"One of the purposes” is too low a threshold (p. 3)
- The use of the "one of the purposes” test in s. 160(5)(a)(ii) establishes too low a threshold, and should be re-framed as “one of the main purposes."
There should be a specific tax debt that is being avoided (pp. 4-6)
- The reference in s. 160(5)(a)(ii) to a test of it being reasonable to consider that one of the purposes of the transaction or series was “to avoid … liability … for an amount payable under this Act” also sets too low a threshold and should be re-framed to refer to a demonstrable current or future anticipated tax debt of the transferor that would otherwise be avoided, determined at the beginning of the applicable series of transactions. Otherwise, the rule could apply, for example, to:
- An individual who makes a contribution to her spouse’s RRSP to protect against future liabilities of that contributor and to reduce (i.e., “avoid”) the transferor’s tax liability for that year and two years later, that individual becomes liable for a tax debt under s. 160 as a result of a dividend from a controlled corporation.
- A Holdco, which was set up to hold Opco for general creditor-proofing reasons, receives a dividend out of Opco’s safe income in 2022 and then, unexpectedly, Opco is unable to pay its 2023 tax liability in 2024.
S. 160(5)(c) rule should reflect all value-for value exchanges (pp. 6-9)
- The rule under s. 160(5)(c) (deeming there to be a net property transfer to the current or future tax debtor under s. 160(1)(e)(i)) is deficient in that it should:
- include the benefit of substituted property for the consideration received, and any property received by the transferor by virtue of the ownership of such property (otherwise than as proceeds of disposition),
- refer to valuation at end of the series rather than throughout the series,
- not be adversely engaged due to FMV fluctuations from external factors such as stock market trading or FX fluctuations, and
- not be engaged where there is a cancellation of the debt or other securities received that represents a payment for value.
- For example, there should not be considered to be a deemed depletion of value if:
- Shares of a corporation (Holdco) purchased for FMV consideration by the future tax debtor from the non-arm’s length (NAL) seller become worthless as part of the series due to a dividend-in-kind by Holdco to such future tax debtor of all its assets (i.e., shares of Opco); or
- The tax debtor assigns a note, equaling the FMV of assets sold by it to the NAL purchaser, to that purchaser’s parent, for FMV consideration, followed by a cancellation of that debt on a s. 88(1) wind-up.
Exclusion of s. 251(5)(b) rights
- There should not be considered to be non-arm's length status by virtue only of rights described in s. 251(5)(b).
Scope should be limited to promoters or devisers (p. 10)
- The reference in s. 160.01(2) to “every person who engages, participates in, assents to or acquiesces in section 160 avoidance planning” is too broad, and should be refocused to apply to those who devise and promote the plan or scheme.
Clerical or secretarial services exclusion is too narrow (p. 10)
- The exclusion in s. 160.01(3) for clerical or secretarial services is too narrow – “it is entirely possible that a person may be more significantly involved in, for example, documenting the transaction, but without understanding the avoidance aspects of the plan as a whole (such as a corporate lawyer or valuator with no tax expertise)."
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