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Yes, Those Emails are Tax Phishing Scams

We were alerted today that some individuals had received fake emails informing the recipient that he/she had received an Interac email money transfer (i.e., a surprise refund).

The emails arrive with the subject line “INTERAC e-Transfer from Canada Revenue Agency System” and appear to emanate from Interac, Dentons, or canadiantaxlitigation.com.

Those emails are a scam. If you receive one of these emails do not click any links in such emails, and do not confirm or provide any personal data. 

Several concerned individuals forwarded sample emails to us:

From: “notify@payments.interac.ca” <admin@canadiantaxlitigation.com>

Date: October 29, 2015 at 2:56:31 PM EDT

To: name@email.com

Subject: INTERAC e-Transfer from Canada Revenue Agency System

<>Dear Tax Payer,

<>Canada Revenue Agency has sent you an INTERAC e-Transfer (previously INTERAC Email Money Transfer).

<>Amount: $741.28
<>Sender’s Message: A message was not provided
<>Expiry Date: 30 October 2015

<>Action Required:
<>To deposit your money, click here: http:/www.cra-arc.gc.ca/confirm/interac/services/REF=IDREFCASE741.28

<>2015 Canada Revenue Agency (CRA) Support

Please see our previous post on fraudulent tax scams here and here.

The CRA’s Security page is available here.

These email tax scams should be reported to the Canadian Anti-Fraud Centre.

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Yes, Those Emails are Tax Phishing Scams

Tax Court: CRA Employee May Not Testify as Expert

In HLP Solution Inc. v. The Queen (2015 TCC 41 ) the Tax Court held that a CRA employee lacked the necessary impartiality to testify as an expert witness because of her prior involvement in auditing the taxpayer.


The taxpayer was a software company that claimed Scientific Research and Experimental Development (SR&ED) tax credits for the 2009 taxation year. The CRA reassessed to deny the SR&ED credit claims.

In the Tax Court, the taxpayer challenged the qualification of the CRA’s expert witness on the basis that she did not have the necessary impartiality to testify as an expert witness in the appeal. The Tax Court held a voir dire to determine whether the Crown’s proposed expert witness could testify in the appeal.

The proposed expert witness held a doctorate in computer science and was employed with the CRA as a Research and Technology Advisor (RTA). The taxpayer’s allegation of impartiality was not based on the fact that the proposed expert witness was employed with the CRA. Rather, the taxpayer argued that it was the proposed expert witness’s involvement in every stage of the file that impugned her impartiality.

The Crown submitted that it is rare for a court to refuse to hear the testimony of an expert witness, and that there must be clear evidence of bias, which, according to the Crown, was not present in this case. Moreover, the Crown submitted that it was in the capacity as an expert that the opinion was given, irrespective of whether this occurred at the audit stage, objection stage, or during appeal.


In analyzing whether to admit the evidence by the Crown’s witness, the Tax Court reviewed the leading case on the admission of expert evidence, the Supreme Court of Canada decision R. v. Mohan ([1994] 2 SCR 9), in which the Court set out the criteria for determining whether expert evidence should be admitted, namely: relevance, necessity in assisting the trier of fact, the absence of an exclusionary rule, and a properly qualified expert.

In Mohan, the Supreme Court established that the question of relevancy is a threshold requirement for the admission of expert evidence and a matter to be decided by the judge as a question of law. There must first be logical relevance in order for the evidence to be admitted. The judge must then perform a cost-benefit analysis to determine whether the value of the testimony is worth the costs, in the sense of its impact on the trial process.

The Tax Court also reviewed R. v. Abbey (2009 ONCA 624), in which the Ontario Court of Appeal applied Mohan but also distinguished between the preconditions to admissibility and the judge’s role as a gatekeeper. The Ontario Court of Appeal noted that while the inquiry into the preconditions to admissibility is a rules-based analysis that tends to yield “yes” or “no” answers, the gatekeeper function does not involve the application of bright line rules and frequently requires the exercise of judicial discretion. The gatekeeper function is more subtle and involves weighing the benefits of the probative value of the evidence against the prejudice associated with admitting the evidence.

