Joint Ownership of Shares In A Private Corporation

Monday, February 18, 2013
Someone online posed an interesting question: Could an individual and spouse jointly own shares of a private corporation?
I had never seen it in practice, never seen it discussed nor come across it in any case law. There are many instances where bank accounts and brokerage accounts are set up as joint accounts and real estate is often held jointly. Why not shares? There appears to be no reason why it can’t happen.
What does it mean to own the shares jointly?
If the couple jointly own the shares, the couple each owns a severable, equal interest in the shares. Thus, if they owned 100 shares, the title could be severed and each own 50 shares.
On death, the surviving spouse would own all the shares. The Ontario Business Corporations Act (RSO 1990, c B.16) addresses this matter in subsection 67(6).
Joint holders
(6) Where a security is issued to several persons as joint holders, upon satisfactory proof of the death of one joint holder, the corporation may treat the surviving joint holders as owner of the security. R.S.O. 1990, c. B.16, s. 67 (6); 2006, c. 8, s. 117 (5).
In this sense the owners are joint tenants with the right of survivorship (JTWROS).
Avoiding probate.
Since the transfer occurs without a will, the property is not subject to probate. In Ontario, probate fees for shares of a private corporation are normally avoided by having a secondary will, one that isn’t probated, or by using trusts.
Jointly owning shares could be a more cost effective method of reducing probate fees but should not be the primary objective for doing so.
Rollover on Death.
Normally, subsection 70(5) of the Income Tax Act deems an individual who dies to have disposed of all capital property at fair market value; however, since the these shares would pass to the individual’s spouse, subsection 70(6) provides an exclusion to the deemed disposition. The surviving spouse would be subject to tax on the unrealized gains of the shares.
Voting The Shares.
Section 102(4) of the OBCA deals with casting votes on jointly held shares.
(4) Unless the by-laws otherwise provide, where two or more persons hold shares jointly, one of those holders present at a meeting of shareholders may in the absence of the others vote the shares, but if two or more of those persons are present, in person or by proxy, they shall vote as one on the shares jointly held by them. R.S.O. 1990, c. B.16, s. 102 (4).
Where control of the corporation is an issue, an agreement between the spouses could explicitly state their intentions on how the shares should be voted.
Taxing Gains and Income.
The shares would be subject to the attribution rules for spouses and, depending on the circumstances, gains and income could be attributed back to one spouse and not taxed in the hands of the other.
Scenario one. If shares are are issued from treasury for a nominal amount and each spouse contributes their own funds to purchase the shares then the attribution rules would not apply.
Scenario two. An individual owns all the share of a corporation with a potential capital gain. The spouse could receive a joint interest in the shares by way of a gift and, provided no election is made under subsection 73(1), the transfer would happen at cost, that is, no capital gain; however, the attribution rules would apply.
Notes.
1. A reference to spouse includes a common-law partner as defined in the Income Tax Act.
2. Joint ownership of shares of a private corporation can be done with any two persons, however, from an estate planning point of view such an arrangement can result in any of a number of negative consequences.
Posted in Estate Planning | Tagged , , , , , | 1 Comment

What is an automobile?

