Illegality

Table of Contents

Cases

Le Groupe PPP Ltée v. The Queen, 2017 TCC 2, briefly aff'd 2018 CAF 123

whether a product was an insurance policy did not turn on whether the provider was a properly licensed insurer

A Quebec company (“PPP”) through car dealers offered motor vehicle replacement “warranties,” which, in the event of the loss of the vehicle through accident or theft, would cover the difference between the depreciated value of the vehicle (which was covered by the regular insurer) and the cost of a new replacement vehicle.

PPP was unsuccessful in its contention that it was entitled to input tax credits under s. 175.1 in respect of the ‘warranty” claims paid by it. Among other considerations, after October 1, 2010, anyone in Quebec wishing to issue an insurance product was required to hold an insurer's licence. In rejecting a PPP argument that its not being licensed established that the warranty was not an insurance policy (so that the stated exclusion in s. 175.1 for an insurance policy did not apply), Tardif J stated (at para. 43, TaxInterpretations translation):

[I]t is not a permit, licence or accreditation which defines the nature of the work executed, but rather the facts and tangible acts and actual performance. …

[I]n civil law, it is quite possible to have an insurance contract without having a qualified or accredited insurer. The nature and purpose of the contract is in no way affected.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 175.1 “warranties” funding the incremental cost of a new vehicle after complete loss of old vehicle likely were insurance policies and were not re quality, fitness or performance 327
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) payer of auto “warranty” claim did not benefit from the auto supply 259

Durocher v. Canada, 2016 CAF 299

proper for the Tax Court to pass on the alleged nullity of a contract in the context of passing on the correctness of an assessment

A financial institution, which was controlled by a non-resident, acquired an option to subscribe at a future date for the majority of the equity of a holding company for an Opco which, if actually exercised by it, would have violated a prohibition in the Act respecting financial services (Quebec) against it acquiring greater than a 20% stake in the company. Noël CJ affirmed the finding of Rip J below that a mere option did not violate such Act. The effect of finding the option to be valid is that the Opco did not qualify as a Canadian-controlled private corporation, so that capital gains deductions claimed at a higher level in the structure were properly denied.

Before so concluding, he stated obiter, respecting a Crown argument that it would have been beyond the competence of the Tax Court to (instead) declare that the options were invalid under Quebec law:

[T]he role of the TCC, when confronted with an argument based on nullity in the context of an appeal under the ITA, cannot be assimilated to that of a Superior Court which has the power to “declare” a contract to be a nullity for all purposes pursuant to section 33, 35 and 142 of the Code of Civil Procedure… (see in comparison Markou v. The Queen, 2016 TCC 137, paras. 7-21 where the TCC was confronted with a similar problem in the context of litigation arising in a common law province… .)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) option valid notwthstanding that its exercise in full by holder would be illegal 315
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 Tax Court can review validity of contract in reviewing assessment 123

Hôpital Santa Cabrini v. Canada, 2016 CAF 207

arrangement alleged by hospital would have implicitly contravened provincial health legislation

The appellant (the “Hospital”), which had a shortage of nurses on staff and contracted with three independent personnel-services agencies (the “Agencies”) for the services of nurses employed by them, sought a refund of the GST and QST charged by the Agencies on the ground that such services were for the supply of nursing services under Sched. V, Pt II, s. 6. Before instead finding that the Agencies were providing taxable placement services rather than (patient) nursing care, Boivin JA noted (at para. 22, TaxInterpretations translation) that under the Quebec Occupational Health and Safety Act “a hospital cannot delegate the control of care services to a placement agency… .”

