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There is currently speculation in the media that Liberal Finance Minister Bill Morneau’s next federal budget will increase the capital gain inclusion rate from 50% to 75%.The combined marginal tax rate on capital gains is currently 26.7% for a resident of Québec. This rate would reach nearly 40% if the budget was to increase the capital gain inclusion rate to 75%. A $1,000,000 capital gain would thus generate approximately $133,000 in additional taxes. Proposed tax planning Assuming that the rumour materializes, it is possible to counter the adverse effects of such change by implementing a simple tax planning measure before the budget is tabled. The planning involves transferring assets that have appreciated in value to a corporation. Subject to certain conditions, the transfer allows for the gain to be made prior to the new rules coming into force, thus allowing the taxpayer to benefit from the current 50% inclusion rate. Such a course of action could be of interest to someone who is considering selling assets in the short or medium term. Impact if anticipated measure is not adopted Should the budget not include the anticipated change, it would be possible to reduce and even cancel the capital gain by filing rollover tax forms after the budget is released. No gain would be realized and consequently no tax would be payable. Our highly qualified tax team is available to assist you in that regard.

On March 17, 2016, Finance Minister Carlos Leitão tabled the Quebec Government’s 2016-2017 budget in the National Assembly. The budget contains several measures intended to foster job creation and economic growth, with a special emphasis on innovation, environmentally friendly practices, and digital technologies. The Quebec Government’s economic plan includes $65 million in additional funding for three technology seed funds. Factoring in the leveraging effect of matching private investments, $125 million will be available to finance Quebec’s innovative technology businesses. The government’s first announcement in this regard is a partnership with the multinational Merck & Co. and the Fonds de solidarité FTQ, which will create the AmorChem II fund. This fund will invest in 15 promising new projects in the life sciences sector originating in Quebec universities and research centres. The initial closing amount of the fund has been set at $50 million. The Quebec Government will contribute $20 million, and Merck and the Fonds de solidarité FTQ will each invest $15 million. The fund will be open to additional investors in subsequent rounds. The first fund managed by the AmorChem team was launched in 2011. Its objective is to increase the commercial value of innovative research carried out in Quebec. Its $41 million capitalization is now fully committed to some 20 promising projects. Another 2016-2017 budget measure will create the InnovExport fund, to support innovative Quebec businesses with more than 50 projects focused on export markets. The businesses that will benefit from its support will be at the seed or start-up phase, and will already have the support of an incubator, an accelerator or an equivalent structure. Based in Quebec City, the fund has a capitalization of $30 million. Half of this amount is being funded by the Quebec Government, but the fund can also count on financial support from institutional investors ($12.7 million) and from 15 entrepreneurs ($2.3 million) who will take part in selecting and working with the businesses. The 2016-2017 budget earmarks $30 million for the creation of a new clean technology seed fund with a target capitalization of $45 million. The details related to the rollout of this initiative will be made public at a later date. The Quebec Government has also announced a $16 million contribution to the second closing of the Teralys Capital Innovation Fund. This amount comes on top of a matching investment by the Federal Government and $64 million in private capital, for a total of $96 million. This round follows the first closing, which reached $279 million in size. As a result, the fund has reached its target of $375 million, making it the largest fund of funds in Canada. The mission of the Teralys Capital Innovation Fund is to finance venture capital funds that focus on financing innovative Quebec businesses in the life sciences, green and industrial innovation, and information and communications technologies sectors. To date, it has committed to investing more than $170 million in ten venture capital funds and in five businesses with high growth potential. Lavery Capital is pleased with these measures which allow the Quebec Government to reaffirm its support for the venture capital industry as a vector of economic development and job creation. The announced measures will help support several innovative businesses at each stage of development and in every sector of the knowledge economy, while fostering the emergence of qualified and internationally competitive venture capital managers in Quebec.

CONTENTS Directors’ liability for payroll withholding taxes Due diligence: An evolving standard To what risks of liability or being found guilty are directors exposed? Environmental liability of directors and officers Directors’ liability for payroll withholding taxes Luc Pariseau and Audrey Gibeault Directors of a corporation may be held personally liable in cases where the corporation fails to withhold and remit federal or provincial payroll taxes on salary, wages and certain benefits. Directors may also be liable for amounts which ought to have been withheld on payments to a non-resident that are subject to withholdings under Part XIII of the Income Tax Act1 (herein referred to as the «Act»). This article reviews in more detail the potential exposure that directors face, and also briefly describes some of the possible remedies that are available in such cases. With respect to federal income taxes, the failure of a corporation to deduct, withhold or remit source deductions under the Act, the Employment Insurance Act2 or the Canada Pension Plan Act3 subjects its directors to personal liability for the unpaid and unremitted amounts. A similar principle applies in the province of Quebec for an amount that an employer was required to deduct, withhold or remit under the Tax Administration Act4 (hereinafter referred to as the “Administration Act”), the Act respecting the Québec Pension Plan,5 the Act respecting parental insurance,6the Act respecting labour standards,7the Act to promote workforce skills development and recognition,8 and the Act respecting the Régie de l’assurance maladie du Québec.9 The purpose of these rules is to make the directors liable for the payment of the employer’s contributions. Section 24.0.1 of the Administration Act and section 227.1 of the Act apply to directors holding office on the date on which the amounts were to be remitted, the date they were to be deducted, withheld or collected, and the date on which an amount was to be paid. In certain circumstances, a person not officially appointed as a director could be considered to be a “de facto” director and become liable if such person performs some of the functions that a director would normally perform. Before a director becomes liable under these provisions, the tax authorities have to demonstrate that they cannot recover the amounts directly from the particular corporate taxpayer. Additionally, the tax authorities must register a certificate for the amount of the corporation’s liability and establish that the amount remains unsatisfied. The director will need to establish that he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.10 The case law on this point11 has shown that the issue is generally whether, at the relevant time, the director knew or ought to have known of the problem, and whether he took the action within his power under the circumstances to correct the situation. In addition, the tax authorities cannot assess a director for source deductions owing after the expiry of two years from the date on which the director ceased to be a director of the corporation.12 Directors may require the corporation to purchase insurance on their behalf to protect them and former directors against liabilities incurred due to their status as directors, provided that they have fulfilled their fiduciary duties. Directors may, in particular, seek the advice of tax specialists to ensure that they comply with their obligations relating to payroll withholding taxes. _________________________________________ 1  R.S.C. 1985, c. 1 (5th Supp). 