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CONTENTS The 2014 Federal Budget Plan sounds the death knell for two family tax planning measures much appreciated by entrepreneurs and some professionals The Expert and the Court You signed a contract for services... with an employee? How to properly identify the relationship between the parties and what are the consequences of a wrong categorization ? Application of GAAR to a cross-border debt “clean-up” transaction: The Pièces Automobiles Lecavalier Inc. CaseTHE 2014 FEDERAL BUDGET PLAN SOUNDS THE DEATH KNELL FOR TWO FAMILY TAX PLANNING MEASURES MUCH APPRECIATED BY ENTREPRENEURS AND SOME PROFESSIONALSMartin BédardINCOME SPLITTING THROUGH A TRUST OR PARTNERSHIPFirst, the 2014 Federal Budget Plan (the “Budget”) ends the possibilities for splitting the income of trusts and partnerships in respect of business and rental income attributed to a minor child.Such income will henceforth be considered as being part of the split income of the trust or partnership and taxed at the marginal rate.As described in the Budget, the conditions of application of this new measure are as follows: the income is derived from a source that is a business or a rental property; and a person related to the minor is actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or has, in the case of a partnership, an interest in the partnership (whether held directly or through another partnership) The structures affected by these new measures could be used by professionals conducting their activities through a partnership of which their minor children or a trust established for their benefit were members. Such structures allowed for directly or indirectly allocating a portion of the income of the partnership to the minor child and thus benefit from progressive tax rates.As of 2014, the rules governing split income will apply to these structures, which will no longer offer a tax benefit. However, it is still possible to split such income with related persons who have reached the age of majority.POST-MORTEM INCOME SPLITTING: THE TESTAMENTARY TRUSTThe Budget also puts an end to the progressive tax rates applicable to a testamentary trust, a measure which was announced in the 2013 Federal Budget Plan.Up to now, testamentary trusts were allowing their beneficiaries to benefit from several progressive tax rates. Among the tax planning possibilities associated with the availability of such progressive tax rates were the use of numerous testamentary trusts, the postponement of the completion of the administration of an estate for tax purposes or the avoidance of the Old Age Security Recovery Tax.Testamentary trusts will henceforth be uniformly taxed at their marginal tax rates. However, progressive tax rates will remain applicable in the following two cases: (i) for the thirty-six (36) first months of an estate which is a testamentary trust and (ii) in the case of a trust whose beneficiaries are eligible for the federal disability tax credit.The Budget also provides that the tax year-end of testamentary trusts must henceforth be December 31 of each year starting December 31, 2015.These measures will apply to taxation years 2016 and following.THE EXPERT AND THE COURTDominique VallièresIn the context of litigation, lawyers frequently require the testimony of experts, particularly accountants. Well presented, this evidence may have a decisive influence on the outcome of a trial. In the contrary situation, a debate on the quality of the expert or the weight to be given to his or her testimony may occur. This is why we review in this bulletin the role, qualification and credibility of the expert.THE ROLE OF THE EXPERTThe role of the expert is to express an opinion based on his or her scientific, economic or other knowledge, which exceeds that of the judge and without which it is impossible to draw from the facts the correct conclusions. In other words, when the judge is able by himself to understand the facts and draw the correct inferences, an expert is neither necessary nor admissible. For example, the calculation of the gross profits from a contract, which only constitute a mathematical operation, will not require a particular expertise and an accountant called upon to testify on that matter will be at best considered as an ordinary witness. The role of the expert is to enlighten the Court in as objective or impartial a manner as possible.THE QUALIFICATION OF THE EXPERTTo express his or her opinion, the expert must first be recognized as such by the Court. The expert will therefore be first examined respecting his or her training and experience. If the expert qualification is contested, and the Court considers that the expert is insufficiently qualified, it may refuse to hear him or her. The qualifications of the expert must be related to the matters about which he or she testifies.The training of the witness and