Tax on corporate transactions in Canada: overview

A Q&A guide to tax on corporate transactions in Canada.

This Q&A gives a high level overview of tax in Canada and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.

The Q&A is part of the Multi-jurisdictional Guide to Tax on Transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

 

Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The Canada Revenue Agency (CRA) is responsible for enforcing federal taxes on corporate transactions. The CRA is also responsible for enforcing provincial taxes on corporate transactions in all provinces except for Québec and Alberta.

Revenu Québec is responsible for the enforcement of provincial taxes on corporate transactions in Québec.

The Alberta Treasury Board and Finance is responsible for the enforcement of provincial taxes on corporate transactions in Alberta.

 

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

The Canada Revenue Agency (CRA) may provide guidance on the tax consequences of corporate transactions. The main types of guidance that a taxpayer may apply for are:

  • Technical interpretation. This provides the CRA's general interpretation of the law. It does not deal with specific fact patterns, so it might not apply to the particular facts of a corporate transaction or determine its specific outcome.

  • Advance tax ruling (ATR). An ATR provides the CRA's application of the law to a particular transaction. It deals only with the specific fact pattern that is presented to the CRA. The CRA is bound by an ATR unless there is a material omission or misrepresentation in the facts presented to the CRA. The proposed transaction must be implemented within a specified time period and is technically only binding on the CRA with respect to the particular parties making the application for the ATR.

  • Pre-ruling consultation. In October 2013, the CRA launched a one-year pilot project for pre-ruling consultations. A pre-ruling consultation allows taxpayers to consult with the CRA on a proposed transaction before submitting an ATR request. The pre-ruling consultation does not provide a definitive ruling to the taxpayer and any comments are not binding on the CRA. However, it does provide the taxpayer with an indication of whether an ATR should be pursued. In December 2014, the CRA announced the extension of the pre-ruling consultation process.

The CRA may also issue a variety of clearance or compliance certificates in certain situations, including:

  • A section 116 certificate. The purchaser of a non-resident seller's taxable Canadian property is required to withhold and remit a portion of the purchase price to the CRA on account of the seller's tax liability. However, the non-resident seller may apply for a compliance certificate to relieve the purchaser from this obligation (section 116, Income Tax Act (Canada) (ITA)).

  • Federal clearance certificates. The liquidator of a corporation being dissolved may be liable for outstanding amounts owed by the corporation. The liquidator may apply to the CRA for a clearance certificate in order to confirm that outstanding amounts have been paid.

  • Provincial clearance certificates. Clearance certificates may be obtained at the provincial level with respect to outstanding provincial sales taxes.

 

Main taxes on corporate transactions

Transfer taxes and notaries' fees

3. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

Transfer taxes

There are no transfer taxes on corporate transactions involving the transfer of shares in the capital of a corporation.

Certain value added taxes are imposed on the sale of assets in Canada (see Question 5).

Land transfer taxes

Key characteristics. Land transfer taxes or fees vary by province and territory, with respect to application, scope and rates. Land transfer taxes are highest in Nova Scotia. There are no land transfer taxes in Alberta, Saskatchewan, Newfoundland, Yukon, the Northwest Territories and Nunavut, although there are fees associated with registering a transfer of real property in these jurisdictions.

Triggering event. Land transfer taxes are triggered by the transfer of real property.

Liable party. The purchaser is generally liable for the land transfer taxes. However, the parties may negotiate the ultimate responsibility as between themselves.

Applicable rate(s). The rates vary from province to province. Provinces that do not have a land transfer tax typically have a registration fee payable on registration of the transfer of land.

Notaries' fees

Key characteristics. The only notaries' fees in Canada arise in Québec. Otherwise, there are no notaries' fees under federal law or provincial law of the other provinces.

Triggering event. The notaries' fees in Québec apply to certain transactions, including real property transactions and security interests involving property that must be made by notarial act.

Liable party/parties. The parties to the transaction are responsible for the notaries' fees.

Applicable rate(s). Notaries' fees are not regulated in Québec, so the cost may vary depending on the particular notary used in the transaction.

 

Corporate and capital gains taxes

4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Corporate tax

Key characteristics. Corporations must pay corporate income tax on corporate transactions.

Triggering event. Corporations are liable for the following taxes with respect to their capital gains, income and dividends received:

  • Capital gains. A corporation realises a capital gain when it disposes of capital property such as assets or shares. The quantum of the capital gain is the proceeds of disposition of the asset less the asset's adjusted cost base. However, a corporation will only pay tax on half of the resulting capital gains. Taxable capital gains may also be offset against half of its capital losses. 

  • Income. A corporation will have to pay income tax on its business income. For example, the income earned from the sale of inventory or services will be taxed as business income.