2  SC 1996, c. 23. 3  RSC 1985, c. C-8. 4  R.S.Q. c. A-6.002. 5  R.S.Q., c. R-9. 6  R.S.Q., c. A-29.011. 7  R.S.Q., c. N-1.1. 8  8 R.S.Q., c. D-8.3. 9  R.S.Q., c. R-5. 10  227.1(3) of the Act and 24.0.1 of the Administration Act. 11  Soper v. Canada, [1998] 1 C.F. 124 and Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] C.S.C. 68. 12  227.1(4) of the Act and 24.0.2 of the Administration Act.     Due diligence: An evolving standard Jean-Philippe Latreille and Emmanuel Sala Nobody is held to the impossible. This maxim is reflected in statutes that hold directors of a corporation liable, on a solidary or joint and several basis, for its failure to comply with certain tax obligations. Indeed, directors will generally be relieved from such liability if they can demonstrate that they acted with a degree of care, diligence and skill that is reasonable under the circumstances. This is commonly known as the “due diligence defence.” Naturally, the circumstances are specific to each case, and there are no hard and fast rules for determining whether a director can rely on the due diligence defence. We must therefore turn to the courts’ interpretation of this standard, which has fluctuated somewhat in recent years. For many years, an “objective-subjective” test prevailed. This meant that directors had to show they had exercised the skill that can be expected from a person with the same level of knowledge or experience. The fact that the director’s personal abilities were taken into account made it possible to apply the standard of due diligence with some flexibility. However, following the Supreme Court of Canada’s 2004 decision in Peoples,1courts have determined that the test for the due diligence defence should be objective, but must also include a consideration of the specific circumstances faced by the corporation and its directors. Although all directors have the same duty of diligence, it should be noted that the analysis of a director’s liability must take into account the very different contexts in which “outside” and “inside” directors operate. Inside directors play an active role in the corporation’s management and can influence the conduct of its business affairs. They are in a better position to become aware of a corporation’s financial difficulties soon after they arise, and to take such corrective measures as are possible. The reality for outside directors is very different: most often, they are completely dependent on the information they receive from the corporation’s management and on the opinions expressed by experts (such as the corporation’s auditors) though this does not give them licence to disregard outward signs of financial difficulty. Consequently, the distinction between outside and inside directors is a contextual factor to take into consideration as part of the “objective” analysis associated with the due diligence standard ordained by the Supreme Court. This means that instead of considering the skills, aptitudes or personal characteristics of a given director — an approach that would fit more closely with the “objective-subjective” analysis that used to prevail — one must consider the circumstances associated with the director’s role and position with the corporation. Furthermore, the obligation which tax statutes impose on directors is an obligation of means, not an obligation of result. Thus, a director will not be held liable if he or she implemented measures that a reasonably prudent person would have taken, even if those measures did not yield the desired results. In this sense, directors cannot be regarded as unconditional guarantors of a corporation’s tax liabilities. For example, a director will not be held liable for the failures of an employee of the corporation if that employee had the necessary training and was appropriately supervised. In conclusion, the decision to become a director of a corporation should not be taken lightly. Before accepting such an office, one should ensure that the corporation has sound governance practices in place and that these practices will be followed throughout one’s mandate. Directors should not hesitate to consult with their legal advisors in order to ensure that they act in accordance with their obligations and thereby limit their exposure to liability. _________________________________________ 1  Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] xv3 SCR 461.     To what risks of liability or being found guilty are directors exposed? André Laurin Directors are subject to the legal liability regime provided in the incorporating statute of the legal person and possibly to that of its registered office and, in some respects, to the regimes in place in jurisdictions where the legal person carries out its activities. It is therefore important to have a good knowledge of the laws that apply to the legal person and directors. In the context of Quebec law, directors face two major types of potential liability, namely: contractual liability to the legal person of which they are directors or, by way of derivative action, to the persons who may step into the shoes of the legal person in certain circumstances (shareholders or creditors of the legal person); and extracontractual liability (delictual, quasi-delictual and penal) to third parties, but also to the legal person. Contractual Liability Civil contractual liability stems from the nature of the link between the legal person and its directors. Under Quebec law, directors are mandataries of the legal person. They may incur liability to the legal person if they do not discharge their duties (care and loyalty) to the legal person or if they exceed the limits of their mandate. Extracontractual Liability Extracontractual liability may be civil or penal in nature. A person seeking a civil liability judgement is required to prove that the director, in the course of discharging its duties, committed a fault which caused damages to such person. However, the person may in some circumstances rely on legal liability presumptions against the director. The court will assess the elements put before it according to the rule of preponderance of evidence. For instance, a director who would knowingly support the decision of the board to authorize the marketing of a product which he knows is hazardous or non-compliant with the regulatory standards of the industry and may cause damages to third parties may be ordered to pay damages to the victims who suffer such damages. In the same way, a director who votes in favour of a recommendation to the shareholders to approve a merger or accept a takeover bid which he knows or should have known that it is not fair or not in the interest of the legal person and its shareholders may be held liable to the shareholders. Failure by a director to exercise its duty of care or duty of loyalty to the legal person may in certain circumstances be considered by the courts as being a civil fault in the context