his or her practical experience, will be considered. Although either may be enough, a really convincing expert will generally have solid training and experience, failing which, even if the Court accepts to hear him or her, less weight may be given to his or her testimony.THE WEIGHT GIVEN TO HIS OR HER OPINIONAs is the case with any other witness, the Court will have to assess the credibility of the expert, particularly in the presence of contradictory opinions. The Court may review the seriousness of the steps taken by the experts. It will give more weight to the opinion of a witness who directly noted the facts and reviewed the data than to the opinion of another witness who only relied on what he or she has been told. A mostly theoretical opinion or an opinion which only describes principles will also be given less weight. It is important for the witness to explain why the particular facts of the case allow for drawing a particular conclusion. Furthermore, in the presence of diverging schools of thought on a particular item, the Court appreciates that the expert considers them and explains why one should be favoured over the other in the situation at hand. Dogmatism, the absence of justification and the out of hand dismissal of a recognized approach will also generally be negatively perceived.This is consistent with the very basis of the role of the expert, which is to impartially and objectively enlighten the Court. The Court will want to ensure that the expert keeps the required distance and independence to issue a credible opinion. If the Court perceives that the expert is taking sides or “pleads the case” of the party who retained his or her services, his or her credibility will suffer. Thus, even though it is admissible, the testimony of the expert and his or her conduct will be more closely scrutinized if it is demonstrated, for instance, that he or she is employed by a party or expressed in the past an opinion on similar issues.Although this situation is rarer, the Court could even refuse to hear the witness if it is convinced that he or she will be unable to be impartial. Such may be the case when the expert personally advocates in favour of the position defended by a party or the fact that he or she was personally involved in similar litigation. The animosity or the closeness which may exist between the expert and a party may also negatively affect the expert. In this respect, it is important for the expert to be transparent to the party who retains his or her services.CONCLUSIONThe really useful expert is the one whose conduct may be summarized by these three words: competence, thoroughness and objectivity.YOU SIGNED A CONTRACT FOR SERVICES… WITH AN EMPLOYEE? HOW TO PROPERLY IDENTIFY THE RELATIONSHIP BETWEEN THE PARTIES AND WHAT ARE THE CONSEQUENCES OF A WRONG CATEGORIZATION?Valérie Korozs and Martin BédardThe Court of Appeal of Québec recently issued an interesting decision on this subject in the Bermex international inc. v. L’Agence du revenu du Québec case1 (“Bermex”).It must be noted that regardless of the fact that the parties have described their agreement as a contract for services or an agreement with a self-employed person, a court is not in any way bound by such a description.The courts have developed certain criteria for analyzing the legal status of a person in order to determine whether that person is an employee or a self-employed person. Among these criteria, the relationship of subordination, that is, whether a person works under the direction or control of another person, has always been decisive.What about when a person is not, strictly speaking, “under the direction or control of another person”,2 due to the fact that he or she runs the business? This is the question the Court of Appeal had to answer in the Bermex case.The Court adopted a broad interpretation of the concept of the subordination relationship by considering the degree of integration of the worker into the company, a criterion derived from the common law.THE FACTSFollowing a tax audit of four companies, the Agence du revenu du Québec (the “Agency”) concluded that Mr. Darveau, their main director and officer, did not have the status of a self-employed person but rather that of an employee. Accordingly, the Agency was of the view that the management fees paid to Mr. Darveau had to be considered employment income and therefore, had to be included in the companies’ payroll.The four companies targeted challenged the Agency’s assessments before the Court of Québec but to no avail.THE DECISION OF THE COURT OF APPEALJust like the trial judge , the Court of Appeal concluded that the intent of the parties to enter into a service contract was not clear from the evidence in the case.The fact that Mr. Darveau was a shareholder of the appellant corporations allowed him some freedom of action, giving the impression that he acted as a self-employed