report of proceedings of the fifty-eighth tax conference … · report of proceedings of the...

Report of Proceedingsof the

FIFTY-EIGHTH

TAX CONFERENCE

convened by the

CANADIAN TAX FOUNDATION

at

The Westin Harbour Castle Hotel, TorontoNovember 26-28, 2006

*CTFCanadianTax Foundation

ACEF L'Association canadienned'etudes fiscales

A forum for tax analysis and researchUne tribune pour I'analyse et la recherche fiscales

Detailed Contents

RECENT DEVELOPMENTS

Dividend Taxation: The New Regime, Heather Evans andPearlE. Schusheim 1:1Abstract 1:1Introduction 1:2Impact on Shareholders 1:2

Federal Tax Treatment 1:2Provincial Tax Rates 1:3

Impact on Corporations 1:5Eligible Dividends 1:6

Definition of "Eligible Dividend" 1:6Designation Requirement 1:6Administrative Guidance 1:7

Part III. 1 Tax and the Excessive Eligible Dividend Designation 1:9Tax and Designation : 1:9Status of Corporation 1:9Calculation of Tax 1:9Anti-Avoidance 1:10Shareholder Liability 1:10Election for Separate Dividend 1:11Corporate Filing Obligation 1:11

GRIP 1:12LRIP 1:13

Examples 1:14GRIP 1:14LRIP 1:16

Implications in Selected Situations of Interest 1:18Basics of Opening GRIP Calculation 1:18Asset Sale Versus Share Sale 1:20Non-Resident Shareholders 1:22CCPC Status Changes 1:23

GRIP of a New CCPC 1:23LRIP of a New Non-CCPC 1:23

Impact of Losses 1:24Election Not To Be a CCPC 1:24Selected Observations for CCPCs 1:25

Conclusions 1:25Notes 1:26

Retroactivity: Policy and Practice, Thomas E. McDonnell 2:1Abstract 2:1Introduction ' 2:1Policy 2:3

Definitions of Retroactive Laws and Retrospective Laws 2:3

viii DETAILED CONTENTS

The Rule of Law 2:4Introduction 2:4The Meaning of "Rule" 2:10The Meaning of "Law" 2:10Some Observations Regarding the Scope of the Rule 2:11General Propositions 2:14Taxation-Specific Propositions 2:15

Practice 2:17The Department of Finance Guidelines 2:17Comments on the Guidelines 2:18Examples of Retroactive Legislation 2:20

The 2004 Amendment to Section 245 of the Act 2:20The 2003 Amendments to the GST Regarding School Transportation

Services 2:21De Facto Retroactivity 2:23A Review of the Tax Legislative Process Is Needed 2:24

The Legal Challenge to Retroactive Legislation 2:24The Charter Arguments 2:25The Bill of Rights Arguments 2:26The Unwritten Principles Argument 2:27

Conclusion 2:29Notes 2:30

Understanding What the Supreme Court of Canada Said inCanada Trustco, Alan M. Schwartz 3:1Abstract 3:1Introduction 3:1Fundamental Principles of GAAR 3:2

Introduction 3:2Tax Benefit 3:4Avoidance Transaction 3:5Abusive Transaction 3:5Burden on Minister 3:7The Former Subsection 245(4) 3:7Role of Appellate Courts 3:8Series of Transactions: The Nexus Requirement 3:9

The Inherent Contradictions in "Textual, Contextual and Purposive"and "Certainty, Predictability and Fairness" 3:12

Introduction 3:12Textual, Contextual, and Purposive: Principles from Driedger 3:12

Textual Analysis 3:13Contextual Analysis 3:14Purposive Analysis 3:16

Certainty, Predictability, and Fairness: Anti-Avoidance and theRule of Law 3:19

Abusive Tax Avoidance: The Object-and-Spirit Test 3:21Introduction 3:21The Origins of the Modern Approach and the Object-and-Spirit Test 3:22The Plain Meaning Approach: Limitations on the Purposive Approach . . . . 3:23

DETAILED CONTENTS i

Specific Anti-Avoidance Rules and GAAR 3:27Detailed Provisions and Courts' Reluctance To Go Beyond the Specific . . . 3:28GAAR Not To Fill the Gap 3:30Taking Advantage of a Loophole: Not Necessarily an Abuse 3:30Object and Spirit, Specific Rules, and Weil-Established Concepts 3:31Application of the General Rule When There Has Been Compliance

with the Specific Rule 3:33Abusive Tax Avoidance and Reliance on Specific Provisions 3:36

Defeating the Underlying Rationale 3:36Loyens 3:36Fording Coal 3:37

Lacking a Proper Basis or Wholly Dissimilar 3:37Fredette 3:38Lipson 3:38Harris 3:38

Notes 3:39

GAAR Redux: After Canada Trustco, Manon Thivierge 4:1Abstract 4:1Introduction 4:1GAAR After Canada Trustco: The Beginning 4:1GAAR and Surplus Stripping 4:4GAAR and Interest Deductibility 4:10OtherGAAR Cases Under Appeal 4:13Conclusion 4:21Notes 4:21

LEGISLATIVE, ADMINISTRATIVE, AND JUDICIALDEVELOPMENTS

Canada Revenue Agency Round Table 5:1It is anticipated that the material presented at the Canada Revenue AgencyRound Table will be published as a CRA publication.