of proceedings against the director by the legal person itself or third parties. Specific statutes identify certain behaviours as constituting penal or criminal offences. Some statutes also create presumptions of guilt. The evidence will be assessed on the basis of the “beyond a reasonable doubt” criterion. Furthermore, the Criminal Code (Canada)1, mainly in section 21, opens the door to the concept of complicity to or participation in a criminal or penal offence. A director who is found guilty may, according to the case and the nature of the criminal offence, be ordered to pay a fine, be imposed a limitation of his rights and even imprisonment. In most cases, a defence of due diligence may be made, even against a presumption, if the director has been in fact diligent. Furthermore, it is to be noted that the more the determination of the fault is objective, the less accessible becomes the defence of due diligence. For a more detailed analysis of the duties of directors and the nature of their potential liability, please refer to the document entitled “The Corporate Director: Questions and Answers”.2 Other remedies The oppression remedy and the application for an injunction complete the arsenal of means or remedies which may be brought against directors. _________________________________________ 1  Criminal Code (Canada) R.S.C. (1985), c. C-46. 2  “The Corporate Director: Questions and Answers”. lavery.ca/sme/corporate-governance.html     Environmental liability of directors and officers Katia Opalka Several federal and provincial statutes in force in Quebec make corporate directors and officers personally liable for offences of an environmental nature committed by the corporation. Corporations can face site assessment and clean-up orders. Subject to certain conditions, directors and officers of a corporation can be named to such orders. The environment ministry can also refuse to issue or renew environmental authorizations on the grounds that a director or officer of the corporation, of a related corporation, or of a lender of the corporation was found guilty of an offence or convicted on certain types of tax charges in the preceding five years. This article reviews sources of personal liability for directors and officers and then identifies measures that can be taken to manage these risks so that they don’t become an obstacle to recruiting and retaining talented people. Quebec’s Environment Quality Act (EQA or the Act) creates a presumption: when a corporation is convicted of an offence under the Act, its directors and officers are presumed to be guilty of that offence unless they can show that they exercised due diligence and took all necessary precautions to prevent commission of the offence. In the case of a partnership, all the partners, except for special partners, are deemed to be directors of the partnership, unless they can show that one or more of them, or a third person, manages the affairs of the partnership. Where a director or officer commits an offence, the minimum and maximum amounts of the fines prescribed in the Act for individuals (min. $1,000/max. $1,000,000) are doubled. When a corporation defaults on payment of an amount owed to the Minister under the EQA or its regulations, the corporation’s directors and officers are jointly and severally liable with the corporation for the payment of that amount, unless they can show that they exercised due care and diligence to prevent the breach which led to the claim. With respect to site assessment and clean-up orders, directors and officers may be the subject of such an order if they have had custody or control of the site, unless they can show that either: they were unaware of and had no reason to suspect the presence of contaminants in the land, having regard to the circumstances, practices and duty of care; once they became aware of the presence of contaminants in the land, they acted in conformity with the law, as to the custody of the land, in particular as regards the duty of care and diligence; or the presence of contaminants in the land is a result of outside migration from a source attributable to a third person. To guard against the risk of environmental liability, corporate directors and officers should make sure that the corporation has an environmental management system that works. They should also consider whether it would be worthwhile to take out pollution insurance, to address risks that are not normally covered in directors’ and officers’ liability insurance policies.

SOMMAIRE US Parent corporations sending employees into Canada to subsidiaries – General tax issues and remedy Business trips to Canada: Business visitor status or work permit? US Parent corporations sending employees into Canada to subsidiaries – General tax issues and remedy Emmanuel Sala, Carolyne Corbeil and Luc Pariseau Where a corporation is a resident of the United States (the “US”) for the purposes of the Convention Between Canada and the United States of America With Respect to Taxes on Income and Capital (“Treaty”) (the “US Parent”) and sends US-based employees (the “US Employees”) in Canada to perform services for the benefit of a Canadian corporate subsidiary (the “Canadian Subsidiary”) under a service agreement, all parties involved may become subject to Canadian federal and Quebec provincial tax obligations and the US Parent and the Canadian Subsidiary may become subject to federal and Quebec sales tax obligations TAX ISSUES Consequences to US Parent When the US Parent sends US Employees to work in Canada, it may be considered as carrying on a business in Canada for Canadian federal income and sales tax purposes, triggering the application of the following income and sales tax compliance obligations: Withholding of federal income tax source deductions, remittance thereof to the Canada Revenue Agency (“CRA”) and compliance with payroll filing obligations in connection with the portion of the remuneration paid to the US Employees attributable to duties performed in Canada. Registering for federal and Quebec sales tax purposes (“GST/QST”) and fulfilling compliance obligations in this regard, including charging to and collecting from the Canadian Subsidiary GST/QST on any fees charged by the US Parent to the Canadian Subsidiary in consideration for the work performed by the US Employees for the benefit of the Canadian Subsidiary (“Chargeback Fees”). Maintaining a business number together with a payroll and corporate income tax program accounts with the CRA. Filing a Canadian federal income tax return with the CRA within 6 months after the end of its taxation year Should the US Parent be carrying on this business through a “permanent establishment” (“PE”) situated in Canada, as this term is defined under the Treaty, liability for Canadian federal income tax obligations and Canadian payroll taxes and employer contributions could arise. Essentially, the US Parent may have a PE in Canada under the Treaty should it be determined that the US Parent has a Fixed Base PE, an Agency PE, a Construction Site PE or a Service PE, as such expressions are defined below. The following provides examples of situations where the CRA may argue that the US Parent has a PE in Canada under the Treaty An office space is made available to the US Employees in the premises of the Canadian Subsidiary – Fixed Base PE. Presence in Canada of the US Employees who exercise the authority to conclude contracts in the name of the US Parent – Agency PE. The US Employees perform planning and supervising activities at a construction site which will be in place for a period of more than 12 months – Construction Site PE. Services are provided in Canada by one or more US Employees for an aggregate of 183 days or more during a 12-month period – Service PE. Particular attention must be given to Construction Site PE and Service PE which have been given a broad interpretation by the CRA. A US Parent may be deemed to have a Service PE in Canada under the Treaty if the US Employees and, in certain circumstances, US subcontractors, enter into Canada to provide services to the Canadian Subsidiary. Under the Service PE rules, the US Parent would have a PE if the services provided in Canada, by one or many US Employees, continue for an aggregate of 183 days or more in any twelve-month period. However, the determination of a Service PE remains subject to the rules applicable to the Construction Site PE. In general, it is the CRA’s view that the Construction Site PE rules override the Service PE rules and that only services rendered in Canada, but away from the Construction Site PE, can be considered when making the determination of a Service PE. In other words, if the US Parent has employees or agents (including directors of the board of directors) in Canada for a total of more than 182 days in a 365-day period in connection with a project, excluding the days during which the US Parent’s employees, agents or subcontractors render services at the Construction Site PE of the US Parent, if any, the US Parent will be deemed to have a PE in Canada, and any profits attributable to that PE will be taxable in Canada. In computing the number of days for the purposes of the Service PE 183-day threshold, where the US Parent sends individuals simultaneously in Canada to provide services to the Canadian Subsidiary, their collective presence during one calendar day will count for one day only. From a Quebec provincial income tax perspective, should the US Parent have a PE situated in the Province of Quebec which constitutes an “establishment” for Quebec income tax purposes, the US Parent will also be liable for Quebec provincial income tax, Quebec income tax source deductions and Quebec payroll taxes/employer contributions. However, since the notions of Construction Site PE and Service PE do not exist for Quebec income tax purpose, the threshold for US Parent to have an “establishment” in the Province of Quebec is higher than at the federal level. Consequences for Canadian Subsidiary From the Canadian Subsidiary’s perspective, service agreements with the US Parent should not result in any significant adverse income and sales tax consequences other than the combined federal and Quebec 24% tax withholdings that will have to be withheld and remitted to the tax authorities with respect to the Chargeback Fee. GST/QST would also likely be payable by the Canadian Subsidiary to US Parent with respect to those amounts, but a corresponding GST input tax credit and QST input tax refund should generally be available to the Canadian Subsidiary. Consequences for US Employees To the extent that the US Parent has a Fixed Base PE, an Agency PE, a Construction Site PE or a Service PE in Canada, Treaty relief for Canadian taxes on Canadian-source income should not be available to the US Employees and their portion of income that will be derived from services rendered or duties performed in Canada should be subject to tax in Canada. Consequently, the US Employees will generally also be subject to Canadian income tax compliance obligations. REMEDY: SECONDMENT ARRANGEMENT To mitigate most of the foregoing PE issues and other tax issues associated with carrying on a business in Canada, the US Parent could enter into a secondment arrangement with the Canadian Subsidiary and the US Employees. A secondment arrangement generally consists in a written agreement where the legal terms of the secondment and the factual relationship between the seconded US Employees and the Canadian subsidiary are established. CONCLUSION In conclusion, careful consideration must be given at any time a US Employee or a US-based consultant enters Canada to render services or perform duties for the benefit of a Canadian Subsidiary. Efficient tax planning such as putting in place a secondment arrangement can, subject to US transfer pricing considerations, usually minimize the US Parent’s Canadian tax liability but the key is to plan any significant presence of US Employees and/or US-based consultants prior their entry in Canada.     Business trips to Canada: Business visitor status or work permit? Nadine Landry With the globalization of commerce, the number of people travelling for business purposes is on the rise. Many will think that a business trip does not have much to do with immigration given that it may seem as simple to enter Canada for business purposes as it is to enter as a tourist. However, there are important differences and the distinction between who qualifies as a business visitor and who is considered a foreign worker is not always clear. With the globalization of commerce, the number of people travelling for business purposes is on the rise. Many will think that a business trip does not have much to do with immigration given that it may seem as simple to enter Canada for business purposes as it is to enter as a tourist. However, there are important differences and the distinction between who qualifies as a business visitor and who is considered a foreign worker is not always clear. The main exemption category is the business visitor. To benefit from this exemption, the company in question’s main places of business and sources of income and profits must be situated outside of Canada. Theses activities include, but are not limited to, the following: Purchasing Canadian goods or services on behalf of a foreign business or government Taking orders for goods or services Attending business meetings, conferences, conventions and fairs Being trained by a Canadian parent company for which the person works outside Canada Training employees of a Canadian affiliate of a foreign company Being trained by a Canadian business that sold the visitor’s foreign employer equipment or services After-sales service is also exempt from the work permit requirement, subject to certain conditions. Maintenance or repair of specialized equipment purchased or leased outside of Canada is permitted only if the service was provided for in the initial contract of sale. It is important to note that manual installation of equipment is not included and normally requires hiring local employees or obtaining work permits. The North American Free Trade Agreement has broadened the scope of permissible activities for American or Mexican nationals to include, among others, certain activities related to research, marketing and general services. This same agreement will facilitate the obtaining of work permits for certain professionals as well as for individuals who have specialized knowledge or who hold management positions and who are transferred to a Canadian subsidiary. In conclusion, entering Canada for business purposes must not be taken lightly and businesses would be well-advised to make sure that their employees have the appropriate status based on the purpose of their trip when travelling to Canada for business. Border officials are strict and there is strong political will to protect the labour market and to crack down on offenders. Moreover, the federal government has announced the enactment of certain legislative amendments which provide for more severe penalties in cases involving false statements. More specifically, the period of inadmissibility to Canada will be five years instead of two. Considering that Canadian border officials have broad powers to search, a person would be very ill-advised to attempt to enter Canada under false pretenses. The classic business meetings scheduled over the next two weeks will not be very convincing if it is not adequately supported by sufficient evidence.