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part II - Section 6 a hospital which contracted for the services of nurses employed by a personnel-services agency was receiving a taxable supply 219
Tax Topics - Income Tax Act - Section 180 - Subsection 180(3) contractual interpretation question subject to Housen standard 54

Livent Inc. v. Deloitte & Touche, 128 OR (3d) 225, 2016 ONCA 11, rev'd in part 2017 SCC 63

auditors liable for failure to detect the company’s own fraud effected through its senior management

Deloitte was unsuccessful in arguing that it was not liable to the receiver for a public company (Livent), for failure to detect the fraudulent misstatement of Livent’s financial statements, because it was the most senior management of Livent who were proactively engaged in the fraud, so that effectively Livent was suing Deloitte for Livent’s own fraud. Blair JA quoted with approval a statement by Lord Mance in Stone Rolls Ltd., [2009] UKHL 39 (at para. 241) that “[i]t would lame the very concept of an audit” if the auditor could “defeat a claim for breach of duty in failing to detect managerial fraud at the company’s highest level by attributing to the company the very fraud which the auditor should have detected.”

Locations of other summaries Wordcount
Tax Topics - General Concepts - Negligence and Fiduciary Duty auditors liable for failure to detect the company’s own fraud effected through its senior management 220

Hedges v. Canada, 2016 FCA 19

illogical to infer a tax benefit from illegal sales

The zero-rating of controlled drugs in Sched. VI, Part I, s. 2(d) would apply to dried marihuana if it is viewed as a drug which may only be sold to a consumer under an "exemption" from Health Canada. After noting the Crown’s concession that marihuana is a “drug,” Rennie JA found that "Authorizations to Possess" (ATPs) issued by Health Canada were not such exemptions, so that marihuana did not come within this carve-out for drugs which could be sold only with an exemption.

The appellant before him was an unlicensed and illegal producer. Before so concluding that its sales were not exempted, he stated (at para. 24):

It would be illogical to tax a drug that may be lawfully sold to a consumer, (i.e., all the drugs captured by the carve out) but to exempt from taxation a drug that is not lawfully sold.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Schedules - Schedule VI - Part I - 2 authorizations to possess marihuana were not sale exemptions 220
Tax Topics - Statutory Interpretation - Headings heading did not contemplate illegal drugs 94

Envision Credit Union v. Canada, 2013 DTC 5144 [at 6275], 2013 SCC 48, [2013] 3 S.C.R. 191

lawful interpretation preferred

The taxpayer ("Envision") was formed on the amalgamation under the Credit Union Incorporation Act (B.C.) (the "CUIA") of two credit unions. S. 23(b) thereof provided that "the amalgamated credit union is seized of and holds and possesses all the property ... and is subject to all the debts ... of each amalgamating credit union."

The taxpayer sought to avoid having this qualify as an amalgamation described in s. 87(1) of the Act (which required that all property of the predecessors, other than intercompany shares or debts, become property of the amalgamated corporation). To this end, a beneficial interest in some "surplus" real estate was conveyed to a numbered corporation subsidiary at the exact stipulated time for the amalgamation in the amalgamation agreement.

In finding that the taxpayers had failed to avoid the application of s. 87(1), Rothstein J stated (at para. 56):

Although there is extrinsic evidence that the predecessors intended to prevent Envision from being seized of the surplus properties, such an arrangement would be in violation of s. 23(b) of the CUIA. When a contract may be construed in two ways, a lawful interpretation ought to be preferred over an unlawful one: G. McMeel, The Construction of Contracts: Interpretation, Implication, and Rectification (2nd ed. 2011), at para. 7.31. Accordingly, the words of the contract (as opposed to the intention of the parties with respect to tax consequences) are best interpreted as merely ensuring that the surplus properties were sold at the time of the amalgamation. This interpretation is consistent with s. 23(b) of the CUIA. As a result, the amalgamation agreement is not invalid.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Separate Existence 121
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) all predecessors' property became Amalco property, and purported conveyance of only some of their property to Amalco was legally impossible 393

Richstone v. MNR, 72 DTC 6232, [1972] CTC 265 (FCTD), briefly aff'd 74 DTC 6129 (FCA)

covenant respected until invalidated

In rejecting an argument that a payment for a non-compete covenant was not taxable under what now is s. 6(3)(d) because the covenant was unforceable, Collier J. stated (at p. 6238):

"That, however, does not solve the problem for the purposes of the section of the Income Tax Act in question. The covenant is a subsisting one: no one has yet challenged it and until that is done it is binding on the parties."