Table ronde de l'Agence du revenu du Canada 6:1II est prevu que les documents presentes lors de la table ronde de l'Agencedu revenu du Canada feront l'objet d'une publication de l'ARC.

Current Cases, Johanne D 'Auray, Edwin G. Kroft, and Roger E. Taylor 7:1Abstract 7:2Introduction 7:2Statutory Interpretation 7:2

La Survivance 7:2Addison & Leyen 7:3Gunn 7:3Stapley 7:4Imperial Oil 7:4Placer Dome 7:5

Procedural Disputes 7:6The Department of Justice's Perspective 7:9

GAAR 7:10

x DETAILED CONTENTS

Requirements 7:10Ministerial Discretion 7:12International Tax Issues 7:13Other Issues 7:14

The Year to Come 7:15Questions from the Floor 7:16Notes 7:19

INTERNATIONAL TAX AND CORPORATE FINANCE

US Legislative and Regulatory Update: Selected Developments in theUS Taxation of Cross-Border Transactions, Douglas McFadyen 8:1Abstract • 8:1Introduction 8:1Portfolio Interest Exemption 8:2Anti-Inversion Rules 8:5Foreign Mergers and Consolidations 8:11Transfer Pricing 8:12Cross-Licensing Arrangements 8:13The Technical Taxpayer Rule 8:14Related CFC Payment Exclusion from Subpart F 8:17Tax-Exempt Use Property 8:18FASB Interpretation No. 48 8:18Notes 8:20

The IRS Enforcement Team Heads to Court: US Tax Cases of Interestto Canadian Practitioners, David B. Blair and Jonathan Prokup 9:1Abstract 9:1Introduction 9:1The IRS Emphasizes Enforcement 9:2Developments in the Judicial Doctrines of Economic Substance and

Substance over Form 9:4Courts of Appeals Reverse Taxpayer Victories Under the Economic

Substance Doctrine 9:4Second Circuit Uses Substance-over-Form Doctrine To Reallocate

Partnership's Income Allocations 9:7IRS Seeks Confidential Taxpayer Documents 9:8International Tax Cases in the US Tax Court 9:11Concluding Observations 9:13Notes 9:14

Income Trust and Mutual Fund Trust Developments,Corrado Cardarelli 10:1Abstract 10:1Introduction 10:1Overview of Income Trust Structures and the Old Rules 10:3Entities Subject to the New Tax: SIFT Trusts and SIFT Partnerships 10:6The Bad Kind of Property: Non-Portfolio Property 10:8The REIT Exception 10:9

DETAILED CONTENTS >

Income Subject to the New Tax: Non-Portfolio Earnings 10:11The New Tax Regime 10:12The Transition Period and the Department of Finance's Guidance 10:14

Benchmark Capital as of October 31, 2006 10:15Growth of 100 Percent Permitted 10:15Meaning of "New Equity" 10:15Replacement of Debt Outstanding as of October 31, 2006 10:16New Non-Convertible Debt 10:16New Equity Issued in Exchange for Exchangeable Interests 10:16Merger of Two or More SIFT Entities Permitted 10:16Conversion of Trusts to Corporations 10:17

Notes 10:17

Corporate Migration into Canada: US Businesses Marketed toCanadian Investors, John Krukowski and Stephen Southard 11:1Abstract 11:1Introduction 11:2Background: Income Securities Structures 11:2Structure 1: Single-Issuer Structure 11:3

US Income Tax Issues and Consequences 11:4Impact of Anti-Inversion Legislation 11:4Branch Profits Tax 11:5Branch-Level Interest Tax 11:6Related-Party Subordinated Debt 11:6Classification of an Interest in a Corporation 11:7Guidelines of the Big Four 11:13

Canadian Income Tax Consequences 11:15Allocation of Purchase Price 11:15Foreign Property 11:15Flowthrough Entity Distribution Tax 11:16Qualified Investments for Deferred Income Plans 11:16Foreign Affiliate Issues 11:16Payments on Income Securities to Non-Residents 11:18Miscellaneous Issues 11:19

Structure 2: Multiple-Issuer Structure 11:20US Income Tax Consequences 11:22

Impact of the Anti-Inversion Rules on the Multiple-Issuer Structure . . . 11:22US Withholding Tax on Interest Paid by the NSULC 11:22The Earnings-Stripping Rules: Code Section 163(j) 11:23Dual Consolidated Losses 11:23

Canadian Income Tax Consequences 11:23Qualified Investment : 11:24Canadian Taxable Income 11:24FAPI Issues 11:24

Structure 3: The REIT Structure 11:25US Income Tax Issues 11:27

REIT as a Partnership 11:27Publicly Traded Partnership Rules 11:29

xiv DETAILED CONTENTS

Reorganizing Non-Excluded Property 14:49Selling Excluded Property 14:50


Recent International Cases, Patrick Marley 15:1Abstract " 15:1Wood v. Holden 15:1Indofood International Finance Ltd v. JP Morgan Chase Bank

NA London Branch 15:3HMRC Draft Guidance on Indofood 15:6

Marks & Spencer pic v. Halsey 15:10Cadbury Schweppes pic, Cadbury Schweppes Overseas Ltd.

v. Commissioners of Inland Revenue • 15:11Western Union Financial Services Inc. v. Addl. DIT 15:11National Westminster Bank, pic v. United States 15:13