CONTENTSInter Vivos discretionary trusts are still relevantA matter of trusts : review of the most frequent pitfallsINTER VIVOS DISCRETIONARY TRUSTS ARE STILL RELEVANTEmmanuel Sala and Luc Pariseau Although the 2014 federal Budget Plan restricted some family tax planning measures involving inter vivos trusts, such trusts remain relevant. Beyond goals such as protecting assets, minimizing the taxes payable upon death, or purification for purposes of the eligibility of shares for the $800,000 capital gains deduction, the relevance of the trust for the purpose of splitting income and capital gains with minor children may still be a critical factor in the cost-benefit analysis of the implementation of such a structure. This article discusses the income-splitting techniques to avoid, as well as those which, when correctly structured and documented, comply with federal and Quebec provincial tax legislation. In short, the purpose of an income-splitting structure is to allocate income or capital gains to a minor child and thus benefit from his progressive tax rates and personal tax credits. SPLITTING TECHNIQUES WITH MINOR CHILDREN SEVERELY SANCTIONED BY TAX LEGISLATION Business or rental income allocated to a minor child in certain circumstances The business or rental income of a trust which is allocated to a minor child is subject to a special tax calculated at the highest marginal rate (“Minor Child Special Tax”) when a person “related” to the minor child either (i) is actively involved in the income generating activity, or (ii) holds an interest in the partnership from which the trust indirectly derives such income. Taxable dividends from certain private corporations Taxable dividends from shares of Canadian and foreign corporations which are not listed on a “designated stock exchange” (except for mutual fund corporations) (“Private Corporation”) allocated by a trust to a minor child are also subject to the Minor Child Special Tax. Taxable capital gain realized on certain sales of shares of Private Corporations A minor child to whom a trust allocates a taxable capital gain from the sale of shares of a Private Corporation to a person with whom the minor child is not dealing at arm’s length is deemed to receive this amount twice as a taxable dividend other than an “eligible dividend”. The deemed taxable dividend will be subject to the Minor Child Special Tax. SPLITTING TECHNIQUES WITH MINOR CHILDREN ALLOWED BY TAX LEGISLATION Currently, dividends received by a trust from corporations listed on a “designated stock exchange” and allocated to minor children are not subject to the Minor Child Special Tax. A tax election must be made for the dividends so that their status is not changed when they are allocated to the minor beneficiaries, and a written resolution must be validly prepared and signed by the trustees in this respect. Capital gains realized by a trust on the sale of property to a person with whom the minor child is dealing at arm’s length, whether such property consists of shares in a Private Corporation, a Corporation listed on an exchange, or an immovable, may be allocated to him without triggering the Minor Child Special Tax. When the property on which the capital gain is realized consists of “qualified small business corporation shares”, the $800,000 capital gains deduction of the minor child may be available. FINANCING OF THE TRUST IN THE CONTEXT OF SPLITTING WITH MINOR CHILDREN The success of a splitting structure mainly depends on the ability of the trust to finance its investments. A loan made directly by a parent, or indirectly through a management corporation, is a solution that is both simple and efficient from a tax perspective. The measures intended to deter income splitting, particularly some allocation rules and the Minor Child Special Tax, do not apply to income derived from a loan made to the trust at an interest rate equal to or higher than the prescribed interest rate in force at the time the loan is made, if and only if the interest is paid before January 31 of each year. In addition, the allocation rule commonly referred to as “75(2)”, which re-allocates the income from property to the person from whom the said property was received, should not apply to such an arrangement. At the present time, since the prescribed rate is at an all-time low, i.e. 1%, and the terms of such loans are not limited in time, splitting income with minor children through a loan to a trust should translate into significant savings, subject to the performance level obtained on the investments made by the trust. A TRAP TO AVOID It is important to keep in mind that, when income is allocated to minor children through a trust, it is the children who must benefit from the amounts so allocated. Thus, so that the children can be considered the true beneficiaries of the income allocated by the trust, the income must be entirely available to them for their own benefit. With this in mind, the tax authorities will consider the following circumstances when reviewing these amounts: (i) the manner in which the amounts are received, (ii) the person with effective control over such amounts, (iii) the obligations and restrictions on the manner of disposition thereof, and (iv) the use made of them by the minor children, or the persons actually benefiting therefrom. The risk to taxpayers of income or capital gains splitting with minor children is that the tax authorities may take the position that the children acted as accommodating parties, whether as agents or as a front, for the parents. The success of a splitting operation therefore depends on adequate documentation proving that the amounts which are allocated to the minor child, and thereafter reimbursed to the parents, represent the repayment of expenses paid by the parents for the child’s benefit. The use of a trust for purposes of investment and income splitting with minor children poses quite a few challenges, but remains a fundamentally worthwhile tax-savings tool in the appropriate circumstances. The implementation of such a structure should be fine-tuned by your tax expert. A MATTER OF TRUSTS: REVIEW OF THE MOST FREQUENT PITFALLSCarolyne Corbeil and Emmanuel Sala For this special edition Ratio on trusts, we propose a review of the most frequent pitfalls in tax planning schemes involving discretionary family trusts. THE SETTLOR IS ALSO THE BENEFICIARY OF THE TRUST: LOSS OF TAX-DEFERRED ROLLOUT One still all too frequently sees cases in which the settlor of the trust, i.e. the person who made