Publications

Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.

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  • Tax Aspects of Insolvency and Bankruptcy

    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

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  • Time limit extensions: What are the possible consequences on limitation periods for tax purposes?

    A recent Ministerial Order1 from the Minister of National Revenue has formally extended certain deadlines under the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”). The Order is retroactive to March 13, 2020. The extension is 6 months or until December 31, 2020, whichever is earlier. This Ministerial Order will have various implications for taxpayers and registrants, in particular in terms of limitation periods. For example, notices of reassessment may be issued until December 31, 2020, for taxpayers whose reassessment period under the ITA expired between May 20, 2020, and December 30, 2020, even in circumstances where there is no misrepresentations attributable to negligence, carelessness or wilful default in tax returns and no waivers of the regular reassessment period have been signed. As a result, the taxation years subject to the Order (in particular 2016 or 2017, depending on the taxpayer) and reporting periods would not be statute-barred in these circumstances. Reporting periods and taxation years that became statute-barred on or before May 19, 2020, are not subject to the Order. It remains to be seen how the Canada Revenue Agency (“CRA”) intends to apply the Ministerial Order. The CRA has stated that “generally, taxpayers would be informed of the details of a potential (re)assessment, including whether or not the CRA is applying an extension to a (re)assessment period under the Ministerial Order.”2 Time limits extended by 6 months The period for claiming SR&ED expenditures (Form T661), normally 12 months after the corporation’s filing due date for a return;3 The period for claiming an SR&ED investment tax credit (Form T661 and Schedule 31 or Form T2038), normally 1 year after the corporation’s filing due date for a return; The normal reassessment period for a taxation year (normally 3 years or 4 years after the issuance of a notice of assessment under the ITA) that would normally have expired after May 19, 2020, but before December 31, 2020; The normal reassessment period for a reporting period (normally 4 years following the issuance of an assessment under the ETA) that would normally have expired after May 19, 2020, but before December 31, 2020; The deadline for applying for an extension of time to file a Notice of Objection under the ITA and the ETA that would normally have expired after March 12, 2020 (normally 1 year after the expiry of the time limit for filing a Notice of Objection), as well as the time limit for appeal of the Minister’s decision dismissing such an application with the Tax Court of Canada. Our taxation team can help you manage your deadlines and your interactions with the tax authorities.   Canada Gazette, Part I, Vol. 154, No. 37: COMMISSIONS, September 12, 2020 https://www.canada.ca/en/revenue-agency/services/covid-19-ministerial-orders/time-period-other-limits-faq.html For corporations and trusts with a tax year-end from September 13, 2018, to December 31, 2018, and an SR&ED reporting deadline from March 13, 2020, to June 30, 2020, the deadline is extended by 6 months. For corporations and trusts with a tax year-end from January 1, 2019, to June 29, 2019, and an SR&ED reporting deadline from July 1, 2020, to December 29, 2020, the deadline is extended to December 31, 2020. For individuals who operated a sole proprietorship for which the tax year ended on December 31, 2018, and whose SR&ED reporting deadline was June 15, 2020, the deadline is extended to December 15, 2020.

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  • Court upholds deductibility of carrying charges

    The Tax Court of Canada (the “Court”) recently upheld the deductibility of carrying charges incurred in connection with an issuance of shares.  In so doing, the court upheld the tax benefits arising from a common financing practice. In addition, the Court reiterated the principle in tax matters according to which, save in exceptional cases, the legal relationships established by one or more taxpayers must be respected. In this case1, Laurentian Bank (the “Bank”) issued shares from its share capital to the Caisse de dépôt et placement du Québec (“CDPQ”) and the Fonds de solidarité des travailleurs du Québec (“FSTQ”) totalling $120M, through a private placement.  In addition to assuming a portion of the costs incurred by CDPQ and FSTQ in connection with this issuance of shares, the Bank agreed to pay each of the investors, as professional fees for services rendered in connection therewith, an amount corresponding to 4% of the total amount of their investment.  The Canada Revenue Agency challenged the Bank’s deduction, over 5 years, of the total amount of $4.8M paid to CDPQ and FSTQ, in particular on the grounds that no services had been rendered to the Bank by the two investors and that the expense was unreasonable. The Court ruled in favour of the Bank and allowed it to deduct the amount of $4.8M in computing its income on the basis of paragraph 20(1)(e) of the Income Tax Act, namely, in 20% increments over five fiscal years. Not only did the Court recognize the merits of the Bank’s arguments as to the fact that it had incurred an expense for services obtained from the CDPQ and the FSTQ, but the Court also confirmed that the expense was reasonable under the circumstances. In this decision, the Court recognized the favourable tax consequences for an issuer of shares arising from a common practice in the field of financing through share issuance. It also appears that the reasons for the Court’s decision could be applied to other costs incurred in the context of financing activities and thus allow entities incurring such costs to obtain a significant tax advantage.   It is therefore to the advantage of corporations issuing shares or borrowing to carefully analyze and negotiate the financing agreements they are considering in order to maximize their tax benefits. Our taxation team can assist you in setting up a share issuance that is both successful and optimal from a tax standpoint.   Banque Laurentienne du Canada c. La Reine, 2020 CCI 73

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  • What are Revenu Québec's new tools to fight against “aggressive” tax planning?