  • Dividends. A corporation may be taxed on intercorporate dividends that it receives from another corporation in which it holds shares. However, a private corporation may be entitled to a tax refund of up to one third of the taxable dividends paid to its shareholders. A corporation may actually receive declared dividends or it may be deemed to receive dividends. Deemed receipt of dividends arises where a corporation repurchases or redeems shares from a shareholder. The amount by which the repurchase or redemption price exceeds the paid up capital (PUC) attributable to the shares is deemed to be a dividend. The PUC of shares is generally the stated capital for the class of shares as determined by corporate law. Intercorporate dividends received by a corporation are generally added to its income and taxed. However, there are two circumstances where a corporation may receive dividends tax free:

    • the non-taxable half of capital gains may be added to a corporation's capital dividend account (CDA). A corporation may then elect to pay dividends out of its CDA tax free; or

    • a corporation may pay intercorporate tax free dividends to a connected corporation. A corporation holding shares in another corporation is connected with that other corporation if it holds more than 10% of the voting shares and value attributable to all outstanding shares.

Liable party/parties. The seller selling the property giving rise to income or the corporate shareholder receiving dividends is liable for the tax.

Applicable rate(s). The rate of corporate tax depends on the type of income earned, the type of corporation earning the income and the province in question. For example, with respect to active business income earned by a general corporation the provincial tax rates vary from 10% to 16%, while the federal net tax rate is 15%.

 

Value added and sales taxes

5. What are the main value added and/or sales taxes potentially payable on corporate transactions?

Federal sales tax

Key characteristics. Value added taxes are generally imposed on the sale of assets and services in Canada. At the federal level Canada has a goods and services tax (GST).

Triggering event. The sale of assets (including property or services) triggers the sales tax. However, the sale of certain assets, including shares, is exempt.

Liable party/parties. The general rule is that the seller is liable for paying the tax and the purchaser is liable for collecting and remitting the tax. However, this is only a general rule and the rates and application of GST depend on:

  • The location where the assets are supplied.

  • The nature of the assets sold.

  • The nature of the parties in the transaction.

The actual tax consequences of a transaction will therefore vary.

Applicable rate(s). The rate of GST is 5%.

Provincial sales tax

Key characteristics. The provinces of British Columbia, Manitoba and Saskatchewan have a provincial sales tax (PST). A harmonised sales tax (HST) is in effect in the provinces of Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The HST essentially combines the GST and PST imposed in those provinces. Québec also has a sales tax (QST).

Alberta is the only province that has just GST without any HST or PST.

Triggering event. The sale of assets (including property or services) triggers the sales tax. However, the sale of certain assets, including shares, is exempt.

Liable party/parties. The general rule is that the seller is liable for paying the tax and the purchaser is liable for collecting and remitting the tax. However, this is only a general rule and the rates and application of PST and HST depend on:

  • The location where the assets are supplied.

  • The nature of the assets sold.

  • The nature of the parties in the transaction.

The actual tax consequences of a transaction will therefore vary.

Applicable rate(s). HST and PST vary from province to province. The combined rates of applicable HST and PST therefore vary from 0% to 15% depending on the location the assets are supplied, the nature of the assets and the parties involved.

 

Other taxes on corporate transactions

6. Are any other taxes potentially payable on corporate transactions?

Canada and its provinces do not impose a capital tax on corporations.

 

Taxes applicable to foreign companies

7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

Land transfer taxes

A foreign company will be liable for land transfer taxes if applicable to the province in which the land is located.

Corporate tax

Corporate tax on income. A foreign company will be liable for federal corporate tax on income earned from carrying on business in Canada. It is a question of fact whether a foreign company is carrying on business in Canada. A foreign company will be deemed to be carrying on business in Canada if it undertakes certain activities, for example manufacturing a product in Canada. However, Canada's tax treaties generally relieve corporate tax liability and limit it to tax on income earned from a permanent establishment of the foreign company in Canada.

Capital gains tax. A foreign company will be subject to capital gains tax on the disposal of its capital property. The purchaser of capital property that is taxable Canadian property must also be aware they are responsible for withholding and remitting 25% of the purchase price to the Canada Revenue Agency (CRA) in these transactions, unless the foreign company has obtained a compliance certificate from the CRA that is provided to the purchaser.

Branch tax. Where a foreign company has established a Canadian branch, it may be responsible for a branch tax. The branch tax is payable on branch profits repatriated to the foreign company and not reinvested in Canadian assets. The rate is generally 25%, but it may be reduced depending on whether a tax treaty exists to reduce the effective rate.

Sales tax

A foreign company that carries on business in Canada must register for, charge and collect a goods and services tax (GST), a harmonised sales tax (HST), and a provincial sales tax (PST), as appropriate.

Withholding tax

A withholding tax is levied against interest, dividends, management fees, rents and royalties paid to a foreign company. The withholding rate is generally 25%, but this may be reduced by a tax treaty. The Canadian payer is required to withhold and remit the tax to the CRA.

 

Dividends

8. Is there a requirement to withhold tax on dividends or other distributions?

Withholding tax

A 25% withholding tax applies on dividends paid to non-residents. However, the rate of withholding tax may be reduced under Canada's bilateral tax treaties, assuming that the recipient qualifies for treaty benefits. Under the Canada-US Income Tax Convention 1980, as amended, the rate is reduced to 5% if the beneficial owner of the dividend is a corporation which owns at least 10% of the voting stock of the corporation paying the dividend. In all other cases, the rate is reduced to 15%. The rules regarding reduction of dividend withholding tax are similar under Canada's other bilateral tax treaties.

