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A non-retroactive rectification order? Anderson rectifies agreement but not agreed transaction

Taxpayers who erroneously record an agreement in a manner that (per the erroneous documentation) would cause unintended tax consequences to arise may find relief in the equitable remedy of rectification. Rectification is discretionary; when it is awarded, a rectification order is granted by a court on the basis that a document inaccurately reflects the true original agreement of the parties with the order having effect nunc pro tunc (i.e. retrospectively or retroactively) as of the date of the original agreement. The retrospective effect of a rectification order is binding for tax purposes. However, in Anderson v. Benson Trithardt Noren LLP  2015 SKQB 123, affirmed by 2016 SKCA 120, (Anderson) [1] while the Court rectified documents recording a section 85 rollover, the Court refused to declare that its order was retrospectively binding for tax purposes. Confused? Anderson provides both a cautionary tale of the importance of diligently implementing even the most vanilla tax planning and a thought- provoking discussion of rectification in the tax context.

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Significant changes to the Canadian Principal Residence Deduction

Oh, give me a home where the buffalo roam

Where the deer and the antelope play;

Where seldom is heard a discouraging word,

And the sky is not cloudy all day [unless the home is in a Canadian trust]

Many of us are familiar with the above opening words of “Home on the Range” – a classic western folk song that has its roots in the early 1870s. “Home on the Range” is a sentimental song that waxes about the longings and importance of a person’s home. With that in mind, the Department of Finance released a series of measures on October 3, 2016, aimed at “…protecting the financial security of Canadians, supporting the long-term stability of the housing market and improving the integrity and fairness of the tax system, including ensuring the principal residence exemption is available only in appropriate cases.” The measures released included changes to the mortgage default insurance rules for lenders and the announcement of a public consultation to “seek information and feedback on how modifying the distribution of risk in the housing finance framework by introducing a modest level of lender risk sharing for government-backed insured mortgages could enhance the current system.” Details on the public consultation should be available shortly with the release of a public consultation paper by the Department of Finance. With British Columbia recently introducing a new tax on foreign purchasers for the Vancouver area, yesterday’s announcement by the federal government is likely part of a continuing series of overall amendments that Canadian governments will make to ensure the stability of Canada’s housing market. Home on the Range.

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Section 84.1: What brought Poulin and Turgeon to the table?

Section 84.1 of the Income Tax Act (Act), in its current form, was introduced in 1985 (concurrent with the introduction of the capital gains deduction), and the provision has always been a source of heartburn for planners. It is a very broad anti-avoidance rule that tries to prevent surplus from being stripped from corporations as a tax-free capital distribution, rather than a taxable distribution in the form of dividends. In order for section 84.1 to apply, there needs to be a transfer of shares of a corporation by an individual or trust to another corporation with which the individual does not deal at arm’s length, and immediately after the disposition, the purchaser corporation and the corporation whose shares are being transferred are connected. While the Act deems related persons to not deal at arm’s length, it also states that it is a question of fact whether persons who are not related to each other are, at a particular time, dealing with each other at arm’s length. If section 84.1 applies, then the otherwise tax-free return of surplus in the form of capital distributions will be turned into a taxable distribution in the form of dividends.

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U.S. taxation of Australian Superannuation funds: when the Super is NOT so super after all

Retirement and pension funds generally do not make or break national political campaigns. Except, of course, Australian Superannuation funds. Fondly referred to as “Supers” by Australians, proposed reforms to Supers announced by Australian Treasury Secretary, Scott Morrison, in May apparently cast a definitive impact on the Coalition’s lackluster performance in the July 2016 national elections, resulting in a controversial “wafer-thin” majority lead.

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US citizens living in Australia – US tax filing obligations

On July 4, 2015, The Sydney Morning Herald ran an article entitled “Why Australia is now home to the sixth largest American population in the world.” The article discusses the dramatic increase in US citizens who have recently chosen to make Australia their home. According to the article, and the Australian Bureau of Statistics, the number of US citizens living in Australia has increased to 90,000 from 60,000 from 2001 to 2011. Economist Lyman Stone has published even more statistical information on the American diaspora in Australia.

Regardless of the reasons US citizens immigrate to Australia, they all share one thing in common: the requirement to file US tax returns. The unfortunate news is that US tax law is agonizingly complex, and the worse news is that this complexity increases exponentially when applied to an individual who is subject to both US and Australian tax law.

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The end of the Small Business Deduction?

