by Marc Weisman of Torkin Manes LLP
As part of my tax and estates practice, I frequently advise executors on tax and estates matters. The recent decision of the Federal Court of Canada in Rosenberg Estate v. Canada (National Revenue) 2011 DTC 5075 highlights the importance of filing final tax returns on time to avoid penalties to the estate.
This was not a simple estate. Mr. Rosenberg passed away on June 14, 2003 without a Will and therefore without an executor. The court appointed a liquidator (Quebec term for estate trustee) on November 3, 2003. The heirs were in dispute. There was also an undeclared offshore bank account that ultimately resulted in a voluntary disclosure. The liquidator had instructed Mr. Rosenberg’s accountant to prepare and file the terminal return and remit a payment on account of the tax owing. The accountant failed to file the terminal return on time and the liquidator appointed a new accountant. Neither the liquidator nor the accountant had sufficient information to determine the precise amount of tax owing by the filing deadline of the terminal return. Further, the liquidator had to deal with all of the complications of an intestacy and disputes between the heirs.
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by Marc Weisman of Torkin Manes LLP
In the last two or three years, the Canada Revenue Agency (“CRA”) has been aggressive in its pursuit of corporate taxpayers and their directors for unremitted payroll withholding taxes and goods and services taxes. As part of our tax practice, we have acted for more than 200 corporate and individual taxpayers in these situations, so we take careful note of court decisions that have a bearing on this field.
In a recent case (Dupont Roofing & Sheet Metal Inc. 2011 DTC 5031), the Federal Court of Canada surprisingly ruled that the CRA is not required to issue a notice of assessment before it enforces collection on unremitted payroll withholding taxes.
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By Richard Dusome of Gowling Lafleur Henderson LLP
When structuring a new financing for a corporate borrower, lenders typically obtain postponements from all other creditors and shareholders advancing loans to the proposed borrower. Postponements establish the lender’s priority to receive payment from the borrower vis-à-vis these other known creditors.
However, some shareholders who have not actually advanced loans to the borrower may still hold shares that contain a right of retraction that will require the borrower, at the shareholder’s option, to purchase the retractable shares at a pre-arranged price following the issuance of an exercise notice. The retraction serves to create a new debt obligation out of what was originally an equity holding.
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By Mike Todd of Gowling Lafleur Henderson LLP
Lenders should be aware that one of the waivers found in most standard form guarantees of certain statutory rights is not effective under the British Columbia Personal Property Security Act (“BCPPSA”).
This was the result in the recent BC Supreme Court decision HSBC Bank Canada v. Kupritz. The facts of that case are unremarkable. A trucking company went out of business leaving an unpaid debt to the bank of approximately $1 million. The bank was unable to recover that amount from the company’s assets and therefore sued the two principals of the company on their unlimited guarantees. One of the principals defended the claim on the basis that the bank had breached its obligations to him under the BCPPSA by failing to secure the company’s assets, improvidently realizing on the collateral seized, failing to provide notice of the impending sale of the collateral and failing to provide an accounting.
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By Lisa Brost and Jeffrey Levine of McMillan LLP
Generally speaking, banks’ customers have no immediate right to the proceeds of the cheques that they deposit. Under the terms of most banking services agreements, banks can place holds on cheques deposited by their clients for a reasonable period of time. Further, even if a hold is not put on a cheque, any advance of credit by a bank on deposit of a cheque is usually provisional in nature. The cheque may still be returned, or dishonoured, by the bank on which the cheque is drawn, leaving the bank that provided provisional credit in respect of the cheque with recourse to recover such amount from its client.
These guiding principles of the cheque payment process were recently considered by the Ontario Superior Court of Justice in Re*Collections Inc v The Toronto-Dominion Bank.1 The plaintiffs in this action moved to certify a class action against three of Canada’s six major banks (the “Banks”). In the proposed class action, the plaintiffs sought to recover profits that the Banks allegedly earned at their customers’ expense through use of the proceeds of held cheques between the time that cheques were deposited by their customers and the time that the proceeds of the cheques were made available to the customers.
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By Jason J. Annibale and Allison Worone (summer student) of McMillan LLP
[Ed. note: I believe this also serves as a cautionary tale for anyone who oversees payments in any industry, not just those subject to construction trusts.]