person. It is not surprising that as an officer, Mr. Darveau managed his own schedule, work and compensation nor is it surprising that he was not under the direct supervision of another authority. This freedom resulted from his status as an officer and not from the contract for services upon which he was relying.The Court of Appeal placed a particular emphasis on the fact that it was the appellant companies who assumed all risk of loss and who profited from the activities: [translation] “Yet, a company does not assume the errors of an external consultant”.3 Mr. Darveau did not bring any [translation] “expertise requiring the intervention of an external person in an area that he knows better than anyone, he simply deals with the day-to-day problems of his companies, as he so acknowledges.”4CONCLUSIONAccording to the line of case law followed by the Court of Appeal in the Bermex case, one shall take criteria such as control, ownership of tools, expectation of profits and risks of loss, as well as integration into the company into consideration for the purpose of determining a person’s status as a self-employed individual or an employee.An erroneous categorization of the nature of the contract may have significant financial impacts on the company and the individual in question, both from a tax and labour law perspective. It is therefore essential to undertake a careful analysis of the true status of the person involved before the beginning of the contractual relationship._________________________________________1 2013 QCCA 1379.2 Article 2085 of the Civil Code of Québec.3 Para 59 of the Court of Appeal’s judgment.4 Para 60 of the Court of Appeal’s judgment.APPLICATION OF GAAR TO A CROSS-BORDER DEBT “CLEAN-UP” TRANSACTION: THE PIÈCES AUTOMOBILES LECAVALIER INC. CASE LAVERY, AN OVERVIEWÉric GélinasThe Tax Court of Canada recently rendered a decision dealing with the general antiavoidance rule (“GAAR”) in the context of the elimination of a cross-border debt between Greenleaf Canada Acquisitions Inc. (“Greenleaf”) and Ford US, its American parent company, prior to the sale of Greenleaf’s shares, who owed the debt, to a third party. In the case under review, Ford US subscribed for additional Greenleaf shares and Greenleaf used the proceeds from the subscription to repay its debt to Ford US.The purpose of the transactions in question was to avoid the application of section 80 of the Income Tax Act (“ITA”) upon the forgiveness of a portion of the debt. Without the debt repayment, the rules pertaining to debt parking contained in paragraphs 80.01(6) to (8) ITA would have resulted in the application of section 80 ITA in such a way as to reduce Greenleaf’s tax attributes and even add to its income the portion of the “forgiven amount” not being sheltered.The Minister of National Revenue (“Minister”) was of the view that GAAR applied to the “clean-up” transaction in such a way that Greenleaf had to realize a capital gain of $15 million on the forgiveness of the debt. Greenleaf’s tax attributes were accordingly reduced and certain adjustments to its taxable income were made pursuant to section 80 ITA.ANALYSIS OF THE COURTFrom the outset, the taxpayer acknowledged that the transactions provided it with a tax benefit, namely, the preservation of Greenleaf’s tax attributes through the avoidance of the provisions of section 80 ITA.As to whether these transactions constituted “avoidance transactions”, the taxpayer attempted, particularly through the testimony of the accounting expert, to prove that they had been carried out only for US tax and accounting purposes, and that they therefore had bona fide non-tax purposes and did not constitute avoidance transactions. The Court did not rely on this testimony because it constituted hearsay. Furthermore, the Court applied the negative inference doctrine since no representative of Ford US had testified and that the testimonies provided were deemed not to be credible.With respect to the issue of abuse, the Court agreed with the Minister’s argument to the effect that the “clean-up” transactions were abusive since they circumvented the purpose and spirit of section 80 ITA: if the debt had not been repaid using the proceeds from the subscription, the rules governing debt parking would have applied and Greenleaf’s tax attributes would have been reduced pursuant to section 80 ITA.CONCLUSIONThis decision is particularly important in a context of debt reorganization within a corporate group. The type of transactions discussed in the decision under review is frequently used. Practitioners will have to pay particular attention to the tax impact of such a transaction. When it is possible to do so, it will obviously be preferable to simply convert a debt into shares of the debtor corporation to the extent that paragraph 80(2)(g) ITA is applicable so that no forgiven amount will result from the conversion.

