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.
2023 Quebec budget: tax holiday for investments in critical and strategic minerals
On March 21, 2023, Quebec’s Minister of Finance tabled his budget for the 2023-2024 fiscal year. One of the budget’s key measures is the introduction of a new tax holiday in connection with major investment projects. At first glance, the new measure does not appear to be specifically aimed at the mining industry, but some mining companies involved in the extraction of critical and strategic minerals and planning substantial investments in the near future could greatly benefit from it. Under the new tax exemption, a corporation or partnership that carries out an investment project of more than $100 million in Quebec will be eligible, under certain conditions, for an income tax holiday and a holiday from the employer contribution to the Health Services Fund. As far as income tax is concerned, this new 10-year tax holiday consists of a deduction in the calculation of the company’s taxable income. The deduction is calculated by applying a rate of 15%, 20% or 25% to the cumulative total of eligible project expenditures. Since this tax measure is intended to promote investment outside major urban centres, the rate will vary according to the project’s location, ranging from 15% for projects in areas with high economic vitality, to 20% for projects in areas with intermediate economic vitality and up to 25% for those in areas with low economic vitality. The higher rates of 20% and 25% are more likely to apply to mining projects, which are generally located in remote areas with lower economic vitality. The critical and strategic minerals identified in the context of this measure are the following: antimony, bismuth, cadmium, caesium, copper, tin, gallium, indium, tellurium, zinc, cobalt, rare-earth elements, platinum-group elements, graphite (natural), lithium, magnesium, nickel, niobium, scandium, tantalum, titanium and vanadium. Let’s briefly consider the example of a mining company carrying out a major investment project for lithium mining in the Nord-du-Québec administrative region, designated by the Quebec government as a territory with intermediate economic vitality. During the investment phase, while the mine is being developed and built, the company incurs $200 million worth of eligible expenditures, which are capital expenditures for new mining equipment and heavy machinery for lithium extraction and processing. Evidently, the company will probably sustain a loss during the investment phase, and, because it has no taxable income, it will not be able to immediately benefit from the tax holiday. However, should the company have taxable income of $50 million in year 5, after four years of investment and mine development, it will be able to deduct $40 million of this taxable income under the new tax holiday, reducing its taxable income to $10 million for that year. This $40 million deduction is based on the application of the 20% rate for territories with intermediate economic vitality to the $200 million of eligible expenditures for the mining project. Another point relevant to the mining industry is that the income tax holiday will apply only to tax payable under the provisions of the Taxation Act. In other words, this tax holiday will not reduce the amounts payable under the Mining Tax Act. With respect to the Health Services Fund, companies will generally be eligible for an employer contribution holiday on wages paid to employees for pay periods falling within the exemption period for major investment projects. In order to benefit from this new tax holiday, companies will have to obtain an initial certificate, as well as annual attestations issued by the Quebec Minister of Finance. Our team of professionals specializing in mining and tax law is available to answer all your questions regarding this new measure and to assist you in your mining investment projects in Quebec.
The Canada Emergency Wage Subsidy: The Canada Revenue Agency takes action
In response to the pandemic, the Canadian government launched in the spring of 2020 the Canada Emergency Wage Subsidy (the “CEWS”), a program that provides employers with a subsidy based on the remuneration paid to their employees and income they lost during the pandemic. Section 125.7 of the Income Tax Act (the “ITA”) sets out how the subsidy is to be calculated, and likely caused problems for those who had to interpret this ambiguous provision without supporting doctrine or jurisprudence. For instance, calculating the “qualifying revenue,” which is central to the CEWS calculation, involves many nuances. As an example, it requires that an entity’s revenue during qualifying periods be estimated and that certain items be excluded, such as “extraordinary items,” a term new to the ITA. The calculation of “eligible remuneration,” another important component of the CEWS calculation, also has a number of peculiarities, such as the inclusion of remuneration for related and managerial employees. The Canada Revenue Agency (“CRA”) now has taxpayer’s CEWS calculation in its sights. The CRA began auditing CEWS claims and issuing notices of assessment to taxpayers in an effort to reduce the amount of CEWS originally granted. With reductions in pre-pandemic period qualifying income or the inclusion of items that taxpayers had initially excluded in their qualifying period income, such assessments are likely to have a significant impact on the CEWS amounts to which taxpayers were entitled, especially for companies with a large number of employees. In specific cases, the CRA may also impose penalties which can be as high as 50% of the excess subsidy claimed. Although the time limit for amending CEWS claims has expired, submitting a fairness request to amend a previously filed claim may be possible in some circumstances. Moreover, when notices of assessment are issued, a notice of objection may be filed to contest the adjustments made by the CRA. It is important to keep all documentation related to the calculation of the “qualifying revenue,” your employees’ remuneration and any other accounting documents to support the CEWS amounts claimed. A proactive approach and early intervention in a CEWS audit will not only result in a more favourable outcome in a given case, but will also prevent many back-and-forths with the CRA. Lavery’s tax law team is familiar with the CEWS program and its intricacies, and can assist you should you be audited or should you receive a notice of assessment from the CRA.