    On May 17, 2019, the Ministère des Finances du Québec announced new anti-avoidance tax measures in its Information Bulletin 2019-5 (the “Bulletin”) that are in line with today’s tightening of the tax environment and the fight against tax planning deemed to be aggressive. The measures announced on May 17, 2019, essentially target three types of operations: sham transactions; nominee agreements; mandatory disclosure of “prescribed transactions.” Failure to comply with the new measures could have consequences not only for taxpayers having carried out such transactions, but also for various persons associated with or related to said taxpayers. These consequences range from substantial penalties to a ban on doing business with the Government of Québec. The measures also provide for penalties, and, in the case of sham transactions, bans affecting advisers and promoters of such operations. This initiative began on October 15, 20091 and the new measures set out in the Bulletin supplement those announced on November 10, 20172, which included, among other things, penalties imposed on taxpayers3 and promoters of transactions4 when an assessment is issued based on the General Anti-Avoidance Rule (“GAAR”). Most of these measures came into force on February 1, 20185. The new measures Sham transactions The concept of “sham” has been defined as a transaction or a complex series of transactions conducted with an element of deceit so as to create an illusion calculated to lead the tax authorities away from the taxpayer or to confound the tax authorities with respect to the true nature and legal consequences of the transaction(s)6. As announced in the Bulletin, four new measures will apply to assessments, reassessments or additional assessments (an “Assessment”). As a result, taxpayers who are party to a transaction or series of transactions involving a sham could be subject to one or more of the following measures: Longer limitation period to issue a reassessment: The Agence du Revenu du Québec (“Revenu Québec”) will have an additional three years to issue a reassessment for a transaction involving a sham. The limitation period will now be six or seven years rather than three or four years. This measure applies not only to the taxpayer, but also to taxpayers related to or associated with said taxpayer. For example, this measure applies to a taxpayer who is a member of a partnership that is itself party to a sham transaction7. More severe penalties for the taxpayer, promoter and adviser: For a taxpayer having participated in a sham transaction, the new measures introduce a penalty equal to the greater of $25,000 or 50% of the tax benefit generated by the sham transaction; For the Promoter or the Adviser having participated in a sham transaction that will be subject to an Assessment, the penalty will be equal to 100% of the fees paid for said transaction. For the purposes of the new measures and in accordance with section 1079.9 of the Taxation Act, a person is referred to as a “Promoter” if (i) the person or partnership commercializes the transaction or series of transactions, promotes it or otherwise supports its development or the interest it generates; (ii) the person or partnership receives or is entitled to receive, directly or indirectly, a consideration for the commercialization, promotion or support, or another person or partnership related to, or associated with, the person or partnership receives or is entitled to so receive such a consideration; and; (iii) it is reasonable to consider that the person or partnership assumes an important role in the commercialization, promotion or support. In addition, in accordance with section 1079.8.1 of the Taxation Act, an “Adviser” in respect of a transaction means a person or partnership that provides help, assistance or advice regarding the design or implementation of the transaction, or that commercializes or promotes it. In-house and independent tax planners are thus covered by these definitions and are subject to the disclosure obligations and penalties listed below. Suspended limitation period: The limitation period otherwise applicable will be suspended to allow for the issuance of a reassessment to determine the tax consequences arising from a transaction or series of transactions involving a sham when Revenu Québec makes a formal demand for information concerning unnamed persons. These three measures came into force on May 17, 2019, except for a transaction that is part of a series of transactions that began before said date and will be completed before August 1, 2019. Registration in the Register of Enterprises Ineligible for Public Contracts (“RENA”) upon a final assessment: A taxpayer who is the subject of a final assessment in respect of a sham transaction or a promoter or adviser on whom a penalty has been imposed on the same basis will be registered in the RENA. The duration of this ban and the possibility of appealing this decision are not mentioned in the Bulletin and remain unclear. Normally, a five-year ban could apply. In order to obtain the authorization of the “Autorité des marchés publics” to bid for public contracts or subcontracts, the companies concerned will need to obtain a certificate from Revenu Québec confirming that the taxpayer in question has not been the subject of a GAAR-based final assessment nor participated in a sham transaction, in addition to the criteria that already apply, namely that appropriate tax returns and documents have been duly filed and that the taxpayer is not indebted to Revenu Québec. The same will apply to the Promoter or Adviser of the transaction that led to the issuance of the final assessment. The Bulletin announces that these taxpayers will be included on the RENA list. As of the date of this bulletin, this measure has not yet been adopted by the National Assembly. Nominees A nominee agreement is considered to be a valid agreement by which a person is mandated to act in the place of, and in the name of, another person. This type of agreement is often used in real