In HLP, the Tax Court held that it was preferable to disqualify the expert at the qualification stage. The Court based its conclusions on many of the taxpayer’s allegations, including the following:

  • the proposed expert witness was involved with the audit and objection;
  • the proposed expert witness delivered the opinion (the technical review report) that served as the basis for the assessment;
  • following the taxpayer’s representations, the proposed expert witness also wrote an addendum to the technical review report in which she maintained the same position;
  • the proposed expert witness participated in every meeting with the taxpayer as the CRA’s representative;
  • the proposed expert witness confused her role as an RTA with that as an expert witness; and
  • the proposed expert witness reproduced word-for-word paragraphs from her technical review report.

The Tax Court was careful to note that it was not disqualifying the expert on the basis of her employment with the CRA but rather on the basis of her close involvement throughout the audit and objection stages of the file.

The Tax Court allowed the Crown to submit a new expert report.

The Tax Court’s decision in HLP will have a direct impact on future cases in which proposed expert witnesses were involved in the audit and objection processes as CRA employees. Such employees – though they may have the required professional qualifications to testify as an expert witness – cannot be qualified as expert witnesses because they lack the necessary impartiality to testify.

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Tax Court: CRA Employee May Not Testify as Expert

CRA Publishes Reminder on Charities’ Political Activities

Political activities have been a hot topic for the CRA’s Charities Directorate in the last few years.

In the CRA’s 2015 Program Update, the Charities Directorate stated that its recent political activity audit included 60 charities, with various results (i.e., education letters, compliance agreements, revocations, etc.).

Generally, a registered charity may not engage in partisan political activities, but a modest amount of political activities are permitted (i.e., those political activities that are non-partisan and connected and subordinate to the charity’s purposes). As a general guideline, a registered charity cannot devote more than 10 percent of its total resources to political activities (the CRA applies slightly different percentages to small charities).

Political activities were revisited again recently when the Charities Directorate published an “Advisory on partisan political activities”, which stated:

Since we are in an election period, we remind registered charities that they are prohibited from devoting any of their resources to partisan political activities. A partisan political activity is one that involves the direct or indirect support of, or opposition to, any political party at any time, whether during an election period or not, or a candidate for public office.

Given the time and resources spent by the CRA educating the charitable sector on the subject, most or all charities should not be surprised to see this latest update from the CRA.

However, a surprising part of the Advisory may be the following statements:

Charities that use the Internet or social media to post information should ensure the information does not contain partisan political statements. Also, the information should not link to statements made by a third party that support or oppose a candidate or political party.

When a charity invites comments on its website, blogs, or on social media, it should monitor them for partisan political statements and remove, edit, or moderate such statements within a reasonable time.

Charities should be aware of the CRA’s views on social media and political activities, and during the 2015 federal election charities should be careful to ensure that any invited comments on a charity’s website, blog, Facebook page or Twitter account do not conflict with the CRA’s views on partisan political activities.

Charities may wish to consult their professional advisers if there are any questions about compliance with the Income Tax Act and the CRA’s views.

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CRA Publishes Reminder on Charities’ Political Activities

Beware of Telephone Tax Scams

Several clients have contacted me in recent weeks after receiving telephone calls from individuals who claim to be from the Canada Revenue Agency.

Typically, the caller will provide his name, an employee ID, a CRA office address and telephone number with a Canadian area code.

The caller is aggressive, alleges that the taxpayer owes an amount to the CRA, and demands immediate payment. The caller also threatens arrest or other punishments if the amount is not paid.

These telephone calls are a scam. If you receive one of these calls, do not provide or confirm any personal data.

The CRA has recently issued a warning about this type of telephone scam, and a news report on the scam is available here.

These telephone tax scam calls should be reported to the Canadian Anti-Fraud Centre.

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Beware of Telephone Tax Scams

FCA Dismisses Appeal of Revocation of Charity Status

In Public Television Association of Quebec v. M.N.R. (2015 FCA 170), the Federal Court of Appeal dismissed the appeal by the Public Television Association of Quebec (“PTAQ”) of the CRA’s decision to revoke PTAQ’s registered charity status.


PTAQ was constituted to advance education through the production, distribution and promotion of non-commercial, educational television programs and films.

Generally, PTAQ carried out its charitable activities through an intermediary: Vermont ETV Incorporated (aka Vermont PBS) (“VPT”) pursuant to a fundraising agreement and a broadcasting agreement.

Under these agreements, PTAQ would purchase a slate of educational programming from VPT, and such programming would then be broadcast on certain television stations. VPT would, in the course of various fundraising activities, raise funds from Canadian donors as an agent of PTAQ, which would issue donation receipts to the Canadian donors.