Friday, February 15, 2013
Case Citation
Myrdan Investments Inc v. The Queen (2013 TCC 35) [TCC] [CanLII]
Summary
An individual used a corporate-owned pick-up truck in carrying out his duties as employee and shareholder of Myrdan Investments Inc. The appeal focuses on the issue of whether the truck meets the definition of an “automobile” in subsection 248(1) of the Income Tax Act (ITA).
The minister took the position the truck was an automobile and assessed a taxable benefit for an employer-provided automobile and classified the property in Class 10.1 instead of Class 10. In reviewing the facts, the court found the truck met the exceptions in paragraph (e) of the definition. Namely, the truck was used, all or substantially all, for the transportation of goods, equipment or passengers in the course of gaining or producing income (paragraph (e)(ii)) and used primarily for those purposes in remote locations (paragraph (e)(iii)). Meeting either condition is sufficient to exclude a vehicle from the definition of being an automobile.
As a result, the employment benefits were dismissed; however, there was a personal element to the use of the pick-up truck and the taxpayer was assessed a benefit as a shareholder under subsection 15(1). The court assessed the shareholder benefit based on personal-use kilometres and the rate set by the Department of Finance for use in calculating benefits under paragraph 6(1)(k). It did so since it seemed reasonable given there was no known or reliable fair market value for renting such a truck.
Further the truck was placed in the company’s Class 10 pool. Class 10.1 only applies to a “passenger vehicle”, which is defined to be an automobile purchased or leased after June 17, 1987, over a certain value.
The minister argued the vehicle was not used to transport goods or equipment or passengers. At times there were passengers and the judge viewed the safety equipment and first-aid kit carried in the truck and required for work in the oil-fields of Alberta were sufficient to meet the definition.
Myrdan Investments Inc. held various shares and interests in private businesses. The minister argued the test on the vehicle’s use in the course of gaining or producing income should be limited to activities related directly to Myrdan and exclude any activity done for its investments. In finding for the appellant, the judge referenced an Interpretation Bulletin that addresses the issue of non-interest bearing loans to subsidiary corporations. In Canadian Helicopters Ltd. (2002 FCA 30) the Federal Court of Appeal agreed with the Tax Court of Canada that interest incurred to make the non-interest bearing loan was deductible since it enabled the company to increase its capacity to pay dividends and hence was a source of income for the parent. In this case, providing services to a subsidiary enhanced its ability to pay dividends and thus the truck was used in the purpose of gaining income from property.
This case is a reminder that the phrase “all or substantially all” is not set in stone as to mean 90% or more. Similarly, the phrase “used primarily” is flexible. In the judge’s words,
“The respondent has argued that “primarily” represents a standard of at least 50%; however, this standard, like the “all or substantially all” standard, is flexible.”
And, in a case cited by the judge, the phrases were described as elastic.
Issue
[1] These appeals from reassessments for the taxation years of Myrdan Investments Inc. (“Myrdan” or the “corporate appellant”) ending October 31, 2006 and October 31, 2007 and for the 2007 taxation year of Daniel Halyk (the “appellant” or “Mr. Halyk”) involve the question of whether a pickup truck is an “automobile” within the meaning of that term as defined in subsection 248(1) of the Canada Income Tax Act (the “ITA”) or whether the vehicle falls within the exceptions in subparagraphs (ii) and (iii) of paragraph (e) of that definition.
[21] …The central issue remaining in these appeals is the use of the truck owned by Myrdan and operated by Mr. Halyk. An inquiry into the use of the truck will determine whether it is an “automobile” pursuant to the definition in subsection 248(1) of the ITA what method should be used to calculate the shareholder benefit to Mr. Halyk. If the truck was not an automobile, it was properly classified by the taxpayer as class 10 capital property. If the truck was an automobile, the Minister’s assessment on the basis that the truck was a “passenger vehicle” included in class 10.1 is correct. The definition of “passenger vehicle” includes an automobile. The appellant’s position is that the truck is not an automobile, since it falls within either or both of the following exclusions in subparagraphs (ii) and (iii) of paragraph (e) of the definition of “automobile”:…
[22] The respondent’s position is that the truck meets the requirements for neither of the above exclusions.
[23] In respect of Mr. Halyk’s appeal, the issue is whether he received a benefit taxable under subsection 15(1) of the ITA and, if so, what the value of that benefit was. If the truck was an automobile, the value of the shareholder benefit is calculated under subsection 6(2) of the ITA. If the truck was not an automobile, the value of the shareholder benefit must be determined by other means. In the reassessment for Mr. Halyk’s 2007 taxation year, the Minister assessed a shareholder benefit of $13,811 in respect of a passenger vehicle stand by charge and $3,872 in respect of passenger vehicle operating costs.
ITA / ETA
| 6(1)(e)—Standby charge for automobile |
| 6(1)(k)—Automobile operating expense benefit |
| 6(2)—Reasonable standby charge |
| 15(5)—Automobile benefit |
| 248(1) “automobile” |
| 248(1) “passenger vehicle” |
| Reg. Sch. II, Class 10, 10.1 |
Cases Cited
547931 Alberta Ltd. v. The Queen, 2003 TCC 170 (CanLII)
| Lyncorp International Ltd. v. Canada (2011 FCA 352) |
| Lyncorp International Ltd. v. The Queen (2010 TCC 532) |
| McHugh (B.J.) v. Canada ([1995] 1 C.T.C. 2652) |
| Pronovost v. The Queen (2003 TCC 139) |
Walsh v. The Queen, 2009 TCC 557 (CanLII)
| Canadian Helicopters Ltd. (2002 FCA 30) |
Analysis
[8] In order to fulfil his duties as CEO of Total Energy, Mr. Halyk was required to travel to a number of locations to perform business operations necessary for Total Energy. Total Energy entered into an agreement with Myrdan whereby Myrdan would receive management consulting fees and a monthly allowance for the operating expenses with respect to a vehicle that was suitable for Mr. Halyk’s purposes as CEO of Total Energy. The capital cost of the vehicle would be covered by Myrdan, and the expense involved in operating it for the purposes of Total Energy’s business would be covered by Total Energy.
3.2 Was the truck an automobile?
3.2.1 Was the appellant transporting “goods” or “equipment” in the course of gaining, earning or producing income?
3.2.2. Can work for all the businesses visited by Mr. Halyk be counted as use in gaining, earning or producing income for Myrdan?
[29] The evidence shows that Mr. Halyk did use the equipment in question here on safety stand-down tours, for example and was required to wear the safety equipment in order to have access to work sites, besides which he had to set an example for the staff in the various businesses Myrdan and Total had invested in. These instances of the use of safety equipment had a clear income-producing purpose. My finding on this point is consistent with the Court’s finding in Pronovost v. The Queen[5] (also an informal procedure case), where equipment such as tools and first aid kits was kept in a truck at all times but was still “transported” for the purposes of the exclusion in the definition of “automobile”.
3.2.2[3]. Can work for all the businesses visited by Mr. Halyk be counted as use in gaining, earning or producing income for Myrdan?
[31] The respondent submits that the tests for determining use of a vehicle in producing income can only apply to income earned for the owner of the vehicle, i.e., Myrdan. Therefore, Mr. Halyk’s use of the truck in the other businesses owned by Myrdan and Total Energy should not count in applying the use tests in subparagraphs (ii) and (iii) where the connection to income earned by Myrdan is too remote.
