur les sociétés associées (Recent developments concerning affiliated corporations), journées d’étues fiscaleds, CTF, June 9, 2011
- Conference on recent developments in Canadian case law concerning permanent establishments and the allocation of profits under tax agreements, International Association of Young Lawyers, Barcelona, February 2011
- Jurisprudence récente (Recent case law), Technical seminar, CTF, June 2008
- Acquisition d’entreprises canadiennes par des non-résidents, structures et considérations fiscales canadiennes (Acquisitions of Canadian businesses by non-residents, structures and Canadian tax considerations), Technical seminar, CTF, February 2008
- Règles sur les minimisations de pertes (Stop-loss rules), Technical seminar, CTF, March 2005
- Considérations fiscales relatives aux modes de rémunération pour les employés clés (Tax considerations relating to methods of compensating key employees), APFF, 2005 Annual convention
- Considérations fiscales relatives à l’introduction d’employés dans l’actionnariat (Tax considerations relating to employees becoming shareholders), APFF, 2004 Annual convention
- Aspects fiscaux relatifs aux conventions entre actionnaires (Tax aspects of shareholder agreements), APFF, 2002 Annual convention
- Retrait et arrivée d’un associé et dissolution d’une société de personnes (Withdrawals and arrivals of partners and dissolutions of partnerships), Revue de planification fiscale et successorale, Vol. 20, no 2, 1998
- Master’s Degree in taxation (M.Fisc.), Université de Sherbrooke, 1995
- Master of Laws (LL.M.), Université Laval, 1994
- LL.B., Université Laval, 1992
Boards and Professional Affiliations
- Canadian Tax Foundation (CTF)
- International Fiscal Association (IFA)
- Association de planification fiscale et financière (APFF)
The current crisis caused by the COVID-19 pandemic has already caused, and will continue to cause, significant liquidity problems for some businesses. Companies whose financial difficulties threaten their very existence will have to restructure in order to avoid bankruptcy, either by availing themselves of the protection of the Companies' Creditors Arrangement Act1 (the "CCAA") or by using the proposal mechanism of the Bankruptcy and Insolvency Act2 (the "BIA"). Tax considerations related to an arrangement or a proposal accepted by creditors Making use of the provisions of the CCAA or the BIA entails tax considerations for the debtor corporation that directors and owner-operators need to consider. Some of these tax considerations are discussed below. In the context of the restructuring of a debtor company, creditors may accept a partial settlement of their claim or a conversion of their claim into shares in the debtor company. If a corporation is not bankrupt within the meaning of the Bankruptcy and Insolvency Act, the settlement of a debt for an amount less than its principal will have tax consequences for the debtor corporation. For example, certain tax attributes of the debtor corporation such as the balance of loss carryforwards, the undepreciated portion of the capital cost of depreciable property or the adjusted cost base of capital assets will be reduced by the amount of the reduction in the receivable, if any. In certain cases, if the tax attributes of the debtor corporation are insufficient to absorb the amount of debt forgiven, inclusion in the calculation of its taxable income may occur, creating a tax liability. Several strategies can be adopted to limit undesirable consequences in the context of a restructuring under the Companies' Creditors Arrangement Act. As mentioned, it may be possible, among other things, to convert the debt into shares of the debtor company without causing adverse consequences, if the fair market value of the shares issued upon conversion of the debt is equal to the principal of the debt. In some cases, a debt held by a shareholder of the debtor company could be written off without consideration and without the need to issue shares. Finally, it may be possible, in certain situations, to avoid inclusion in the income of the debtor corporation through the use of certain reserve mechanisms or through tax deductions. Insolvency is a delicate situation for any business. Proper tax planning will allow the debtor company to maximize the effectiveness of the restructuring process offered by the CCAA. Our taxation team can help you set up effective planning in this context. R.S.C. 1985, c. C-36 and amendments R.S.C. 1985, c. B-3 and amendments
The sale of a business is often the most significant business transaction in an entrepreneur’s life. In addition, the net proceeds from such a sale often represent an entrepreneur’s only retirement fund. Therefore, it is crucial to maximize such proceeds by reducing or deferring the taxes resulting from the transaction as much as possible. The Canada Revenue Agency (“CRA”) recently reversed an administrative position that it had expressed in 2002 with respect to beneficial tax planning as part of the sale of a business. This change in its rather technical administrative position opens the door to very effective tax planning that offers real tax deferral opportunities to business owners wishing to sell their business. Consider the following example: Sale of 100% of shares to a third party without prior planning Ms. Tremblay wishes to sell 100% of the shares of her company (“Opco”) to a third party for their fair market value (“FMV”) of $10 million. These shares have an adjusted cost base of $1.00. Ms. Tremblay’s direct sale of 100% of Opco shares to a third party would result in a capital gain of approximately $10 