NatWest I: July 27, 1999 15:14NatWest II: November 14, 2003 15:14NatWest III: December 16, 2005 • 15:14

Notes 15:15

Selected Issues in Cross-Border Debt Financing, K.A. Siobhan Monaghanand Raj Juneja 16:1Abstract 16:1Introduction 16:2Overview: What Is Financing? 16:2Withholding Tax on Interest 16:3

Statutory Exemptions from Withholding Tax 16:3Clause 212(l)(b)(iii)(E) and Subparagraph 212(l)(b)(viii) 16:3Subparagraph 212(l)(b)(iv) and Subsection 212(14) 16:4Subparagraph 212(l)(b)(vii) 16:5

Treaty Exemptions from Withholding Tax 16:5Tax-Exempt Organizations 16:6Sales on Credit .' . 16:6

Loans to and from Partnerships 16:7Partnership as Borrower: The 5/25 Exemption ; 16:11

The Thin Capitalization Rules -. • 16:12Relevant Debt: An Overview '. 16:13Relevant Equity: An Overview 16:13Specified Shareholders 16:13Timing of Measurement Issues 16:15Partnerships and the Thin Capitalization Rules 16:17

Partnership as Borrower 16:17Partnership as Lender 16:21

Section 78 16:26Guarantees :• 16:27

Payment of Guarantee Fees: Overview 16:27Receipt of Guarantee Fees: Overview '. . . . 16:28

DETAILED CONTENTS x

Upstream Guarantees: Cross-Border Context 16:29Downstream Guarantees: Cross-Border Context 16:30Quantum of Fee: What Is Reasonable? 16:31Tax Consequences of Payments Made Pursuant to a Guarantee 16:32

Loss Recognition 16:32Interest Deductibility on Borrowed Funds 16:35Withholding Tax Implications 16:36

Section 247: Contemporaneous Documentation 16:37Double-Dip Financing 16:38

Overview 16:38Inbound Financing 16:39

An Inbound Double-Dip Financing Utilizing Hybrid Entities 16:39An Inbound Double-Dip Financing Utilizing Hybrid Securities 16:43

Outbound Financing 16:44Tower Structure 16:44Alternative Outbound Financing Structure 16:57


Transfer-Pricing Update, 2006, Bill Maclagan 17:1Abstract 17:1Canadian Updates 17:1

Penalties 17:1Transfer Pricing for Income Tax and Customs 17:4Organizational and Other Changes at the CRA 17:6

US Updates 17:7Selected 2006 US Jurisprudence 17:7

GlaxoSmithKline Holdings (Americas) Inc 17:7Xilinx Inc. and Subsidiaries 17:8

Intangible Values 17:8US Services Regulations 17:9

Selected 2006 OECD Updates 17:11Attribution of Profits to a Permanent Establishment: Still Drafting

Five Years Later 17:11Comparability Guidance 17:14

Notes 17:15

Canadian Competent Authority Update, Martin Skretkowicz andAlexandra Diebel 18:1Abstract 18:1Introduction 18:1Memorandum of Understanding (June 3, 2005) 18:2

Reaching Agreement 18:2Procedural Issues 18:3Substantive Issues 18:3

Memorandum of Understanding (December 8, 2005) 18:4Advance Pricing Arrangements 18:5Recent OECD Developments Regarding Supplementary Dispute

Resolution Mechanisms '. 18:9

xvi DETAILED CONTENTS

MEMAP 18:9Position Papers 18:13Use of Third Parties 18:13Rejection of a Proposal by the Taxpayer 18:14Repatriation Agreements 18:14Timeline of a Typical MAP Process 18:14

Arbitration: Proposed Changes to Article 25 of the OECD ModelTax Convention 18:14

Context 18:14Proposed Article 25(5) 18:17Proposed Commentary on Article 25 18:17

Current Status 18:20Summary 18:21Notes 18:22

COMMODITY TAX AND TRADE ISSUES

Considering the Role of Trade and Investment Treaties in Tax Disputes,John W. Boscariol 19:1Abstract 19:1Introduction 19:1The Growing Impact of Trade and Investment Treaties on Tax Measures 19:2

Expanding Scope of Obligations 19:2More Effective Enforcement '. ' 19:3The Canadian Experience 19:3Impact on the Strategic Decision-Making Process 19:4

Emergence of Foreign Investment Protection 19:5Tax Versus Trade: Three Areas of Conflict 19:6

Discriminatory Taxation Measures 19:6Prohibited or Injurious Subsidization 19:8Expropriation and Compensation 19:8

Challenging a Tax Measure Under an Investment Treaty 19:9The Dispute-Settlement Mechanism 19:9The NAFTA Chapter 11 Investor-State Mechanism 19:10Key Jurisdictional and Procedural Considerations 19:11

Existence of an Investor and an Investment 19:11Nationality of the Investor 19:12Selection of Rules of Arbitration 19:12Seat of Arbitration 19:12Timing 19:13Waiver or Recourse to Local Remedies 19:13Governing Law of the Dispute 19:13

New Developments in Investment Treaty Law 19:13The Canada-Peru BIT 19:13Canada Signs the ICSID Convention 19:15Future BIT Negotiations 19:16

Update on Trade and Investment Disputes over Tax Measures 19:16Recent Developments in WTO Jurisprudence 19:16

DETAILED CONTENTS xv

United States—Tax Treatment for "Foreign Sales Corporations" 19:17European Communities—Measures Affecting Trade in •