[34] The respondent relies on Lyncorp International Ltd. v. The Queen,[6] to exclude the kilometres travelled by Mr. Halyk to visit the Theo Halyk Company, a wholly owned subsidiary of Myrdan. In that case, Lyncorp, the appellant corporation was denied the deduction of expenses incurred by its owner for travel to businesses in which it had invested. Lyncorp paid the expenses for that individual’s travel to provide support services gratuitously to the businesses. The Court in Lyncorp held that the connection to Lyncorp’s income from business or property was too tenuous, since Lyncorp would only profit from these expenses by receiving future dividends from its investments in the business venture if they were profitable.
[35] The position adopted by the respondent with respect to travel to and from the Theo Halyk Company, is at odds with the CRA’s position concerning the application of paragraph 20(1)(c), which set out the requirement to be satisfied with respect, to the deduction of interest on borrowed money. The provision provides that the borrowed money must be used for the purpose of earning income from a business or property in order for interest to be deductible. The CRA accepts that interest on borrowed money used to make an interest-free loan is nonetheless deductible in the following context:
25. Interest expense on borrowed money used to make an interest-free loan is not generally deductible since the direct use is to acquire a property that cannot generate any income. However, where it can be shown that this direct use can nonetheless have an effect on the taxpayer’s income-earning capacity, the interest may be deductible. Such was the case in Canadian Helicopters where in the court found that there was a reasonable expectation on the part of the taxpayer of an income-earning capacity from the indirect use of the borrowed money directly used to make an interest-free loan. Generally, a deduction for interest would be allowed where borrowed money is used to make an interest-free loan to a wholly-owned corporation (or in cases of multiple shareholders, where shareholders make an interest-free loan in proportion to their shareholdings) and the proceeds have an effect on the corporation’s income-earning capacity, thereby increasing the potential dividends to be received. These comments are equally applicable to interest on borrowed money used to make a contribution of capital to a corporation of which the borrower is a shareholder (or to a partnership of which the borrower is a partner). A deduction for interest in other situations involving interest-free loans may also be warranted depending upon the particular facts of a given situation.[7]
It is reasonable to infer that the service provided by Mr. Halyk to the Theo Halyk Company enhanced that corporation’s ability to pay dividends to Myrdan. Moreover, Lyncorp is distinguishable on the basis that none of Lyncorp’s subsidiaries were wholly owned by it.
3.2.2[4] The “all or substantially all” test: use to transport goods, equipment or passengers in the course of gaining or producing income
[39] In Pronovost, Associate Chief Judge Bowman (as he then was) pointed out:
The 90% rule used by the CCRA has no statutory basis although it may be necessary that some sort of rigid criterion be applied administratively. That does not mean that the court must follow it . . . [9]
[40] In 547931 Alberta, Judge Bowie adopted a similar view:
. . . [i]f Parliament had intended that 90%, or any other fixed percentage, should govern, then it would have expressed that in the statute, rather than using what is obviously, as Judge Bowman put it in Ruhl v. Canada, an expression of some elasticity. . . [10]
[41] In Ruhl v. Canada, Judge Bowman (as he then was) discussed the flexibility that the courts are entitled to show in interpreting terms such as “primarily” and “substantially all”:
The terms “substantial” or “substantially all” are expressions of some elasticity. It has been said that they are an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole. They do not require a strictly proportional or quantitative determination.[11]
[42] In light of the above, the appellants have demonstrated that they have satisfied the “all or substantially all” test in subparagraph (e)(ii) of the definition of “automobile” in subsection 248(1) of the ITA.
3.2.5 The “used . . . primarily” test: use to transport goods, equipment or passengers in the course of earning or producing income in remote locations
[43] The appellants have also demonstrated that the use of the truck brings it within subparagraph 248(1)(e)(iii) of the definition, which requires use primarily for income-earning or -producing purposes in remote locations. The respondent has argued that “primarily” represents a standard of at least 50%; however, this standard, like the “all or substantially all” standard, is flexible.
[49] The respondent has argues that two other trips in Mr. Halyk’s summary chart should be excluded from the subparagraph (iii) calculation, on the basis that no passengers or equipment were transported. Specifically, they are the trips to Rocky Mountain House from January 22 to 26, 2007 (410 km) and to Lloydminster and Estevan on September 5 to 10, 2007 (2,630 km). Indeed, no passengers are recorded on the summary chart. However, as discussed above, the evidence shows that Mr. Halyk was at all times transporting equipment for use in earning or producing income.
4.1 Mr. Halyk’s benefit
[50] Because the truck is not an automobile, the automobile benefit provisions in subsection 15(5), paragraph 6(1)(e), subsection 6(2) and paragraph 6(1)(k) of the ITA do not apply.
[51] The respondent did not make any proposal with respect to how Mr. Halyk’s shareholder benefit should be calculated if, as I have concluded, the truck is not an automobile. The appellants’ position is that this Court should rely on the method described in McHugh (B.J.) v. Canada.[13] Where the personal use of property is incidental to the business purpose for which the property was acquired, McHugh suggests a valuation approach based on the “fair rental value” of the shareholder’s actual use of such property owned by the corporation.
[52] McHugh does not mandate a method for determining the fair rental value of a vehicle that is based on actual use. In the absence of market information about the fair rental value of a truck such as the one used by the appellant, it appears reasonable to apply the statutory rate that is used to calculate the employee benefit for personal use of a passenger vehicle. Applying the 22-cent rate to 4,320 personal use kilometres, the shareholder benefit works out to $950.40.
Decision
[53] For the reasons noted above and taking into account the Minutes of Settlement entered into by the parties and filed at the hearing, the appeals are allowed and the reassessments are referred back to the Minister for reconsideration and reassessment on the basis that:
Myrdan’s taxation year ending October 31, 2006
a. Myrdan did not carry on a personal services business.
b. The income earned by Myrdan in the course of providing services to Total Energy Services Inc. was income from an active business.
c. Myrdan is entitled to additional advertising expenses of $4,097.
d. Myrdan is entitled to additional insurance expenses of $746.
e. Myrdan is entitled to additional repairs and maintenance expenses of $1,147.
f. Myrdan is entitled to additional travel expenses of $3,217.
g. Myrdan is not entitled to any additional expenses other than those noted above.
Myrdan’s taxation year ending October 31, 2007
1. Myrdan did not carry on a personal services business.
2. The income earned by Myrdan in the course of providing services to Total Energy Services Inc. was income from an active business.
3. Myrdan is entitled to additional advertising expenses of $4,676.
4. Myrdan is entitled to additional insurance expenses of $1,044.
5. Myrdan is entitled to additional repair and maintenance expenses of $1,406.
6. Myrdan is entitled to additional travel expenses of $3,978.
7. The assessed capital cost allowance (“CCA”) with respect of the Motor Home of $12,000 shall remain as assessed;
8. Myrdan’s pickup truck is automotive equipment within class 10 of Schedule II to the Income Tax Regulations and is not a passenger vehicle within class 10.1.
Mr. Halyk’s 2007 taxation year
1. The assessed personal use benefit with respect to the Motor Home of $6,544 shall be removed from income.
2. The assessed operating costs with respect to the Motor Home of $1,785 shall be removed from income.
3. Mr. Halyk’s personal use of Myrdan’s (pickup truck) resulted in an aggregate taxable benefit of $950.54.