CONTENTS Part XII.2 Tax Applicable to Trusts: a Potentially Expensive Tax Whichis Often Overlooked Application of the Anti-avoidance Rule in Subsection 83(2.1): Caution Is Required in the Context of the Acquisition of a Private Corporation Revenu Québec to Scrutinize Trusts Directors’ Liability for the Debts of a Corporation Payable to Employees for Services Rendered During the Directors’ Term of Office  PART XII.2 TAX APPLICABLE TO TRUSTS: A POTENTIALLY EXPENSIVE TAX WHIChis OFTEN OVERLOOKEDLuc PariseauSeveral years after the creation of an inter vivos trust, the tax residence of one or several beneficiaries who were initially residents of Canada may change. For example, a beneficiary child may become a resident of the United States to study and possibly remain there, thus severing his or her residential ties with Canada. In such a case, Part XII.2 tax may apply1 to the trust whichis a resident of Canada since one or several of its beneficiaries have become non-residents of Canada under the Income Tax Act (“ITA”).The purpose of Part XII.2 tax in the ITA is to avoid situations whereby non-residents of Canada reduce their tax burden by holding assets or operating a business in Canada through a trust whichis a resident of Canada for tax purposes instead of directly holding the assets or operating the business. In fact, a non-resident who operates a business in Canada and later disposes of it and realizes a capital gain will be taxable in Canada at the same rate as a Canadian resident on his or her business income and on the capital gain thus realized. In the absence of the Part XII.2 tax, the non-resident could operate his or Part XII.2 tax applicable to trusts: a potentially exp ensive tax whic his often overlooked her business and hold the business assets through a trust resident in Canada to avoid being himself or herself liable for Part I tax.Where the conditions are met, Part XII.2 tax applies at the rate of 36%, most particularly on the income from a business operated in Canada earned by a trust, on income from real property located in Canada and on the taxable capital gains from the disposition of taxable Canadian property (“TCP”). A TCP includes, among other things, shares of private corporation to the extent that, during the 60 month period preceding the time of disposition, more than 50% of the fair market value of the shares is directly or indirectly attributable to real or immovable property located in Canada2. Thus, the presence of a non-resident beneficiary somewhat contaminates the trust resident in Canada because when the income earned by the trust is taxable under Part XII.2 of the ITA, the tax is payable irrespective of whether the income is attributed to a resident beneficiary or not3.Part XII.2 tax must be paid by the trust in the 90 days following the end of the fiscal year4. The beneficiaries who reside in Canada may generally claim a refundable tax credit representing Part XII.2 tax paid by the trust on the portion of income attributed to them. Thus, Canadian beneficiaries should generally not be penalized for the Part XII.2 tax paid by the trust. However, since the trust must first pay the Part XII.2 tax and the Canadian beneficiaries can only claim a refundable tax credit in their own tax return several months later, Part XII.2 tax may result in certain cash flow difficulties. As for the non-resident beneficiaries, Part XII.2 tax may represent a net cost if the non-resident beneficiary resides in a foreign country which taxes the income attributed by the trust residing in Canada without providing foreign tax credits or other mechanisms to enable taxpayers to avoid double taxation.Some planning may be considered when it is anticipated that the beneficiary of a trust will become a non-resident of Canada in order to reduce or avoid Part XII.2 tax. In such situation, it is important to consult a tax advisor to assess the choices that could be made._________________________________________   1 Part XII.2 tax may apply in other situations which are not covered in this bulletin.  2 Under the ITA, a gain from the disposition of real or immovable property located in Canada or Canadian resource property also constitute a TCP. Timber resource property and in certain circumstances, shares of the share capital of a corporation listed on a designated stock exchange may also be considered as TCP.  3 The expression “beneficiary” not being defined in the ITA, some issues may be raised as to the status as a beneficiary of a non-resident person who does not receive any income or capital from the trust in a given fiscal year.  4 Paragraph 104(30) ITA also provides that Part XII.2 tax paid by a trust for a fiscal year must be deducted from its income for the year.  