Continental Bank Leasing Corp. v. Canada, 98 DTC 6505, [1998] 2 S.C.R. 298

statutory statement that illegal act not invalid

There was no dispute that the participation by the taxpayer, as a partner, in a partnership for a four-day period resulted in a breach by its parent (a bank) of s. 174(2)(i) of the Bank Act, which prohibited the direct or indirect investment or participation in a partnership by a bank. The majority found that the unlawfulness of the investment by the bank and the taxpayer did not affect the legality of the partnership's business or of the taxpayer's participation in the partnership. Furthermore, considerations of public policy required that breaches of the Bank Act not lead to the invalidation of contracts and other transactions because "to unravel commercial transactions on the basis that a corporate actor breached a statute is to introduce uncertainty into the affairs of individuals and businesses" (p. 6509) and, furthermore, s. 20(1) of the Bank Act (which stated that no act of a bank was invalid by reason only that the act was contrary to the Act) supported the view that Parliament never intended breaches of the Bank Act to render bank transactions null and void.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance question of constructing the genuinely-reflective documents 192
Tax Topics - Income Tax Act - Section 96 5 day partnership with tax motivation 161

Bow River Pipe Lines Ltd. v. Canada, 97 DTC 5385 (FCA)

assignment of partnership interest invalid where assignee not admitted

A wholly-owned subsidiary ("Lone Rock") of the taxpayer held a 99.9% limited partnership interest in a partnership between Lone Rock and a subsidiary of Lone Rock ("Newco"). Lone Rock assigned its limited partnership interest in the partnership to the taxpayer, the taxpayer on the same day caused Lone Rock to be wound up, and the following day Newco and the taxpayer signed a distribution agreement whereby the partnership assigned all its assets to the taxpayer.

The taxpayer was found not to have become a member of the partnership because the assignment of Lone Rock's limited partnership interest had not complied with provisions of the partnership agreement that required: the assignee of the interest to agree in writing to be bound by the terms of the agreement; the execution by the assignor to be guaranteed by a Canadian chartered bank; and all requisite filings as required by the Partnership Act (Alberta) to be made. There could be no finding of an implicit consent of the parties to these breaches because the partnership agreement also provided that no amendment thereto would be effective unless it had been approved by an extraordinary resolution.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Transitional Provisions 62
Tax Topics - Income Tax Act - Section 96 mere assignee of partnership interest was not a partner 189

Cooper v. The Queen, 88 DTC 6525, [1989] 1 CTC 66 (FCTD)

income tax consequences attaching to illegal loan

In finding that the making of an interest-free loan by executors in breach of their duties under provincial law did not give rise to a benefit to the recipient, Rouleau, J. stated: "A well established principle of income tax law states that the illegality (if any) of actions of the taxpayer, in this case the payment to the Plaintiff in relation to the terms of the trust, is irrelevant in the assessment of tax liability."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) interest-free loan recognized as obligation rather than benefit 101
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) interest-free loan 102

Curlett v. MNR, 61 DTC 1210 (Ex Ct), briefly aff'd 62 DTC 1320, [1967] CTC 62, [1967] S.C.R. 280

profits allegedly received in breach of fiduciary duty

The taxpayer regularly made mortgage loans at a discount and then sold them for their face amount to his company. In dealing with a submission that the mortgage discounts were not income to the taxpayer because he had an obligation, as a director of his company, to account to that company for the profits, Dumoulin J. noted that the taxpayer "had not evinced discernible signs of being prompted by any lurking urge to discharge such a belatedly invoked obligation to refund the" company. His profits were taxable.

See Also

Raposo v. The Queen, 2018 CCI 81

partnership for illegal activity was void under Art. 1417 of the Civil Code

The taxpayer and the three other members of the “Raposo clan” were involved in the sale of cocaine in the Gatineau area. The Crown took the position that, as a member of a partnership, the taxpayer was solidarily liable under ETA s. 272.1(5) for uncollected GST on the cocaine sales.