million and total income taxes of approximately $2.7 million, assuming that her capital gain is not eligible for the capital gains exemption. In this scenario, Ms. Tremblay would be left with a sum of approximately $7.3 million after taxes. Sale of shares with the newly approved prior tax planning In the second scenario, prior to the sale to the third party, Ms. Tremblay would create a management company (“Gesco”) and transfer 50% of Opco shares to it on a rollover basis, with no immediate tax consequences. Gesco would then internally exchange Opco shares in order to realize a $5 million capital gain within Gesco, resulting in income taxes of approximately $1.26 million for Gesco, a portion of which would later be refunded through the use of a non-eligible refundable dividend tax on hand account. Subsequently, Ms. Tremblay would sell her remaining 50% of Opco shares to Gesco in two transactions of 25% each, both payable by a promissory note equal to the FMV of the shares—in our example, $2.5 million per transaction. Ms. Tremblay would then be deemed to have received two dividends of $2.5 million each. The first would be designated as a capital dividend by Gesco and would therefore be tax-free for Ms. Tremblay. The second would be designated as an ordinary (non-eligible) dividend, resulting in total income taxes of approximately $1.18 million for Ms. Tremblay. The designation of the second dividend as an ordinary dividend would result in a refundable dividend tax on hand for Gesco of approximately $766,000. Gesco, owning 100% of Opco shares having an adjusted cost base equal to their FMV, would sell them to a third party for a sum of $10 million, generating no additional capital gain within Gesco. By using the tax mechanisms of a capital dividend account and a non-eligible refundable dividend tax on hand account, the sale of Opco shares would result in total income taxes of approximately $1.67 million, split between Ms. Tremblay and Gesco. Ms. Tremblay would then be left with proceeds of $3.82 million after taxes, while Gesco would be left with $4.51 million after taxes. Given that Ms.Tremblay would keep funds within Gesco, she would be able to defer the time at which she would be taxed on them, that is, when Gesco would pay her a dividend. In the meantime, she could make investments through Gesco. This type of planning would result in a tax deferral of almost 38% of the income taxes that, without prior planning, would have been payable on the sale of the shares. Our taxation team will be happy to answer all your questions and advise you on the most appropriate tax planning for your business. The information and comments contained herein do not constitute legal advice. They are intended solely to enable readers, who assume full responsibility, to use them for their own purposes.
The COVID-19 crisis has significantly slowed economic activity in all respects. The area of corporate mergers and acquisitions is no exception, and the level of activity, which was high before the crisis, has dropped significantly because of it. It is difficult to predict when and at what pace such activity will resume, but we expect that, like many other sectors of the economy, this market will be different from what it was before the crisis. Among other things, we expect that the uncertainty regarding economic recovery will see vendors and purchasers increasingly rely on earnout clauses to reach agreements on the value of a business. Opportunities to obtain financing for the acquisition of a competitor or a complementary business are also likely to be limited, which will change how such transactions are financed. The new behaviours made necessary by the post-crisis economic environment will certainly have considerable fiscal impacts. The tax rules applicable to earnout clauses can be complex, and parties to such transactions should learn about them before signing a letter of intent for a potential transaction. Those wishing to sell could get an unpleasant surprise in terms of the net result of the sale of their business if they aren’t properly advised from the outset. In some cases, the sale of a business that would normally be expected to generate a capital gain with only 50% of such gain being included as taxable income could instead be 100% taxable as business income. Earnout clauses offer very interesting tax planning possibilities in some cases, such as the maximization of capital dividend accounts that corporations can use to pay tax-free dividends to their shareholders. The same care should be applied by those wishing to acquire or sell a business with regard to the different methods of financing transactions that are likely to become popular after the crisis, such as partial financing by the vendor. Poor tax planning in this regard could result in liquidity problems for vendors if payment of the balance of the sale price is spread out over too long a period. Purchasers will also want to maximize the tax benefits of this type of financing. The main way to do so involves banking on interest costs resulting from the financing of the purchase price, but to reap such benefits and others, the commercial agreements relating to the purchase must be carefully structured. Tax complexities are numerous in M&A transactions, and those mentioned above are just two examples. The tax incidence of such transactions should be analysed as soon as they are contemplated. Parties to M&A transactions often wait too long before analyzing tax aspects. They thus greatly limit their opportunities to benefit from optimal tax planning. For more information, our taxation team is available to help you.