Federal Budget 2022: Good News for Mining Exploration Compagnies!
On April 7, 2022, Finance Minister Chrystia Freeland tabled the federal government’s new budget for 2022. This budget includes several tax measures relevant to the mining industry in Canada. The Canadian federal government intends to provide $3.8 billion over eight years to implement Canada’s first critical minerals strategy. One of the methods used to implement this new strategy and stimulate exploration is an investment vehicle well known to the mining industry: flow-through shares. The 2022 budget proposes to create a new 30% Critical Mineral Exploration Tax Credit (CMETC) for certain specified minerals. Specified minerals that would be eligible for the new CMETC are: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. As for the regular mineral exploration tax credit, the exploration expenses must have been incurred in Canada. The renunciation of expenses must also have been made under flow-through share agreements entered into after budget day and before March 31, 2027. It is important to note that there will be no cumulation of tax credits. Eligible expenditures will not be eligible for both the proposed new CMETC and the 15% regular mineral exploration tax credit (METC). In order for exploration expenses to qualify for the CMETC, a qualified person (as defined in National Instrument 43–101 issued by the Canadian Securities Administrators) will further have to certify that the expenses renounced will be incurred in the course of an exploration project for specified minerals. On this point, the measure seems to insert a new legal test of “reasonable expectation” that the minerals targeted by the exploration are “primarily specified minerals”. No details have yet been issued on the mechanics of applying this test. However, if the qualified person is unable to demonstrate that there is a reasonable expectation that the minerals targeted by the exploration project are predominantly specified minerals, the related exploration expenses would not be eligible for the CMETC and consequently, any credit granted for ineligible expenses would be recouped from the flow-through share holder who received the credit. Pending the tabling of a more detailed legislative version, careful attention and planning will therefore be required for new flow-through share financings to ensure that they meet the legal criteria for this new tax credit. Our team of professionals in securities, mining law and taxation is available to answer all your questions regarding this new measure and to assist you in the implementation of a successful flow-through financing: Josianne Beaudry René Branchaud Ali El Haskouri Charles-Hugo Gagné Éric Gélinas Sébastien Vézina
Pre‑ruling Consultation with the Canada Revenue Agency (CRA): a little‑known yet practical service
Canada’s tax system is very complex and tends to become more complex over time. Amendments to tax laws in recent years have not simplified our tax system, quite the contrary. The introduction of various intention tests in tax laws has also further increased tax authorities’ discretion as to the application of such laws. In this context, it is often a good idea to obtain the Canada Revenue Agency’s (“CRA”) advice on the application of tax laws to proposed transactions. Given that the CRA is responsible for applying the Income Tax Act (the “ITA”) and other legislation, some Canadian taxpayers would be well advised to ensure that the CRA will agree with their interpretation of the ITA in the context of a proposed tax plan or transaction. Getting the CRA’s opinion will help to steer clear of differences in opinion that could lead to lengthy and costly debates. The CRA has long offered Canadian taxpayers the opportunity to consult it before proceeding with tax plans or transactions. The two best known mechanisms for doing so are requests for a Technical Interpretation and requests for a Ruling. As a request for a Technical Interpretation is made anonymously, the resulting interpretation as to the application of the ITA is not binding on the CRA, and it requires a considerable amount of time to obtain. A request for a Ruling, on the other hand, requires identification of the parties and details of the proposed tax plan or transaction, and the resulting Ruling will bind the CRA to certain conditions. It is also faster to obtain. The CRA charges a fee to render a Ruling, but does not charge one for a Technical Interpretation. There is, however, a third, lesser-known mechanism available to taxpayers: a Pre-ruling Consultation. Some of its advantages include: Faster feedback for taxpayers as to the likelihood that the CRA will render the Ruling sought. Lesser preparation costs, as a Pre-ruling Consultation request requires less information than a request for a Ruling. Lower fees to be paid to the CRA in cases where the CRA believes that it cannot render the Ruling a taxpayer is seeking. The use of the Pre-ruling Consultation service will often be the best way to begin the request for a Ruling process. By using the service, taxpayers can quickly determine, at a relatively low cost, whether they should engage in the request for a Ruling process. The service isn’t a substitute for obtaining such a Ruling, however, as a Ruling has the advantage of binding the CRA with respect to the tax consequences of a proposed tax plan or transaction. Our taxation team can guide you and answer your questions regarding the services that the CRA offers in connection with tax compliance.