In rejecting this position, Paris J referred to Article 1417 of the Civil Code (“A contract is absolutely null where the condition of formation sanctioned by its nullity is necessary for the protection of the general interest”), and stated (at paras. 26, 34, TaxInterpretations translation):

On numerous occasions, the jurisprudence has reiterated that a purpose which is contrary to the public order and which contravenes a penal provision, in the current case, of the Criminal Code, engages the absolute nullity of the contract in accordance with Article 1417 … .

It therefore follows that under Quebec law the Raposo clan did not constitute a partnership.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 272.1 - Subsection 272.1(5) alleged partnership was void as having an illegal purpose contrary to public policy 141
Tax Topics - Income Tax Act - Section 96 illegality of partnership business voided the partnership 131

Uber Canada Inc. v. ARQ, 2016 QCCS 2158, aff'd 2016 QCCA 1303

Uber drivers' breach of provincial registration statute did not justify their failure to register for QST purposes

The ARQ obtained a search warrant for searching an Uber Canada office in Montreal. In order to be granted the search warrant, the ARQ employee laying the information was required to have reasonable grounds to believe that Uber Canada was committing an offence. The search warrant was granted inter alia on what were found to be reasonable grounds that Uber Canada was aiding the drivers in committing the offence of wilfully evading the collection of QST by virtue of its system for collecting the customer fares through the customers’ credit cards not treating those fares as being subject to QST (or GST).

Cournoyer JCS, in his capacity of judge reviewing the validity of the search warrant after it had been granted and executed, rejected an Uber Canada challenge to this ground, on the basis of the failure of the information to disclose to the granting judge that many of the drivers could be small suppliers. Under s. 407.1 of the Quebec Sales Tax Act (similar to s. 240(1.1) of the ETA), a small supplier who carried on a taxi business was required to register, and the Quebec Act respecting transportation services by taxi required the registration of the Uber drivers’ cars as taxis. He stated (at para. 207, TI translation):

One cannot claim that one escapes the application of a law on the basis of one’s own delinquence.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 240 - Subsection 240(1.1) Uber drivers, as operators of “taxi” businesses, likely were required to register for QST 268
Tax Topics - Income Tax Act - Section 231.3 - Subsection 231.3(3) it was reasonable for ARQ on a search to seize smart phones and laptops to make subsequent complete copies 416
Tax Topics - Other Legislation/Constitution - Charter (Constitution Act, 1982) - Section 8 seizure of computers containing personal information was the only practicable approach 132

Durocher v. The Queen, 2016 DTC 1013 [at 2584], 2015 TCC 297, aff'd 2016 CFA 299

potential illegality of an option to acquire control of a private corporation did not nullify the option, so that the corporation was not a CCPC

A financial institution, which was controlled by a non-resident, acquired an option to subscribe at a future date for the majority of the equity of holding company for an Opco which, if actually exercised by it, would have violated a prohibition in the Act respecting financial services (Quebec) against it or related persons acquiring greater than a 20% stake in the company. Rip J found that the option itself did not violate the statute and that, even if it did, a provision in the Civil Code apparently stipulating nullity of an illegal contract should not be applied where a regulatory body (here, the AMF) was accorded responsibility for sanctioning breaches of the statute - and, in any event, Quebec jurisprudence indicated that the absolute nullity sanction should be applied “with restraint and diligence.”

As the option was valid, the corporation in question was not a CCPC, so that subsequent sale of shares in a grandparent corporation by individuals did not qualify for the capital gains exemption.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation potential illegality of an option to acquire control of a private corporation did not nullify the option, so that the corporation was not a CCPC 433
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share potential illegality of 3rd-party option to acquire control of a subsidiary corporation did not nullify the option, so that the subsidiary was not a CCPC 195

McLarty v. The Queen, 2014 DTC 1162 [at 3556], 2014 TCC 30

participations contrary to agreement were disregarded

On December 31, 1993, the taxpayer and 21 other signatories to a joint venture acquired rights to exploit seismic data. Under the terms of the joint venture agreement, no nominees were permitted, but in fact various of the purchasers were acquiring their rights on behalf of others (totaling 30) who also claimed Canadian exploration expense deductions for "their" share of the seismic expenditures. Favreau J stated (at para. 80) that this:

is not an indication of a sham. It is rather an indication that some persons were not legally members of the Joint Venture and were not entitled to the deductions. The Minister should have simply denied those person the tax deductions... .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency participations contrary to agreement were disregarded 107
Tax Topics - General Concepts - Sham sham cannot apply to just part of transaction 139
Tax Topics - General Concepts - Tax Avoidance sham cannot apply to just part of transaction 139
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) revenues 10% of interest 178
Tax Topics - Income Tax Act - Section 67 leveraged purchase of seismic data at arm's length was presumptively reasonable 282