an irrevocable gift in favour of the trust for the purpose of constituting an autonomous and separate trust patrimony, is also designated as a beneficiary of that trust. This mistake generally occurs when several classes of persons are named as beneficiaries and the link between the settlor and the taxpayer wishing to implement the trust is not clearly identified. For instance, the trust deed may designate the father and mother of the taxpayer and the father and mother of the taxpayer’s spouse as beneficiaries while the taxpayer’s father-in-law acts as the settlor. Such circumstances result in the application of subsection 75(2) of the Income Tax Act (“ITA”), with the result that the trust property cannot be distributed without triggering tax consequences to the beneficiaries of the trust other than the settlor (hereinafter “Rollout”). TRANSFER OF PROPERTY TO A CORPORATION OF WHICH THE TRUST IS A SHAREHOLDER: DEEMED INTEREST A freeze transaction must generally be carried out when one is planning to insert a trust within an existing corporate structure. A freeze consists of exchanging all the participating shares issued by the corporation (generally, the common shares) for preferred shares redeemable at a value equal to the fair market value of the corporation immediately prior to the freeze transaction (“Preferred Shares”). The trust may then subscribe to participating shares of the corporation for a nominal consideration. From a legal point of view, a given taxpayer will then have “transferred” participating shares to the corporation for a consideration consisting of preferred shares (hereinafter, the “Transferred Shares”). When a trust is established in favour of the spouse and/or minor children of the person initiating the freeze to allow him to split his income, and no clause in the trust deed restricts the allocation of income to the spouse and the minor children, the attribution rule in subsection 74.4(2) ITA may apply, unless the corporation qualifies as a “small business corporation”1. Generally, this attribution rule results in the taxing of a specifi ed amount of interest, calculated at the prescribed rate on the value of the Transferred Shares, in the hands of the person initiating the freeze. This interest attributed to the person initiating the freeze may however be reduced by the amount of a taxable dividend which is declared and paid by the corporation in respect of the Preferred Shares. Unless one is certain that the corporation will at all times remain a “small business corporation”, we recommended that one provide for the payment of a taxable dividend on the Preferred Shares calculated at the prescribed rate in order to avoid the occurrence of this attribution rule. INTEREST-FREE LOAN TO THE TRUST: LOSS OF THE ROLLOUT AND ATTRIBUTION RULES On frequently seen situations in which a person, who is both a trustee and beneficiary of a family trust established for the benefit of his family (hereinafter “Trustee/Beneficiary”), transfers funds to the trust for the purpose of enabling it to acquire shares or other property, or pay certain expenses. However, it is important to remember that the trust possesses a patrimony which is separate and autonomous from that of the Trustee/ Beneficiary, and that there should generally be no transfer of funds between the latter and the trust. Unless such a transfer constitutes an actual loan within the meaning of the applicable law (a bona fide loan), the attribution rule in subsection 75(2) ITA will apply and all the income or capital gains derived therefrom will be re-attributed directly back to the Trustee/Beneficiary. As a result, the splitting sought with the spouse and/or minor children of the Trustee/Beneficiary will not be achieved. Furthermore, if subsection 75(2) ITA applies, the trust will lose the Rollout in favour of the minor children (i.e. the beneficiaries other than the Trustee/ Beneficiary and his spouse). In addition, where it is reasonable to consider that the income earned by the trust from the funds thus loaned is thereafter allocated and paid to the minor children and/or the spouse of the Trustee/Beneficiary, these loans should be at the prescribed interest rate, failing which certain attribution rules will generally apply, causing the income earned by the trust from the funds loaned and allocated to the minor children and/or the spouse of the Trustee/Beneficiary to be attributed to the Trustee/Beneficiary. VOTING SHARES OF A CORPORATION HELD BY THE TRUST: RISK OF ACQUISITION OF CONTROL FOR PURPOSES OF THE ITA. When the shares of a corporation with a majority of the voting rights, that is, shares providing for the election of a majority of directors of the corporation, are held by a trust, the case law has held that it is the trustees who control the shares of the corporation, and they hold de jure control thereof. In such circumstances, the position of the tax authorities is generally that there is an acquisition of control of the corporation for purposes of the ITA when one of the trustees is replaced, unless none of them is dealing at arm’s length with the others. An acquisition of control at a given time may have adverse tax consequences for the corporation, particularly in respect of the use of its losses realized prior to that time, the imposition of a year-end immediately prior to that time, and the application of certain restrictions respecting expenses and investment tax credits for scientific research and experimental development. Accordingly, it is generally preferable for trusts to only hold participating, non-voting shares. FAILURE TO DOCUMENT TRANSACTIONS INVOLVING THE TRUST: DIFFICULT AUDIT WITH TAX AUTHORITIES Similarly to corporations, it is imperative for trusts to document the transactions they conduct during the year and maintain their trust “book”. This practice allows for subsequent follow-ups to be done to substantiate the transactions and distributions of the trust (e.g., prove that a bona fide loan was entered into and repaid) and ensure their tax treatment is accurate. In the event of an audit, an up-to-date trust book will serve as an important tool for defending the tax treatment of the trust’s operations. _________________________________________1 Generally, to be considered a “small business corporation”, all or substantially all of the value of the assets of the corporation must be attributable to assets that are used principally in an active business carried on primarily in Canada: section 248(1) ITA, “small business "corporation”.