Charitable Activities

Generally, a Canadian charity may carry out its charitable activities in two ways: directly, or through the use of an intermediary. If the charity uses an intermediary to carry out charitable activities, the charity must maintain direction and control of its resources (see CG-004 “Using an Intermediary to Carry out a Charity’s Activities within Canada” (June 20, 2011)). The CRA’s scrutiny of a charity’s use of an intermediary is greater where the activities are carried on outside Canada (see CG-002 “Canadian Registered Charities Carrying Out Activities Outside Canada” (July 8, 2010)).

In this case, the CRA reviewed PTAQ’s corporate objects and activities and determined that PTAQ had failed to devote all of its resources to its own charitable activities. The CRA issued a Notice of Intention to Revoke pursuant to paragraph 168(1)(b) of the Income Tax Act. PTAQ filed a Notice of Objection under subsection 168(4) of the Act, and the CRA confirmed the proposal to revoke PTAQ’s registration.

Pursuant to subsection 172(3) of the Act, an appeal of the CRA’s decision to revoke a charity’s registration is made directly to the Federal Court of Appeal (rather than the Tax Court).


On appeal of a proposed revocation in respect of a charity that has used an intermediary to carry out charitable activities, the charity must adduce evidence that it was carrying on charitable works on its own behalf and not merely acting as a conduit (i.e., the charity must establish that it maintained direction and control of its resources).

The Court of Appeal dismissed the appeal and held that PTAQ had failed to establish the CRA’s conclusion that PTAQ was not devoting all of its resources to its own charitable activities – which was a question of mixed fact and law – was unreasonable.

The Court of Appeal stated:

[55] Based on the evidence outlined above, I conclude that it was reasonable for the Minister to determine that PTAQ failed to maintain direction and control over its resources as it did not devote all its resources to its own charitable activities. The provisions of the broadcasting and fundraising agreements were not followed or respected. PTAQ has not adduced evidence that it exercised proper control over the activities of its agent by demonstrating how it monitored the cost of the broadcasting activities, the donations received and the fundraising. It has not established how the Minister erred in coming to the conclusion that PTAQ is only used to issue receipts for donations received by VPT from Canadian donors, as the documentation contained in the record does not overturn the factual findings noted above with respect to the broadcasting and fundraising agreements.

The CRA’s revocation and the Court of Appeal’s decision are stern reminders of the necessity for Canadian charities that are essentially “friends of” foreign charitable organizations to implement measures that will ensure that direction and control of the Canadian charity’s resources remain with the Canadian charity.

Further, such direction and control must in fact be exercised by the Canadian charity, and evidence of such direction and control should be recorded in the Canadian charity’s corporate documents (i.e., meeting minutes, reports, correspondence, etc.).

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FCA Dismisses Appeal of Revocation of Charity Status

Zhang: BC SC Refuses to Rectify Share Transfer

In Zhang v. Canada (A.G.) (2015 BSCS 1256), the British Columbia Supreme Court refused to grant rectification of a transaction in respect of which the taxpayers had no common intention to avoid capital gains tax on a share transfer.

The taxpayer was resident in British Columbia. He carried on a business of manufacturing and distributing laser equipment. In 2002, the taxpayer incorporated LABest Optronics Co. Ltd. (“LABest”) in China to carry on the business.

In 2003, the taxpayer met with his accountant to discuss his 2002 Canadian tax return. In the course of this discussion, the taxpayer asked about the distribution of income from LABest, and the accountant suggested that income earned in the company could be taxed in China and distributed to a Canadian corporate shareholder as exempt surplus dividends without further Canadian tax being imposed, and then later paid to the taxpayer.

Subsequently, the taxpayer incorporated Beamtech Optronics Co. Ltd. (“Beamtech”), a B.C. company. The accountant suggested that the shares of LABest be transferred to Beamtech. The taxpayer sought and obtained regulatory approval for the share transfer from the Chinese government, and such approval included a transfer value (determined by the government) of $150,000 USD. Beamtech paid $150,000 USD cash to the taxpayer, and no section 85 rollover of the shares was undertaken.

The CRA subsequently reviewed and assessed the transaction on the basis that the fair market value of the LABest shares was $661,164 CDN, resulting in a capital gain of $221,950 for the taxpayer in 2003.