COVID-19: Anticipating Capital Gains, Wealth, Gift and Inheritance Taxes
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.
Payment to non-residents of Canada: How can the Multilateral Instrument (MLI) be applied?
The internationalization of trade has led to an increase in payments made by Canadian companies to non-residents of Canada, which are most of the time subject to Canadian withholding taxes. Canadian payers must ensure that they withhold the correct percentage of Canadian tax on such payments, as they are liable to the tax authorities for any failures on their part in this regard. In addition, payment recipients will normally want to minimize Canadian withholding taxes and ensure that they have benefitted from the lowest applicable rate. Canadian Tax Treaties In many cases, determining the Canadian withholding tax rate will depend on the application of a tax treaty between Canada and the payment recipient’s country of residence for tax purposes. Canadian tax treaties may reduce the rate of the tax that a Canadian payer must withhold. If interpreting tax treaties was already complex in many situations, it has become even more so with Canada’s adoption of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”). Since January 1, 2020, the MLI generally applies to most tax treaties between Canada and other countries, and its application may result in the non-application of certain provisions of a tax treaty. In such situations, a Canadian payer will be required to withhold the rate provided for in the Income Tax Act (“ITA”), that is, 25%, instead of the reduced rate provided for in the tax treaty between Canada and the recipient’s country of residence for tax purposes, which will typically vary from 0% to 15%, depending on the type of payment involved and the recipient’s tax status. The application of the Multilateral Instrument (MLI) For the time being, applying the Multilateral Instrument (MLI) is tricky for several reasons. First, the MLI does not apply to all of Canada’s tax treaties, nor to all of the articles of the treaties to which it does apply. It thus becomes necessary to first verify whether the MLI applies to a reduction in the withholding rate provided for in a Canadian tax treaty. Second, the Multilateral Instrument (MLI) provides for a general anti-avoidance rule with rather unclear application criteria. When the rule does apply, it may have the effect of denying a benefit provided for in a tax treaty. In short, the MLI is making the application of the ITA’s withholding tax on payments to non-residents more complex. Given that Canadian tax authorities will now apply the Multilateral Instrument (MLI), Canadian taxpayers should exercise caution and obtain proper advice before applying a rate less than the ITA’s 25% rate. Our taxation team is available to assist you and answer your questions regarding the application of the Multilateral Instrument (MLI) to payments made to non-residents.
The tax system to the rescue of print media
Canadian newspapers’ loss of advertising revenues to the hands of internet giants over the past several years has jeopardized the very existence of many such newspapers. In 2018, our governments announced several advantageous tax measures in order to ensure the survival of independent print media. In 2019, two favourable tax statuses were added to the Income Tax Act1 (Canada) (the “ITA”)—that of qualified Canadian journalism organization (“QCJO”) and registered journalism organization (“RJO”). The statuses of QCJO and RJO offer the following advantages under the ITA: A 25% refundable labour tax credit for salaries or wages payable in respect of an eligible newsroom employee, effective January 1, 2019; A 15% non-refundable personal income tax credit to allow individuals to claim digital news subscription costs paid to a qualifying organization after 2019 and before 2025 The addition of RJOs as qualified donees. The qualified donee status allows an entity to issue donation receipts, and thus allows any person donating money or property to an RJO to benefit from a tax credit or deduction in the calculation of their taxable income. In addition, the status of RJO allows an entity to receive donations from other entities with a favourable tax status, such as a registered charity;2 An exemption from income tax levied under the ITA. An entity must meet several conditions to obtain the statuses of QCJO and RJO, and the application process can take several months. Obviously, having these statuses involves other federal and provincial tax consequences that must be assessed on a case-by-case basis before making such a request to the tax authorities. Our taxation team is experienced in this area of law and can help you to obtain the statuses of QCJO and RJO and assess the tax consequences involved. Subsections 149.1(1) and 248(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5thsuppl.); Subsection 248(1), ITA “registered charity”.
Teleworking: What are the allowable expenses for employees and tax impacts for employers?
