Taxation

Overview

We represent Canadian and international companies and their owners in many different sectors, offering a full range of services that include developing and implementing beneficial tax structures and strategies, representing clients in court, and negotiating settlements with the tax authorities.

Our team of tax lawyers will find ingenious ways to optimize your investments while reducing your tax expenses. 

Services

  • Tax planning for Canadian residents and non-residents, including the creation and organization of companies, partnerships, joint ventures, and trusts in Canada and internationally
  • Taxation of public and private financings and financial products
  • Taxation of the purchase and sale of businesses (assets or shares)
  • Tax considerations of technology transfers and maximization of R&D tax credits
  • Advance rulings on tax issues from federal and provincial authorities
  • Tax considerations of real estate projects
  • Interpreting income tax treaties
  • Representation before federal and provincial tax authorities, administrative tribunals, and courts
  • Interpretation and opinions concerning income tax as well as the GST, HST and QST
  • Tax aspects of pension plans and benefit plans
  • Development of international structures and strategies for importers and exporters of goods and services
  • Mining taxes
  • Testamentary trusts and post-mortem estate planning
  • Domestic and international trusts
  • Tax-exempt organizations
  1. U.S. Tariffs Announcement: Repercussions and Trade Strategies for Our Quebec Businesses

    Nearly four years after the coming into force of the Canada-United States-Mexico Agreement (“CUSMA” or the “Agreement”), U.S. President-elect Donald Trump announced on November 25 that he intends to implement a 25% tariff on all products entering the United States from Canada and Mexico, starting on the first day of his presidency, January 20. Donald Trump indicated that this tariff will remain in place until Canada and Mexico bolster their border policies, which he believes are responsible for the increase in illegal immigration and the trafficking of devastating drugs in the United States. As a reminder, CUSMA currently provides for tariff-free access to U.S. markets as far as most Canadian and Quebec products are concerned. Hence, although these still remain speculations, and no details were provided by the president-elect concerning this aspect in his announcement, several legislative authorities appear to exist on which his future administration could rely to implement such a measure. It could, among other things, invoke the essential security interests exception in CUSMA, which allows a party to the Agreement to apply any measure that it considers necessary with respect to the protection of its own essential security interests, the national security exception contained in the Trade Expansion Act of 1962, on which President Trump’s first administration had based itself in 2018 to introduce tariffs on U.S. imports of certain steel and aluminum products, or the provisions of the National Emergencies Act. The announcement sent shockwaves through the political and business communities in Canada and Quebec — and understandably so, given the close commercial ties the United States has with Canada, including Quebec. Indeed, alone in the first quarter of 2024, Quebec’s merchandise exports to the United States totalled C$21.2 billion, representing nearly 74.6% of the province’s international merchandise exports, making the United States Quebec’s main trading partner worldwide. Thus, the imposition of a 25% tariff would have a considerable impact on our businesses, which depend heavily on the U.S. market to export their products, which products would be made less competitive on that market. Such a measure could be particularly detrimental to the Canadian forestry industry, softwood lumber already being hit hard by tariffs of nearly 15% as it is. The impact of this protectionist tariff on the U.S. economy would also be considerable. While in the short term it could benefit certain domestic manufacturers and producers, in the longer term it would be likely to harm the U.S. economy as a whole due to higher input costs for many U.S. manufacturers and the disruption of established supply chains, notably in the automotive and steel industries. Hence, to maintain their profitability, many U.S. businesses could be forced to pass on these additional costs to their end consumers by raising the price of their products, which would undeniably lead to another wave of inflation, not to mention the potential retaliatory measures that the Canadian government might want to put in place in response to such a tariff and which could affect certain spheres of the U.S. economy. Although dispute resolution mechanisms are provided for in CUSMA, they are unlikely in the short term to lessen the potential impact of the measures being considered by the Trump administration, as a final decision under these mechanisms can take a long time. The November 25 announcement could also serve as a lever for the new U.S. administration in future negotiations on the renewal of CUSMA, for which preparatory discussions will begin next year, or in negotiations for a separate free trade agreement between the United States and Canada that would exclude Mexico. Canadian businesses would also be well advised to encourage the various trade associations they are members of to undertake lobbying efforts both with U.S. decision-makers and with their corporate customers in the United States in order to expose the adverse impacts that the announced tariff is likely to have on U.S. businesses. Pending a more detailed announcement, including as concerns any specific tariff exemptions, businesses should pay extra attention to their choice of future trading partners. In an increasingly protectionist global economic context, a trading partner diversification strategy is the best defence a business can have to mitigate the risks associated with a particular country’s tariff policies. The Comprehensive Economic and Trade Agreement signed by Canada and the European Union in 2017 — in the negotiation of which our firm was involved — may prove an interesting solution in this regard. Our team of professionals in commercial and tax law is available to help you navigate the issues raised by this announcement. We will put our expertise at your service to support you in your commercial negotiations and develop strategies designed to mitigate the impact that the announced tariff increase could have on your business.  