 

Share acquisitions and disposals

Taxes potentially payable

9. What taxes are potentially payable on a share acquisition/share disposal?

Land transfer tax

Generally, land transfer taxes (see Question 3, Land transfer taxes) are not payable on a sale or purchase of shares.

Sales tax

Generally, a goods and services tax (GST), a harmonised sales tax (HST), Québec sales tax (QST) and a provincial sales tax (PST) (see Question 5) are not payable on a sale or purchase of shares.

Individual and corporate tax

Non-resident individuals and corporations must pay Canadian income tax (see Question 4) on taxable capital gains earned on the sale of taxable Canadian property:

  • A taxable capital gain is one-half of the capital gain on a capital property.

  • A capital gain is the amount by which the proceeds of sale of a capital property exceed its adjusted cost base and selling expenses.

Generally, taxable Canadian property includes a private company share if more than 50% of the fair market value of the share was derived directly or indirectly from Canadian real property or certain Canadian resource properties. Public company shares can also be taxable Canadian property in certain situations.

 

Exemptions and reliefs

10. Are any exemptions or reliefs available to the liable party?

Under the Canadian tax system:

  • A company will generally prefer to sell shares rather than assets.

  • Conversely, a purchaser will generally prefer to purchase assets instead of shares.

This tension arises because, for sellers, preferential tax treatment is often available on share sales. However, purchasers will usually receive better underlying tax attributes in the assets they are acquiring if they purchase assets rather than shares.

Tax-deferred rollovers

An individual or corporation can transfer shares that are capital property to a corporation in exchange for other shares of that corporation (and sometimes other consideration as well) (sections 51, 85, 85.1 and 86, Income Tax Act (Canada) (ITA)). When all conditions are satisfied, the transfer is a tax-deferred rollover, meaning that no taxable capital gains are triggered at the time of transfer.

Specifically, sections 51 and 86 of the ITA allow a transferor to transfer shares of a corporation back to the corporation. These provisions facilitate share conversions and capital reorganisations. The two sections apply even if the corporation is a non-resident. Section 85.1 of the ITA allows a tax-deferred share-for-share exchange involving a Canadian corporation exchanging its shares for the shares of a taxable Canadian corporation.

Under section 85 of the ITA, most assets (not just shares) can be transferred to a taxable Canadian corporation on a tax-deferred basis. The conditions for a section 85 rollover include that the transferor receives shares of the corporation and the parties file a joint election.

Lifetime capital gains exemption

If the seller is an individual resident in Canada, taxable capital gains may be offset by using the lifetime capital gains exemption if the shares being sold fall within the definition of "qualified small business corporation share". The definition requires the corporation whose shares are being sold to be engaged in an active business and have limited passive assets. In 2014, the lifetime capital gains exemption is Can$800,000, and it will be indexed in subsequent years.

Small business share rollover

An individual who disposes of common shares of an eligible small business corporation can defer capital gains if the proceeds are reinvested in another eligible small business corporation and certain other conditions are met.

 

Tax advantages/disadvantages for the buyer

11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

If the corporation being acquired has loss carryforwards (non-capital losses and net capital losses), the losses may be preserved and be available to offset income and taxable capital gains. However, the ITA has many rules that restrict the use of losses on a change of control. These rules must always be considered on an acquisition of a corporation with loss carryforwards.

Disadvantages

The liabilities of the corporation will remain, including tax liabilities, such as unpaid income tax and failure to collect or remit goods and services tax (GST), harmonised sales tax (HST), Québec sales tax (QST) and provincial sales tax (PST). The purchaser inherits the tax cost of the corporation's assets, potentially limiting the amount that could be deducted in respect of depreciable assets. Also, there may be a mismatch between newly acquired shares with a high tax cost and pre-acquisition corporate assets with a low tax cost, which can lead to higher taxation on the sale of those assets and the distribution of the proceeds (see Question 13: Acquisition bump).

 

Tax advantages/disadvantages for the seller

12. Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

A share sale will generally lead to a lower effective tax rate on the purchase price received by the seller.

If the purchase price is payable by instalments, a capital gains reserve is available, thereby delaying tax on a portion of the purchase price.

The cost recovery method of reporting the gain or loss on the sale may be available on earn-out agreements.

Individuals resident in Canada may be able to use the lifetime capital gains exemption to shield capital gains from tax (see Question 10, Lifetime capital gains exemption).

Disadvantages

There are no particular tax disadvantages of a share sale.

 

Transaction structures to minimise the tax burden

13. What transaction structures (if any) are commonly used to minimise the tax burden?

Techniques for delaying tax

If the purchase price is payable by instalments, a capital gains reserve is available (see Question 12: Advantages). All or a portion of the seller's shares can be exchanged for shares redeemable or exchangeable at the request of the purchaser or at specific times. This is implemented using a tax-deferred rollover (see Question 10: Tax-deferred rollovers).