2013.02.15 - 20 - JamesPiperCA - 6(1)(e)—Standby charge for automobile

2013.02.15 - 20 - JamesPiperCA - 6(1)(k)—Automobile operating expense benefit

2013.02.15 - 20 - JamesPiperCA - 6(2)—Reasonable standby charge

2013.02.15 - 20 - JamesPiperCA - 15(5)—Automobile benefit

2013.02.15 - 20 - JamesPiperCA - 248(1) “automobile”

2013.02.15 - 20 - JamesPiperCA - 248(1) “passenger vehicle”

Posted in Employee Benefit, Income Tax Act | Tagged , , , , , , , , | Leave a comment

Exempt Service for GST

Thursday, February 14, 2013
Case Citation
Keeler v. The Queen (2013 TCC 28) [TCC] [CanLII]
Summary
A taxpayer’s services did not meet the requirements of being an exempt service under Part II of Schedule V of the Excise Tax Act. The act sets out specifics requirements and the the trauma therapy service simply didn’t met them.
Issue
[1] This appeal concerns whether trauma therapy services provided by the appellant, Lyn Williams‑Keeler, are exempt from goods and services tax (GST). Ms. Williams-Keeler has been assessed under the Excise Tax Act on the basis that the services are taxable except to the extent that they are covered by provincial health insurance.
ITA / ETA
Part II of Schedule V
Cases Cited
None.
Analysis
[13] The Excise Tax Act provides exempt status to a great many health care services listed in Part II of Schedule V. Services by trauma therapists are not listed specifically, but Ms. Williams‑Keeler submits that her services are encompassed by the following exemptions:
(a) a supply by a medical practitioner (section 5);
(b) a supply by a practitioner of a psychological service (section 7(j)); and
(c) a supply of a health care service made on the order of a medical practitioner or practitioner (section 10).
[14] Despite the sympathetic circumstances of this appeal, I have concluded that the services provided by Ms. Williams‑Keeler are not encompassed by any of the above exemptions. My reasons follow.
Decision
[33] I would conclude that the exemptions relied on by Ms. Williams‑Keeler do not include the trauma therapy services that she provides. Although there may be good policy arguments in favour of exempting these services, this is a matter for Parliament and not the courts. The appeal will be dismissed.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.
Posted in Excise Tax Act, Exempt Good or Service | Tagged , | Leave a comment