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  2. Financing Quebec’s Energy Transition: Unlocking the Potential of Flow-Through Shares

    Quebec has set ambitious energy transition and industrial decarbonization targets. The shift to greener practices has to be taken in a context where our energy consumption could rapidly grow under the combined effect of a number of factors, such as the reindustrialization of our economy, population growth, transport electrification and the potential for artificial intelligence to consume vast amounts of energy. Investing in the development of energy infrastructure is therefore critically important, as an abundance of energy is key to economic prosperity. The problem is that public finances are already stretched to the limit with the need to renovate our aging infrastructure, among other things. Encouraging private equity investment is thus vital, and tax incentives can be very effective in this respect. The American example In 2022, the United States passed its Inflation Reduction Act (IRA), with the goal of stimulating investment in the renewable energy sector, in particular. More specifically, the IRA altered or created a number of tax credits to encourage private investment.1 Over the past two years, US businesses have announced a total of almost US$276 billion in new investments in clean energy generation and the capturing or elimination of carbon dioxide and other forms of industrial decarbonization, an increase of 34% on the two years previous.2 The IRA is effective in that it takes the respective situations of various energy sector stakeholders into account in a creative, flexible and pragmatic way, especially where taxation is involved. Energy project promoters often have to wait many years for their projects to generate income and profits, even though the banks and other investment funds they solicit financing from can be presumed to be operating profitable businesses. The tax losses that occur in the years during which such projects are designed and built are therefore of little interest to developers, but of immediate interest to investors. And so, a tax equity market has emerged, in which businesses subject to taxes can invest in the shares of entities set up to develop such projects so as to benefit from tax credits and faster depreciation. Typically, the entity that cashes in the investment and develops the project distributes 99% of income, losses and tax credits to investors until a predetermined return is achieved. Once that return is achieved, the investor’s share of the benefits decreases, and the developer has the option of buying out the investor’s residual share. The IRA has transformed how federal clean energy tax credits are monetized, and it is now possible to buy and sell such credits without having to make a long-term investment. For businesses, this new way of doing things is an additional and attractive way to participate in the growing tax credit market.3 In 2023, the volume of the tax equity market for American projects was around US$20 to 21 billion, up about US$18 billion from the previous year.4 It appears that the trend will continue. It is estimated that the value of the current market, which is particularly attractive to banks, is set to double to US$50 billion a year by 2025.5 The equivalent of flow-through shares The Quebec and Canadian tax deductions mechanism that most closely resembles the US tax equity market is probably flow-through shares. Through these, businesses in the mining and renewable energy sectors can transfer their mining exploration expenses and other expenses—specifically designated as eligible—to investors, who can then deduct them from their own taxable incomes.6 These businesses can thus issue shares at a higher price than they would receive for common shares to finance their exploration and development operations. Investors are willing to pay a higher price in return for the tax deductions afforded by the eligible expenses incurred by the issuing businesses, which can amount to a maximum of 120% of the equity invested in the shares.7 Investors can also claim a 15% or 30% federal tax credit. However, because tax incentives cannot be transferred, our mechanism is more rigid than the American one, and it can only be applied to mineral exploration and development expenses and certain specific expenditures related to renewable energy and energy conservation projects, such as electricity generation using renewable sources like wind, solar energy and geothermal energy.8 With ambition and innovation comes the need to take action Quebec could draw inspiration from the IRA to increase the attractiveness of flow-through shares and broaden their scope of application, thereby creating a new tool to finance the energy transition. The renewable energy sector is similar to the mining sector in many respects, not least in terms of the considerable amount of capital required to build the infrastructure needed to operate a mine or energy generation facility. The flow-through share mechanism, which is well-established and popular with investors,9 could be just as successful in our energy transition context. Making such incentives easier to transfer would also drive the emergence of a market similar to the US tax equity market. A number of Québec flagship companies, such as Hydro-Québec,10 Innergex11 and Boralex,12 are also very ambitious when it comes to developing large-scale energy projects. They face major financing challenges, as do those in the industrial decarbonization and infrastructure renewal sectors. Innovation is necessary to meet these challenges and make the transition to a more sustainable, but just as prosperous, world, and to do so in good time.13 Link Rhodium Group and MIT’s Center for Energy and Environmental Policy Research (CEEPR), Clean Investment Monitor, link Brandon Hill, How to take advantage of tax credit transferability though the Inflation Reduction Act, Thomson Reuters Institute, April 16, 2024, link Allison Good, Renewables project finance to keep pace in 2024, but tax equity rule looms, S&P Global, January 12, 2024, link Lesley Hunter and Mason Vliet, The Risk Profile of Renewable Energy Tax Equity Investments, American Council on Renewable Energy, December 2023, link Link, page in French only Link Link Prospectors & Developers Association of Canada, Flow-through shares & the mineral exploration tax credit explained, link Link Link Link The authors would like to acknowledge the participation and the work done by Sophie Poirier in this publication

