Separate Existence


Loblaw Financial Holdings Inc. v. Canada, 2020 FCA 79, aff'd 2021 SCC 51

subsidiary did not manage its funds on behalf of parent

At issue was whether a Barbados bank subsidiary (Glenhuron ) of the taxpayer, which used equity funds received from its Canadian parent to invest in short-term debt obligations, conducted its business principally with persons with whom it dealt at arm’s length, as required in s. 95(1) - investment business - (a). In rejecting the Tax Court’s characterization of Glenhaven as investing on behalf of a non-arm’s length person (its parent), so that such investments had the aspect of the conduct a business with a non-arm’s length person, Woods JA stated (at paras. 61-62):

The Court… erred in not respecting the fundamental principle that a corporation and its shareholders are separate and distinct entities (see Chevron Corp. v. Yaiguaje, 2015 SCC 42 at para. 95 ...).

… Glenhuron was not managing Loblaw’s money but its own. It was an error of law for the Court to consider that Glenhuron’s money belonged to Loblaw.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Investment Business - Paragraph (a) a Barbados bank sub conducted its business of investing in short-term debt principally with arm’s length persons 602
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business receipt of equity funds from parent was not part of Barbados bank’s business 188
Tax Topics - Statutory Interpretation - Redundancy/reading in words error to apply an unexpressed intention 172
Tax Topics - Statutory Interpretation - Drafting Style no additional requirements should be inferred in legislation drafted with “mind-numbing detail” 172
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Foreign Accrual Property Income fundamental purpose of FAPI is to capture passive income 164

Brunette v. Legault Joly Thiffault, s.e.n.c.r.l., 2018 SCC 55

shareholders cannot bring action in relation to damages suffered by their corporation

A Quebec trust, whose sole asset was its investment in the holding company for a group of retirement residences companies (Groupe Melior) that became bankrupt following an ARQ assessment, sued the professional advisors of Groupe Melior on the basis that they had set up a flawed tax structure set up for Groupe Melior. In the course of finding that the trust had no standing to bring this action because it was a mere shareholder, Rowe J indicated that “the civil law produces a conclusion similar to that” under Foss v. Harbottle (1843), 67 E.R. 189 “which categorically bars shareholder recovery for faults committed against a corporation” (para. 24), and went on to state (paras. 25, 27):

The C.C.Q. recognizes that legal persons such as corporations have a distinct legal personality (art. 298) and a distinct patrimony (art. 302). As with all legal persons, corporations “have full enjoyment of civil rights” (art. 301) and the “capacity to exercise all their rights” (art. 303). Read together, these provisions lead to the conclusion that the right of action of a corporation belongs to the corporation itself. Like other claimants with the capacity to act, the corporation itself must exercise its rights of action in its own name. The corollary is that shareholders may not personally exercise a right of action that belongs to the corporation… .

…It would be incoherent — and indeed, unjust — for shareholders to benefit from limited liability while at the same time gaining a right of action in relation to faults committed against the corporation in which they hold shares… . The corporate veil is impermeable on both sides; just as shareholders cannot be liable for faults committed by the corporation, so too are they barred from seeking damages for faults committed against it … .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Negligence, Fiduciary Duty and Fault a shareholder generally cannot sue for bad tax advice provided to the corporation 407

Anthony v. Canada (National Revenue), 2016 FC 955

taxpayer bound by lease agreements being contracted by his corporation rather than personally

The taxpayer brought an application pursuant to s. 18.1 of the Federal Court Act for review of CRA’s denial of a claim made in 2010 pursuant to s. 152(4.3) for the deduction by the taxpayer of rental expenses incurred in 2001 in leasing two machines (used in his business of self-employed machinist), on the basis that the machines were leased in the name of his corporation, D.A. Machining Consulting Inc. The taxpayer testified that he intended to transfer his business on a rollover basis to D.A. Machining Consulting into his corporation in 2002, but the transfer was not completed. Following a 2005 audit, CRA offered to settle the issues arising from the 2001 and 2002 taxation years if the taxpayer signed a waiver of his appeal rights for both years respecting his business income and expenses. The Tax Court denied his subsequent appeal in 2007, finding that the taxpayer was bound by the waiver so that s. 169(2.2) barred his appeal. CRA denied the taxpayer’s 2010 s. 152(4.3) application on the basis that the purpose of s. 152(4.2) was not to dispute an assessment that had been previously dealt with under an objection, and on the basis that the rental expenses were incurred by D. A. Machining Consulting Inc.