CONTENTS  Life Insurance Policy: How to Extract Funds from a Corporation with No Tax Impact Constructive Dismissal Analyzed in the Context of a Business Acquisition The Right of Withdrawal, a Controlled Form of Contractual Freedom Transfers of Residences Involving a Spousal Testamentary Trust LIFE INSURANCE POLICY: HOW TO EXTRACT FUNDS FROM A CORPORATION WITH NO TAX IMPACTLuc Pariseau with the collaboration of Martin Bédard, articling studentIndividual shareholders who wish to withdraw funds from a corporation can face some tax challenges that are sometimes difficult to overcome. Nevertheless, there are various ways of achieving this objective that limit or eliminate the negative tax consequences to the shareholder and the corporation, provided certain conditions are complied with. The transfer of a life insurance policy by an individual shareholder to a corporation where the two are in a non-arm’s length relationship is often an effective way of accomplishing this.The technique is simple. The individual transfers his policy to his corporation and receives a consideration equal to the fair market value of the policy, as determined by an actuary. The consideration paid by the corporation may be in the form of money or a promissory note that will be paid when the corporation has the necessary cash available. By operation of the ITA, the proceeds of disposition are deemed to be equal to the cash surrender value of the policy transferred at the time of the disposition.1The shareholder is then taxed on the difference between the cash surrender value of the policy and its adjusted cost base, and the resulting gain, if any, is considered to be income from property and not a capital gain.2 Assuming that the cash surrender value of the policy is low and that its fair market value is high, the shareholder will benefit from a significant disbursement of funds with little or no negative tax impact.The fair market value of a policy will be higher than its cash surrender value, for instance, where the insured’s health condition has deteriorated since he or she took out the policy. This will also be the case where the theoretical premium for a comparable policy would be higher than that paid for the policy in question for financial reasons attributable to the type of policy purchased or to changes in pricing.As for the corporation, it ends up making a non-deductible outlay of funds and acquiring an interest in an insurance policy with an adjusted cost base equal to its cash surrender value. Thus, upon the death of the shareholder, in addition to receiving the insurance proceeds, the corporation will also benefit from an increase in its capital dividend account equal to the indemnity received, less the adjusted cost base of the policy.3The Canada Revenue Agency acknowledges the validity of this type of planning, but seems to be uncomfortable with the result.4 It has submitted this issue to the Department of Finance which has indicated that it is studying the issue. However, no amendment has been made to the statute to date, more than 10 years after the issue was raised for the first time in 2002.In addition, there are certain advantages to the corporation holding the insurance policy and paying the premiums, particularly the fact that the after-tax cost of the premiums is often lower to the corporation than it would be to the shareholder.The foregoing analysis is obviously general in nature and a more detailed assessment is advisable for any individual who is in a position to transfer a personally owned policy to a corporation.________________________________  1 Subsection 148(7) of the Income Tax Act (“ITA”).  2 Subsection 148(1) and paragraph 56(1)(j) ITA.  3 Subsection 89(1) “capital dividend account” d) ITA.  4 CRA, Technical Interpretation 2002-0127455, “Non arm’s length disposition” (May 7, 2002); CRA, Technical Interpretation 2003-0040145, “Transfert d’une police d’assurance-vie” (October 6, 2003); ARC, Technical Interpretation 2008-0303971E5, “Transfer of a life insurance policy” (May 27, 2009).CONSTRUCTIVE DISMISSAL ANALYZED IN THE CONTEXT OF A BUSINESS ACQUISITIONGuy Lavoie and Élodie Brunet with the collaboration of Brittany Carson, articling studentIn the case of St-Hilaire c. Nexxlink inc.1 the Court of Appeal of Québec analyzed the concept of “constructive dismissal” in the specific context of a business acquisition.In this case, Nexxlink was the subject of an acquisition that resulted in a series of changes to the business, some of which affected the employment conditions of Mr. St-Hilaire. Believing that this had resulted in substantial changes to the essential conditions of his employment contract, Mr. St-Hilaire left his employment shortly after the transaction, alleging that he had been constructively dismissed. He claimed $525,000 in damages from Nexxlink.The Court of Appeal affirmed the decision of the Superior Court, holding that Mr. St-Hilaire had not been constructively dismissed.According to the criteria laid down by the Supreme Court of Canada, constructive dismissal involves [translation] “1) a unilateral decision by the employer, 2) a substantial change or changes to the essential terms of the employment contract, 3) the employee’s refusal of the changes, and 4) the employee’s departure.”2 These criteria are assessed from the perspective of a reasonable person placed in the same situation.3In the context of the transaction in this case, the change in the title of Mr. St-Hilaire’s position from vice-president, business development to vice-president, infrastructure equipment sales did not amount to a substantial change in his employment conditions nor a demotion, but rather a change in the organization of the business, which was within the management rights of Nexxlink.With respect to the changes alleged by Mr. St-Hilaire to his responsibilities and target market, these were only fears. In the context of a business acquisition, some of the senior executives’ duties may be changed or clarifi ed over time: [translation] “a period of uncertainty or adjustment is entirely foreseeable”. According to the Court, a reasonable person placed in the same context as Mr. St-Hilaire could have foreseen that he would have retained his client accounts, and that various opportunities could be expected within the new business.With regard to Mr. St-Hilaire’s compensation, it consisted primarily of a base salary of $170,000, a $40,000 bonus plan, and 20,000 stock options at the time he started his employment.Contrary to Mr. St-Hilaire’s allegations, the Court found that the criteria for awarding the annual bonus had not been substantially changed. Moreover, even if this had been the case, his employment contract expressly stated that the bonus plan could be changed simply upon the approval of the board of directors. As for the cancellation of the stock options, even if this could be considered to be a reduction in Mr. St-Hilaire’s compensation, he never complained about it before leaving the company. According to the Court, Mr. St-Hilaire undoubtedly did not feel that this was an essential condition.In conclusion, the Court of Appeal found that Mr. St-Hilaire was aware of the role that was reserved for him in the new business. The structure he complained of was temporary and uncertain. In the context of this transaction, the allegations of constructive dismissal were ill founded.The interest of this decision lies in the fact that it relativizes the concept of constructive dismissal in the specific context of a business acquisition, in addition to reiterating the principle that the structure of a business is not bound to remain static.________________________________  1 2012 QCCA 1513 (C.A.)