estate transactions. The Bulletin states that the tax legislation will be amended to take into account three new measures: Mandatory disclosure: From now on, any nominee agreement must be disclosed to Revenu Québec within 90 days of its conclusion, using a prescribed form8. No such form is currently available, this does not preclude the taxpayer from providing the information listed in the Bulletin in order to comply with this new measure and avoid any penalties. Penalty for non-disclosure: Failure to comply with the obligation will result in a penalty of up to $5,000. The parties to the nominee agreement will be jointly and severally liable for said amount. Suspended prescription period: In cases where the information return disclosing the nominee agreement is not filed within the prescribed time limit, the prescription period otherwise applicable will be suspended with respect to the tax consequences arising from a transaction or series of transactions that occurred that year and that are part of the nominee agreement. It is important to note that the disclosure made by either party to the nominee agreement will be deemed to also have been made by the other party. These new measures apply to all nominee agreements entered into on or after May 17, 2019. These measures also apply to any nominee agreement entered into before May 17, 2019, for which the tax consequences of transactions relating thereto persist after said date. In these cases, the deadline for disclosure to Revenu Québec is September 16, 2019. Mandatory disclosure and “prescribed transactions” In 2009 and 2015, Revenu Québec implemented measures to counter abusive tax planning that included a mandatory disclosure mechanism for certain transactions deemed to be “aggressive.” The Bulletin states that tax legislation will be amended to extend the scope of this mandatory disclosure mechanism to transactions or series of transactions that will be called “prescribed transactions.” A taxpayer who carries out a prescribed transaction or who is a member of a partnership carrying out a prescribed transaction will be required to file an information return for all transactions that, for a fiscal or taxation year, result in a tax benefit of $25,000 or more or have an impact on income of $100,000 or more. A prescribed transaction will be a transaction or series of transactions whose form and purpose are significantly similar, but not necessarily identical, to those described by Revenu Québec on a list yet to be published. As of the date of this bulletin, said list has not yet been published. Revenu Québec will publish a list of these transactions at such time as it deems appropriate. This measure is not in effect at this time. In addition, an Adviser or Promoter commercializing a prescribed transaction that requires little or no modifications to adapt it to different taxpayers is required to disclose to Revenu Québec, using the prescribed form, the facts relating to the prescribed transaction and any other information provided for in the form. Penalties: : A taxpayer who fails to file the aforementioned information return will incur a penalty of up to $100,000. the taxpayer who fails to comply with this obligation to disclose a prescribed transaction will incur a penalty equal to 50% of the tax benefit obtained as a result of the transaction in question. In addition, the prescription period applicable to a taxation year covered by this information return will be extended in accordance with the current provisions of the Taxation Act; An Adviser or Promoter who fails to file the aforementioned information return will incur a penalty of up to $100,000. Moreover, the Adviser or Promoter who fails to comply with this disclosure obligation will incur a penalty equal to 100% of his or her fees with respect to the various taxpayers to whom he or she has commercialized or promoted the undisclosed prescribed transaction. These measures will apply to all prescribed transactions published by Revenu Québec as of May 17, 2019. For more details, we invite you to refer to the information bulletin 2019-5. Our team specializing in litigation and tax law can help you prevent or resolve any potential disputes with the tax authorities.   Information Bulletin 2009-5. Tax Fairness Action Plan and Information Bulletin 2017-10. Penalty increased from 25% to 50% of the amount assessed. Penalty increased from 12.5% to 100% of the fees paid to the promoter. A ban on contracting with the State when the taxpayer is subject to a final GAAR-based assessment was also provided for, but this measure has not yet been adopted by the National Assembly. This measure would also affect the promoter. Cameco Corporation v. The Queen, 2018 TCC 195. According to the Bulletin, this measure applies to a taxpayer who is party to a sham transaction; a taxpayer who is a member of a partnership that is party to a sham transaction; a corporation associated with the taxpayer or the partnership that is party to a sham transaction at the time that it is carried out; a corporation associated with a taxpayer who is a member of a partnership that is party to a sham transaction at the time that it is carried out; a person related to the taxpayer or the partnership that is party to a sham transaction at the time that it is carried out; a person related to a taxpayer who is a member of a partnership that is party to a sham transaction at the time that it is carried out. The taxpayer must disclose the identity of the parties to the nominee agreement; a full description of the facts relating to the transaction or series of transactions to which the nominee agreement relates; the identity of any person or entity on which such a transaction or series of transactions has tax consequences; and any other information requested in the prescribed form.

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  • Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

    The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

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