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  3. New rules will make it easier to transfer family businesses

    The 2023 Federal Budget (the “Budget”), tabled on March 28, 2023, proposes amendments to certain provisions of the Income Tax Act (ITA) that would make “genuine” intergenerational business transfers no longer subject to the anti-avoidance rules of section 84.1 and allow the transferor to benefit from their capital gains exemption. To do so, the Budget establishes new general conditions that the parties must meet, as well as specific conditions that apply to “immediate” transfers, or those made over a period of no more than 36 months, and “gradual” transfers, or those that take five to ten years to complete. The general conditions that the parties must meet when disposing of a company may be summarized as follows: The vendor must be an individual other than a trust. Immediately prior to the transfer, the vendor, alone or with their spouse, must control the currently operating company. At the time of the transfer, the purchasing company must be controlled by one or more of the vendor’s children, who must be at least 18 years of age. The notion of “child” also includes stepchildren, grandchildren and nieces and nephews. The shares of the company being transferred must be qualified small business corporation (QSBC) shares or shares of the capital stock of a family-farm or family-fishing corporation (QFFP). The specific conditions relate to the transfer of control, economic interests and management of the company, and vary from case to case. FOR AN IMMEDIATE TRANSFER (36-MONTH TEST) In the case of immediate transfers, de jure control (being the holding of the majority of shares having voting rights), and de facto control (which includes the economic influence making effective control of the company likely), must be transferred at the time of sale. Voting and participating shares not transferred to the purchasing company at the time of sale must be transferred within the following 36 months, such that after this period, the transferor may hold only preferred shares, that is, non-voting or non-participating shares for an indefinite period (vs 10 years in the case of a gradual transfer). Also, the child, or at least one member of the group of children, must participate in the family business on a regular, significant and continuous basis for a minimum period of at least 36 months after the transfer is made. Lastly, the transferor must take reasonable steps to transfer the business’s administration and know-how and completely cease to manage the business before the 36th month after the transfer was made. FOR A GRADUAL TRANSFER (FIVE–TO–TEN–YEAR TEST) If the transfer is gradual, only de jure control must be transferred at the time of disposition. The balance of the voting and participating shares not transferred at the time of disposition must be transferred within 36 months of the first transfer. However, under the rules respecting gradual transfers, the transferor will only be bound to transfer de facto control of the business within 10 years of the initial transfer. In the case of a transfer of economic interests, the vendor is expected to significantly reduce the value of the equity and advance they have invested in the business within 10 years of the initial sale. The same requirement for a child’s active participation in the company and transfer of the management of the business apply, but this time for a period of 60 months after acquisition. PREVIOUS RULES (Bill C-208) The provisions of the 2023 Federal Budget have the effect of setting aside certain requirements of Bill C-208 applicable to the realization of a capital gain. Under Bill C-208, for the transferor to benefit from their capital gains exemption, the operating company and the purchasing company could not be amalgamated within 60 months of the sale. The bill also required that an independent assessment of the fair market value of the company’s shares be filed with the Canada Revenue Agency, along with an affidavit signed by the vendor. However, as of January 1, 2024, these criteria are no longer applicable. An assessment will no longer be required, although under section 69 of the ITA, the transfer will still have to be made at fair market value. The 2023 budget (reinforced by the 2024 Federal Budget) also introduces new rules for the alternative minimum tax, a temporary tax that the transferor in an intergenerational business transfer often has to pay. To avoid having this temporary tax becoming permanent, it’s important to understand the subtleties of these new rules. Our team of tax professionals will be happy to help you and answer any questions you may have about these new legislative changes.

