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Halloween trick or treat? The Department of Finance releases income tax technical amendments and new GAAR decision.

On October 31, 2011 (on the fifth anniversary of the income trust amendments) the Department of Finance released a package of income tax and sales and excise tax technical amendments.  While most practitioners, including our firm, are still working through the package there are two proposed amendments that are worthy of an early comment.

Subsection 15(2)

It is proposed that subsection 15(2) be amended to clarify that a partnership can be connected with the shareholder of a particular corporation if that partnership does not deal at arm’s length with, or is affiliated with, the shareholder.  The proposed amendment applies in respect of loans made and indebtedness arising after October 31, 2011.  This amendment is important and noteworthy given the fact that it was questionable from a read of the existing law as to whether or not partnerships could be connected with the shareholder of a particular corporation.  Accordingly, taxpayers and their advisors will need to take a fresh look, in light of this proposed amendment, as to whether or not partnerships will be connected with a corporation thereby causing subsection 15(2) to apply to such loans or indebtedness.  To the extent that subsection 15(2) will apply, such loaned amounts may be included in the connected shareholder’s income.

Personal services business corporations

The Department of Finance is proposing a significant change for a personal services business carried on by a corporation.  Prior to the announcement of these technical amendments, it may have been advantageous for a person, who would otherwise be considered to be an employee, to incorporate their employment services.  Such a corporation is commonly known as a Personal Services Business corporation.  Prior to the introduction of the eligible dividend regime, it was not advantageous to have a Personal Services Business corporation since such a corporation would automatically be taxed at the highest corporate tax rate and all expenses (with certain limited exceptions such as salaries to the shareholder) would not be deductible. With the introduction of the eligible divided regime in 2006 and declining corporate tax rates, having a personal services business corporation’s income being taxed at the highest corporate rate and later distributing such surplus as an eligible dividend could provide, in some cases, a significant tax deferral.

The proposed amendment introduced in yesterday’s technical amendments will eliminate any such deferral opportunities by causing any income earned by a corporation from a personal services business to be taxed at a combined Federal-Alberta rate of 38% (as compared to the normal highest corporate rate for 2011 of 26.5%; 25% for 2012).  The proposed amendment applies to taxation years that begin after October 31, 2011. Such an amendment should discourage any taxpayer from entering into a personal services business corporation relationship.

Follow us on Twitter @Moodystax for further updates on these technical amendments.

New GAAR decision

On October 28, 2011 the Tax Court of Canada released a decision – Global Equity Fund Ltd. v. Her Majesty the Queen.  This decision is the latest decision in which the General Anti-Avoidance Rule (“GAAR”) was at issue.  The firm that defended the taxpayer has written a good summary blog on the decision and you will find it here. Readers are encouraged to read this interesting decision.  Moodys LLP were the tax advisors for the taxpayer in the structuring of the transactions at issue.  The taxpayer’s victory was the only “win” of the three similar cases decided by the Tax Court in 2011.