Capital gains stripping

Dividends paid by a corporation resident in Canada to another connected corporation resident in Canada are generally disregarded. A holding company can be put in place to receive dividends from a corporation whose shares are to be sold. The dividends paid out will lower the value of those shares, reducing capital gains on the sale. If the amount of dividends paid out of the corporation exceeds its safe income (which is similar to the concept of after-tax retained earnings), those dividends may be deemed to be capital gains subject to tax (section 55, Income Tax Act (Canada) (ITA)).

Acquisition bump

A purchaser can incorporate a Canadian corporation to acquire 90% or more of the shares of a taxable Canadian corporation. The acquired corporation will then be amalgamated or wound-up into the acquiring corporation. The tax cost of the shares of the target will be used to "bump" the tax cost of its capital assets other than depreciable property. This helps to minimise issues arising from a high tax cost in newly acquired shares and a low tax cost in the pre-acquisition corporate assets, especially real property (see Question 11: Disadvantages).

Exchangeable shares

The ITA does not allow shares of a Canadian corporation to be transferred to a non-resident corporation on a tax-free rollover basis. This is a disadvantage for non-residents seeking to acquire a target Canadian corporation whose shareholders wish to delay taxable capital gains.

In substance, a rollover can still be achieved in this situation by issuing the shareholders of the target with exchangeable shares. This involves a non-resident corporation incorporating a Canadian acquisition corporation to acquire the shares of the target on a tax-free rollover basis (see Question 10: Tax-deferred rollovers). The shares of the acquisition corporation will be exchangeable into shares of the non-resident corporation at a later date.

 

Asset acquisitions and disposals

Taxes potentially payable

14. What taxes are potentially payable on an asset acquisition/asset disposal?

Corporate tax

Accounts receivable. Doubtful debts that are later collected are treated as taxable business income in the year of sale. There is, however, an election available on the sale of accounts receivable, which allows the purchaser to maintain a reserve for the accounts receivable.

Capital property. For assets that are capital property that have increased in value, capital gains tax will generally be owing on that increased value. Depending on the province in which the disposition occurs, the effective rate of tax is about 20% to 25%. In certain non-arm's length transactions, capital gains deferral is available.

Depreciable capital property. Where depreciable capital property is sold, there are a number of possible tax consequences. If the sale amount exceeds the purchase price or the undepreciated capital cost, there will be a capital gain and possibly recapture of previously deducted depreciation. If the sale amount is less than the undepreciated capital cost, a deduction may be taken.

Eligible capital property. These rules are likely to change as the consultation process was started with the release of Canada’s 2014 budget. Presently, sales of eligible capital property (which includes customer lists, goodwill, trade marks, and quotas) may be taxed at 75% or 50%, depending on their treatment before the sale.

Inventory. Where a business is sold, the inventory is deemed to have been sold in the course of carrying on business. This leads to a full income inclusion.

Sales tax

While transfers of assets are generally subject to goods and services tax (GST) and harmonised sales tax (HST), relief may exist if substantially all of a business is being sold (see Question 15).

Land transfer tax

On sales of real property, land transfer taxes (see Question 3, Land transfer taxes) often apply. These are administered by the provinces and are often between 0% and 2%, depending on the value of the transfer and the province in which the land is located.

 

Exemptions and reliefs

15. Are any exemptions or reliefs available to the liable party?

A company will generally prefer to sell shares rather than assets and a purchaser will generally prefer to purchase assets instead of shares (see Question 10).

Corporate tax

Rollovers. Many rollovers are available in the Income Tax Act (Canada) (ITA) that defer tax on sales between parties. The most notable of these allows assets (other than real property inventory) to be sold or transferred to a corporation on a tax-deferred basis under section 85 of the ITA. Under strict conditions, assets may be split out of a corporation on a tax-deferred basis using a so-called butterfly transaction (see Question 26). These rollovers defer capital gains tax that would otherwise be realised on the sale.

Sales tax

Exempt transactions. There are numerous exemptions from sales taxes. Generally, where substantially all of a business is being purchased, there is an election for goods and services tax (GST) not to apply. Likewise, provinces have their own statutory and administrative exemptions, which defer tax on asset sales.

Input tax credits. Because the GST is a value-added tax, the purchaser will normally be able to claim input tax credits, as a method of recovering any tax paid on the transaction.

Land transfer tax

Deferrals are available in certain circumstances. These vary from province to province. These types of deferrals normally arise among non-arm's length parties.

 

Tax advantages/disadvantages for the buyer

16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

Purchasers generally prefer to acquire assets. The purchase price can be allocated (provided it is not unreasonable) to inventory and depreciable property, which generally have the most useful tax attributes for the purchaser. In the case of depreciable property, for instance, the taxpayer will generally want a high cost, so that the asset can be depreciated. In the case of inventory, the high cost minimises business income realised on the sale of the inventory.

Disadvantages

Asset sale agreements may trigger land transfer taxes that could otherwise be avoided on a share sale agreement.

Asset acquisitions are sometimes problematic for non-tax reasons. If a business has particular licences or contracts that are not transferable, an asset sale agreement may not be possible, particularly if they are necessary to operate the business.

 

Tax advantages/disadvantages for the seller

17. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

Generally, a seller will prefer a share sale (see Question 12). However, there can be certain advantages for a seller on an asset sale. For example, losses on the sale of non-capital property can be used to offset income.

