ABIL Loan to Shareholder or Corporation? – Sas Ansari

ABIL Loan to Shareholder or Corporation?

Barnwell v Canada, 2016 FCA 150

The taxpayer appealed from a decision of the Tax Court of Canada (2015 TCC 98) finding that the loan subject to the Allowable Business Investment Loss claim was made to the individual and not the Corporation.

A long time acquaintance of the taxpayer incorporated a business and the taxpayer provided funding. No formal agreement was concluded.

This case highlights the need for business persons and investors to obtain professional advice to ensure that the arrangements and outcomes are what are assumed or expected.


The Income Tax Act allows a taxpayer to deduct one-half of Allowable Business Investment Losses in the year (ITA 39(1)(c)(iv)) on the basis that the debt is owed by a Canadian Controlled Private Corporation (CCPC).

The FCA agreed with the TCC, on the basis of both the documentary and oral evidence presented at trial, that the debt was owed by the individual shareholder and not the corporation. The factors were:

  • Cheques made out to individual and not corporation;
  • Promissory notes were from individual not corporation;
  • Taxpayer’s journal described loans as being to individual;
  • Majority of cheques deposited in personal bank account; and
  • Debtor understood loans to be to him personally.

- Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Tax Court of Canada Rules 58 and 91 – Sas Ansari

Tax Court of Canada Rules 58 and 91

3488063 Canada Inc v Canada, 2016 FCA 233

This case has a long procedural and factual history that will not be repeated here.  The appeal issues included whether the Tax Court of Canada property dismissed the Rule 58 and 91  (Tax Court of Canada Rules, General Procedure) applications brought before it.


Rule 58 provides that a Court may grant an order to determine a question of law or mixed fact and law before  a full hearing, and Rule 91 provides that, where the conditions are satisfied, a judge may grant certain remedies (including allow an appeal).  Both rules provide for discretionary decisions by a Judge (para 32).  The appeal also wanted to review a decision with respect to amendments of pleadings, also a discretionary decision – Merck & Co., Inc. v. Apotex Inc., 2003 FCA 488.

Standard of Review

The Federal Court of Appeal stated that, in reviewing the decisions of the TCC Judge, the Judge was to be shown deference in relation to discretionary decisions (para 34). An Appeal Court is not to interfere with such decisions lightly unless the judge made an error or law or an obvious serious error (para 34) – Turmel v. Canada, 2016 FCA 9, para 12; Hospira Healthcare Corp. v. Kennedy Institute of Rheumatology, 2016 FCA 215Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235. The standard of review is correctness for questions of law and palpable and overriding error for questions of fact.

Rule 91

Here, the CRA failed to have a policy in place to ensure that the email messages of employees, now retired, were properly retained. Rather, the retiring employees themselves determine what emails should be archived and not destroyed.   The CRA stated that (para 39):

It would seem to me that any party to litigation or potential litigation should have an adequate policy in place to ensure that potentially relevant documents are not destroyed. In particular, once a notice of objection has been served on the Minister, the Canada Revenue Agency should ensure that the email accounts of those involved are preserved and a policy is in place to ensure that such emails will be available for disclosure if they are determined to be documents that are to be disclosed in relation to any subsequent litigation before the Tax Court of Canada.

That said, the relevant matter was not the conduct of the CRA, but the procedural history and the provisions of the ITA (rules that deal with assessments and appeals).

The Court examined the difference between a party’s disclosure obligations under Rule 82 versus under Rule 81.  Unlike Rule 82, a party is only required by Rule 81 to provide a list of those documents tat such party would be proposing to use either to establish its case or to attach the case of the other side, NOT a list of all relevant documents that may have been in a party’s possession or control (para 43).  Where appeals are joined, how do these rules interact?

The FCA also noted that the remedies that a Tax Court can grant under section 171 of the ITA, on appeal to it, relate to a particular assessment or reassessment.  As such, even where jointed, each assessment remains a separate assessment for purposes of an appeal (para 48), and concluded (para 51):

As noted above, each assessment that is under appeal to the Tax Court of Canada retains its separate identity throughout the Tax Court process with respect to the merits of the assessment. Because each assessment retains its separate identity, it would seem to me that each appeal of a particular assessment would also retain its identity as a separate appeal with respect to the merits of the appeal. Since the Act provides that an appeal relates to a particular assessment, this one to one relationship of an appeal to an assessment with respect to the merits of such assessment or appeal cannot be altered by the Rules.