Unreported Income, Gross Negligence Penalty

Thursday, February 14, 2013
Case Citation
Murugesu v. The Queen (2013 TCC 21) [TCC] [CanLII]
Summary
A taxpayer and his corporation were engaged in placing workers with a farm in southern Ontario. As an immigrant with limited knowledge of language, laws etc. he relied on an accountant to prepare his personal tax return and those of his corporation. In doing so, the reported amounts did not reflect the facts. CRA sought to assess him and the corporation for unreported income as well as apply the gross negligence penalty under 163(2) of the Income Tax Act.
Part of the confusion lies with the fact the corporation paid some workers in cash and thus while the revenue of the corporation was understated, its cash payments for wages was also understated—a fact lost on the CRA and hence this appeal.
To the extent any funds paid from the corporation to the taxpayer were not included in income, the respondent (CRA) did not provided sufficient evidence to refute the testimony of the taxpayer.
Since the judge found no unreported income with his personal tax return, there could be no gross negligence penalty. That was not the case for the corporation, a portion of the assessed amount was unreported but did the penalty apply?
The burden is on the government to show the taxpayer acted in a way that warrants the gross negligence penalty. They could not. The judge found the taxpayer was a credible witness who unknowingly relied on an incompetent accountant. Further, the notion the penalty was assessed primarily based on the quantum of the unreported income was not relevant in determining if a person “knowingly, or under circumstances amounting to gross negligence” made a false statement in a return.
It seems to me a more thorough investigation by the CRA would have avoided this appeal. It appears they made assumptions instead of gathering facts about the taxpayer’s situation.
Issue
[14] I will first consider the Corporation’s appeal with respect to its 2002 fiscal year. The sole issue before the Court is whether the Corporation incurred an expense for wages in excess of the $301,305 reported on its 2002 income tax return.
[29] As I noted previously, the Minister assumed that Mr. Murugesu appropriated all of the unreported income of the Corporation. As a result, she included the amount of the unreported income in his income under subsection 15(1) of the Act on the basis that the Corporation had conferred a benefit on Mr. Murugesu.
ITA / ETA
| 15(1)—Benefit conferred on shareholder |
| 163(2)—False statements or omissions |
Cases Cited
| Venne v. Canada ([1984] C.T.C. 223) |
Analysis
[11] Mr. Murugesu does not know why his accountant understated the Corporation’s gross revenue. He accepts that the Corporation did understate its gross revenue by $171,142 on its income tax return; however, he argues that the First Accountant also substantially understated the Corporation’s wage expense. As a result, the unreported income is substantially less than $171,142. He also argues that the Corporation should not be subject to a gross negligence penalty.
[12] The Minister assessed Mr. Murugesu personally in respect of the $171,142 of purported unreported income. She included in his taxable income a $171,142 shareholder benefit pursuant to subsection 15(1) of the Income Tax Act (the “Act”) and imposed a $22,560 gross negligence penalty.
[23] I have reviewed the numerous time cards for the workers paid in cash that are included in Exhibit A-1. I agree with counsel for the Respondent that the hourly rates shown on the time cards are lower than the hourly rates used to calculate the Corporation’s fees. This is consistent with Mr. Murugesu’s testimony. Further, in my view, it shows that the Corporation has not attempted to overstate the cash wages it paid to certain of its workers.
[27] Exhibit R-12 provides a breakdown of the $301,305 that the First Accountant reported on the Corporation’s 2002 income tax return as wages. This breakdown shows that $59,917 of the $301,305 was for cash wages. As a result, I have concluded that the Corporation understated by $88,856 the wages reported on its 2002 income tax return. This represents the difference between the actual cash wages of $148,773 and the amount reported by the accountant, $59,917.
[28] In summary, the Corporation understated its 2002 income by $82,286, that is, the difference between its unreported gross revenue of $171,142 and the $88,856 understatement of its cash wages.
[38] I do not find the schedule particularly helpful. It certainly does not support a finding that Mr. Murugesu appropriated the $82,286 of income that the Corporation failed to report on its income tax return.
[39] The withdrawals identified by Ms. Moore [CRA Investigator] would appear to consist of the wages paid to Mr. Murugesu ($52,182), whatever wages the Corporation paid to Mr. Murugesu’s spouse and a portion of the $148,773 in cash payments that the corporation made to its workers.
[40] It is my view that the objective evidence before me supports Mr. Murugesu’s testimony that he did not appropriate any amounts from the Corporation.
[41] The Minister levied gross negligence penalties in respect of Mr. Murugesu’s 2000, 2001 and 2002 taxation years. The Minister also levied a gross negligence penalty of $11,227 in respect of the Corporation’s 2002 taxation year.
[42] Since I have found that Mr. Murugesu did not receive a shareholder’s benefit in 2002, the penalty in respect of his 2002 taxation year will be removed.
[44] Pursuant to subsection 163(3), the burden of establishing the facts justifying the assessment of the penalty is on the Minister.
[45] As Justice Strayer stated in Venne v. The Queen, [1984] C.T.C. 223 (FCTD) at 234:
. . . “Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not . . . .
[46] Ms. Moore testified that she made the decision to levy the gross negligence penalties. She testified that she based her decision on the magnitude of the unreported amounts, the fact that Mr. Murugesu and the Corporation made cash withdrawals and the fact that Mr. Murugesu used some of the cash withdrawals to purchase a new condominium. She also referred to a “rough source and applications of funds” analysis. However, the Respondent did not provide the Court with the analysis.
[47] Ms. Moore testified that she never had a conversation with Mr. Murugesu or any employee of the Corporation. Notwithstanding the fact that Sargent Farms had provided her with the employees’ time sheets, she was not aware that the Corporation paid some of its employees in cash.
[48] After reviewing all of Ms Moore’s testimony, it appears to me that she based her decision to levy the gross negligence penalties primarily on the magnitude of the unreported income. This in my view is not a sufficient fact, in and of itself, to justify the imposition of the gross negligence penalties.
[49] Mr. Murugesu testified that, because of his very limited understanding of English and the Canadian taxation system, he relied on the First Accountant to properly prepare and file his tax returns. He had no idea that the tax returns filed by the First Accountant were incorrect.
[50] Once an official from the CRA came to his home to discuss the problems with regard to his tax returns he immediately fired the First Accountant and hired a new accountant.
[51] Counsel for the Respondent did not adduce any evidence either through Ms. Moore or through his cross-examination of Mr. Murugesu that would undermine Mr. Murugesu’s credibility. As I noted previously, I found Mr. Murugesu to be a credible witness.
Decision
[56] Accordingly, the Corporation’s appeal in respect of its 2002 taxation year is allowed with costs. The reassessments are referred back to the Minister for reconsideration and reassessment on the basis that the Corporation, when filing its income tax return, understated its income by $82,286. The subsection 163(2) gross negligence penalty will be vacated.
[57] Mr. Murugesu’s appeal in respect of his 2000, 2001 and 2002 taxation years is allowed with costs. The reassessments are referred back to the Minister for reconsideration and reassessment on the basis that no amount should be included in his income for the 2002 taxation year under subsection 15(1). All subsection 163(2) penalties will be vacated.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

2013.02.14 - 18 - JamesPiperCA - Blogspot - 15(1)—Benefit conferred on shareholder

