In the CRA’s interpretation of GAAR, in addition to listing 10+ illegal tax avoidance methods, it also identifies the following tax-saving strategies as legal and acceptable:
Facts
An individual taxpayer transfers his or her business to a corporation primarily to obtain the benefit of the small business deduction.
Interpretation
There is nothing in section 125 (that provides for the small business deduction) or elsewhere in the Act that prohibits an individual from incorporating his or her business. The incorporation is consistent with the Act read as a whole and, therefore, subsection 245(2) would not apply to the transfer of the business to the corporation.
Facts
A corporation resident in Canada owns property, the proceeds of disposition of which would result in the immediate realization of income, a capital gain, or both.
The taxpayer sells this property to an arm’s length taxable Canadian corporation in consideration for redeemable shares having a redemption amount equal to the fair market value of the property sold. The taxpayer and purchaser elect under s.85(1) in respect of the property to defer recognition of the profit that would be realized on a straightforward sale of the property.
The shares have paid-up capital equal to the amount elected so that on the redemption of the shares the taxpayer receives the profit on the sale as a taxable dividend deductible under s.112(1) of the Act.
Interpretation
If the property transferred is non-depreciable capital property, s.55(2) applies and the taxpayer would realize a capital gain equal to the difference between the redemption amount and the adjusted cost base of the redeemable preferred shares. s.245(2) would, therefore, not apply.
On the other hand, if the property transferred is depreciable property or property the proceeds of disposition of which would result in the realization of income, s.245(2) would apply on the basis that the issue of the preferred shares is undertaken to avoid the consequences of a straightforward disposition of the property.
Facts
The common shares of a corporation would be “qualified small business corporation shares” as defined in s.110.6(1) except that at the time in question all or substantially all of the assets of the corporation are not used in an active business carried on primarily in Canada.
The shareholders wish to sell their shares and to have the gains qualify for the special increased capital gains exemption provided by s.110.6(2.1) of the Act.
To achieve this result, the shareholders incorporate a corporation and transfer to this corporation shares of the operating corporation that have a fair market value equal to the fair market value of the assets that are not used in the active business of the operating corporation.
The operating corporation purchases these common shares from the new corporation and pays the purchase price of the shares by transferring the non-business assets to the new corporation.
The operating corporation may have a tax liability arising from the disposition of the non-business assets. The new corporation may be subject to s.55(2) of the Act if the gain on the purchased shares is attributable to something other than income earned or realized by the operating corporation.
Interpretation
The formation of the new corporation and the transfer of the shares to the new corporation is not an abuse of the Act. The transfer of the non-business assets is governed by s.55(2) of the Act. Since the definition of a qualified small business corporation share does not require that all or substantially all of the assets be used in carrying on an active business in Canada for a particular period of time prior to the sale of the shares, the distribution of the non-business assets prior to the sale is acceptable. Therefore, in this case, the transactions undertaken to “purify” the corporation are in accordance with the scheme of the Act.
Facts
A corporation owes an amount for services rendered by a person who does not deal at arm’s length with the corporation. The amount arises from a bona fide transaction and is deductible to the corporation.
However the amount is not paid before the end of the second taxation year following the year in which the expense was incurred so as to maximize the deferral of its taxation in the hands of the person.
Interpretation
s.78 (which deals with unpaid amounts) does not deny the deduction of a bona fide expense to a taxpayer in the year that it is incurred. It does, however, provide that either the taxpayer or the non-arm’s length person will include the amount in income in the third taxation year following the year in which the expense is incurred. The deferral in such circumstances is contemplated by s.78(1) of the Act and s.245(2) would not apply.
Facts
An individual provides services to a corporation with which he or she does not deal at arm’s length. The company does not pay a salary to the individual because payment of a salary would increase the amount of a loss that the company will incur in the year.
Interpretation
There is no provision in the Act requiring a salary to be paid in these or any circumstances and the failure to pay a salary is therefore not contrary to the scheme of the Act read as a whole. Subsection 245(2) would not apply to deem a salary to be paid by the corporation or received by the individual.
Facts
A taxable Canadian corporation, which is profitable, has a wholly-owned taxable Canadian corporation that is sustaining losses and needs additional capital to carry on its business.
The subsidiary could borrow the monies from its bank but the subsidiary could not obtain any tax saving in the current year by deducting the interest expense.
Therefore, the parent corporation borrows the money from its bank and subscribes for additional common shares of the subsidiary and reduces its net income by deducting the interest expense.
The subsidiary uses the money to gain or produce income from its business.
Interpretation
The borrowing by the parent corporation is for the purpose of gaining or producing income as required by para.20(1)(c) of the Act and s.245(2) would, therefore, not apply.
Facts
A taxable Canadian corporation has agreed to purchase all of the shares of an operating corporation, which is also a taxable Canadian corporation.
The purchaser incorporates a holding corporation which borrows the purchase price and pays the vendor for the shares.
The holding corporation and the operating corporation amalgamate so that the interest payable on the monies borrowed to acquire the shares can be deducted in computing the income from the business of the amalgamated corporation.
Interpretation
The borrowing by the holding corporation and the amalgamation are not abusive and s.245(2) would not apply to the borrowing by the holding corporation.
Facts
A taxable Canadian corporation merges with another taxable Canadian corporation that is a shell company.
On the merger the shareholders who controlled the predecessor receive common shares of the merged company and the minority shareholders of the predecessor receive redeemable preferred shares that are immediately redeemed.
The sole reason that the minority shareholders receive shares instead of cash is to cause the merger to comply with the requirements of s.87(1)(c) of the Act.
Interpretation
s.245(2) would not apply to the issue of the preferred shares as such issue is not regarded a misuse of a provision of the Act or an abuse of the Act read as a whole.