Commercial Vessels 19:17Korea—Measures Affecting Trade in Commercial Vessels (2005) 19:17Mexico—Tax Measures on Soft Drinks and Other Beverages 19:18China—Value-Added Tax on Integrated Circuits 19:19United States—Equalizing Excise Tax Imposed by Florida on

Processed Orange and Grapefruit Products 19:19European Communities and Certain Member States—Measures

Affecting Trade in Large Civil Aircraft 19:20United States—Measures Affecting Trade in Large Civil Aircraft 19:20China—Measures Affecting Imports of Automobile Parts 19:20India—Measures Affecting the Importation and Sale of Wines and

Spirits from the European Communities 19:21India—Additional and Extra-Additional Duties on Imports from

the United States 19:21Canada—Tax Exemptions and Reductions for Wine and Beer 19:21China—Certain Measures Granting Refunds, Reductions or

Exemptions from Taxes and Other Payments 19:22Recent Developments in Bilateral Investment Treaty Jurisprudence 19:23

Occidental Exploration and Production Company v. Republicof Ecuador 19:23

Ecuador v. Occidental Exploration & Production Co 19:23EnCana Corporation v. Republic of Ecuador 19:24Marvin Roy Feldman Karpa v. United Mexican States 19:25United Mexican States v. Karpa 19:25Corn Products International, Inc. v. United Mexican States 19:26Archer Daniels Midland Company and Tate & Lyle Ingredients

Americas, Inc. v. United Mexican States 19:26Conclusion: Strategic Opportunities 19:26Appendix: Overview of Canada's International Trade and Investment

Agreements and Ongoing Negotiations 19:27Free Trade Agreements in Force 19:27Free Trade Agreements: Discussions and Negotiations 19:27Canada's Bilateral Investment Treaties 19:28Trade and Investment Cooperation Agreements (TICA).. 19:30Trade and Economic Cooperation Agreements (TECA) 19:30Memorandum of Understanding on Trade and Investment (MOUTI) 19:30Other Key Initiatives 19:30

Notes 19:31

GST Essentials in Corporate Reorganizations, Danny Cisternaand Winxie Tse 20:1Abstract 20:1Introduction 20:2

Closely Related Parties 20:2Non-Resident Affiliates 20:3Butterfly Transactions 20:5

xviii DETAILED CONTENTS

Case Law Developments 20:6Aviva Canada Inc. v. The Queen 20:6A & W Trade Marks Inc. v. The Queen 20:10

Non-Corporate Entities Used in Reorganizations 20:12Partnerships : 20:13

Supplies Made by a Partner Deemed To Be Made by the Partnership . . . 20:13Expenses Incurred by Partners 20:15Supplies by a Partner to the Partnership Outside, of Partnership

Activities •. 20:15Supply by a Partnership to a Partner 20:17Additional Considerations 20:17

Trusts 20:18Joint Ventures 20:19

Conclusion 20:22Notes : 20:22

"Carrying On Business in Canada" and "Permanent Establishment":GST Considerations, W. Jack Millar 21:1Abstract 21:1Introduction 21:1Relevance of Carrying On Business for GST Purposes 21:2

Non-Resident Override Rule 21:3Non-Resident Status 21:4Non-Resident Must Not Be GST-Registered 21:4Non-Resident Must Not Be Carrying On Business in Canada 21:5

Definition of a "Business" 21:5Definition of "Carrying On Business" 21:6

Common-Law Tests for Carrying On Business 21:7Determining Whether a Non-Resident Lessor Is Carrying On

Business in Canada 21:11The CRA's Policy on "Carrying On Business" 21:13

The CRA's Policy Prior to 2001 21:13The CRA's 2001 Policy 21:14The CRA's Policy in 2002 21:16The CRA's Current Policy 21:16

Review of P-051R2 Examples . 21:19Sale of Goods 21:19Lease of Goods 21:19Services 21:22

Application of the CRA's Policy in Practice 21:24Drop-Shipment Rules 21:25Flowthrough of ITCs 21:27Zero-Rated Supplies to Non-Residents 21:28

Relevance of "Permanent Establishment" for GST Purposes 21:28Definition of "Permanent Establishment" 21:29"Fixed Place of Business" 21:30Space Available : 21:31Meaning of "Fixed" 21:31

DETAILED CONTENTS xi

Meaning of "Through Which the Person Makes Supplies" 21:32"Fixed Place of Business of Another Person" 21:34Jurisprudence on the Meaning of "Permanent Establishment" 21:35Resident Only in Respect of the Permanent Establishment 21:37Zero-Rating Provisions 21:38Supplies Between Branches 21:38Permanent Establishment Outside Canada 21:41

Electronic Commerce 21:41Permanent Establishment 21:41Carrying On Business 21:43


TAX PRACTICE DEVELOPMENTS

Discussion with a Former Tax Court Justice, Hon. Ronald D. Bell, QC,Warren J.A. Mitchell, QC, and Joel A. Nitikman 22:1Questions from the Floor 22:18Notes 22:23

Privilege: A Practical Discussion in a Cross-Border Context,James C. Yaskowich 23:1Abstract 23:1Introduction 23:1Privilege: The Canadian Experience 23:3

Conflicting Interests 23:3Solicitor-Client Privilege and Litigation Privilege 23:3Solicitor-Client Privilege 23:4