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  4. Tax opportunities under the Indian Act

    Although it is not often well-understood in business and tax circles, the Indian Act (the “Act”), coupled with federal and provincial tax laws, provides several tax planning opportunities for Indigenous taxpayers. These laws provide various tax exemptions for people who qualify as “Indians” under the Act, as well as for “bands” and other “councils.” These terms are defined in the Act and require case-by-case analysis, but essentially they refer to people of Indigenous origin who have at least one family member who is registered or entitled to be registered as an Indian within the meaning of the Act. The criteria for a tax exemption In particular, those who qualify can benefit from a tax exemption when income is earned on a “reserve.” There are several criteria to be met, and although the Canada Revenue Agency (“CRA”) has issued guidelines on the subject, their application remains a question of fact that varies depending on the particular circumstances applicable to each taxpayer. In general, the CRA requires that income earned by an “Indian” within the meaning of the Act be sufficiently connected to a reserve to be exempt. This is the case when, for example, income-generating services are performed entirely or almost entirely within the territory of a reserve, when the employer and the employee reside on a reserve, or when income is derived from non-commercial activities carried out by a band. Business income can also be tax-exempt, but the criteria for being considered connected to a reserve are stricter, since generally only income-generating activities situated on a reserve will be tax-exempt. However, it is still possible to organize the affairs of a taxpayer and their corporate entities to ensure that these criteria are met, or to highlight certain connecting factors. Such planning, if done properly, is entirely legitimate and can result in significant tax savings. In a recent interpretation (CRA Views 2022-0932231I7), the CRA illustrated this principle by considering employment income related to an off-reserve airport to be exempt, even if none of the guidelines are followed, in cases where such an airport is necessary to supply a reserve that has no other means of transportation and delivery. This interpretation shows that the connection between an income and a reserve is not established solely by the physical presence of the income-generating business, and that several other arguments, sometimes more subtle, can be used to support the connection between an income and a reserve.  A few nuances to consider However, care must be taken when a company is incorporated by someone who qualifies as an “Indian.” A company with its head office on a reserve cannot qualify as “Indian” within the meaning of the Act. Its income therefore cannot be tax-exempt, and will be taxed according to the usual rules. Despite this, certain plans can ease the tax burden on these companies and on shareholders who qualify as “Indians” under the Act, such as paying wages and bonuses to an employee shareholder. But it’s essential to carefully analyze the various pitfalls and risks that such planning entails. Furthermore, certain exemptions exist for companies formed by bands, but the eligibility criteria are strict and require a thorough analysis of the proposed structure. In addition to the income tax exemption, “Indians” within the meaning of the Act and certain entities mandated by bands may benefit from a tax exemption when they purchase goods on a reserve or have goods delivered to them on a reserve. Different exceptions and nuances apply. However, companies headquartered on a reserve are not exempt from their tax collection obligations and may be required to register for the GST/QST. To help you understand these rules and ensure optimal tax planning, we invite you to consult our tax team. We look forward to working with you on your business projects.

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  1. Five new members join Lavery’s ranks