On June 13, 2022, Resonetics announced the purchase of the entirety of the shares of Agile MV, a Montréal-based medical device design and development contract manufacturing company. The transaction was motivated by the quality of expertise that Agile MV's team of engineers, scientists, and technicians possess throughout the entire production cycle, from initial concept consolidation to mass production. Our partner, Audrey Gibeault, had the privilege of representing the company in this major transaction that involved complex tax planning, among other things. In business law, this transaction was led by our partner Étienne Brassard. Ms. Gibeault and Mr. Étienne Brassard were mainly assisted in this transaction by Gabrielle Ahélo. They were assisted by Luc Pariseau, Sonia Guérin, France Camille De Mers, Brittany Carson, Éric Gélinas, André Vautour, Michael Pageau, Maxime Chabot and Charles-Hugo Gagné. —Agile MV is a Quebec-based medical device design and development contract manufacturing company. It specializes in the development of minimally invasive diagnostic and therapeutic medical devices in the following areas: cardiac electrophysiology, interventional cardiology, interventional radiology, interventional pulmonology, interventional gastroenterology, interventional pain management and interventional neurology.Resonetics specializes in advanced engineering and manufacturing solutions for the life sciences industry, laser cutting, centerless grinding, nitinol processing, thin-wall stainless steel and precious metal tubing, photochemical machining, microfluidics, sensor solutions and medical energy.
On June 29, Chronometriq, a North American leader in healthcare management, announced its acquisition of Health Myself Innovations Inc. A Lavery team represented and advised Chronometriq to help them succeed in this acquisition, which will enrich their platform and service offering as well as contribute to the growth of their operations in the United States. Lavery supported Chronometriq for their Series A (financing by a Silicon Valley venture capital fund) and for their Series B (financing by a New York venture capital fund). It is a privilege for us to work towards the expansion of Chronometriq and to contribute to a fast-growing Quebec success story in the field of health technologies. To read the press release, click here.
On October 1, Chronometriq, a Montréal-based supplier of technology that facilitates healthcare access and patient communications, announced that it had received more than $20 million in funding from Full In Partners. This funding will enable our client Chronometriq to strengthen its leadership position in Canada and drive its growth in the United States. Lavery played a significant role in representing Chronometriq’s interests throughout this transaction and helped it take on the kinds of challenges high-growth startups face when negotiating major funding. Chronometriq, founded in 2012, was named one of the 25 most innovative companies by C2 Montréal. It is now a leader in digital healthcare management, thanks to its range of comprehensive appointment management products suited to both clinics and patients. In the past year alone, Chronometriq has served 12 million users through the network of North American clinics that use its products. This mandate was successfully completed thanks to the extensive expertise of the Lavery team led by Jean-François Maurice and made up of Éric Gélinas, Felicia-Yifan Jin, Ali El Haskouri, Tina Basile, Guillaume Laberge, Florence Fournier, Shereen Cook and Pierre-Olivier Valiquette.
On June 26, 2018, the QFL Solidarity Fund announced a $70 million investment in EBI, a leading Quebec and Canadian firm active in the integrated residual materials sector, including the collection and transport of waste matter, recyclables and residual materials, the transformation, recovery and disposal of residual materials as well as the production of natural gas. A Lavery client for the past two decades, EBI has been represented by the firm in connection with every legal aspect of this investment initiative. The Lavery team, spearheaded by André Paquette, with the assistance of Jacques Paul-Hus, was composed of Nadia Hanine (Mergers & Acquisitions), Éric Gélinas (Taxation), Pierre Denis (Financial Services), Audrey-Julie Dallaire (Environment), Carolle Vaudry and Isabelle Normand (Corporate).