The taxpayer sought rectification of the share transfer to substitute a section 85 rollover of the LABest shares to Beamtech.

The Court stated that the “proper approach” to rectification under B.C. law is as follows:

  1. The focus of the analysis in tax cases is on the intention of the related parties when they entered the transaction. This is because the “mistake” in the written instrument is usually a mistake as to the tax consequences of the transaction. It matters not if the mistake was caused by misinformation from the taxpayer to his advisors, or mistaken advice provided by a professional advisor to the taxpayer.
  2. There is nothing objectionable about taxpayers attempting to avoid tax.
  3. The real question which must be considered is whether the taxpayer is able to establish a specific continuing intention to avoid the particular tax in question. A general intention to avoid taxes is not sufficient. The determination of what constitutes sufficient specificity of intention will depend on the context and the circumstances of each case.
  4. Where rectification is aimed at a wholly distinct kind of tax avoidance, which was not specifically contemplated at the time the written instrument was formed, rectification will not be granted.
  5. A common specific intention is one which existed before the formation of the instrument in question and continued since that time. It must be a “precise” and “clearly-defined object” before rectification will be granted.

In the present case, the Court was concerned that there were significant inconsistencies in the evidence of the taxpayer and his accountant. Further, the evidence established only that the taxpayer intended to implement a corporate structure (i) for the tax-efficient movement of funds from LABest to Beamtech, and (ii) that was acceptable to the Chinese government. The taxpayer had only consulted his accountant about discrete tax issues, but never retained his accountant to provide a comprehensive review of all tax issues that may arise in respect of the transaction. The Court held that the taxpayer had no specific intention to avoid capital gains tax on the share transfer.

The Court dismissed the taxpayer’s application.

The more challenging aspect of Zhang is the Court’s discussion of the requirements for rectification – i.e., whether a specific or general intention to avoid tax must exist for rectification to be granted. The B.C. Court referred to the leading tax rectification case, Juliar v. A.G. (Canada) ((2000), 50 O.R. (3d) 728 (Ont. C.A.), leave to appeal to the Supreme Court of Canada dismissed (File No. 28304)) (Dentons was counsel for the successful taxpayer), and the B.C. cases that have interpreted Juliar (see, for example, McPeake v. Canada (A.G.) (2012 BCSC 132)). The Court stated that, in B.C., “Rectification will not be granted where there is only a general intention to avoid taxes.”

The Alberta Court of Queen’s Bench reached a similar conclusion in Graymar Equipment (2008) Inc. v A.G. (Canada) (2014 ABQB 154) and Harvest Operations Corp. v. A.G. (Canada) (2015 ABQB 237)).

This may conflict with the reasoning in Juliar and other Ontario cases (see TCR Holding Corporation v. Ontario (2010 ONCA 233) and Fairmont Hotels Inc. v. A.G. (Canada)(2015 ONCA 441) in which the Ontario Court of Appeal has clearly stated that rectification was available where the taxpayers had a general intent to carry out their transactions on a tax-efficient (or tax-neutral) basis and had no expectation as to the specific manner in which the transaction would be carried out.

However, Zhang raises the question as to whether the distinction between specific and general intent is meaningful at all. On any rectification application, a court’s focus will always be on the nature of the mistake, the circumstances of the error, and the evidence of the taxpayer’s intent. Whether their intent is described as “specific” or “general”, taxpayers who are careless or cavalier about the Canadian tax implications of a transaction likely cannot establish that they intended to minimize or avoid taxes and cannot expect to obtain relief from the courts.

As of the time of the writing of this post, the taxpayer had not appealed to the B.C. Court of Appeal.

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Zhang: BC SC Refuses to Rectify Share Transfer

McNally: CRA Does Not Have Unfettered Discretion to Delay Assessment

In McNally v. Canada (National Revenue) (2015 FC 767), the taxpayer brought an application to the Federal Court for an order requiring the Minister to assess his tax return. The Federal Court allowed the taxpayer’s application and ordered the Minister to examine the taxpayer’s tax return and issue a Notice of Assessment within 30 days.


The taxpayer invested funds in a gifting tax shelter in respect of which he claimed a number of deductions.

The taxpayer filed his 2012 federal income tax return in April 2013. Two months later – in June 2013 – he received a letter stating that his return had not been assessed because the CRA was undertaking an audit of the gifting tax shelter program. In July 2013, the taxpayer filed an application for judicial review of the CRA’s decision not to assess his return. Two years later, the taxpayer’s 2012 return still had not been assessed.