Descoteaux and Its Component Parts 23:4Privilege: A Substantive Right, Not a Procedural Tool 23:5

Litigation Privilege 23:6Breadth and Scope of Litigation Privilege 23:8Expiration of Litigation Privilege 23:10

Common Interest Privilege 23:11Limited-Purpose Waiver 23:14Implied Waiver 23:17Third-Party Privilege 23:20

The US Experience 23:21Attorney-Client Privilege 23:21Selective (Limited-Purpose) Waiver 23:24Tax Accrual Workpapers and Listed Transactions 23:27Common Interest Privilege 23:29Third-Party Communications 23:30Work Product Doctrine 23:31Federally Authorized Tax Practitioner Privilege 23:33Erosion of Attorney-Client Privilege: Statutory Disclosure 23:35


xx DETAILED CONTENTS

Current Interprovincial Issues, Paul K. Grower 24:1Abstract 24:1Residence: Why Move South When You Can "Move" to Alberta? 24:1

Legislative Authority 24:2Determining Residence 24:3

The Practical Implications 24:5Dual Residence 24:6The Problem with Health Care 24:11Provincial Sales Taxes 24:12

Taxable Services: The Law 24:12Manitoba 24:12Saskatchewan 24:12British Columbia 24:12

Taxable Services: The Practical Issues '. . . 24:13Taxable Services: The Pressing Concern 24:16

Notes 24:16

TAX PLANNING FOR INDUSTRY

Review of Tax Issues Arising as a Result of Short-TermCross-Border Assignments, Benita Loughlin 25:1Abstract 25:1Introduction 25:1Corporate Tax Issues 25:2

Carrying On Business 25:3Canadian Domestic Guidance 25:3US Domestic Guidance 25:5

Treaty Provisions: Permanent Establishment 25:5Withholding Under Regulation 105 25:7Transferring Corporate Deductions and Creditable Costs 25:9Transfer Pricing 25:10

Employee Tax Issues 25:10Residence 25:10

Domestic Law 25:10US Residence Rules 25:11Tie-Breaking Residence Under an Income Tax Treaty 25:11

Taxation of Cross-Border Employment Income 25:12General Sourcing Rules 25:12Taxation of Employment Income Under an Income Tax Treaty 25:12

Rules Specific to Canada-US Transfers 25:15Short-Term Business Visitor Exception 25:15Canada-US Income Tax Treaty 25:15

Taxation of Directors 25:16US State Laws 25:16Foreign Tax Credits 25:17

Overview of Canadian Foreign Tax Credit Rules 25:17Overview of US Foreign Tax Credit Rules 25:18

Overseas Employment Tax Credit 25:18

DETAILED CONTENTS x;

Social Security, Employment Insurance, and Other Payroll Taxes 25:18Canadian Social Security and Employment Insurance 25:19Exposure to Double Social Security Coverage 25:19Social Security Totalization Agreements 25:19Double Coverage of Employment Insurance 25:20

Withholding and Reporting 25:21Withholding for Residents of Canada 25:21Withholding for Non-Residents of Canada 25:22Canadian Reporting 25:22Withholding for US Citizens and Residents . . ' . . ' 25:22Withholding for Non-Residents of the United States 25:23US Reporting 25:24

Tax Reimbursement Allowances 25:24Tax Equalization 25:24Tax Protection 25:24Choosing a Plan 25:24

Board and Lodging 25:25Canadian Rules 25:25US Rules 25:25

Legal Considerations 25:26Secondment Arrangements 25:26

Structuring the Arrangement ,. 25:27Shadow Payroll 25:27Tax Implications 25:27

Cross-Border Equity Compensation Issues 25:28Conclusion , 25:29Notes 25:29

Land of a Thousand Rates: Interprovincial Tax Planning,Raymond G. Adlington : . . . . 26:1Abstract 26:1Introduction 26:1Provincial Taxation • 26:2

Taxation of Individuals 26:2Taxation of Trusts 26:4Taxation of Corporations 26:4

Provincial Tax Rates 26:7Eligible Dividends 26:7Individuals 26:8Corporations 26:11

Planning Opportunities 26:12Changing Province of Residence . . 26:12Extraprovincial Trusts 26:13Professional Corporations 26:16Yukon Manufacturing and Processing 26:16Finance Companies 26:18Loss Utilization 26:20

xxii DETAILED CONTENTS

Response to Interprovincial Tax Planning 26:20Legislative Response 26:20Judicial Response 26:23Administrative Response 26:26

Future Issues in Interprovincial Tax Planning 26:28Conclusion 26:29Addendum 26:29Notes 26:30

Tax Due Diligence: When Is It Enough? R. Michael Clifford andPeter J. Dale 27:1Abstract 27:1Introduction 27:1What Is TDD? 27:2What Is VDD? 27:3What Is VA? 27:4Planning 27:5

The Call 27:5Get the Facts 27:5Scope 27:5Materiality and Risk Management 27:6Timing and Team Selection 27:7Deliverables '. 27:7Electronic Data Rooms 27:7Engagement Letter 27:8

Execution 27:8Information Request List 27:8What To Look For? 27:9Tax Provision Working Papers 27:10Quantification of Exposures 27:10Reporting 27:11

When Has Enough TDD Work Been Completed? 27:11Representations, Warranties, Escrow, and Survival Period 27:12Transaction Liability Insurance 27:12