Coicou v. M.N.R., 2008 TCC 628

illegality of work contract meant that no insurable employment

Archambault J relied on Art. 1413 of the Civil Code was relied upon to find that Quebec employment contracts with immigrants without the legal right to work in Canada were invalid and not “contracts of employment” for the purpose of EI eligibility (so that the appellant was not entitled to EI benefits), stating (at para. 45):

Although this sanction might appear excessive or disproportionate in relation to the consequences of working in Canada without a work permit (which Mr. Coicou could easily have obtained) it is not within the courts' power to amend the Civil Code in order to adopt a scheme of sanctions different from the one enacted by the legislator. It is clear that the courts in common law provinces have the necessary latitude to adopt fairer sanctions, for there, contrary to the situation in Quebec, the doctrine of illegality is a creature of the judiciary, not a creature of the legislator. Since the provisions of the Civil Code clearly set out the consequences that stem from the absence of one of the essential conditions for the existence of a contract, that is to say, an object that is neither prohibited by law nor contrary to public order, this Court has no choice but to find that the sanction decided by the legislator, namely the nullity of the contract, must apply.

Richter & Associates Inc v. The Queen, 2005 TCC 92

Act applied to what has occurred irrespective of legality

In rejecting a submission that the trustee for a bankrupt company was not authorized by the Bankruptcy and Insolvency Act to engage in a "litigation support business" of providing assistance to most of the creditors in connection with their action sounding in negligence against company's former auditors, C&L for $800 million in damages, Archambault J stated (at paras. 33-4):

[T]he Trustee, acting as agent for the Estate, was legally entitled to carry on the undertaking in question. … In any event, I would add that the Act is not to be applied to transactions that ought to have taken place, nor is it to be applied only to transactions that could be legally carried out. In my view, the Act ought to be applied to what has actually taken place.

See summary under s. 141.01(2).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Business litigation support services provided by trustee for bankrupt financial institution were an "undertaking" 269
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) allocation between costs incurred by trustee in bankruptcy for bankrupt financial institution to provide litigation services to creditors, and costs incurred in connection with its action qua trustee 375
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(5) allocation between own suit and litigation support 68
Tax Topics - Excise Tax Act - Section 141.1 - Subsection 141.1(3) - Paragraph 141.1(3)(b) action brought by trustee for bankrupt financial institution deemed to be not in course of commercial activity 184
Tax Topics - Excise Tax Act - Section 265 - Subsection 265(1) - Paragraph 265(1)(f) trustee's own suit and litigation support activity were related 278
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business litigation support services provided by trustee for bankrupt financial institution were an "undertaking" 270

Canada v. Libra Transport (BC) Ltd., [2001] GSTC 57, Docket: 98-2151-GST-G, aff’d 2002 FCA 347

trucker presumed not to be an unlicensed insurer

In the course of finding that a trucking comapny was providing insurance to trucking operators as agent rather than on its own account, Bowie J stated (at para. 13):

[O]nly an insurance company licensed to do so may sell insurance, and only a provincial government may sell motor vehicle licences…

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Supply trucker presumed not to be an unlicensed insurer 216
Tax Topics - General Concepts - Agency trucker presumed not to be an unlicensed insurer 167

Wallsten v. The Queen, 2001 DTC 215 (TCC) (Informal Procedure)

The taxpayer entered into a contract with Sun Life to provide sales services as an independent contractor. The taxpayer then agreed with a company owned by him and his family ("Lakeside") that Lakeside would receive all proceeds under the contract with Sun Life. Lakeside provided all equipment and supplies for the conduct of the sales business and paid salary to the taxpayer.

