The Federal Court of Appeal has recently confirmed that a taxpayer and a company controlled by the taxpayer's nephew are considered to "act at arm's length" in a transaction where the nephew's company purchases promissory notes from a charity controlled by the taxpayer only to help the taxpayer solve a tax problem. 

On December 14, 2009 the Minister of Finance issued a News Release and Backgrounder setting out the Government of Canada's response to an April 2009 court decision on the application of GST to certain investment management fees.

Income tax is complicated.  As such, mistakes in transactions are liable to occur from time to time, especially when professional advisors do not consult tax specialists prior to undertaking transactions.  The Court of Queen's Bench of Alberta ("QBA") has added another arrow to taxpayers' quivers when mistakes lead to unintended tax consequences.  In Stone's Jewellery Ltd. v. Arora 2009 ABQB 656, a well thought out and structured judgment by Madam Justice Strekaf, the taxpayer sought an order to rectify or rescind two transactions involving the transfer of land that resulted in the unanticipated assessment of more than $6 million in taxes.  The Canada Revenue Agency ("CRA") opposed the taxpayer's action. 

For many years, accountants for Canadian-controlled private corporations ("CCPCs") have followed the old adage of advising their clients to "bonus down" to the Small Business Limit (the amount of active business income earned in Canada that is subject to the lowest corporate tax rate), as it generally provided the owner-manager/shareholder with higher after-tax cash than the alternative of paying tax in the corporation, and then ultimately paying dividends to the owner-manager/shareholder. This is because corporate income subject to the general tax rate was poorly integrated when such income was eventually paid as a dividend to the owner-manager/shareholder. Table 1 roughly displays the lack of integration for a corporation earning $1,000,000 of taxable income in the late 1990's.

As mentioned in our blog of September 29, 2009, one of the most common errors that we identify during our review of private corporations is the corporate ownership of personal use assets.  The shareholders of the corporation will often believe that it is tax efficient to purchase assets inside the corporation that would otherwise involve the withdrawal of funds from the corporation to purchase such assets (which would be a taxable withdrawal).  Unfortunately, the tax consequence of the acquisition of personal use property by a corporation is not pretty.  We often see vacation homes, automobiles, boats, art collections, etc. owned by the corporation.  Certainly the most common examples we see are vacation property and in some unusual cases the primary residence of the shareholder(s).

Tomorrow marks the second anniversary of the establishment of Moodys LLP Tax Advisors!  While the last year has certainly provided economic challenges for our clients, we are extremely pleased with the services, clients and growth that our firm has had.  A special thank you to the Moodys' teammates and Shea Nerland Calnan LLP (our fantastic legal partner).  A special thank you also to all of our great service providers.  Moodys has some exciting new plans and service offerings that we will share with you soon!

For those of you who enjoy reading our blogs, we are pleased to announce our new blogsite at www.taxandestateplanning.com which hosts all of our blogs and has a link to a whole host of other interesting blogs.  We encourage you to visit this website.

As a tax specialist firm, we work with many private corporations and their accounting and legal advisors. We see a lot of opportunities for planning and take great pleasure in working with the fabulous advisors that serve our clients. 

Unfortunately, however, we often come across plans that could perhaps have been better thought out. One of the common strategies that we trip across is the use of "management fees" to reduce income of one corporation and increase the income of another corporation. Often times the payor corporation and the recipient corporation have different taxation year ends and therefore the plan is a loose attempt to try and get an income tax deferral.  In some cases, advisors will recommend the use of a disassociated "Management Co" (owned by a related person) to receive management fees in an attempt to multiply access to the small business deduction (with the result being lower income tax rates on retained profits).  There are a host of income tax issues that need to be considered with the use of management fees between related corporations. For example, are the management fees legitimate, are they reasonable, were they incurred for the purpose of earning from a business or property, are the management fees earned over the course of the year (and, if so, is the resulting deferral eliminated or reduced) and are GST issues  properly considered?