Other Objectives 27:13Valuing the Business Being Acquired 27:13The Acquisition-of-Control Rules 27:14


Recent Developments in R & D, Natan Aronshtam and John Hutson 28:1Introduction 28:1Recent Announcements by the Minister of Finance 28:1

Distribution Tax 28:1New Economic Agenda 28:2

Recent Legislative Changes 28:2The Alcatel Case 28:2The 18-Month Rule 28:5

DETAILED CONTENTS xxi

Other Legislative Changes 28:6Carryforward of ITCs : 28:6Increase in the Small Business Limit 28:7Territorial Limit 28:8Deemed Year-End 28:8Recent Legislation To Implement Previously Announced Changes . . . . 28:8Provincial Changes : . . . . 28:9

Recent Court Cases 28:10Partnerships 28:10Payment for Intercompany R & D 28:10Cost of Materials Consumed 28:10Ability of the Minister To Change ITC Carryforward Amounts 28:11CCPC Status 28:11

Recent CRA Administrative Positions 28:11CCPCs with Taxable Capital in Excess of $15 Million 28:11Outsourcing 28:12

New and Revised CRA Guidance and Forms 28:13Sector-Specific Guidance ' 28:13New and Revised Application Policy Papers 28:14

Government and Non-Government Assistance 28:14Shared-Use Equipment 28:14Experimental Production and Commercial Production with

Experimental Development 28:15Resolving SR & ED Claimants' Concerns 28:15

RevisedForms 28:15Planning Strategies 28:16

General 28:16CCPCs 28:17Partnerships and Other Entities 28:18International ' 28:19


PERSONAL INCOME TAX AND ESTATE PLANNING

Observations on Section 94, William I. Innes and Dessislav Dobrev 29:1Abstract 29:1Introduction 29:1The Carter Commission Report 29:2The Pre-1972 Tax Environment 29:4The Introduction of Section 94 29:5

The First Proposal 29:5The New Proposal 29:5The Grandfathering of Inter Vivos and Testamentary Trusts 29:6The Application of the ITARs 29:7

The Evolution of Section 94: 1976to 1999 29:7TheCaseLaw 29:7

xxiv DETAILED CONTENTS

Amendments : 29:81982 Amendments ; 29:81985 Amendment . 29:91991 Amendment 29:91997 Amendments 29:9

The Literature 29:10The Introduction of Sections 233.2 Through 233.7 29:11The Role of the Auditor General 29:12Non-Resident Trust Estate Freezes . 29:14

The Introduction of the New Section 94 29:15The Structure of the New Section 94 29:15

The Charging Rule 29:15Excluded Provisions 29:18To What Trusts Does the New Section 94 Apply? 29:19Arm's-Length Transfer . , : 29:21Restricted Property 29:24

Shares 29:25Specified Share 29:25Debt 29:26Other . 29:27

Resident Beneficiary : 29:28Connected Contributor ,. 29:30Rules of Application 29:31

Deemed Transfers 29:31Deemed Contributions 29:35Transfers Deemed Not To Be Contributions 29:36

Exempt Foreign Trusts 29:37Limit to Amounts Recoverable 29:41Where the Contributor Becomes Resident in Canada Within 60 Months

After Contributing ' 29:45Deemed Resident Contributor 29:45Deemed Contributor 29:46Determining Arm's-Length Dealing and Related Entities 29:46Anti-Avoidance 29:46Coming-into-Force Provisions ; 29:46

Perceived Traps for Practitioners and Additional Compliance Costs 29:47Establishing a Non-Resident Trust 29:47

Transfers and Loans 29:47Deemed Contributors 29:47Beneficiaries 29:48

Administering a Non-Resident Trust 29:48Services : 29:48Corporate Transactions 29:48Financial Assistance 29:49Trust Reorganizations 29:49

Transactions Between Trustees and Beneficiaries . . . . . ' 29:49Distributions 29:49Loans to Beneficiaries 29:49

DETAILED CONTENTS xx

Purchases of Trust Property 29:50Renunciations and Waivers 29:50

Summary 29:50Section 94 and Canada's Tax Treaty Framework 29:50

Dual Residence of Trusts Under Canada's Income Tax Treaties 29:50The Government's Position 29:51Possible Challenges to the Government's Position 29:52


The Multijurisdictional Estate: Selected Canadian Income Tax Issues,Michael Cadesky 30:1Abstract 30:1Introduction 30:1Estate-Planning Considerations 30:3

Control of Assets 30:4Wealth Preservation and Growth 30:4Ability To Determine the Distribution of Assets '. 30:4Creditor-Proofing and Spendthrift Provisions 30:4Taxation 30:5Philanthropy 30:5

Tax Considerations 30:5No Deemed Disposition on Death and No Capital Gains 30:5Estate Taxes and Estate Duties 30:6Succession Duties and Inheritance Taxes 30:6Transfer Taxes 30:6Wealth Taxes 30:6Gift Tax 30:6

An Example of Triple Tax ' . ' . . . ' 30:7Use of Trusts 30:7Canadian Taxation of Individuals 30:8

Example 1: Canadian Decedent, Foreign Assets 30:8Example 2: Foreign Decedent, Canadian Property 30:9