On June 13, 2016, the Organisation for Economic Co-operation and Development (OECD) released its Economic Survey of Canada. There were some interesting comments and criticisms about Canada’s overall economy. However, as it relates to small business taxation, the following quote should be noteworthy for Canadian private client tax advisors.

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Think the new small business deduction rules don’t affect you? Think again!

Proposed amendments to the Income Tax Act introduced in the 2016 Federal Budget will significantly alter the Small Business Deduction (SBD) scheme for taxation years that begin following March 21, 2016. An admittedly over-simplification of the complexities of these amendments is that they aim to restrict the multiplication of the SBD in which unassociated corporations provide services to a partnership or corporation a partner or shareholder of which is not arm’s length with the service-providing corporation. A simple example of this is HusbandCo providing services to WifeCo. There has been much discussion, and there is sure to be more, on the application of these amendments to the structures they are intended to effect; however, that is not the subject of this blog.

The breadth of these amendments reaches the most basic of planning and circumstances, and all practitioners should be aware – as we’ll describe in the following two situations.

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CRA confirms US LLLPs and LLPs are indeed corporations

At the International Fiscal Association conference held in Montréal on May 26, 2016, the CRA orally announced its conclusion that US limited liability limited partnerships (LLLPs) and US limited liability partnerships (LLPs) would be classified as corporations for Canadian tax purposes. In light of similar classification of US limited liability companies (LLCs), the CRA’s conclusion is not too surprising. We applaud the CRA’s announcement that it will allow transitional relief for at least some affected taxpayers as we advocated in our April 22, 2016, publication and we await the further details on the relief measures when the CRA releases its written responses in the coming weeks.

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Fort McMurray Fires – Alberta Strong

This morning, Albertans woke up to an assessment of the damage that has been inflicted on the city of Fort McMurray. The damage caused to this beautiful city is shocking. Thankfully, and somewhat miraculously, the positive is that no one was hurt. Let’s hope the worst is over.

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Canadian Tax Free Savings Accounts – Canada Revenue Agency Audit Project

As we have previously written, the Canada Revenue Agency (“CRA”) is aggressively reviewing certain Tax Free Savings Accounts (“TFSAs”). Subsection 146.2(6) of the Canadian Income Tax Act provides that if a TFSA “carries on one or more businesses,” then Part I tax is payable on its business income. This provision, little noticed until recently, has been the basis for a wave of CRA tax assessments issued to TFSAs in respect of income allegedly earned from carrying on a securities trading business inside the TFSA. Generally, the assessments are issued to TFSAs with high balances whose annuitants are investment advisors or have significant knowledge and experience in the securities industry, particularly (but not always) where the TFSA has traded frequently in speculative stocks. There is usually no limitation period for the CRA to assess because TFSAs generally do not file a tax return under Part I of the Act.

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United States Limited Liability Limited Partnerships – Are you ready for the Canada Revenue Agency’s new hybrid creation?

Canadians who thought they had invested in a partnership when they invested in a US Limited Liability Limited Partnership (LLLP) may be surprised in the coming weeks to find they actually own a “hybrid entity”. No, this isn’t some new genetically modified plant or Frankenstein monster. It’s, for example, an entity which is treated as a partnership in one country, but taxed like a corporation in the other country. Another common hybrid entity Canadians may be familiar with is the US Limited Liability Corporation (LLC). Basically, a hybrid entity is one that is fiscally transparent in one country and not in another. An entity is fiscally transparent if profits are taxable directly in the owners’ hands, regardless of whether any distributions were made to the owners. Based on Canada Revenue Agency (CRA) comments, it appears the CRA is soon going to decree that a US LLLP is a corporation for Canadian tax purposes, thus turning US LLLP interests held by Canadians into investments in hybrid entities. Does our firm agree with the CRA’s comments? No… but we will not debate that conclusion here. Instead, we discuss the challenge that Canadians will face if the CRA’s position is correct.

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The attack on the collaborative relationship between tax professionals and tax administrators

For those of you who know me, you’ll know that I’m not shy about expressing my views. While some may not agree with them, I’m okay with that. I enjoy healthy, respectful debate on issues of tax administration and tax policy. However, the media, particularly the CBC, has recently been taking aim at the tax profession with “investigative reports” suggesting “inappropriate planning” is being done by certain professionals. While the “investigations” might make for good media for the average viewer, such “investigations” are, in many cases, simply wrong or misleading and sweep in organizations and individuals that have nothing to do with the particular case. These reports further exaggerate the situation with provocative language to embellish the reporter’s story.

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