News of Note

In Riopel, a tax plan which contemplated a sale of shares followed first by an amalgamation, and then by the redemption of shares and repayment of a note by Amalco, was not properly implemented.  Among other problems, the amalgamation occurred before any sale.  LeBel J found that under art. 1425 of the Quebec Civil Code, the Court had the jurisdiction to declare that the written instruments did not give effect to the "the agreement of wills" reached by the parties when (before any documents were drafted) they were presented with the fully-articulated tax plan.

The simpler AES facts entailed a s. 86 exchange of shares for shares and a note, where the amount of the note was too high due to a miscalculation of the ACB of the old shares.  LeBel J found that there was an agreement of wills for there to be a s. 86 rollover by taking back note only up to the ACB.  Therefore, a declaration could be made under art. 1425 that the self-help documents which the parties entered into (after the filing of a notice of objection to the assessments of capital gain) - to reduce the note and issue (retroactively created) preferred shares - reflected that agreement.

The result in both cases is reasonably generous in the Quebec context as the articles of the corporations effectively were amended retroactively.

After referring to the argument of the Attorney General of Canada as intervener, that the Juliar line of cases was inconsistent with Shafron and Performance Industries, LeBel J stated (at para. 55) that the cases now before him were "governed by Quebec civil law and are not appropriate cases in which to reconsider the common law of rectification."

Neal Armstrong.  Summary of Agence du Revenu du Québec v. Services Environmentaux AES Inc. and Agence du Revenu du Québec v. Riopel, 2013 SCC 65 under General Concepts - Rectification and Interpretation Act, s. 8.1.

Where Canco drops FA1 into FA2, prior to a sale of FA1 by FA2 to an arm’s length non-resident purchaser, s. 69(11)(b) will not apply to deny s. 85.1(3) rollover treatment on the drop-down transaction: FA2 is not "exempted" from tax under the Act on its sale of FA1, but simply is not subject to tax under the Act in the first place.

Neal Armstrong.  Summary of 21 October 2013 Memorandum 2013-0505831I7 under s. 69(11).

The Fundy Settlement case established that the residence of a trust turns on where its central management and control is exercised.  However, where a trust is resident both in Canada and the United States under each jurisdiction's general rules, the Canadian competent authority, in an endeavour to resolve the trust's residency under Art. IV (4) of the Canada-US Convention, will consider such factors as the residency of the settlor and beneficiaries, the location of the trust property, and the reason the trust was established in its jurisdiction.  CRA also notes that Art. IV(4) only obliges the authorities to attempt rather than reach a resolution of the residency question.

As s. 4.3 of the Income Tax Conventions Act trumps the Convention, the Convention's tiebreaker rules cannot be applied where s. 94(3) deems a trust to be resident in Canada.

Neal Armstrong.  Summary of 11 October 2013 APFF Round Table Q. 3, 2013-049281 F (Dual residency of a trust) under Treaties - Art. 4.

Several years after the redemption of preferred shares which the taxpayer had received for the transfer under s. 85(1) of property to Opco, CRA determines that the transfer had occurred at an under-valuation, so that the taxpayer receives an additional payment from Opco "pursuant to" the price adjustment clause in the redeemed shares.  CRA considers that this payment will be recognized by the taxpayer as a dividend in the year of payment.

In many situations, the taxpayer would be better off not implementing such a price adjustment clause.

Neal Armstrong.  Summary of 29 October 2013 T.I. 2013-0507881E5 ("Price adjustment clause") under s. 84(3).