Canadian Taxation of Trust Arrangements 30:10Example 1: Canadian-Resident Trust, Non-Resident Beneficiaries 30:11Example 2: Non-Resident Trust, Canadian Beneficiary 30:13Example 3: Non-Resident Trust, Canadian Assets 30:14Example 4: Canadian-Resident Family, Non-Resident Beneficiaries 30:15


Charities Update, Robert B. Hayhoe and Kate Lazier 31:1Abstract 31:1Introduction 31:1Charitable Giving ' 31:2

Split Receipting 31:2Charitable Donation Tax Shelters Previously Available 31:3

Valuation-Based Shelters: Buy Low, Donate High 31:3Leveraged Donations . . . . ; . . . . 31:3

xxvi DETAILED CONTENTS

Initial Canadian Government Responses to Charitable DonationTax Shelters 31:3

Definition of "Gift" 31:3Flawed Specific Valuations 31:4Amendment of "Personal-Use Property" Definition 31:4Amendment of "Tax Shelter" Definition 31:4Tax Court of Canada and Federal Court of Appeal Require

Bulk Valuation 31:4Anti-Avoidance in the Draft Legislation 31:5

Subsection 248(35): Attack on Valuation-Based Shelters 31:5Subsection 248(34): Attack on Leveraged Donation Shelters 31:6

Gifts of Securities 31:7Investment Asset Rollover 31:8A Note About Flowthrough Shares 31:8

Gifts of Ecologically Sensitive Land 31:10Case Law: Benquesus 31:11

Charity Tax Regulatory Changes 31:11Foundation Loans 31:11CRA Audits 31:12Intermediate Sanctions 31:13The New Appeal Process: Implemented but Not Yet Populated 31:13Case Law 31:16

Bayit Lepletot 31:16AYSA. . 31:17


TAX PLANNING FOR OWNER-MANAGED BUSINESS

Alternative Remuneration Strategies for Owner-Manager Businesses,Mitchell A. Stein 32:1Introduction 32:1Salary or Dividend? 32:1

Investment Income 32:2Active Business Income 32:3

To Bonus Down or Not 32:4Automobiles 32:9Individual Pension Plans 32:11Notes 32:13

Valuation: Recent Developments, Richard M. Wise 33:1Abstract 33:1Introduction 33:1Recent Views Expressed by Canada Revenue Agency Valuators 33:2

Price Adjustment Clauses 33:2Stock Market Prices 33:2Use of Hindsight 33:3Fractional Interests in Real Property 33:4

DETAILED CONTENTS xxv

Intellectual Property Valuations 33:6Reasonable Royalties Method 33:6The Analytical Approach : 33:9

Stock Options 33:9Reasonable Compensation': Guidance from US Courts 33:11Recent US Developments 33:15

IRS Valuation Engineering Program 33:16IRS Business Valuation Guidelines 33:16IRS Intangible Property Valuation Guidelines 33:17

US Treasury Department Regulations 33:18Circular 230 33:18Notice 2006-96 and Code Section 170 33:20

Other US Valuation-Related Penalties 33:23An Important US Tax Court Decision 33:23


Trusts: Practical Issues, Uses, and Pitfalls, Mary Anne Bueschkens 34:1Abstract 34:1Introduction 34:1WhatlsaTrust? 34:2

The Three Certainties 34:2Ownership of Assets 34:3Civil-Law Trusts 34:4

Ownership of Assets 34:6Changes in Trustees and Acquisition of Control 34:7

Acquisition of Control 34:7Consequences of an Acquisition of Control 34:9

Effects on Determination of Relationships 34:10Avoiding an Acquisition of Control 34:11Mitigating the Results of an Acquisition of Control 34:12

Valuation of an Interest in a Trust 34:12Fixed Interests in a Trust 34:12Discretionary Interests in a Trust 34:13

Family Law Act 34:13Income Tax Act (Canada) 34:14FLA Versus ITA 34:15Why Do We Care About Valuation? 34:16

Use of Alter Ego and Joint Partner Trusts 34:20General Considerations 34:20What Is an Alter Ego Trust? 34:20What Is a Joint Partner Trust? 34:20Use of Alter Ego Trusts and Joint Partner Trusts as Will Substitutes 34:21Use of Alter Ego Trusts and Joint Partner Trusts as Alternatives to

Power of Attorney for Property 34:22Creditor Protection 34:23Disadvantages of Using Alter Ego and Joint Partner Trusts 34:24

Non-Tax Considerations 34:24

xxviii DETAILED CONTENTS

Tax Considerations . 34:25Charitable Gifting 34:25

Interprovincial Tax-Planning Benefits of Alter Ego and Joint Partner Trusts . . . 34:27Residence of a Trust 34:27Taking Advantage of Low Provincial Tax Rates by Using Alter Ego

or Joint Partner Trusts 34:28Death of a Settlor of a Trust Resident in a Low-Tax Jurisdiction 34:29


Selected Tax Aspects of Buy-Sell Provisions, Walter Benzinger,Doris Trevisani, and Karen Wilkinson 35:1Abstract 35:1Introduction 35:1Triggering Event: Death 35:3

Pre-1995 Rules: Grandfathering Provisions 35:3The 50 Percent Solution 35:4Other Issues To Consider 35:5The Impact of the Enhanced Dividend Tax Credit Rules 35:6Capital Gains Exemption 35:10

Triggering Event: Disability 35:12Capital Gain 35:14Deemed Dividend on Corporate Redemption 35:16Dividend to Holding Company 35:16GRIP Dividend to Holding Company 35:18