The COVID-19 pandemic has changed Canadian workplaces. For many organizations, the pandemic and its containment measures have fast-tracked the shift to teleworking. In this context, the Canada Revenue Agency (the “CRA”) and the Agence du Revenu du Québec (the“ARQ”) have published administrative positions regarding deductible expenses for employees working from home as well as for their employers. Eligible expenses for an EMPLOYEE The first condition for claiming employment expenses related to teleworking involves being obliged to work from home. The CRA has announced some flexibility in this regard, to the effect that if an employer did not require an employee to work from home but gave them the option to do so because of the COVID-19 pandemic, the CRA will consider the employee to have worked from home as a result of the pandemic. Temporary flat rate method: Federal and Quebec deduction of $2 per day without Form T2200 On December 15, 2020, the Government of Canada announced that employees who worked from home more than 50% of the time for at least four consecutive weeks in 2020 will be able to deduct $2 from their incomefor each day worked during that period and for each additional day worked outside that period, for a maximum of $400. The temporary flat rate method only applies to the 2020 taxation year. To qualify, the employee must only deduct only home office expenses and no other employment expenses. Details of expenses incurred for with teleworking or Form T2200 will not be required to claim this deduction. On December 16, 2020, the Government of Quebec followed the Government of Canada’s lead by announcing that taxpayers would be allowed to deduct $2 per day for each day worked from home, up to a maximum of $400, without supporting documents or a TP-64.3 form. Detailed method In general, an employee (whether a tenant or a homeowner) may deduct reasonable expenses directly related to the use of space in the home for work if and only if at least one of the following two conditions is met: (i) The space devoted to work in the home is “the place where the individual principally (interpreted by the courts to be more than 50% of the time) performs the office or employment duties”; or (ii) The workspace in the home is “used exclusively [...] to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.” The period used to assess eligibility criteria for 2020 must be at least four consecutive weeks. This period may last more than a month. If the workspace is part of a residence rented by the individual, a reasonable portion of the rent may be deductible. However, an individual may not claim any deduction for the rental value of the workspace in a home owned by the individual or for amortization, taxes, insurance or mortgage interest in respect of that home. Notwithstanding the above restrictions, the Income Tax Act provides that employees remunerated by commissions may deduct a reasonable portion of the taxes and insurance paid for the home they own, if one of the above criteria is met. It is important to note that these expenses are eligible only to the extent that they are not otherwise reimbursed by the employer. In order to determine the amount that can be deducted in this way, it is important to use a reasonable basis for calculation.For example, the calculation can be based on the area of the workspace in proportion to the total area of the home. Other possible uses of space must also be considered. The use of 100% compared to 75% of the space by an employee is an important factor in the calculation. For example, a kitchen table used as office space by an employee will have mixed use, which will have a direct impact on the amount of deductible expenses. Eligible expenses(salaried employees and those remunerated by commission) Electricity Heating Water Utility portion (electricity, heat and water) of the employee’s condominium fees Home internet service costs Maintenance and minor repair costs Rent paid for the house or apartment where the employee lives Eligible expenses(employees remunerated by commission only) Home insurance Property taxes Rental of a cell phone, computer, laptop, tablet, fax machine, etc. that is reasonably related to commission income Ineligible expenses(salaried employees and those remunerated by commission) Mortgage interest Mortgage payments Internet connection fees Furniture Capital expenses (replacement of windows, floors, furnace, etc.) Wall decorations Note that if an employee can deduct an expense in calculating taxable income for income tax purposes, they may also qualify for a refund of the Goods and Services Tax / Quebec Sales Tax (“GST/QST”) paid. GST and QST refunds are taxable and must be included in the employee’s income tax return the following year. It is also important for the employee to keep supporting documents. The CRA recently developed an expense calculator to simplify calculating eligible expenses. An employee will have to complete the following forms to deduct expenses and obtain GST and QST refunds: a) T777 – Statement of Employment Expenses; b) TP-59 – Employment Expenses of Salaried Employees; c) GST370 – GST/HST Rebate Application; and d) VD-358 – QST Rebate for Employees. In order to deduct employment expenses from income, including certain expenses related to space devoted to working from home, the employee must have received two forms from the employer: a) Form T2200 - Declaration of Conditions of Employment (“T2200”); and b) Form TP-64.3 General Employment Conditions (“TP-64.3”) (Quebec employee only). Considerations for the employer On December 15, 2020, the CRA announced the launch of a simplified process to claim home office expenses for the 2020 tax year. Accordingly, a simplified version of Form T2200 was made available as Form T2200S. The form may be found here. In order for an employee to be able to deduct the expenses described above, Form T2200S must indicate: If the employee worked at home because of the COVID-19 pandemic; If the employer reimbursed or will reimburse the employee for some of the home office expenses; and If the amount was included on the employee’s T4 slip. Finally, the employer