Unlike an asset sale, the proceeds of a share sale generally end up in the hands of the seller at the date of the sale. This is subject to a five year maximum reserve, which can be disadvantageous. In contrast, where a seller keeps the proceeds of a disposition of assets in the company, those proceeds can be slowly drawn out by dividends over a longer time period (see Question 18, Deferred distribution of sales proceeds).

Disadvantages

Generally, the main disadvantage for the seller in an asset sale is that the transaction is subject to the following two levels of taxation (see Question 18, Surplus strips):

 

Transaction structures to minimise the tax burden

18. What transaction structures (if any) are commonly used to minimise the tax burden?

There are many ways in which tax can be minimised on the sale of assets. Some commonly used methods are the following.

Surplus strips

A corporate level assets sale can lead to double taxation- once at the corporate level and once on distribution of the proceeds to the shareholders. If the shares of the corporation have a tax cost that equals their fair market value or capital gains on the shares can be avoided in some other way, various surplus-stripping structures can be put in place to allow proceeds from the corporate level asset sale to be returned to the shareholders without the second level of tax. However, these structures may be considered aggressive and targeted by the Canadian Revenue Agency (CRA).

Allocation of purchase price

One strategy for sellers is to try to allocate as much of the purchase price to eligible capital and non-depreciable property as possible. The purchaser will usually not be amenable, but this is preferable for the seller to having the purchase price attributable to inventory and depreciables.

Deferred distribution of sales proceeds

Providing the seller does not require the proceeds of disposition of the assets, those proceeds can be left in the company. Tax will be payable on dividends, when those amounts are paid out. This can occur over many years, to keep a seller individual in a lower tax bracket.

 

Legal mergers

Taxes potentially payable

19. What taxes are potentially payable on a legal merger?

Land transfer tax

There is no land transfer tax levied on a merger (also referred to as an "amalgamation" in Canada) of two corporations. If the merger involves the winding-up of a subsidiary into its parent corporation, land transfer tax will generally apply unless steps are taken (see Question 21).

Corporate tax

Generally, no corporate income tax (see Question 4) is payable as the result of an amalgamation that meets the following conditions (section 87, Income Tax Act (Canada) (ITA)):

  • The merger is an amalgamation of two or more taxable Canadian corporations (a corporation incorporated or resident in Canada that is not otherwise exempt from tax under Part I of the ITA).

  • All the property and liabilities of the predecessor corporations immediately before the merger becomes property and liabilities of the amalgamated corporation.

  • All of the shareholders that are holders of the capital stock of any of the predecessor corporations before the merger receive shares of the capital stock of the amalgamated corporation.

On a winding-up of a subsidiary corporation into its parent corporation, no corporate tax is generally payable where (section 88, ITA):

  • At least 90% of the shares of each class of the capital stock of the subsidiary corporation, itself a taxable Canadian corporation, were, immediately before the winding-up, owned by another taxable Canadian corporation.

  • All of the shares of the subsidiary not owned immediately before the winding-up by the parent corporation were owned at that time by persons (which includes corporations) dealing at arm's length with the parent corporation.

 

Exemptions and reliefs

20. Are any exemptions or reliefs available to the liable party?

Land transfer tax

See Question 21.

Corporate tax

See Question 19.

 

Transaction structures to minimise the tax burden

21. What transaction structures (if any) are commonly used to minimise the tax burden?

Land transfer tax

Land transfer taxes vary from province to province. For illustrative purposes, the position in the Province of Ontario is set out below.

There is no exemption from land transfer tax in Ontario where real property (in other words, land) is transferred on a winding-up. If a subsidiary is the beneficial and legal owner of real property in Ontario, on the winding-up, Ontario land transfer tax will apply. Tax will be payable on the registration of the land in the name of the parent corporation based on the fair market value of the real property.

To eliminate this, legal title can be transferred by the subsidiary to the parent so that the parent holds title as a nominee. Since the value of the consideration paid by the parent is nil, no land transfer tax will be payable. On the subsequent winding-up of the subsidiary into the parent, the parent could apply for an exemption from land transfer tax under the Land Transfer Tax Act (Ontario) (subsection 3(9)). This exemption applies to the disposition of a beneficial interest in land from one corporation to another corporation, each of which is an affiliate at the time of the disposition.

Corporate tax

See Question 19.

 

Joint ventures

Taxes potentially payable

22. What taxes are potentially payable on establishing a joint venture company (JVC)?

Land transfer tax

Where real property is transferred to the JVC, land transfer tax may be payable (see Question 3, Land transfer taxes).

Corporate tax

Transfer of property to a JVC will be treated as a taxable disposition under the Income Tax Act (Canada) (ITA) (see Question 4) based on the fair market value of the transferred property, unless a rollover election is made jointly by the transferor and the transferee. This may result in the realisation of capital gains or proceeds of disposition in the hands of the transferee. In addition, income earned by the JVC, if carried on as a corporation, is subject to income tax as a Canadian taxpayer.