2013.02.14 - 18 - JamesPiperCA - Blogspot - 163(2)—False statements or omissions

Posted in Income Tax Act, Penalties | Tagged , , , , | Leave a comment

For Lack of Evidence Allowable Business Investment Loss Denied

Wednesday, February 13, 2013
Case Citation
Stinson v. The Queen (2013 TCC 22) [TCC] [CanLII]
Summary
A taxpayer sought to deduct an allowable business investment loss (ABIL) and the deduction was disallowed. The case doesn’t revolve around the fine points of law concerning what is or isn’t an ABIL but the believability of the evidence (or lack of it) put forth by the plaintiff. While the judge did not use the word sham, he may have thought of it in dismissing the appeal.
I find it interesting to see how in one case a judge will discount a plaintiff’s testimony while accept others. The words of the decision can’t capture the court proceedings and the smell test one uses. Is this taxpayer earnest and forthright or cagy and deceitful? Many cases rest on this question.
If you are wondering what an ABIL is and why it matters, here goes.
For the most part, an investment in a corporation, through shares or debt, is usually considered capital property and any loss from its disposition results in a capital loss. Capital loss can only be applied against capital gains. Enter the ABIL—a special type of capital loss in that it can be used to reduce all sources of income not just capital gains.
What is an ABIL? It is one-half of one’s business investment loss (BIL). The one-half being the inclusion rate for capital gains or loss or a BIL.
So what is a BIL? Without getting bogged down in technical details, it’s a loss on shares or debt of a small business corporation (SBC). This leads into the definition of an SBC—a Canadian-controlled private corporation (CCPC) carrying on an active business.
The progression continues onto what is a CCPC or active business etc.
The point to remember is an ABIL is more beneficial in reducing taxes than a regular capital loss provided that is what happens and you have evidence to support your claim.
Issue
[1] The appellant, Deane Stinson, appeals an assessment made under the Income Tax Act that disallowed a deduction for an allowable business investment loss (ABIL) claimed in the 2008 taxation year.
[8] The issue in this appeal is whether the appellant incurred an ABIL on December 31, 2008 on the basis that his loans to Tille were uncollectible at that time.
ITA / ETA
| 39(1)(c) “business investment loss” |
| 50(1)—Debts established to be bad debts and shares of bankrupt corporation |
| 248(1) “small business corporation” |
Cases Cited
None.
Analysis
[10] The respondent submits that claim of the ABIL was properly disallowed on the basis of any one of the following:
(a) Tille was not a small business corporation at any time in 2008,
(b) the appellant had not made any loans to Tille, and
(c) the appellant has not established that any loans became bad debts in 2008.
[11] I would first comment that the appellant’s case depends in large part on his own self-interested testimony and on a limited number of documents that were within the appellant’s control. I have found that there is insufficient documentation to establish the ABIL, and that and (sic) the appellant’s testimony and some of the documents entered into evidence are not reliable.
[13] As for the documents that were entered into evidence, I have concluded that some of the key documents are not reliable. For example,
(a) The appellant provided to the Canada Revenue Agency (CRA) promissory notes evidencing the debt that were purportedly signed by one of the new owners of Tille. The reliability of the notes is doubtful because there are different versions of the notes that have different wording and also different signatures.
(b) The purported demand for payment made by the appellant (Ex. A-11) states an amount owing that does not correspond with the other evidence.
(c) The purported change of ownership on December 12 and 20, 2008 whereby shares were transferred to unrelated persons (evidenced by a hand-written shareholders’ ledger) is inconsistent with a statement made by the appellant in Tille’s corporate tax return for the year ended April 30, 2009 that his sons were the only shareholders. The ownership by the sons is also reflected in an ABIL questionnaire that was provided to the CRA on January 31, 2011.
(d) The appellant submitted a list of employees to the CRA which attempts to establish that Tille had at least five full time employees. The evidence surrounding these employment relationships was implausible.
[15] The problems with the evidence were so profound that the relevant facts regarding the ABIL claim cannot be determined.
Decision
[16] I would conclude that the appeal should be dismissed on the ground that the appellant has failed to establish, even on a prima facie basis, that any debts became bad in 2008. In particular, I am not satisfied that any shares of Tille were acquired by unrelated persons in 2008, or that any debts owing to the appellant in 2008 became uncollectible in that year.
[17] The appeal will be dismissed.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

2013.02.13 - 17 - JamesPiperCA - Blogspot - 39(1)(c) “business investment loss”

2013.02.13 - 17 - JamesPiperCA - Blogspot - 50(1)—Debts established to be bad debts and shares of bankrupt corporation

2013.02.13 - 17 - JamesPiperCA - Blogspot - 248(1) “small business corporation”

Posted in Capital Gain (Losses), Income Tax Act | Tagged , , , , , | Leave a comment

GST New Housing Rebate

Wednesday, February 13, 2013
Case Citation
Wong v. The Queen (2013 TCC 23) [TCC] [CanLII]
Summary
An individual purchased a new condo and claimed a GST rebate under section 254 of the Excise Tax Act. One of the requirements for the rebate is the individual must acquire the property for “use as the primary place of residence.”
The court looked the facts concerning her residency and that of her son. She maintained a larger residence in the same city while owning this property. Her son, a university student, resided in the condo for a short period during the summer break. Further the condo was tiny compared to her existing residence.
The judge found it difficult to believe she intended this condo to be her primary place of residence and denied the GST rebate.
Issue
[1] Ms. Wong is appealing the disallowance of her claim for a GST/HST new housing rebate of $22,982.71 relating to the purchase by her and her spouse of unit 501-2550 Spruce Street in Vancouver (the “Property”).
[2] The Minister of National Revenue (the “Minister”) disallowed the rebate on the basis that Ms. and Mr. Wong did not acquire the Property for use as their primary place of residence or as the primary place of residence of a relation.
ITA / ETA
| 254(2)—New housing rebate |
Cases Cited
None.
Analysis
[3] Paragraph 254(2)(b) of the Excise Tax Act, R.S.C., 1985, c. E-15 sets out that the new housing rebate is available where, at the time the purchaser becomes liable or assumes liability under an agreement for purchase and sale of the unit, the purchaser intends to use the unit as a primary residence for him or herself or for a relative.
[11] At the hearing before me, Ms. Wong presented a number of household bills to show that she and her spouse had moved into the Property and were continuing to reside there and, at one point, she went so far as to say that she and her spouse moved into the Property in August 2011. I find it extremely unlikely that they did, because it was admitted that when they took possession in August 2011, their son moved in and stayed until the end of his summer break from university. It is implausible that Ms. and Mr. Wong and their son would all stay in the Property and leave the house on West 15th Avenue unoccupied. Furthermore, the floor area of the Property was just 631 square feet. The house had a floor area of 2200 square feet and contained an office that Mr. Wong used in the evening.
[12] Mr. Wong testified that they moved into the Property in February 2012. This is consistent with Ms. Wong’s evidence that they moved in after the rebate claim had been denied. I accept that they did, in fact, begin using the Property a great deal of the time from February 2012 on, despite the fact that the Property was much smaller than their house. However, the actual use of the Property by the Wongs is not relevant, in light of their own testimony that they did not intend to use the Property as their primary place of residence when they entered into the contract to purchase it.
[14] Given that the Wongs’ son was expected to spend the majority of his time away from Vancouver in 2011, 2012 and at least the early part of 2013, and that his subsequent plans were uncertain, I find that, in December 2009, the Wongs did not expect or intend that the Property would be his primary residence.
Decision
[15] For these reasons, I find that Ms. Wong is not entitled to the GST/HST rebate, and her appeal is dismissed.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