    Lavery is delighted to welcome Julien Ducharme, Jessyca Duval, Anyssa Lacoste, Chloé Béland and Anne-Sophie Paquet.    Julien Ducharme – Senior Associate  Julien Ducharme joins our Business Law team on September 3.  His practice focuses primarily on mergers and acquisitions, corporate law, commercial law and corporate financing. In this role, Julien represents and assists small and medium-sized enterprises (SMEs), multinational corporations and institutional investors in connection with diversified commercial operations and large-scale business projects.  “With a team comprised of individuals as experienced in their respective fields as they are driven by human and professional values essential to creating a stimulating work environment conductive of surpassing oneself, my return to Lavery after several years abroad was a natural decision. I look forward to contributing concretely to the success of businesses operating in Quebec as their trusted business partner.”    Jessyca Duval – Senior Associate  Jessyca joins our Labour and Employment Law group and the Litigation group.    As part of her practice, she advises employers on all legal aspects relating to human resources management and matters relating to occupational injury, in addition to representing employers before various administrative tribunals and ordinary courts of law.  “I decided to join Lavery's team for their passionate and dedicated professionals, whose recognized skills and commitment make every collaboration not only rewarding, but genuinely enjoyable.”    Chloé Béland - Associate  Chloé is a member of the Labour and Employment Law group.   She advises employers on hiring and terminating employees, developing and implementing employment-related policies, psychological harassment, human rights, occupational health and safety, and labour standards.  “In my opinion, Lavery not only embodies innovation, expertise and excellence in the legal field, but is also a Quebec success story. Lavery deeply values team spirit and collaboration, which are essential values for delivering quality legal services and meeting high client expectations.  The diversity of labour and employment law cases was also a key factor in attracting me to Lavery. I’ll be able to continue growing my skills and developing creative solutions to complex challenges at Lavery, while taking a human-centred approach.  But what really convinced me to join Lavery were the passionate and inspiring lawyers I had the pleasure of meeting. Their warm, human approach resonates perfectly with my values. The friendly conversations I had reinforced my conviction that I’ll feel at home in this team.”    Anyssa Lacoste – Associate  Anyssa is a member of the Labour and Employment Law group.  She supports and represents her clients in a wide range of expertise, from drafting employment contracts to administrative recourses, implementing work policies and regulations and amending working conditions.  “I decided to join Lavery because of the firm’s reputation and expertise. Right from the start, I felt the firm had the values I was looking for in an employer. I am convinced that Lavery will contribute to my professional and personal development.”    Anne-Sophie Paquet - Associate  Anne-Sophie Paquet is a lawyer practising in the Business Law group and a member of the firm’s tax law team.   She advises and supports her clients in the planning, analysis and implementation of tax structures and strategies, in particular for business transactions.  “I chose to join Lavery because of the excellence of its team and because I was looking for a dynamic work environment that fostered collaboration. Joining the firm gives me the opportunity to support a diverse clientele in achieving their goals.” 

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  2. Lavery involved in the construction of the new Île-aux-Tourtes bridge

    Following a qualification process, the Ministère des Transports et de la Mobilité durable du Québec (MTMD) issued a call for tenders in 2022 for the construction of the new Île-aux-Tourtes bridge pursuant to the project delivery method known as design-build-finance (DBF). Since this was a DBF, the financing of this project had to be included in the proposals made by the selected candidates. Lavery represented the successful consortium made up of Dragados Canada Inc., Roxboro Excavation Inc. and Construction Demathieu & Bard Inc. Our role required expertise in the following areas: (a)   Governance and corporate law  (b)  Project financing (banking and securities)  (c)   Public procurement (d)  Construction law (e)   Commercial agreements (f)    Taxation  Lavery represented the consortium from the call for proposals to the financial close, including the drafting phase leading up to the awarding of the contract to the consortium. The financing was the most complex part of this transaction. Under the hybrid approach retained for that project, a major credit facility to be granted by a bank syndicate had to be set up, as well the private placement of two tranches of bonds. This involved adjusting the rights and obligations of creditors on both sides within a sophisticated intercreditor agreement. The financing also required parent company guarantees, including from French and Spanish corporations, which required us to find common ground to accommodate the typical requirements of a North American financing and the specific corporate and commercial features applicable in France and Spain. To meet this challenge, we put together a multidisciplinary team, divided up the work in accordance with our professionals’ diverse expertises, and dedicated a team member exclusively to interactions with the MTMD, its lawyers and the issuers of performance bonds typical for this kind of projects. Sound project management practices were essential to the success of this team effort. It is a privilege for Lavery to have participated in this essential project allowing the people of Quebec to obtain a new bridge linking the regions of Montérégie and Montréal. The Lavery team was led by Josianne Beaudry, Nicolas Gagnon, Édith Jacques, David Tournier and André Vautour, and included Véronik Bonneville-Pesant, Katerina Kostopoulos, Jean-François Maurice, Joseph Gualdieri, Siddhartha Borissov-Beausoleil, Alexandre Turcotte, Luc Pariseau, Charles Hugo Gagné, Mickaël Pageau, Jean-Vincent Prévost-Bérubé and Yohann Lévy.

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