In finding that CRA’s decision should stand, and in rejecting a submission (at para. 23) that “it was unfair for the Minister’s delegate not to ‘match’ the expenses he incurred in paying the rental payments for the two machines against the income he earned by using the machines, and…although his corporation’s name was on the lease with CIT, the corporation was in fact inactive,” Bowell J stated (at paras. 24 to 26):

[T]he matching principle is not a rule of law which dictates or requires that expenses must always be matched with profits; it is simply an accounting principle that a court may or may not consider depending upon the particular facts and circumstances of a case. …

…The Applicant chose to collect revenue generated by the machines personally, rather than through his corporation, and he cannot rely upon an accounting principle to ignore the legal reality of the lease and argue that the cost of the lease payments should be attributed to him personally and deductible from his personal income for the 2001 taxation year. …

...[I]t is not completely accurate to assert…that his corporation was inactive because, even if it may not have been earning any income, it was nonetheless active at least to the extent it incurred monthly obligations for the rental payments. Moreover, even if the Applicant’s corporation was simply a shell, it was a shell that nevertheless was the party to the lease agreement with CIT and protected the Applicant from personal liability for the rental payments.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit matching principle not a rule of law 234
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.2) s. 152(4.2) denials are subject to judicial review 127

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

shareholders do not own the corporation's assets

The taxpayer was formed on amalgamation, and purported to avoid the application of s. 87 by causing some of its property to be transferred to a numbered corporation simultaneously with the amalgamation (so that it did not possess "all of the property" of its predecessors, as required by s. 87).

In the course of finding that this attempt failed, Rothstein J rejected a "tracing" approach of the Court of Appeal which, in effect, treated the shares of the numbered company as being the same as the surplus properties. He stated (at para. 57):

It is a basic rule of company law that shareholders do not own the assets of the company: see, e.g., Wotherspoon v. Canadian Pacific Ltd., [1987] 1 S.C.R. 952, at p. 1033.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality lawful interpretation preferred 282
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 415

Desnomie v. Canada, 2000 DTC 6250 (FCA)

corporate veil not pierced

Rothstein J.A. applied (at p. 6256) the determination in Pioneer Laundry & Dry Cleaners Ltd. v. MNR, [1939] 4 DLR 481 (HL) that "in a taxing statute the corporate veil could only be pierced in instances of fraud or improper conduct" to find that the court should not look through the character of the taxpayer's employer as a corporation.

Colbert v. The Queen, 94 DTC 6620, [1994] 2 CTC 345 (FCTD)

Before finding, on the evidence, that the taxpayer had transferred all the assets of his chicken farm business to a corporation other than the land and the chicken quota and that the corporation was not an agent of the taxpayer, Wetson J. stated (p. 6622):

"... one must start from the presumption that generally when a company is incorporated to carry on a business, the business becomes that of the company and the shareholder cannot claim that business as his or her own. However, it has also been recognized that the relationship between a company and a shareholder can be such as to constitute the company as an agent of the shareholder. ... When such circumstances exist, the business carried on by the company can in reality be said to be that of the shareholder."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency shareholder generally does not carry on business of corporation 138
Tax Topics - General Concepts - Personality 138
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Former Business Property 60

The Queen v. Jennings, 94 DTC 6507, [1994] 2 CTC 106 (FCA)

farm losses of corporation not those of shareholder

In finding that losses of an incorporated farm business could not be deducted by the individual who had incorporated the business, Robertson J.A. accepted the Crown's submission that the individual and his corporation were "separate legal entities and that 'the normal rule of a corporation being a separate and distinct legal entity from its shareholder' should apply" (p. 5008):

"Only in the clearest of cases, and in compelling circumstances and after a thorough legal analysis could the 'normal rule' be displaced."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Personality 86

The Queen v. MerBan Capital Corp. Ltd., 89 DTC 5404, [1989] 2 CTC 246 (FCA)

The taxpayer ("MerBan") in connection with a leveraged share acquisition arranged for borrowings to be made to two special purpose subsidiaries in order to limit its liability and to facilitate the use of an income debenture. "MerBan was no doubt the driving force behind and ultimate beneficiary of the subsidiaries' activities, restricted as they were. It may be that the Trial Judge believed that the subsidiaries as mere instrumentalities served no business purpose. But it has been held that, even when there is a lack of business purpose, courts will recognize otherwise legally valid and complete transactions or legally created relationships which are clearly enforceable." [C.R: Agency; Tax Avoidance]

Tobias v. The Queen, 78 DTC 6028, [1978] CTC 113 (FCTD)

"... I cannot accept the proposition that the Company carried on a hobby as agent for the plaintiff for to do so would be to disregard the very concept of the nature of a corporation laid down in Salomen v. Salomen & Co. ([1897] 2 A.C. 22) ..." (p. 6038)

Administrative Policy

14 February 2014 External T.I. 2013-0504601E5 F - Bénéfices de fabrication et de transformation

avoidance through M&P carried on through related corp

CRA found that the exclusion from qualifying manufacturing for construction where the manufacturing (the production of asphalt) was carried on by a related corporation for sale to the (road) construction company.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125.1 - Subsection 125.1(3) - Manufacturing or Processing - Paragraph (c) construction exclusion avoided if road asphalt is produced by related corp 150