Other Triggering Events 35:20Control and Buy-Sell Provisions 35:20Taxable Preferred Shares 35:22Conclusion .,. 35:22Notes 35:23

YOUNG PRACTITIONERS

An Introduction to Paragraph 55(3)(a), Ted Citrome 36:1Abstract •. .'. 36:1Introduction 36:1Conceptual Overview 36:2The Paragraph 55(3)(a) Exemption 36:4

Summary of Provisions .' 36:4Key Concepts Informing the Application of Paragraph 55(3)(a) 36:5

Series of Transactions or Events 36:5Unrelated Persons: Relationship to Dividend Recipient 36:8Significant Increase in Interest 36:9

The Paragraph 55(3)(a) Events ' 36:10Subparagraph 55(3)(a)(i) 36:10Subparagraph 55(3)(a)(ii) 36:12Subparagraph 55(3)(a)(iii) : 36:15Subparagraph 55(3)(a)(iv) : 36:16Subparagraph 55(3)(a)(v) 36:17

DETAILED CONTENTS xxi

Other Rules of Application 36:19Continuity Rules in Paragraphs 55(3.01)(b) and (c) ; 36:19Deemed Proceeds of Disposition 36:20

An In-House Divisive Reorganization 36:21Specific Examples of the Application of Paragraph 55(3)(a) 36:26

Incorporating a Dividend Recipient 36:26Partnership Holding Shares of Dividend Recipient 36:28Post-Acquisition Divisive Reorganizations 36:28Non-Resident Public Company Distribution 36:29Amalgamation or Winding Up Involving a Public Company 36:30

Notes 36:31

Tax Shelters: An Overview and Update, Trevor McGowan 37:1Introduction 37:1Tax-Shelter Registration 37:1

Limited-Recourse Debt Gifting Arrangements 37:2Marketed Tax Shelters: The Four-Year Test 37:2Statements or Representations 37:3

Maege 37:3Baxter 37:5

Promoter 37:6Gifting Arrangement 37:6Property Acquired 37:7Tax Deductions 37:8Cost 37:8Prescribed Benefit 37:9Tax-Shelter Registration 37:10Penalties 37:11

The Tax-Shelter Investment Rules 37:11Definition : 37:11At-Risk Adjustment 37:12Limited-Recourse Amounts 37:12'

Tolhoek 37:13Extended Reassessment Period 37:14

Summary 37:14Notes : 37:14

Tax Treatment of Transaction Costs, Nik Diksic and Christian Desjardins . . . 38:1Abstract 38:1Introduction 38:1General Concepts 38:2

Deductibility Under Subsection 9(1) and Paragraph 18(l)(a) 38:2Subsection 9(1) 38:2Paragraph 18(l)(a) 38:3

Application of Subsection 9(1) and Paragraph 18(l)(a) toTransaction Costs: A Brief Judicial History "38:4

British Columbia Power Corp. Ltd. v. MNR 38:4Boulangerie St-Augustin Inc. v. The Queen 38:5International Colin Energy Corporation v. The Queen 38:6

xxx DETAILED CONTENTS

BJ Services Company Canada v. The Queen 38:7Truckbase Corporation et al. v. The Queen 38:9The CRA's Response 38:9

Capital Outlays and Expenses: Paragraph 18(l)(b) 38:10Generally 38:10Recent Case Law 38:11The CRA's Administrative Position 38:14

Specific Deductions Permitted Under Subsection 20(1) 38:14Paragraph 20(1 )(b) 38:14Paragraph 20(l)(e) . ..' 38:15Paragraph 20(l)(e.l) 38:19Paragraph 20(l)(g) 38:20Paragraph 20(l)(bb) 38:20Paragraph 20(l)(cc) 38:22

Specific Issues 38:23Allocation of Transaction Costs 38:23

Generally 38:23Subsection 12(2.2) 38:24

Stock Options 38:25.Generally 38:25Employees 38:26Employers 38:26Cashout Payments: Income Versus Capital 38:27

Shareholder Benefit Issues 38:29Corporate Directors' Duties and Shareholder Communications 38:31Debt Prepayment Penalties 38:33Break Fees 38:34

Generally 38:34Tax Treatment of the Payer 38:34Tax Treatment of the Recipient 38:35


Recent Developments: Shifting the Goalposts on Interest Withholdingand Beneficial Ownership, Ron Choudhury 39:1Abstract 39:1Introduction . 39:1Shifting the Goalposts on Interest Withholding 39:2

Paragraph 212(l)(b) and Subparagraph 212(l)(b)(vii) 39:2Index-Linked Interest 39:3

Prior Position ' 39:3The Current Rulings 39:3Reconciling the Two Positions 39:4

Cash Collateral 39:5Prior Position 39:52006-0180251R3: "Withholding Tax Exemption" 39:6Reconciling the Two Positions 39:8

Conclusion : 39:8

DETAILED CONTENTS XXJ

Beneficial Ownership: How Beneficial Is Indofood? 39:9Facts 39:9Court of Appeal Decision 39:10The International Fiscal Meaning of "Beneficial Ownership" 39:11Beneficial Ownership After Indofood 39:11Beneficial Ownership in Canadian Tax Law 39:12

The Williams Decision 39:12Williams Versus Indofood 39:13Prevost Car 39:14

Planning After Indofood 39:15Conclusion 39:15Notes 39:16