Under subsection 152(1) of the Income Tax Act, the CRA shall examine a taxpayer’s return of income and assess the tax for that taxation year “with all due dispatch.”

The taxpayer argued that the CRA was deliberately delaying the assessment for the improper purpose of discouraging participation in gifting tax shelters. The court noted that, in the CRA’s view, widely-marketed tax shelters are generally invalid. In this case, the CRA admitted that it chose not to assess the tax returns of participants in the gifting tax shelters in order to discourage participation in such investments, to undertake an audit the tax shelter, and to educate the public about gifting tax shelters.

The CRA admitted that the main reason the taxpayer’s return was not reassessed was to discourage participation in gifting tax shelters. The CRA submitted that this motive did not conflict with its duty under subsection 152(1) of the Act.


In allowing the application, Justice Harrington of the Federal Court followed the decision in Ficek v Canada (Attorney General) (2013 FC 502) in which the Court held that the Minister had failed to assess the taxpayer’s return “with all due dispatch.”

In Ficek, a delay in examining the taxpayer’s return arose from a new policy of discouraging certain types of tax shelter investments. In Ficek, the court acknowledged that the CRA has discretion in assessing taxpayers but noted “…the discretion is not unfettered, it must be reasonable and for a proper purpose of ascertaining and fixing the liability of the taxpayer” (para. 21). Importantly, the Court held that there should be some certainty to the taxpayer’s financial affairs (para. 34).

In McNally, Justice Harrington followed this reasoning. He held that the phrase “with all due dispatch” does not imply a specific time period before which the Minister must make an assessment. However, he found that while the Minister has discretion, it is not unfettered. The determination of whether the Minister has examined a taxpayer’s return “with all due dispatch” is a question of fact.

The Federal Court ultimately determined that the Minister had failed to assess the taxpayer’s tax return “with all due dispatch.”  The court held:

[41] … Although the Minister is responsible for administrating the Income Tax Act, ultimately it falls upon the courts to decide whether a claimed deduction is valid or not. It is plain and obvious that Mr. McNally’s rights have been trampled upon for extraneous purposes.

[42] The Minister owes Mr. McNally a statutory duty to examine his return “with all due dispatch.” There may well be circumstances in which it will take some time to reach a conclusion with respect to a given return. It may well be appropriate to await the audit of third parties. However this is not one of those cases.

[43] The CRA is entitled to express concerns with respect to certain shelters and to warn that such shelters will be audited. In Mr. McNally’s case, however, the resulting delay is capricious and cannot be allowed to stand. Even assuming these secondary purposes to be valid, they are overwhelmed by the primary main purpose and cannot save the day.

Interestingly, McNally goes a step further than the Court in Ficek, in which the Court had simply declared that the CRA had failed to assess with all due dispatch. McNally is a good example of the Federal Court exercising its judicial review authority to compel the CRA to carry out its statutory duty. This does not assure the taxpayer that he is entitled to his charitable donation claims, but at least he will be able to commence a challenge of the disallowance of the claims.

While the McNally decision does not go so far as to tell us what “with all due dispatch” means, the decision is the second important reminder that the CRA’s discretion in assessing taxpayers, while broad, is not unfettered.

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McNally: CRA Does Not Have Unfettered Discretion to Delay Assessment

BP Canada: CRA Entitled to Tax Accrual Working Papers

In BP Canada Energy Company v. Minister of National Revenue (2015 FC 714), the Minister brought an application pursuant to subsection 231.7(1) of the Income Tax Act (Canada) (the “Act”) before the Federal Court of Canada.

The Minister sought a compliance order requiring BP Canada to provide tax accrual working papers prepared by BP Canada’s own employees which were requested by the Canada Revenue Agency (“CRA”) during its audit pursuant to subsection 231.1(1) of the Act.

The Federal Court allowed the application and granted the compliance order.


Under subsection 230(1) of the Act, a taxpayer must keep books and records in such form and containing such information as will enable the taxes payable under the Act to be determined.

Under sections 231.1 to 231.7, the CRA may request and a taxpayer may be required to produce such book and records. Additionally, the CRA has routinely made broad requests for tax accrual working papers.