APPLICATION OF THE ANTI-AVOIDANCE RULE IN SUBSECTION 83(2.1): CAUTION IS REQUIRED IN THE CONTEXT OF THE ACQUISITION OF A PRIVATE CORPORATION Éric GélinasMost accountants and lawyers are aware of the fact that a private corporation can pay dividends to its shareholders with no tax impact on them if the dividends are paid out of the capital dividend account (“CDA”). This tax account may consist, among other things, of the nontaxable portion of capital gains realized by a private corporation, life insurance proceeds received by this type of corporation, or capital dividends received from another private corporation. The purpose of the CDA is essentially to ensure that these amounts, which would not be taxable if they were received by the shareholder directly, are treated in the same manner when they are realized through a private corporation. The CDA is therefore a very valuable mechanism because of the favourable tax treatment attached to it.Subsection 83(2.1) of the Income Tax Act (Canada) (“ITA”) provides for an anti-avoidance rule whose purpose is to prevent the shares of a private corporation from being purchased in order to benefit from the available CDA. It reads as follows:(2.1) Notwithstanding subsection 83(2), where a dividend that, but for this subsection, would be a capital dividend is paid on a share of the capital stock of a corporation and the share (or another share for which the share was substituted) was acquired by its holder in a transaction or as part of a series of transactions one of the main purposes of which was to receive the dividend,(a) the dividend shall, for the purposes of this Act (other than for the purposes of Part III and computing the capital dividend account of the corporation), be deemed to be received by the shareholder and paid by the corporation as a taxable dividend and not as a capital dividend; and(b) paragraph 83(2)(b) does not apply in respect of the dividend.In a recent decision in the matter of Groupe Honco Inc. et al. v. The Queen (fi le no. 2009- 2134 (IT)G), rendered on September 4, 2012, the Tax Court of Canada specifi cally considered subsection 83(2.1) ITA. The Court held that subsection 83(2.1) ITA applies in a situation in which the shares of a corporation (the “Target”) were acquired where the Target was the beneficiary of an insurance policy in the amount of $750,000 on the life of the seller, who was very sick at the time of sale of the shares. Since the seller died shortly after the transaction, the insurance proceeds were received by the Target after the acquisition, thereby creating a significant CDA for the Target. Dividends from the CDA, thus created, were subsequently paid by the Target (since merged) to its shareholders. These dividends were redefi ned as taxable dividends by the Canada Revenue Agency on the basis of subsection 83(2.1) ITA.The taxpayers unsuccessfully attempted to argue that the main purpose for the acquisition of the Target’s shares was not to receive the capital dividends, but rather that it was done for other business and tax reasons (e.g. to benefit from the Target’s accumulated losses).However, the Court concluded that subsection 83(2.1) ITA applied and, accordingly, that the dividends paid were in fact taxable dividends.This decision underscores the importance of considering the potential application of subsection 83(2.1) ITA in any situation involving the acquisition of a private corporation in which a CDA remains unused or may be created subsequent to the acquisition.  REVENU QUÉBEC TO SCRUTINIZE TRUSTSDiana DarilusThe Government of Quebec recently decided to give Revenu Québec new tools so that it can ensure that trusts having operations or rental properties in Quebec are in compliance with the tax legislation. In Quebec’s last budget tabled on November 20, 2012, the Quebec government announced amendments designed to require certain trusts that are subject to Quebec tax to file a tax or information return (hereinafter referred to as the “New Rules”). These changes will apply to taxation years starting after November 20, 2012.The New Rules will require certain trusts subject to Quebec tax to file a tax return in three new situations and an information return in one new situation.However, some types of trusts are excluded from the application of the New Rules, for example, estates and testamentary trusts residing in Quebec on the last day of their taxation year if the total of the cost amounts of their property for the entire taxation year of the trust is less than $1 million.CHANGES TO THE FILING OF TAX RETURNSAllocation of income to a beneficiary whether resident or not resident in QuebecWhere a trust subject to Quebec tax for a taxation year deducts an amount allocated to a non-resident beneficiary in the calculation of its income for the taxation year, it must now file a tax return for that taxation year. Previously, it was only required to do so where the amount was allocated to an individual resident in Quebec or a corporation with an establishment there.Thus, where a trust resident in Quebec allocates its income to beneficiaries not resident in Quebec, it must henceforth file a tax return even if it has no tax to pay, realizes no capital gains, and does not dispose of any capital property during the taxation year.Trust resident in Quebec owning property the total of whose cost amounts exceeds $250,000A trust subject to Quebec tax must henceforth file a tax return if it resides in Quebec on the last day of the taxation year and it owns property, at any time during the taxation year, the total of whose cost amounts exceeds $250,000.Trust not resident in Quebec owning business property the total of whose cost amounts exceeds $250,000A trust subject to Quebec tax must henceforth file a tax return if it does not reside in Quebec on the last day of the taxation year and it owns property, at any time during the taxation year, which it uses to carry on a business in Quebec the total of whose cost amounts exceeds $250,000.CHANGES TO THE FILING OF INFORMATION RETURNSTrust resident in Canada outside Quebec holding a rental property in QuebecFrom now on, a trust