Words and Phrases - "undertaking"
7 October 2022 APFF Financial Strategies and Instruments Roundtable Q. 5, 2022-0936301C6 F - Guarantee fee
An individual, a sole shareholder of a corporation, borrows money in order to earn business or property income. To secure his personal loan, his corporation grants a mortgage on a building it owns. The shareholder makes all principal and interest payments on his loan, and also pays his corporation a reasonable fee for the grant of the security (a “guarantee fee”).
Regarding whether the fee would give rise to income from property or a business to the subsidiary, CRA stated that it “generally considers that [a] guarantee fee is received for a service,” that Timmins held that “the provision of services under contract for a fee may be a business within the meaning of subsection 248(1) by virtue of being an undertaking of any kind whatever,” and that whether a business was carried on (i.e., there was an ongoing conduct or carriage of the business) was a question of fact.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.1) | one-time fee to subsidiary for mortgaging its property as security for a bank loan to the shareholder would not qualify under s. 20(1)(e.1) | 139 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) | one-time fee to subsidiary for mortgaging its property as security for a bank loan to the shareholder could qualify under s. 20(1)(e) | 175 |
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | no shareholder benefit where corporation receives a reasonable pledge (or “guarantee”) fee from its shareholder | 124 |
Drumheller v. MNR, 59 DTC 1177, [1959] CTC 275 (Ex Ct)
The taxpayer, who orally agreed with his brother-in-law to jointly seek a franchise to supply a town with natural gas, received $10,000 in lieu of his rights in respect of the franchise which ultimately was obtained, having advised his brother-in-law that he would be required to devote most of his time to a well-servicing company, rather than to serving in a position with the gas company that was to supply the town under the franchise.
The project was "an undertaking of any kind" and the $10,000 receipt was income from a business, rather than a capital receipt. Thurlow J. stated (at p. 1180, DTC):
"the expression an undertaking of any kind appears to me to be wide enough by itself to embrace any undertaking of the kinds already mentioned in the definition; that is to say, trades, manufactures, professions, or callings, and any other conceivable kinds of enterprise as well."
Town of Beauport v. Quebec Railway, Light & Power Co. / Quebec Railway, Light & Power Co. v. Town of Beauport, [1945] S.C.R. 16
A declaration in the 1895 federal incorporating Act of the appellant that its undertaking was a work for the general advantage of Canada (thereby bringing such undertaking under federal jurisdiction) applied to the subsequently acquired bus line enterprise of the appellant. In response to a submission that a bus line was not a physical thing and, therefore, not capable of being part of an undertaking, Rinfret J quoted with approval (at p. 24) a statement that "'undertaking' is not a physical thing, but is an arrangement under which, of course, physical things are used", and then stated that "the word 'undertaking' as used in the statute comprises the whole of the works of the company...."
Baytrust Holdings Ltd. v. IRC, [1971] 1 WLR 1333 (Ch D)
On of the taxpayers ("Nitralloy"), which was a subsidiary of holding company ("Thos. Firth") which carried on a steel manufacturing business through other wholly-owned subsidiaries of Thos. Firth, was found not to have acquired a part of the undertaking of Thos. Firth for purposes of s. 55 of the Finance Act 1927 (UK) when Thos. Firth transferred minority shareholdings in two companies ("British Acheson" and "High Speed") to it in consideration for treasury shares. After referring to a submission of taxpayer's counsel that "if a company's undertaking is the totality of its assets, any part of its assets must be a part of its undertaking," Plowman J stated (at pp. 1353-4):
I am unable to accept that argument. The word "undertaking," in my judgment, denotes the business or enterprise undertaken by a company, and while Thos. Firth's holdings of British Acheson and High Speed shares were no doubt acquired in the course of Thos. Firth's business, they were not, in my judgment, a part of that business. A greengrocer's business is not doubt to sell fruit, but the pound of apples which you can buy can hardly be described as a purchase of part of the greengrocer's business.
Lount Corp. v. A.-G. of Canada (1985), 19 DLR (4th) 304 (FCA)
The owners and operators of a Holiday Inn in Winnipeg used television receiving equipment located on the premises to transmit programming to televisions in the guests' suites. After quoting the statement in R. v. Communicomp Data Ltd. (1975), 53 DLR (3d) 673 at 680, 60 OR (2d) 680 that "the matter becomes an 'undertaking' when there is a commercial aspect about it," Urie J found (at p. 314) that this installation was not a broadcasting receiving "undertaking" for purposes of the Radio Act (Canada) as no separate charges were made to the room occupants, and the installation instead was "merely an incidental amenity provided as part of the whole hotel undertaking."