Taxpayers are generally reluctant to produce tax accrual working papers to tax auditors because these documents could provide a roadmap of the taxpayer’s tax positions, an estimate potential exposure for tax, and an outline the possible assessing position the tax authorities may take. Moreover, these documents are required to be prepared pursuant to securities regulations and accounting standards rather than pursuant to the Act or for the determination of taxes payable.

In “Acquiring Information from Taxpayers, Registrants and Third Parties” the CRA stated that it will follow a policy of restraint in requesting tax accrual working papers during its regular income tax audits – namely, that it would only request them if a proper examination could not be carried out without access to those files.

In BP Canada, the CRA explicitly stated that it sought to obtain BP’s tax accrual working papers to assist the CRA in expediting its audit not only for the years for which the tax accrual working papers were prepared but also for subsequent tax years – thus implying that the documents were not required for the audit but were simply helpful as a matter of convenience for the auditor.


BP Canada submitted that tax accrual working papers are subjective opinions regarding tax filing positions and are not required to establish the tax payable under the Act and therefore do not qualify as books and records that are required to be provided to support a tax filing position.

Moreover, BP Canada submitted that, even if the statutory requirements for a compliance order are met, the Federal Court must justify the exercise of its discretion to grant the order.

In this case, BP Canada argued that such discretion could not be justified because it would constitute a compulsory self-audit by the taxpayer and would violate the Minister’s own policy not requiring such documents to be produced.


In granting the compliance order, the Federal Court found while the Minister may not need the tax accrual working papers to complete an audit, if the Minister wants them, she should have them.  The Federal Court did not accept BP’s “roadmap” argument and put weight on the fact that the tax accrual working papers are already prepared and thus no additional work would be required by the taxpayer.

The Federal Court also stated even though the Act does not require these types of documents be retained, if they are maintained for another reason they can be requested by the Minister.

Finally, the Federal Court relied on the Federal Court of Appeal case Tower v. MNR (2003 FCA 307) in finding that tax accrual working papers do fit within the scope of subsection 231.1(1) which provides that the CRA may request “the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act”.

The Federal Court endorsed the Minister’s audit approach in this case, stating that the Minister’s request for tax accrual working papers is not part of a fishing expedition if the Minister knows that she wants a clear roadmap to be used for current and future audits (see para. 38) (we note, however, that the decision does not consider whether a clear sign of a fishing expedition may be a broad request by the CRA for a roadmap of the taxpayer’s tax considerations).

The decision in BP Canada clearly outlines the Federal Court’s opinion that tax accrual working papers should be produced when requested pursuant to section 231.1 of the Act. The decision serves as an important reminder that taxpayers should be cautious in preparing and maintaining tax accrual working papers.


BP Canada: CRA Entitled to Tax Accrual Working Papers

Mac’s: Quebec CA Affirms Denial of Rectification

In Mac’s Convenience Stores Inc. v. Canada (2015 QCCA 837), the Quebec Court of Appeal affirmed a lower court decision (2012 QCCS 2745) denying rectification of corporate resolutions that had declared a dividend that unintentionally put the company offside the “thin-cap” rules in subsections 18(4)-(8) of the Income Tax Act.


Mac’s, an Ontario corporation, was a wholly-owned subsidiary of Couche-Tard Inc. (“CTI”). In April 2005, Mac’s borrowed $185 million from Sidel Corporation, a related Delaware corporation.

In April 2006, Mac’s participated in several transactions with various related entities, including the declaration of a $136 million dividend on the common shares held by CTI. A similar series of transactions had been undertaken in 2001. However, in 2006, Mac’s professional advisors failed or forgot to take proper account of the $185 million owed by Mac’s to Sidel.

While the $136 million dividend itself was generally without tax consequences, the dividend had the effect of putting Mac’s offside the (then) 2:1 ratio in the “thin-cap” rules in the Income Tax Act. This resulted in the reduction of deductible interest paid by Mac’s to Sidel in the years following the dividend payment (i.e., 2006, 2007 and 2008).


After Mac’s was reassessed by the CRA to disallow the interest deduction, Mac’s sought rectification of the corporate resolution declaring the dividend, and additionally sought to substitute a reduction of its stated capital and the distribution of cash to CTI. This would have had the same effect of paying an amount to CTI while maintaining the proper ratio for interest deductibility.

The Quebec Superior Court dismissed the application on the basis that the Mac’s directors never had any specific discussions regarding the deductibility of interest on the Sidel loan after the payment of the dividend. The various steps in the 2006 transactions reflected the intentions of the parties, and thus there was no divergence between the parties agreement and the documents carrying out the transactions.