 

Exemptions and reliefs

23. Are any exemptions or reliefs available to the liable party?

Land transfer tax

Ontario provides for the deferral of land transfer tax in certain situations. The Land Transfer Tax Act (Ontario) and its associated regulations should be consulted based on the specific factual situation.

Corporate tax

Where the joint venture company (JVC) is operated as a corporation, the transferor of the property may be entitled to elect jointly with the transferee to have the transfer occur on a tax-deferred basis under section 85 of the Income Tax Act (Canada) (ITA) (section 85). For section 85 to apply, the transferee must receive at least one share of the JVC as consideration for the transfer of the property.

If the JVC is being operated as a partnership, a similar tax-deferred transfer may be available under subsection 97(2) of the ITA.

 

Transaction structures to minimise the tax burden

24. What transaction structures (if any) are commonly used to minimise the tax burden?

Land transfer tax

See Question 23.

Corporate tax

See Question 23.

 

Company reorganisations

Taxes potentially payable

25. What taxes are potentially payable on a company reorganisation?

Corporate tax

Depending on the nature of the reorganisation and the parties involved, all taxes that are otherwise applicable to a corporation, including federal and provincial income tax (see Question 4), may also apply to the reorganisation of a corporation.

Sales tax

When properly structured, the reorganisation of a corporation will not typically attract goods and services tax (GST), provincial sales tax (PST), harmonised sales tax (HST), Québec sales tax (QST) or retail sales tax (see Question 5). However, the nature of the parties involved and the subject matter of what is being reorganised may result in the application of one or more of these taxes, which could have a material adverse effect on the reorganisation and the benefits sought to be obtained by it.

Land transfer tax

Land transfer tax (see Question 3, Land transfer taxes) may apply if the reorganisation includes a transfer of Canadian real property which requires registration of the transfer.

Withholding tax

Where one or more of the parties involved in a reorganisation is a non-resident of Canada for tax purposes, withholding taxes may be applicable and certificates of compliance may need to be obtained, otherwise the purchaser may be liable for the tax that the seller would otherwise be liable to pay.

 

Exemptions and reliefs

26. Are any exemptions or reliefs available to the liable party?

Rollovers, exchanges, butterflies and spin-offs

Reorganisations are commonly structured to make use of, or otherwise rely on, specific tax exemption and tax deferral mechanisms found in the Income Tax Act (Canada) (ITA). Some of the more common mechanisms are colloquially referred to as rollovers, exchanges, butterflies and spin-offs.

In brief, a rollover involves the transfer of eligible property to a corporation or partnership. The transfer will take place on a tax-deferred basis for income tax purposes, provided that the conditions for the transfer are met, which include that the transferor receives a share of the transferee corporation or, in the case of a partnership, an additional interest in the transferee partnership, as part of the consideration paid to the transferor.

Provided that certain conditions are met, the ITA also provides for a deferral of income taxes where shares in the share capital of a corporation are exchanged for shares of a different class, either as part of a reorganisation of capital of the corporation or where those shares constitute convertible property to the taxpayer.

Another type of reorganisation commonly carried out is the butterfly or spin-off reorganisation. While not specifically provided for in the ITA like rollovers or exchanges, a butterfly or spin-off reorganisation makes use of various provisions of the ITA to carry out the objective of dividing a corporation or otherwise removing certain corporate assets or a division of the corporation on a tax-deferred basis.

 

Transaction structures to minimise the tax burden

27. What transaction structures (if any) are commonly used to minimise the tax burden?
 

Restructuring and insolvency

28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Tax implications for the business

The Bankruptcy and Insolvency Act (Canada) is the federal statute that primarily governs bankruptcies in Canada.

Bankruptcy. Where a corporation is bankrupt, a trustee in bankruptcy is appointed to take over the bankrupt's affairs. On declaring bankruptcy, a corporation is deemed to have year-end for tax purposes on the day immediately before the corporation is bankrupt. If a corporation receives an absolute discharge from bankruptcy, certain losses (in particular, restricted farm losses, non-capital losses and net capital losses) are lost for the taxation year in which the discharge was granted and any taxation year thereafter, and are not deductible in computing the corporation's income. These losses may, however, be deductible for years before the bankruptcy.

Insolvency. In the context of insolvency, a corporation may make arrangements with its creditors to settle debts for less than the face value of the debt. Where a debt is settled for less than its face value, the Income Tax Act (Canada) (ITA) contains rules on debt forgiveness that may become applicable in the context of bankruptcy and insolvency in connection with any settlement of debt for less than the face value of the debt by the corporation with any of its creditors.

In brief, where all or a portion of a debt is forgiven (in other words, the difference between the face value of the debt and the amount the debt is settled for (the forgiven amount)), the forgiven amount is applied to reduce certain tax accounts of the corporate debtor to the extent of the forgiven amount. Where the tax accounts of the corporate debtor are insufficient to cover the forgiven amount, one half of the remaining forgiven amount is included in the corporate debtor's income for tax purposes. In certain circumstances, the forgiven amount may be transferred in whole or in part to a related party.