The Rules can, however, consolidate or merge appeal in relation to procedural steps applicable to all appeals subject to the consolidation order. Once consolidated, the appeals will proceed as one for purposes of the Rules and each step under the Rules will apply equally to each appeal part of the consolidated proceedings (including one list of documents applying to all appeals) (para 52).  The allowance of an appeal under Rule 91, since in relation to a particular assessment, can only operate in relation to a breach of a Rule in respect to an appeal of a particular assessment (para 54).  The application of Rule 91 is restricted to appeals that were before the Court when the misconduct occurs and  to which the misconduct relates, not later joined appeals (para 59).

Rule 58

The review of a Rule 58 application must consider the particular statutory provision involved in the dispute (para 61).  The FCA agreed with the TCC that the matter could not be resolved prior to a full hearing.

Amendments to Replies

This was dealt with in paras 65 -69, not summarized here.

- Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Failure of Family Lawyers on Support – Sas Ansari

Failure of Family Lawyers on Support Payments

Harder v The Queen, 2016 TCC 197

This is an all too common scenario before the Tax Court – A divorce happens, financial obligations are finalized, and the family lawyers involved don’t understand the tax consequences and tax law requirements.  Their clients end up not getting the financial outcome they expected and lawyers end up getting sued.  Family lawyers need to engage an experienced tax professional to help them plan the division of property and support obligations.  The Income Tax Act is convoluted and detailed.


The taxpayer and his spouse separated and had dealt with the usual stressful, difficult, and emotional matters that go along with a divorce.  The family lawyers involved thought they had gotten the financial right, but they had not. The taxpayer was denied deductions for child support payments and the Tax Court had no choice but to dismiss his appeal all because the family lawyers didn’t understand the ITA’s requirements.


The Income Tax Act prevents a person from deducting an amount in respect of a person where the individual is required to pay a support amount (defined in 56.1(4)) to the individual’s spouse or common-law partner or former spouse or common-law partner in respect of the person where, among other things, the two live separate and apart throughout the year because of a breakdown of the relationship – ITA s 118(5).   There is an exception to allow for a deduction, but only where the application to the facts would result in no person being able to claim the deduction – ITA s 118(5.1).

For tax purposes, the use of the Federal Child Support Guidelines is a starting point that leads to spouses coming to an agreed “support amount”.  A set-off mechanism doesn’t render, memorialize, or transform the distinct values entered along that path into support amounts for purposes of the ITA – Contino v Leonelli-Contino, 2005 SCC 63 at paragraph 32.  The result is a unilateral payment from one spouse to another – Ladell v R., 2011 TCC 314 at paragraph 11.

In shared parenting situations as these – Perrin v Her Majesty the Queen, 2010 TCC 331 at paragraph 16 – where the other spouse is not required to pay a support payment to the net payor, the ITA does not allow a deduction for the dependent amount by the unilateral payor – Cunningham v Her Majesty the Queen, 2012 TCC 279 at paragraph 14; Verones v R., 2013 FCA 69 at paragraph 6.  The exception allowing both parents to claim the dependent deduction only applies where both parents are required, factually, to pay to the other an amount for child support.  Factual or actual payment by both parents to the other require a payment for the time the child in the care of the other payment – Rabb v R., 2006 TCC 140Ochitwa v R., 2014 TCC 263.  The dependent deduction is also available where child support payments are adjusted for further expenses when they are distinctly paid to the other spouse and the amounts are clearly reflected in a written agreement mandating such a payment.

That the tax act requires is a mandatory requirement for each parent to pay to the other an amount reflected in a court order or formal agreement along with conclusive evidence of such payments actually being made – the use of a computer software program to get a unilateral net amount is not enough.  The Court noted at paragraph 11:

[11]        The practising family law Bar should take note. The engagement of the combined effect of subsections 118(5) and 118(5.1), at a minimum, requires a comprehensive documentary and evidentiary record. If separating spouses, seeking joint custody, wish to avail themselves of a dependent deduction for both spouses in such situations, surely family law lawyers can deploy their usual flexible skills to ignore the set off provisions within the paradoxically named “Divorce Mate” for a brief moment and mandate and effect actual periodic payments by both spouses to each other in cases of shared parenting of two or more children. Surely cheques, or even their more modern replacement of recurring e-transfers, may evidence a clearly enumerated, reciprocal and mandatory support amount paid by each spouse to the other.

- Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Offshore Property Income, FAPI – Sas Ansari

Foreign Accrual Property Income of a Lending Business

CIT Group Securities (Canada) Inc v The Queen, 2016 TCC 163

At issue was whether the income earned by Controlled Foreign Affiliates (CFA) of the Taxpayer were Foreign Accrual Property Income (FAPI) or exempted from FAPI.


The facts and structure of the Taxpayer and related entities is complex and not reproduced. See the first 84 paragraphs of the decision.


The Tax Court reviewed the relevant provisions of the Income Tax Act. The ITA subjects the world-wide income of Canadian residents to tax. The FAPI regime in Subdivision i of Division B of Part I deals with income earned on passive outbound investment by Canadian residents through non-resident corporations. The purpose is to subject to Canadian tax certain foreign passive or investment income that would otherwise erode the Canadian tax base, whether or not that income is distributed to Canada or not.

The FAPI regime starts by looking at the Canadian resident taxpayer’s direct and indirect ownership interest in the foreign corporation to determine whether the corporation is a Foreign Affiliate (FA) or a Controlled Foreign Affiliate (CFA) of the Canadian resident.  the FAPI regime only applies to CFAs.  FAPI income must be included on an accrual basis, and included at the end of each taxation year of the CFA that ends in the taxpayer’s taxation year.

The types of income captured by the FAPI regime are defined in subsection 95(1), one such income being income from property which includes income from an investment business, income from an adventure or concern in the nature of trade, but not income included in income from an active business by operation of subsection 95(2).

Paragraph 95(2)(l) includes certain amounts when calculating “income from property” for purposes of FAPI – including income from trading or dealing in indebtedness UNLESS the business is carried on by an affiliate of a foreign bank, a trust company, a credit union, an insurance corporation, or a trader or dealer in securities whose activities are regulated by the law.  An “investment business” is defined in 95(1) to be a business the “principal purpose of which is to derive income from property (including interest, dividends, rents, royalties or any similar returns or substitutes therefor), income from the insurance or reinsurance of risks, income from the factoring of trade accounts receivable, or profits from the disposition of investment property, unless” it carries on such business as a foreign bank, trust company, credit union, insurance corporation, or trader or dealer in securities whose activities are regulated by law.  Subsection 95(1) also expands the definition of “lending of money” to include the acquisition of accounts receivable from arm’s length persons or the acquisition or sale of “lending assets’ (defined in 248(1)).

Clause 95(2)(a)(ii)(B) includes in Income from an Active Business interest paid or payable between related foreign corporations that wold be deductible in calculating their income from an active business (not carried out in Canada).

In interpreting these complex provisions, the court referred to the SCC decision in Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 – the text, context, and purpose method of interpreting legislation:

The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play[s] a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole

With respect to the ITA, the FCA in Lehigh Cement Limited v. The Queen, 2011 FCA 120, stated that the Act is interpreted mostly textually:

“[w]here Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe”: Canada Trustcosupra at paragraph 11. Where the provision at issue is “clear and unambiguous,” its words “must simply be applied”: Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622 at paragraph 40. In such circumstances, a supposed purpose “cannot be used to create an unexpressed exception to clear language” or “supplant” clear language: Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715 at paragraph 23, citing P. W. Hogg, J. E. Magee and J. Li, Principles of Canadian Income Tax Law (5th ed. 2005), at page 569.

The Court proceeded to interpret paragraph 95(2)(l).  The Court preferred the Respondent’s interpretation of the preamble such that the phrasing expanded the meaning of “trading or dealing in indebtedness” to include the earning of interest on indebtedness (para 108).  The preamble, therefore, requires the court to first determine whether the principal purpose of the business is to derive income from “trading or dealing in indebtedness”.

The difference in position between the parties was whether the parenthetical phrase at the end of the preamble is part of the description of the business caught by the preamble or part of the description of the income from the business that is included in computing income from property.  After breaking down the preamble into its constituent parts (as recommended by the Author HERE), the court held that the words describe the type of business by reference to its principal purpose, and the words in the parentheses of concern qualify the last word before it.