The taxpayer appealed to the Quebec Court of Appeal. The Court described the taxpayer’s position as not invoking any error in the lower court judgment but simply alleging that, if the taxpayer’s advisors had made a mistake, then the lower court decision must be reversed on the basis of the Supreme Court of Canada’s decision in Quebec v. Services Environnementaux AES Inc. (2013 SCC 65) (“AES“) (see our previous post on AES here).

The Court of Appeal stated that it understood the Supreme Court’s decision in AES to stand for the proposition that parties who undertake legitimate corporate transactions for the purpose of avoiding, deferring or minimizing tax and who commit an error in carrying out such transactions may correct the error(s) in order to achieve the tax results as intended and agreed upon. The Court of Appeal cautioned that AES does not sanction retroactive tax planning.

In the present case, the Court of Appeal held there was no common intention regarding the “thin-cap” implications of the dividend payment, and thus there was no agreement that should be given effect by the courts.

The Court of Appeal held there was no error by the lower court and dismissed the taxpayer’s appeal.

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Mac’s: Quebec CA Affirms Denial of Rectification

Ironside: TCC Orders Hearing of Question on Rule 58 Motion

In Ironside v. The Queen (2015 TCC 116), the Tax Court allowed the Crown’s Rule 58 motion for a determination of a question of law before the hearing, namely whether the taxpayer was estopped from litigating an issue that had been adjudicated in an earlier Tax Court decision.

In the prior case (Ironside v. The Queen (2013 TCC 339)), the taxpayer had incurred legal and professional fees to defend himself against allegations of committing improper disclosures after being charged in June 2001 by the Alberta Securities Commission. The taxpayer sought to deduct such fees in the 2003 and 2004 tax years.

The Tax Court concluded that the taxpayer’s legal and professional fees had not been incurred to gain or produce income from his chartered accounting business, rather such expenses were personal in nature and were incurred to protect his reputation in the oil and gas industry. The Tax Court dismissed the taxpayer’s appeal.

Subsequently, the taxpayer sought to make the same deductions in the 2007, 2008 and 2009 tax years. The CRA reassessed to deny the deductions, and the taxpayer again appealed to the Tax Court.

In its Reply, the Crown raised the issue of whether “the appeal or a portion of it is barred by application of the doctrine of issue estoppel or is otherwise an abuse of the process of the Court”. The Crown then brought a motion for an order pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure) for a determination of a question prior to the appeal:

Whether the Appellant is barred from litigating within proceeding 2014-1619(IT)G whether the legal and professional fees paid to defend himself in Alberta Securities Commission proceedings and the subsequent appeal are deductible as amounts incurred to gain or produce income from a business or property, on the basis that the characterization of such fees has been previously adjudicated upon and therefore the doctrines of issue estoppel and or abuse of process operate to bar re-litigation of the issue.

The Tax Court noted that Rule 58 contains a two-step process. At the first stage, the Tax Court must determine whether the question posed by the moving party is an appropriate one that should be heard in a subsequent hearing (the second stage).

At the first stage, three elements must exist:

  1. The question proposed must be a question of law, fact, or mixed fact and law;
  2. The question must be raised in the pleadings; and
  3. The determination of the question may dispose of all or part of the appeal, may substantially shorten the hearing, or may result in substantial cost saving.

If all of these elements are present, the Court may set a hearing of the proposed question before a motions judge prior to the hearing of the appeal.

In the present case, the Tax Court held that all three requirements were satisfied. The Court stated,

[12] Clearly, there is the potential that a determination of this question may, according to the materials I have before me and the submissions I heard, dispose of part of the appeal and I need only be satisfied that it “may” so dispose of some of the appeal. I do not have to be absolutely convinced that it will do so in order to refer the question to a Stage Two determination prior to the hearing. If part of the appeal is disposed of, it follows that the proceeding will be substantially shortened. This is precisely the type of question that Rule 58 is meant to target.

The Tax Court ordered that the Crown’s question be set down for a hearing for determination by a motions judge and that certain evidence be presented at the determination (i.e., the pleadings from both appeals, and the Tax Court’s decision in Ironside v. The Queen (2013 TCC 339)).

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Ironside: TCC Orders Hearing of Question on Rule 58 Motion