2013.02.13 - 16 - JamesPiperCA - Blogspot - 254(2)—New housing rebate

Posted in Excise Tax Act, Housing Rebate | Tagged , , | Leave a comment

Defence of Director’s Liability, De facto Director?

Tuesday, February 12, 2013
Case Citation
Chell v. The Queen (2013 TCC 29) [TCC] [CanLII]
Summary
Section 227.1 of the Income Tax Act (“ITA”) and section 323 of the Excise Tax Act (“ETA”) deal with what is referred to as director liability. In essence, where a corporation fails to remit certain amounts (e.g., payroll taxes, Part XIII tax, GST) the director’s are personally liable for these amounts and the government will take action to collect debt from directors. This case deals with this scenario.
There are two defences: first, the individual is not a director and second the director exercised due diligence in managing the affairs of the business. This case addresses both these points.
On the question of being a director, it’s clear one must look to commercial law, the laws governing the corporation, to determine if the person is considered a director. This is referred to as a de jure director. In this case, the individual sent notice to resign as a director; however, subsequent to his resignation, he behaved in a manner consistent with being a director and hence was considered to be a de facto director.
Since, the judge concluded he was a director and the assessment was made within the two year time limits of ITA 227.1(4) and ETA 323(5), the next question to address was whether the individual exercised due diligence.
The judge’s opinion was no. Given the plaintiff knew about the financial difficulties of the business and it’s obligations to remit taxes to the government, a reasonable person would not use funds to support a failing business and neglect its remittance obligations.
Issue
[1] The appellant, Allan A. Chell, is appealing three director’s liability assessments issued against him on May 5, 2008. One assessment pertains to the failure of cDemo Inc.’s (“cDemo”) to remit payroll source deductions (“source deductions”) for its 2003, 2004 and 2005 taxation years. The assessed amount is $53,768.95. Another assessment relates to cDemo’s failure to remit goods and services tax (“GST”) amounts in 2005. The assessed amount is $3,289.39. The third assessment pertains to the failure of Global Autolink Corp. (“Global”) to remit payroll source deductions. The assessed amount is $239,838.42. These appeals were heard on common evidence.
[15] There are two issues in these appeals:
1. First, was the appellant either a de jure or de facto director of cDemo or Global within the two years preceding the assessments?
2. If so, can the appellant rely on the so-called due diligence defence under subsections 227.1(3) and 323(3) of the Income Tax Act (“ITA”) and Excise Tax Act (“ETA”) respectively?
ITA / ETA
| Section 227.1—Liability of directors for failure to deduct |
| 227.1(1)—Liability of directors for failure to deduct |
| 227.1(3)—Idem [Limitations on liability] |
| 227.1(4)—Limitation period |
| Section 323—Tax liability re transfers not at arm’s length |
| 323(1)—Liability of directors |
| 323(3)—Diligence |
| 323(5)—Time limit |
Cases Cited
| Aujla v. Canada (2008 FCA 304) |
| Bremner v. Canada (2009 FCA 146) |
| Buckingham v. Canada (2011 FCA 142) |
Analysis
[16] The appellant argues that he ceased to be a director of cDemo and Global on January 11, 2006, the date on which he posted his letter of resignation at the offices of the two corporations. The appellant submits that, consequently he is not liable for the unremitted source deductions and GST because his resignation occurred more than two years before the assessments. According to the appellant, his continued involvement with cDemo and Global was solely in the capacity of creditor and shareholder, and not as a director. Finally, in the event of a finding to the contrary, the appellant claims that he exercised due diligence to prevent cDemo and Global from failing to remit the source deductions and GST.
[17] In response, the Minister submits that the appellant did not cease to be a director of cDemo or Global more than two years before the assessments. Further, the Minister contends that the appellant did not exercise due diligence to prevent cDemo and Global from failing to remit the source deductions and GST. Therefore, he is liable for their payment.
[20] In the present appeals, it is therefore necessary to determine whether the appellant was a director within the two years preceding the assessments for director’s liability.
[21] Neither the ITA nor the ETA defines when an individual ceases to be a director for the purpose of the director’s liability provisions. Rather, the corporate law of the relevant jurisdiction is determinative: Aujla v. Canada, 2008 FCA 304, [2009] 3 F.C.R. 93, at paragraphs 23 to 25.
[22] A director may be a de jure director or a de facto director for the purpose of director’s liability under the ITA and ETA: see Mosier v. R., [2001] G.S.T.C. 124 (TCC), at paragraph 23. A de jure director is an individual who has been appointed as such pursuant to the corporate law of the jurisdiction in which the corporation was created or continued, as the case may be. A de facto director can exist in two forms. As Bowman A.C.J., as he then was, observed in Mosier, at paragraph 23, “de facto directors can be those who are ostensibly duly elected but who may lack some qualification under the relevant company law, and those who simply assume the role of director without any pretence of legal qualification”. Either de jure or de facto directorship can give rise to director’s liability.
[23] If the appellant was a de jure or de facto director within the two years preceding the assessments for director’s liability, then he is liable for the unremitted source deductions and GST. This is so unless he can rely on the due diligence defence available under both the ITA and ETA.