will have to certify that “this employee worked from home in 2020 due to COVID-19, and was required to pay some or all their own home office expenses used directly in their work while carrying out their duties of employment during that period.” It is expected that a large number of employees will meet the criteria for this deduction, at least as long as the workplace access restrictions attributable to COVID-19 remain in place. The ARQ, for its part, has announced that, exceptionally, an electronic signature of the employer on the TP-64.3 form would be permitted. In addition, on December 16, 2020, the Government of Quebec announced that it will launch, in early 2021, an online service for generating a large number of TP-64.3 forms to be sent to teleworkers. This service aims to reduce the administrative burden on medium and large companies. More information on the online platform is expected in 2021. Other eligible expenses for an employee An employee will also be able to deduct certain expenses for supplies consumed directly in the course of their duties to the extent that they are not reimbursed by the employer, such as: a) Paper, pencils and ink cartridges; b) Internet costs, if they are charged based on usage. To this end, the CRA has announced that for the 2020 taxation year, it will exceptionally accept monthly residential internet service costs (the cost of the plan must be reasonable). Expenses reimbursed by an employer Normally, an amount received from an employer to reimburse an expense is considered a benefit to the employee and must be added to the employee’s employment income, unless such expenses are necessary for the performance of the employee’s duties. Employees may not deduct reimbursed expenses. In addition, in the current context, the CRA and the ARQ have announced that the reimbursement of $500 by an employer to an employee to offset the cost of acquiring personal computer equipment or office equipment required for telework does not constitute a taxable benefit to the employee. For example, if the purchase is a $1,000 desk, the taxable benefit included in the employee’s income will be $500. The CRA has recently announced that this amount will not be increased. Allowance paid by an employer Some employers will prefer to pay an allowance directly to their employees who are teleworking to cover the additional costs they incur. In this context, the employer will be able to deduct this allowance in the calculation of its taxable income, provided that it is a reasonable amount. Normally, the amount of this allowance will be treated as a taxable benefit to the employee and will have to be included in employment income for the taxation year in which the employee receives it, except in the situation covered by the exception mentioned above. Other considerations for the employer It is also important for the employer to consider the tax implications—particularly with respect to source deductions—of the location where the employee primarily works during the pandemic if it differs from the location of the employer’s establishment where they normally report for work. The CRA and the ARQ have announced relief in this respect for the 2020 taxation year. For example, the province of work will not change for employees who work from home because of the COVID-19 pandemic. The province for the purpose of calculating source deductions will continue to be the province of the normal place of work. However, if the employee performs their work in a foreign country, certain tax implications for both the employee and the employer should be considered. Lavery’s tax law team can guide you and answer your questions regarding your company’s tax compliance. Technical interpretation IT-352R2.
International tax planning endorsed by the Court
In the recent decision in Agracity Ltd. v. The Queen1, the Tax Court of Canada (the “Court”) endorsed the Canadian tax consequences of business transactions between a Canadian corporation (“Agracity”) and its Barbados affiliate (“NewAgco-Barbados”) within a group of companies operating in the agrochemical industry (the “Group”). NewAgco-Barbados is an offshore company established for the purpose of negotiating and purchasing a particular herbicide (the “Herbicide”) internationally for resale in Canada. All of NewAgco-Barbados’s profits were generated by the resale of the Herbicide, which were subject to Barbados’s low tax rate. Agracity was in charge of receiving and filling orders for the Herbicide from Canadian consumers, under a service agreement with NewAgco-Barbados for the logistics, storage and transportation of the Herbicide from abroad to Canadian consumers. The Canada Revenue Agency (the “CRA”) attempted to allocate all of NewAgco-Barbados’s profits to Agracity, relying primarily on sham transaction rules and secondarily on transfer pricing rules under subsection 247(2) of the Income Tax Act2 (the “Act”). The Court held that the negotiation and procurement of the Herbicide by NewAgco-Barbados constituted a legitimate commercial objective and a genuine function within the Group. It ruled in favour of Agracity in this case and confirmed that the transactions between Agracity and NewAgco-Barbados were not deceptive and did not warrant any adjustment to Agracity’s profits under transfer pricing rules. This case sheds new light on how to interpret the business role of foreign subsidiaries and the limits of the CRA’s remedial authority with respect to transfer pricing provided for in the Act, making it easier for domestic businesses to implement international business structures. When properly set up and operated, these structures can provide substantial tax savings. The decision in Agracity v. The Queen has not been appealed. Our taxation team can assist you with national and international tax planning for your business transactions. 2020 CCI 91 R.S.C. 1985, c. 1 (5th suppl.);
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
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.
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
Sale of a Business: New Tax Planning Option
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.