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More on Rectification in Quebec

Rectification continues to be a topic of heated debate in Quebec. After a series of decisions by the Court of Appeal last year on the subject, the Quebec Superior Court rendered an important judgment on June 19, 2012 (Mac’s Convenience Stores Inc. v. Couche-Tard Inc., 2012 QCCS 2745) on a motion for declaratory judgment involving a well-known Canadian business.

This case is a reminder that rectification is not always available to correct errors made in the planning of a transaction, even if the unintended tax consequences result in a loss of several million dollars for a taxpayer.

The Facts

On April 14, 2005, Mac’s Convenience Store Inc. (“Mac’s”) borrowed $185 million from a U.S. corporation, Sildel Corporation (“Sildel”), which was a “specified non-resident” for purposes of the thin capitalization rules in subsection 18(4) of the Income Tax Act (the “Act”). Under this loan, Mac’s paid interest to Sildel ($911,854 in 2006, $11,069,590 in 2007, and $10,674,247 in 2008). These interest payments were deducted in computing the income of Mac’s for income tax purposes in the relevant years. This loan was fully repaid by Mac’s in 2008.

On April 25, 2006, Mac’s declared and paid a dividend of $136 million to Couche-Tard Inc. (“CTI”) out of its retained earnings. The decision to declare this dividend was taken after consultation with professional advisers.

More than 18 months later, it was discovered that the dividend of $136 million paid to CTI had the effect of raising the “debt” portion of Mac’s debt-to-equity ratio vis-a-vis Sildel for thin capitalization purposes beyond the then statutory limit of 2:1 under subsection 18(4) of the Act. In early 2008, Mac’s notified the CRA of the situation. After conducting an audit, the CRA issued notices of reassessment to Mac’s denying the deduction of all the interest it paid to Sildel during taxation years 2006, 2007, and 2008.

Mac’s filed a motion for declaratory judgment with the Quebec Superior Court requesting that the dividend of $136 million declared on April 25, 2006 and paid to the respondent CTI be cancelled retroactively and replaced by a reduction of Mac’s paid-up capital in the same amount. This rectification would have required no transfer of funds between the parties, but it would have allowed Mac’s to deduct the interest paid to Sildel in computing Mac’s income under the thin capitalization rules.

To read the full article, click here.

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More on Rectification in Quebec

Trust Me, This Isn’t What It Looks Like

Tax law geeks call it “form over substance” – how Canadians are taxed on their actual relationships and transactions rather than what they intended those to be.

However, mistakes can be made – and sometimes the tax assessed is not reflective of the true nature of the situation at hand.

In the March 16, 2012 issue of The Lawyers Weekly, I discuss the ways in which mistakes may be fixed so as to avoid unintended and adverse tax consequences.

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Trust Me, This Isn’t What It Looks Like

Brick Protection Corp. v. Alberta (Treasury) – Are Warranty Providers Subject to Insurance Corporation Tax Under Part IX of the Alberta Tax Act?

The Alberta Court of Appeal released its decision in this appeal on July 21, 2011.  Brick Protection Corp. (Brick Protection; now Trans Global Warranty Corp.) was a sister corporation of the Brick Warehouse Corp. (The Brick).  Brick Protection sold extended warranties to consumers on appliances and furniture purchased through The Brick.  The issue: Was Brick Protection Corp. doing business as an insurance company in Alberta?  If so, they would be subject to insurance corporation tax under Part IX of the Alberta Tax Act (the Act; now in the Alberta Corporate Tax Act).

For more on the decision of the Alberta Court of Appeal in Brick Protection Corp. v. Alberta (Treasury), read the commentary in FMC’s Focus on Tax.

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Brick Protection Corp. v. Alberta (Treasury) – Are Warranty Providers Subject to Insurance Corporation Tax Under Part IX of the Alberta Tax Act?