Before finding that none of the income earned under the contract with Sun Life was income of the taxpayer notwithstanding a clause in the contract with Sun Life indicating that no assignment of the benefits of the contract would be made by the taxpayer, and after noting judicial authorities that "'an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights'", Bell TCJ indicated (at p. 217) that "the issue in this appeal has nothing to do with a contractual dispute with a third party".

Bernier v. The Queen, 97 DTC 317 (TCC)

The taxpayer's employer issued employee stock options to the taxpayer and others. Later in the same year, the Quebec Securities Commission notified the employer that the options did not comply with the Quebec Securities Act, and the employer responded by notifying the Commission that it would treat the options that had been awarded as null and void.

In finding that the taxpayer was not entitled to any deduction under s. 110(1)(d) in respect of a lump sum she received in the following year in consideration for the waiver of her rights under the stock option, Lamarre Proulx TCJ. found that the shares subject to the option could not be prescribed shares when they could never be issued or purchased.

Cox v. The Queen, 96 DTC 1690 (TCC)

The fact that a transfer of property from the taxpayer's spouse to the taxpayer was void against the trustee in bankruptcy of the spouse did not prevent the application of s. 160(1) to the taxpayer given that the proper interpretation of the Bankruptcy Act was that the trustee had to do something to render the transaction void, which did not occur.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) 60

Lemoine v. The Queen, 96 DTC 1655 (TCC)

prohibited loan recognized

A loan made by a corporation to its individual shareholder was subject to s. 15(2) notwithstanding that the Companies Act (Quebec) prohibited a loan by a company to a shareholder.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2) 80

Wuslich v. MNR, 91 DTC 704 (TCC)

Because the Province of Saskatchewan did not permit the taxpayer to carry on the practice of orthodontics through a corporation, income which his corporation purportedly derived from that practice was his income instead.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 7 97

Administrative Policy

1 November 2016 Internal T.I. 2016-0663971I7 - 104(6)(b), whether amount became payable

distribution contrary to trust deed not considered to be payable

A family trust paid income to the minor children in breach of a prohibition in the trust deed against making distributions to designated beneficiaries. In rejecting a submission based on the statement in Cooper that “the illegality (if any) of actions of the taxpayer, in this case the payment to the Plaintiff in relation to the terms of the trust, is irrelevant in the assessment of tax liability,” CRA stated:

[T]he comments in Cooper do not extend to provide that the illegality (if any) of actions of the taxpayer may be used to obtain a tax benefit or to claim a deduction from income where such a benefit or deduction does not meet the requirements under a plain reading of the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) income that is paid to a minor beneficiary in contravention of the trust deed is non-deductible under s. 104(6) 180
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) income distributions to minor beneficiaries contrary to trust deed included under s. 105(1) 134
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) prohibited distribution from trust 74

9 November 2001 External T.I. 2001-0092495 - CTF ROUND TABLE-PROFESSIONAL CORPs

Notwithstanding the Wallsten decision, the CCRA will not accept that insurance agents or realtors can transfer their commission income to a corporation if they are legally prohibited from doing so by third parties.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Tax Avoidance 33

3 April 1996 Memorandum 952293

Respecting a spousal trust that was not formally varied before assets were distributed to non-spousal beneficiaries, the Directorate indicated that the distribution could not be ignored for income tax purposes, whether or not it was made legally, i.e., a disposition should not be ignored even if the trustee had no authority to distribute.

21 March 1991 Memorandum (Tax Window, No. 1, p. 14, ¶1162)

Fishing income was earned by corporations to which fishermen had leased their fishing licences, rather than by the fishermen personally, notwithstanding that corporations are expressly prohibited by law from holding such licences. The profits from a business are the income of the person carrying on the business even if the business is being carried on illegally.

31 May 1990 T.I. (October 1990 Access Letter, ¶1489)

RC generally would be reluctant to give its assent to a transaction prohibited by the Quebec Companies Act.

Articles

Marshall Haughey, "Issuing Shares for a Promissory Note", 24 Can. Current Tax, May 2014, p. 85.