Tax implications for the owners

A shareholder of a Canadian corporation is not liable for the debts of the corporation by virtue of being a shareholder. A shareholder's liability is limited to the amount paid to subscribe or otherwise acquire the shares in the share capital of the corporation. Where a shareholder is the owner of shares in a bankrupt corporation, the shareholder may be able to claim a capital loss in respect of its shares, even if the shareholder has not disposed of the shares. Where the claim for a capital loss is allowed, the shares will be deemed to have been disposed of for proceeds equal to nil and immediately reacquired at a cost of nil. Consequently, any subsequent disposition in excess of nil proceeds will result in a capital gain to the shareholder.

Tax implications for the creditors

Where a debt or portion of a debt becomes a bad debt, a creditor may elect to have the debt treated as a bad debt and make a corresponding deduction for it. In these circumstances, the bad debt is deemed to have been disposed of and reacquired for nil proceeds, so that any subsequent collection of the debt, or part of it, will result in an inclusion in income for tax purposes.

 

Share buybacks

 

Taxes potentially payable

29. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 3 to 6 as appropriate.)

Deemed dividend

Where a shareholder has its shares repurchased by the corporation in which its shares are held, the shareholder is deemed to have received a dividend equal to the difference between the paid-up capital of the shares and the amount paid by the corporation to repurchase the shares. If the shareholder is a connected corporation, the dividend may be received by the shareholder tax free.

Capital gain

In certain circumstances, in particular, in the context of a sale transaction, a repurchase of shares that would otherwise have resulted in a tax-free intercorporate dividend may be recharacterised as a taxable capital gain.

 

Exemptions and reliefs

30. Are any exemptions or reliefs available to the liable party?

Mutual fund corporation

Where a mutual fund corporation repurchases shares in its share capital, the shareholder whose shares were repurchased is deemed to have received a capital gain, calculated as the difference between the adjusted cost base of the shares and the price paid by the mutual fund corporation to repurchase the shares from the shareholder.

Public company shares

The rules regarding deemed dividends (see Question 29) do not apply to a purchase by a corporation of any of its shares in the open market, if the corporation acquired those shares in the manner in which shares would normally be purchased by any member of the public in the open market. In other words, where a publicly traded Canadian corporation repurchases shares in itself on the open market, the shareholder whose shares are repurchased will, where those shares constitute capital property to the shareholder, realise a capital gain on that disposition (rather than a deemed dividend) equal to the difference between the repurchase price and the adjusted cost base of the repurchased shares to the shareholder.

 

Transaction structures to minimise the tax burden

31. What transaction structures (if any) are commonly used to minimise the tax burden?

Reorganisations to connect corporations or to shift paid-up capital

A connected corporation may receive the deemed dividend tax free (see Question 29). A reorganisation that results in the shareholder corporation and the acquiring corporation being connected may be undertaken so that the deemed dividend arising as a result of the repurchase of shares will be effected on a tax-free basis.

In a similar vein, because the deemed dividend is calculated as the difference between the amount the corporation paid to acquire the share and the paid-up capital in respect of that share, a reorganisation to increase the paid-up capital will reduce the deemed dividend commensurate with the amount of the increase.

 

Private equity financed transactions: MBOs

 

Taxes potentially payable

32. What taxes are potentially payable on a management buyout (MBO)?

There are no provisions in the Income Tax Act (Canada) (ITA) that are particular to MBOs. The taxation of a MBO will therefore depend on the structuring of the transaction and will be treated accordingly.

 

Exemptions and reliefs

33. Are any exemptions or reliefs available to the liable party?
 

Transaction structures to minimise the tax burden

34. What transaction structures (if any) are commonly used to minimise the tax burden?
 

Reform

35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

A protocol to amend the Canada-UK Income Tax Convention was announced in summer 2014. The amendments will eliminate source state withholding tax on interest paid to a payee that is at arm's length with the payor. This benefits Canadian residents earning interest from arm's length UK sources. Canada already does not withhold in these circumstances. The amendments also address time limits for transfer pricing assessments and the exchange of information.

In 2014, the new Canada-Hong Kong Income Tax Convention came into force. Withholding tax on dividends is reduced in the same manner as the Canada-US Income Tax Convention (see Question 8: Withholding tax). Interest paid to a payee that is not at arm's length with the payor is subject to 10% withholding tax. Withholding tax on royalties is also generally reduced to 10%.

 

Online resources

Justice Laws Website

W http://laws.justice.gc.ca/eng

The Justice Laws Website is the online source of the consolidated Acts and regulations of Canada. The consolidations are generally updated every two weeks.

Canadian Legal Information Institute (CanLII)

W www.canlii.org

CanLII is a non-profit organisation managed by the Federation of Law Societies of Canada. CanLII's goal is to make Canadian law accessible for free on the internet. CanLII's website provides access to court judgments, tribunal decisions, statutes and regulations from all Canadian jurisdictions.