(affi rming 2010 QCCS 2276 (S.C.)).  2 Id., para. 29, citing Farber v. Royal Trust Co., [1997] 1 S.C.R. 846 (hereinafter “Farber”).  3 Farber, para. 26.THE RIGHT OF WITHDRAWAL, A CONTROLLED FORM OF CONTRACTUAL FREEDOMCatherine MéthotThe right of withdrawal, also referred to as an “opting out” clause, is the right given contractually or by law to a party to withdraw from a transaction without justifi cation prior to it being actually entered into. Although the withdrawal clause may procure a high degree of freedom, one cannot invoke it in a cavalier manner. Indeed, a withdrawal clause cannot be used in a malicious or abusive manner, nor can it run against the requirements of good faith. Furthermore, to be valid and effective, a withdrawal clause must be enforceable and explicit.The Court of Appeal of Québec recently reminded us of these principles in the case of London v. Kyriacou.1 In this case, the owners of a day-care centre (the “Sellers”) accepted from Mrs. Kyriacou and Mrs. Teologou (the “Purchasers”) an offer to purchase the daycare centre. The sale was initially scheduled to take place on September 29, 2006. This date was thereafter postponed several times and the terms of the offer were also amended on several occasions as the months went by. Among other things, the parties agreed to increase the sale price by $150,000.00 conditionally to the day-care centre being granted a government subsidy within 15 months from the date of the sale. As soon as autumn 2006, the Sellers introduced the Purchasers to the parents of the children attending the day-care centre as being the new owners of the facility from January 2007. In May 2007, the Purchasers began operating the day-care centre and acting like true owners, particularly by having repairs made at their own cost and establishing a new educational program. From May 2007, the parties exchanged several draft sale agreements and the transaction was to take place in August 2007. However, on August 10, 2007, following receipt of a letter from government authorities confi rming that the day-care centre would be subsidized beginning in March 2008, the Sellers notifi ed the Purchasers that they were withdrawing from the negotiations. They also changed the locks of the day-care centre and denied access thereof to the Purchasers.The Purchasers brought a motion for the transfer of title before the Superior Court of Québec to force the Sellers to carry out the transaction. The Sellers opposed the motion, among other things alleging that the initial offer to purchase included an opting-out clause, which they were entitled to rely upon. The clause read as follows: “After due diligence is said and done and all conditions have been agreed upon, if one of the parties’ purchaser or vendor refuse to go ahead the other will be liable for professional fees occurred.”In the first instance, the Superior Court refused to apply the clause because the Sellers had acted in bad faith all along the negotiation process, that further, the clause was not explicit and that had it been explicit, the Sellers, by their actions (particularly by encouraging the respondents to operate the day-care centre and the substance of the discussions on the sale agreement) waived its application. The Superior Court found from the evidence that all the conditions mentioned in the original offer had been satisfied and that there had been an agreement on all the new elements raised thereafter by the Sellers. In short, the terms of the transaction had been agreed upon by the parties and it only remained to make it offi cial by executing an agreement. The Superior Court therefore ordered the parties to sign the agreement and the Court of Appeal affirmed that decision.Although including an opting-out clause in a contract or a letter of offer may constitute a very attractive strategy, the decision summarized in this bulletin articulates the importance of carefully drafting it and demonstrates that one is better to consult a professional before relying on it.________________________________  1 2013 QCCA 37.TRANSFERS OF RESIDENCES INVOLVING A SPOUSAL TESTAMENTARY TRUSTDiana DarilusThe sale of a house by a spousal testamentary trust and the purchase of a new residence in replacement of the former may result in adverse tax consequences if all required precautions are not taken prior to the fact.EXEMPTION FOR PRINCIPAL RESIDENCEWhen a spousal testamentary trust gains possession of a house following the death of a taxpayer and thereafter wishes to dispose of it, the availability of the principal residence exemption to reduce the taxable capital gain resulting from the transfer must be ascertained.Furthermore, the tax act1 provides for certain presumptions when a taxpayer disposed of a house in favour of a spousal testamentary trust through a tax rollover upon death so the trust can benefit from the principal residence exemption for the years during which the deceased taxpayer owned the house.Generally a spousal testamentary trust may benefit from the principal residence exemption upon the sale of the house for all the years during which the deceased taxpayer or the trust itself owned it, to the extent that several conditions are met.One of these conditions is that when the trust was the owner of the residence, the residence must have been ordinarily inhabited by a specified beneficiary, by the spouse or common-law partner or the former spouse or common-law partner of such beneficiary or a child of such beneficiary. A specified beneficiary generally means any person benefi cially interested in the trust who ordinarily inhabited the housing unit (or has a spouse or common-law partner or former spouse or common-law partner or a child who ordinarily inhabited the housing unit).Furthermore, prior to designating the house as principal residence for the years of ownership by the deceased taxpayer while he or she was living or by the trust itself, the trust must also ascertain that no principal residence designation on another property has been made in respect of these years, neither by the deceased person or his or her family unit, nor by a specified beneficiary or his or her family unit.MAINTENANCE OF TESTAMENTARY TRUST STATUSIn the context of a transaction for the sale and purchase of residences involving a testamentary trust, one must be careful not to jeopardize the testamentary trust status of this trust, which benefits from taxation at progressive rates.Therefore, in order to retain its testamentary trust status, no item of property must be contributed to the trust otherwise than by an individual on or after his or her death and as a consequence thereof. The trust could then lose its testamentary trust status and related tax benefits if, for example, it does not deal at the fair market value when acquiring the new residence: the seller may be considered as having made a contribution equal to the excess of the fair market value of the property over the fair market value of the consideration paid by the trust.Subject to certain exceptions, the testamentary trust status of the trust may also be lost if the trust incurs a debt or any other obligation owed to, or guaranteed by, a beneficiary of the trust (for example, the spouse of the deceased person) or another person with whom a beneficiary of the trust does not deal at arm’s length.CONCLUSIONThe tax consequences of transactions involving real property transferred by or to a spousal testamentary trust should always be carefully reviewed beforehand in order to avoid unpleasant surprises.________________________________  1 Income Tax Act.

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.

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