October 8, 2009 by Dan White.

The key point to understand is how CRA likes to interpret things in their favour.
The court here points out that more than 5 employees does not mean at least 6 employees. That is not what the law says.
If you consider that 5 full time employess and one part time employee is not the same as at least 6 employees and could have a huge tax consequence on the taxpayer.
In this case it could mean that an individual having an offshore corporation, could suddenly find themselves disallowed for a huge tax deduction.
I am glad the courts are there to keep CRA in line.
Dan White

Canada: How The CRA’s New Assessing Position Can Reduce Your FAPI

08 October 2009
Article by Soraya M. Jamal and Robert W. Nearing of McCarthy Tétrault LLP

The Income Tax Act (Canada) contains a foreign accrual property income (FAPI) regime that imputes “passive income” earned by a non-resident corporation (a controlled foreign affiliate) to its Canadian-resident controlling shareholders on an annual accrual basis, whether or not such income is distributed to the non-resident corporation’s shareholders. Passive income earned by a controlled foreign affiliate includes income derived from an “investment business.” Generally, an “investment business” will be any business that is carried on in a taxation year by a controlled foreign affiliate, the principal purpose of which is to derive income from property and other specified sources. However, such a business will not be an “investment business” if it can be established that ─ amongst other things ─ the controlled foreign affiliate, throughout the period during which the business is carried on, employs “more than five employees full time” (or the equivalent thereof provided by related corporations, certain members of partnerships, and, pursuant to a recent amendment, certain shareholders, corporations and partnerships) in the active conduct of the business.

Historically, the Canada Revenue Agency’s (CRA) assessing practice has been to treat any business with less than six full-time employees and whose principal purpose is to derive “income from property” as an investment business.1 The basis for the CRA’s assessing practice was a number of cases that interpreted the phrase “more than five full-time employees,” as used in connection with the small business deduction for Canadian corporations.2

Recently, however, the CRA has confirmed that it is changing its assessing practice for purposes of the FAPI regime3 such that a controlled foreign affiliate will now meet the “more than five full-time employees” exclusion in the investment business definition where the controlled foreign affiliate employs five full-time employees and one part-time employee in the active conduct of the business.4 Consequently, a Canadian shareholder of a controlled foreign affiliate that employs five full-time employees and one part-time employee in the active conduct of its business will not be subject to FAPI imputation, provided other requirements are satisfied.

This change to the CRA’s assessing practice was prompted by the recent Tax Court of Canada decision in 489599 B.C. Ltd. v. The Queen.5 In this case, the issue to be determined was whether a taxpayer satisfied the “more than five full-time employees” requirement at a time when it employed five full-time employees and two part-time employees. The Tax Court of Canada concluded that the expression “more than five full-time employees” can be satisfied with the employment of five full-time employees and one part-time employee.

In reaching this conclusion, the Tax Court declined to follow the Federal Court Trial Division’s decision in Hughes & Co. Holdings Ltd. v. The Queen,6 wherein the Federal Court held that “more than five full-time employees” means at least six full-time employees. Notwithstanding that the Hughes decision has been followed in other cases, the Tax Court’s view in 489599 B.C. Ltd. was that the Hughes case was incorrectly decided because the Federal Court had relied on irrelevant precedents, adopted a method of statutory interpretation that was inconsistent with that established by the Supreme Court of Canada, and misinterpreted Parliament’s intention with respect to the language used in the expression. Furthermore, the Tax Court found that it was not bound by the Hughes decision as the Federal Court’s interpretation of the expression was obiter. In finding that the phrase “more than five” should not be equated as meaning “at least six,” the Tax Court stated that had Parliament intended the provision in question to apply only to those businesses that employ at least six full-time employees, Parliament would have used such language.

Consequently, taxpayers who have imputed FAPI based on the CRA’s past assessing practice should consider filing amendments to past returns based on the CRA’s assessing practice.

Posted in Tax Topics | Print | No Comments »

October 8, 2009 by Dan White.

How to get rid of worthless shares.

No matter what you do when it comes to taxes, you will get into trouble if you don’t keep a proper paper trail. Don’t count on the CRA help desk to keep you out of trouble.

When it comes to getting rid of worthless shares, but the shares still exist in the market… you could find yourself with tax problems if you ever get audited. An audit is a process where CRA works to disallow as many expenses and losses as possible. The best Tax Audit Solution is to be prepared ahead of time. An audit ready paper trail is the answer. Don’t get into tax problems because you did not take the time to do things right in the first place.

If your share dispostion is not covered under the Income Tax Act which spells out the circumstances under which you can report the value of certain shares as zero, and claim a capital loss for the full amount that you paid for them.

You need to get rid of the shares and have a paper trail to prove it.  A simple way would be to write up an agreement of purchase and sale to someone at non arms length, e.g. a friend or family member. Transfer the shares to them, write a cheque for a buck, and Bob’s your uncle.

Dan White

Posted in Tax Tips | Print | 1 Comment »