Contributor profiles

William Fowlis, Partner

Miller Thomson LLP

T +1 403 298 2413
F +1 403 262 0007
E wfowlis@millerthomson.com
W www.millerthomson.com

Professional qualifications. Barrister and solicitor, Alberta, QC, FCA, TEP

Areas of practice. Corporate tax; estate planning, succession planning and personal tax; international trade, customs and commodity tax; private client services; private M&A; tax litigation and dispute resolution

Non-professional qualifications. LLB, University of Alberta, 1986; Canadian Institute of Chartered Accountants, Indepth Tax Course, 1981; CA, Institute of Chartered Accountants of Alberta, 1980; BComm., University of Alberta, 1978

Professional associations/ memberships. Law Society of Alberta, 1987; Institute of Chartered Accountants of Alberta, 1980; Society of Trust and Estate Practitioners (STEP), 2000; Canadian Bar Association; Canadian Tax Foundation; Canadian Petroleum Tax Society; Entrepreneurial CAs of Calgary Society; CAFÉ Calgary Advisory Group; American Bar Association; Conference for Advanced Life Underwriting (CALU).

Ilan Braude, Associate

Miller Thomson LLP

T +1 416 595 2956
F +1 416 595 8695
E ibraude@millerthomson.com
W www.millerthomson.com

Professional qualifications. Barrister and solicitor, Ontario, JD

Areas of practice. Tax

Non-professional qualifications. BSc, University of Waterloo, 2002; MSc, University of Toronto, 2005; JD, University of Toronto, 2008

Professional associations/ memberships. Law Society of Upper Canada, Ontario; Canadian Bar Association, Taxation Law section; Canadian Tax Foundation; Ontario Bar Association, Taxation and Charities Section.

Publications.

  • The Impact of Offers to Settle on Costs Awards under Rule 147 of the Tax Court of Canada Rules (General Procedure), Blakes on Canadian Tax Controversy & Tax Litigation, November 2012.

  • Major trends in Canadian tax administration, with E. Kroft, QC, International Tax Review, 5 July 2012.

  • Velcro Canada: The Latest Word on Beneficial Ownership, with P. Stepak, International Tax Review, 1 May 2012.

  • Supreme Court of Canada to have final word on residence of trusts, with B. Bailey, International Tax Review, 1 September 2011.

  • More Foreign Affiliate Tax Rule Changes Introduced, with C. Van Loan, International Tax Review, 1 March 2010.

Brendon Ho, Associate

T +1 780 429 9717
F +1 780 424 5866
E bho@millerthomson.com
W www.millerthomson.com

Professional qualifications. Barrister and solicitor, Alberta

Areas of practice. Tax

Non-professional qualifications. LLB, University of Alberta, 2011; BComm, University of Alberta, 2008

Professional associations/ memberships. Canadian Bar Association; Law Society of Alberta; Edmonton Young Practitioners Group.

Regan O'Neil, Associate

T +1 403 298 2452
F +1 403 262 7000
E roneil@millerthomson.com
W www.millerthomson.com

Professional qualifications. Barrister and solicitor, Alberta

Areas of practice. Tax

Non-professional qualifications. In Depth Tax Course, Part III, Chartered Professional Accountants, Canada, 2014; In Depth Tax Course, Part II, Chartered Professional Accountants, Canada, 2013; In Depth Tax Course, Part I, Chartered Professional Accountants, Canada, 2012; LLB, Dalhousie University, 2007; Bachelor of Commerce, Dalhousie University, 2003

Professional associations/ memberships. Canadian Bar Association; Law Society of Alberta; Calgary Chamber of Commerce.

Publications.

  • Miller Thomson on Estate Planning, Chapter 13, Thomson Reuters Canada Limited, 2012, contributing author.

  • Beneficial Ownership Test For Tax Treaty Benefit Entitlement, Tax Notes, November 2012.

  • A Lesson Worth Repeating: A Look Back at Re Rovet, Business Law in Canada: Recent Developments, Spring 2010.

Graham Purse, Associate

T +1 306 347 8338
F +1 306 347 8350
E gpurse@millerthomson.com
W www.millerthomson.com

Professional qualifications. Barrister and solicitor, Saskatchewan

Areas of practice. Tax

Non-professional qualifications. CPA In-Depth Tax Course, Part I; LLB, University of Alberta, 2011; BA (Dist.) (Economics & History), University of Regina, 2008; Diploma of Music, Humber College, 2001

Professional associations/ memberships. Chair of the Canadian Bar Association's South Saskatchewan Tax Branch, 2012-2015; Canadian Tax Foundation; Law Society of Saskatchewan; Canadian Bar Association

Publications.

  • Covenants Against Competition in Franchise Agreements, 3rd Edition, American Bar Association (forthcoming).

  • Regulation of Property Use and Regulatory Takings in Alberta, Canadian Constitutional Foundation, Dr. R. Brown and G. Purse, 2011.

Stephen Rukavina, Associate

T +1 604 643 1277
F +1 604 643 1200
E srukavina@millerthomson.com
W www.millerthomson.com

Professional qualifications. Barrister and solicitor, British Columbia, JD

Areas of practice. Tax

Non-professional qualifications. JD, University of British Columbia, 2011; BA (Hons), Simon Fraser University, 2008

Professional associations/ memberships. Canadian Bar Association, BC Branch, Taxation Law Subsection; Canadian Bar Association, National Commodity Tax, Customs and Trade Section; Canadian Tax Foundation; International Fiscal Association; Law Society of British Columbia.


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