Prohibition by jurisdiction (pp. 85-6)

[I]n Saskatchewan, Manitoba, New Brunswick, and Newfoundland…a promissory note cannot be given as consideration for the issuance of shares under any circumstances.…

In Alberta, Ontario, and under the CBCA, the restriction only applies to promissory notes issued by the subscriber or a person who does not deal at arm's length with the subscriber… [A] subscriber could pay for shares with a promissory note issued by an arm's length party. …

[I]n British Columbia, the restriction only applies to "a record evidencing indebtedness of the person to whom shares are to be issued" (i.e., a promissory note issued by the subscriber)….

[N]ova Scotia and Prince Edward Island's corporate legislation contains no restriction… .

Consequences of breach: invalid share issuance (pp. 86-7)

The case law is divided on what results when shares are issued for less than adequate or no consideration. The two streams of cases can be described as the "Nullification Stream" and the "Contextual Stream" .[fn 13: For a more comprehensive discussion of the cases see Greg Johnson, "Recent Developments of Interest to Tax Practitioners", 2005 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2005), 18:1-27 at 18:4-8.] The genesis of the "Nullification Stream" can be traced to Professor Bruce Welling's commentary from his textbook Corporate Law in Canada, which was adopted by the Québec Superior Court in Javelin International Ltd. v. Hillier. [fn 15: [1988] Q.J. No. 928 (Qc. Sup. Ct.),,,] In Welling's view, the use of the phrase "shall not be issued" in s. 25(3) of the CBCA (and its provincial equivalents) means that inadequate consideration results in a nullity as between the issuer corporation and the registered holder. This was also the view of the Tax Court in Ball v. MNR [fn 16: …92 D.T.C. 2123…] …. . Nullification was used in the recent Federal Court of Appeal case St Arnaud v. The Queen [St Arnaud]. [fn 18: [2013] F.C.J. No. 338, 2013 FCA 88.]. …[T]he court found that the money paid for shares was either not received by the corporation or received simply as a conduit for the fraudster. The result was that the shares were not validly issued.

Consequences of breach: consequences in court's discretion (p. 87)

The Contextual Stream of cases posits that corporate legislation does not explicitly state what remedy is available when shares are issued without being fully paid for; thus, it is up to the courts to decide on the appropriate remedy. The result can then be nullification, director liability, or permitting the purported shareholder to pay the subscription price to validate the share issue. There are lines of cases out of British Columbia [fn 19: Davidson v. Davidson Manufacturing Co. (1977), [1978] B.C.J. No. 60 (B.C.S.C.); Oakley v. McDougall, [1987] B.C.J. No. 272, 17 B.C.L.R. (2d) 134 (B.C.C.A.); Re Lajoie Lake Holdings Ltd, [1991] B.C.J. No. 137 (B.C.S.C.).] and Ontario, [fn 20: See Dunham and Pollo Tours Ltd. (No. 1), [1978] O.J. No. 3380, 20 O.R. (2d) 3, (Ont. H.C.J.); Gillespie v. Retail Merchants' Assn. of Canada (Ontario) Inc., [1997] O.J. No. 956 (Ont. C.J.).] supporting this view. A more recent Alberta Court of Appeal case also adopts the contextual approach… [fn 21: Pearson Finance Group Ltd. v. Takla Star Resources Ltd., [2002] A.J. No. 422, 2002 ABCA 84, aff'g [2001] A.J. No. 917, 2001 ABQB 588 [Takla].]… .

Validation by curative provision (p. 88)

Interestingly, neither the Nullification Stream nor the Contextual Stream referred to subs. 16(3) of the CBCA or its provincial equivalents. [fn 24: ABCA, s. 17(3); SBCA, s. 16(3); MCA, s. 16(3); OBCA, s. 17(3); NBBCA, s. 14(3); NLCA, s. 29. Subsection 33(2) of the BCBCA is slightly narrower in that it only validates acts that are done contrary to the company's constating documents.] That provision states that "[n]o act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act". This wording is seemingly dispositive of the issue; yet, this is not entirely clear as ambiguity exists in the wording "by reason only"….