NOTE: The courts approach to interpreting this provision is superb and deserves a careful reading (paras 106 – 126).

The Court held that the principal purpose of the FA’s business was to  earn income from interest which is part of the business of earning income from trading or dealing in indebtedness. The next issue was whether the exception  in subparagraph 95(2)(l)(iii) applied.

The relevant exemption would apply if the FA carried on business AS a foreign bank or a trust company.  The word “as” in this context is used as a preposition to express a relationship between the noun phrase and the preceding words – thus means “In the capacity of” (para 139).  To benefit from the exemption, therefore, two requirements must be met:

  1. the business must be carried on in one of the listed capacities or forms; and
  2. the business activities in that capacity must be regulated in the relevant foreign jurisdiction.

The phrase “foreign bank” is exhaustively defined (“means”) in subsection 95(1) with reference to the Bank Act.  Specifically, the definition of “foreign bank” is such that it “identifies not only entities that are banks in the traditional sense but also other entities that may not be banks as such under either Canadian law or the law of the relevant foreign jurisdiction” (para 157).

 In this case, the FA met the definition of a foreign bank and, since it was regulated by the foreign government, it met the two requirements for the exemption.

NOTE: GAAR was not argued in this case.

- Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Loss on Change in Use of Real Property – Sas Ansari

Loss on Change in Use of Real Property

Donaldson v The Queen, 2016 TCC 5

At issue was the correct rules to apply to determine the capital loss and terminal loss resulting from a decrease in property value between two changes in use – primary residence to rental property back to primary residence.


The taxpayers moved from what was their primary residence for work purposes and decided to rent the property out. This resulted in a change in use along with a deemed disposition at FMV and deemed acquisition with cost at FMV.  After a year, the tenant moved out and the taxpayers decided to make the property and house their primary residence again – triggering another deemed disposition and acquisition due to a change in use.  The taxpayer’s had obtained a professional valuation at the time of the changes in use.

The claimed a terminal loss and a capital loss on the house and land triggered by the deemed dispositions on the changes in use on the basis of the decrease in FMV from the date of the change to rental property to the date back to primary residence.


The appeal for the wife was dismissed as it was an appeal from a Nil assessment – Okalta Oils Ltd. v Minister of National Revenue, [1955] S.C.R. 824Interior Savings Credit Union v HMTQ, 2007 FCA 151Chagnon v. Normand (1889), 16 S.C.R. 661 (S.C.C.).

With respect to the husband, the Court reviewed the ITA provisions applicable.  When property changes from income producing to non-income producing, or vice versa, the ITA deems there to have been a deemed disposition at FMV and a deemed acquisition at cost equal to FMV at the time of the change in use.

No capital loss can be claimed on the building as it is depreciable property – ITA subparagraph 39(1)(b)(i) – but a terminal loss can be claimed pursuant to subsection 20(16).  In determining a terminal loss, the UCC (Undepreciated Capital Cost) of the building must first be established.  On the first change in use in 2007 from personal to rental property (ITA 45(1)(a)(i)) a deemed disposition occurred (ITA 13(7)(b), and the second from rental to personal property in 2008 (ITA 45(1)(a)(ii), triggering another deemed disposition (ITA 13(7)(a)).

The UCC on the first change in use is determined according to paragraph 13(7)(b) which sets the capital cost of the building for the acquisition, and the proceeds of disposition are determined on the second change of use according to 13(7)(a).  The terminal loss deductible pursuant to 20(16) is calculated by reference to the definition of UCC in 13(21), and is the difference between the deemed cost on initial disposition and the deemed proceeds on the latter acquisition (para 34) – Solomons v R, 2003 DTC 505 (TCC); Ramesha v R, 2005 TCC 389Gill v R, [2001] 4 CTC 2876 (TCC); Apte v R, [1999] 4 CTC 2145.

The decrease in the value of the land, a non-depreciable capital property, is determined pursuant to ITA paragraphs 39(1)(b) and 40(1)(b).  This is the difference between the proceeds of disposition and the cost of the land at the time of the changes in use.

- Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Income Tax (Federal & Provincial) – HST/GST – International Tax