[27] By posting his letter of resignation at the offices of cDemo and Global on January 11, 2006, the appellant provided to the corporation’s proper notice of resign action under both Delaware and Alberta corporate law. Since he ceased to be a de jure director more than two years before the assessments, it is necessary to determine whether the appellant was a de facto director of cDemo and Global despite his legal resignation.
[28] Following his legal resignation as a director of cDemo, the appellant continued to be actively involved with that company. As discussed above, the appellant negotiated the sale of certain assets of cDemo, signing his name on the corresponding bill of sale. Only a director of cDemo could have authorized the sale of cDemo’s assets. Although this sale occurred May 16, 2007, de facto directorship “must be considered to endure at least as long as [the] person manages or supervises the management of the business and affairs of the corporation in question”: see Bremner v. The Queen, 2009 FCA 146, at paragraph 8.
[29] The appellant continued to act as a de facto director of cDemo until at least June 2006. As noted above, the appellant signed in that month a statutory declaration removing a fellow director from the Alberta Corporate Registry. Such a declaration is effective only if signed by a director. Although the appellant claimed at trial that he was unaware that he was signing in the capacity of director, it is difficult to accept that he thought he could have made that change in the capacity of creditor or shareholder. This evidence suggests that the appellant was a de facto director of cDemo until at least June 2006.
[32] By continuing to act on behalf of Global, the appellant created the impression that he was still a director of the corporation. In my view, the evidence demonstrates that the appellant was a de facto director of Global until at least October 2006, at which time he ceased attempting to conclude a long‑term contract with a prospective client of Global’s.
[36] In The Queen v. Buckingham, 2011 FCA 142, the Federal Court of Appeal confirmed that an objective standard must be used to determine whether a director has satisfied the conditions of the due diligence defence under subsections 227.1(3) of the ITA and 323(3) of the ETA. Mainville J.A. stated:
37 . . . I conclude that the standard of care, skill and diligence required under subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise Tax Act is an objective standard . . . .
38 . . . Consequently, a person who is appointed as a director must carry out the duties of that function on an active basis and will not be allowed to defend a claim for malfeasance in the discharge of his or her duties by relying on his or her own inaction . . . .
39 An objective standard does not however entail that the particular circumstances of a director are to be ignored. These circumstances must be taken into account, but must be considered against an objective “reasonably prudent person” standard. . . .
Clearly, subsections 227.1(3) of the ITA and 323(3) of the ETA entail a modified objective analysis which involves considering what a reasonable person would have done in the circumstances of the individual under assessment.
[37] To establish the defence, the director or former director must show that he or she took positive actions to prevent the corporation’s failure to remit the amounts in question. In Buckingham, the Federal Court of Appeal compared the aforementioned provisions with paragraph 122(1)(b) of the Canada Business Corporations Act, which requires directors and officers to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”. Mainville J.A. wrote:
40 The focus of the inquiry under subsections 227.1(3) of the Income Tax Act and 323(3) of the Excise Tax Act will however be different than that under 122(1)(b) of the CBCA, since the former require that the director’s duty of care, diligence and skill be exercised to prevent failures to remit. In order to rely on these defences, a director must thus establish that he turned his attention to the required remittances and that he exercised his duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts.
[38] At trial, the appellant agreed that he was an inside director who was very familiar with the businesses of both cDemo and Global. The appellant also described his function with the two corporations as being to find new clients in order to develop new business. A reasonably prudent director with that level of familiarity with the businesses of cDemo and Global would have been aware of the significant financial difficulties facing the two corporations. The evidence shows that the appellant did not take any positive steps to ensure that the corporations continued to meet their remittance obligations. Instead, the source deductions and GST were diverted to fund the corporations’ failing businesses.
[40] The evidence shows that the appellant did not exercise “the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances”. A reasonable person in the appellant’s circumstances would have anticipated that the corporations’ financial difficulties could affect the remittance obligations of the two corporations and would have taken steps to prevent failures to remit. The appellant’s lack of oversight and his inaction cannot serve as the foundation of a due diligence defence.
Decision
[44] For all these reasons, the appeals are dismissed, with one set of costs to the respondent.
Note
A paragraph beginning with a number in square brackets is a direct quote from the case.

2013.02.12 - 15 - JamesPiperCA - Blogspot - 227.1(1)—Liability of directors for failure to deduct

2013.02.12 - 15 - JamesPiperCA - Blogspot - 227.1(3)—Idem [Limitations on liability]

2013.02.12 - 15 - JamesPiperCA - Blogspot - 227.1(4)—Limitation period

2013.02.12 - 15 - JamesPiperCA - Blogspot - 323(1)—Liability of directors

2013.02.12 - 15 - JamesPiperCA - Blogspot - 323(3)—Diligence

2013.02.12 - 15 - JamesPiperCA - Blogspot - 323(5)—Time limit

Posted in Director’s Liability, Excise Tax Act, Income Tax Act | Tagged , , , | Leave a comment