residing in Canada outside Quebec which owns a rental property1 located in Quebec, or whichis a member of a partnership2 that owns such a property, must file an information return.For example, a trust residing in Canada outside Quebec which receives passive property income (as opposed to business income) from a rental property located in Quebec must henceforth file an information return in Quebec.The New Rules impose additional obligations on certain trusts that were not previously required to file a tax return or information return. The failure to comply with these New Rules may result in the imposition of penalties and interest._________________________________________   1 The New Rules use the expression “specifi ed immovable property” which means an immovable property located in Quebec (or a right in such immovable property) that is used mainly for the purposes of earning or producing gross revenue that constitutes rent.  2 These New Rules also apply to a trust that is a member of a partnership that itself is a member, directly or indirectly, through one or more other partnerships, of a partnership that owns a specifi ed immovable property.  DIRECTORS’ LIABILITY FOR THE DEBTS OF A CORPORATION PAYABLE TO EMPLOYEES FOR SERVICES RENDERED DURING THE DIRECTORS’ TERM OF OFFICE Catherine MéthotThe Quebec Court of Appeal rendered a decision on November 14, 2012 confi rming the state of the law on the scope of section 119 of the Canada Business Corporations Act (the “CBCA”), which provides as follows: “Directors of a corporation are jointly and severally, or solidarily, liable to employees of the corporation for all debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are such directors respectively.” (my emphasis)In this case, Justice Dalphond found from the evidence that the three respondents, Myhill, Cochrane and Lilge, were not only the elected directors in accordance with the resolutions and records of Société Inter-Canadien (1991) Inc. (“Inter”) until their collective resignation in May or June 1999, but also that they had in fact behaved as Inter’s directors, despite the existence of a declaration by Inter’s sole shareholder divesting them of their powers. Inter terminated its operations on October 27, 1999 and declared bankruptcy on March 27, 2000. Inter’s employees claimed several million dollars in unpaid wages by Inter from the directors under section 119 CBCA.Justice Dalphond noted that section 119 CBCA, [translation] “which enacts a liability exceeding that ordinarily prescribed by the law, without proof of fault, must by its nature be interpreted narrowly [as the case law has consistently held].” The debts payable by a corporation for services performed by the employees on its behalf during the term of office of a director constitute the promised, but unpaid, consideration for the work done during the director’s term of office. This includes wages, the reimbursement of expenses incurred, and any amount earned as a result of the services rendered by the employee whose payment was deferred, such as vacation pay. On the other hand, the debts payable for services performed by the employees on behalf of the corporation do not include all the debts borne by a corporation in relation to its employees.Thus, Justice Dalphond found that the directors could not be held liable for: (i) claims for medical expenses due to the employer’s failure to pay the premiums to the insurers, (ii) pay in lieu of notice for the termination of employment under collective agreements because such pay constituted damages for wrongful breach of employment, and (iii) 40 weeks of severance pay claimed by the employees because this was not a form of deferred compensation, but a guarantee of employment security. However, the judge did find the directors liable for deductions made by the corporation out of the employees’ wages for contributions to the group insurance and for the purchase of bonds, which had not been paid to third parties in accordance with the employees’ instructions, because these amounts were still owed by Inter to the employees as a form of unpaid wages.Justice Dalphond therefore recognized the employees’ right to claim the compensation referred to above jointly and severally from the directors [translation] “if unpaid at the time the actions were instituted, not exceeding an amount equal to six months gross wages per employee”. This was in addition to the amounts that were not contested in the case, namely, back wages, unpaid wage increases, unpaid overtime, unreimbursed expenses, vacation pay, holiday pay and sick leave credits.

The Application for Rectification by the Court Is Not a Cure for all Ills: Prevention is Better than (Attempting!) a Cure Register your Trade-marks! The Importance of Having a Detailed Power of Attorney in the Event of a Person’s Incapacity Effect of a Unanimous Shareholders’ Agreement on CCPC Status

The Trust : An Efficient Asset Protection Tool? Amendments to the Obligations of Employers Hiring Foreign Workers – One Year Later: Are you Ready for Service Canada’s Verification? Did you Know? Trustee’s Tax Liability

Defined Benefit Pension Plans : The Temporary Funding Relief Measures will Likely be Extended! A New Statutory Framework for Federal Not-for-profit Organizations Conversion of Debt into Shares by a Corporation in Financial Difficulty; Pay Attention to the Tax Consequences Conflicting Rights of Hypothecary Creditors and Tenants