Developers and others with payment obligations in the construction pyramid (payors) can better manage their risk and exposure by ensuring that their payment and accounting practices are well-managed and clear – particularly given the Ontario Court of Appeal’s recent decision in Colautti Construction Ltd v Ashcroft Development Inc . 1 As Colautti confirms, payors must clearly allocate their payments to particular invoices or debts. Failing to do so may in certain circumstances allow those entitled to payment (payees) to apply received payments to other outstanding accounts – even where such accounts are due on other contracts or where the accounts have been outstanding past the two-year limitation period in which a claim for payment could be made. Colautti also cautions that payors who comingle project monies received with other funds, may be found to have breached their trust obligations owed to their payees under the Construction Lien Act . 2
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By Marc Weisman of Torkin Manes LLP
The Federal Court of Appeal in Bozzer v. The Queen, 2011 FCA 186 (“Bozzer”), reversing the decision of the Federal Court of Canada (Trial Division), 2010 FC 139, issued a landmark decision on June 2, 2011, changing the landscape for applications for the waiver of interest and penalties under the Tax Act (Canada) (the “ITA”).
The Canada Revenue Agency (the “CRA”) has a policy of “Taxpayer Relief,” under which it may waive interest and penalties in such circumstances as:
- financial hardship or inability to pay,
- actions of the CRA such as processing delays or providing incorrect information, and
- extraordinary circumstances such as illness (see Canada Revenue Agency Income Tax Information Circular IC07-1).
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By Eric Koh of Gowling Lafleur Henderson LLP
Introduction
A director of a corporation is personally liable under subsection 323(1) of the Excise Tax Act1 (“ETA”) for the failure of the corporation to remit goods and services tax (“GST”). However, subsection 323(5) imposes a time limit on this liability whereby a director will not be held liable for unremitted GST two or more years after ceasing to be a director. Unfortunately, the Tax Court of Canada’s (“TCC”) decision in Snively v. The Queen 2 (“Snively”) makes it more difficult for an individual to rely on subsection 323(5). Indeed, this decision may have broader ramifications on directors’ liability in general, and beyond the ETA. According to the TCC, an individual may still be a deemed director of a corporation even after formally resigning from that position.
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by Kevin P. McElcheran of McCarthy Tétrault LLP
[Ed.: Concerning Indalex Limited (Re), 2011 ONCA 265]
This week, the Ontario Court of Appeal surprised many by deciding that in the context of the CCAA proceedings of Indalex, pension plan deficiency claims can have priority over security held by secured DIP lenders. The Court granted priority for the entire wind-up deficiency of two pension plans over the DIP lender’s security. If not reversed on appeal, the ruling creates a potential worst case scenario for secured lenders in Ontario and could affect availability of credit for all employers who provide defined benefit pension plans for their employees.
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by Barbara McIsaac, Q.C., and Nadia Effendi of Borden Ladner Gervais LLP
Introduction
On January 6, 2011, the Ontario Court of Appeal released a decision affirming the decision of the Ontario Superior Court of Justice concluding that the Personal Information Protection and Electronic Documents Act, S.C. 2000, c. 5 (PIPEDA) prohibited a financial institution from disclosing the mortgage discharge statement of a mortgagor to a third party creditor.1
This decision is important, as it confirms that financial institutions cannot disclose financial information about one of their customers without the consent of that customer, unless one of the exceptions in PIPEDA allowing disclosure without consent applies.
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by Stevan Novoselac, John Sorensen and Michelle McBride of Gowling Lafleur Henderson LLP
In a recent decision of the Ontario Superior Court, Lemberg v. Perris,1 Eric and Valerie Lemberg successfully sued their loyal accountant, Michael Perris (“Perris“), for breach of fiduciary duty. Over the course of their almost twenty-year relationship, Perris provided tax and accounting advice to the Lembergs and performed their tax compliance work.
Perris advised the Lembergs to engage in a so-called “art-flip” tax reduction scheme. The Lembergs accepted Perris’ advice and enjoyed their large tax savings. However, they were reassessed by the Canada Revenue Agency (“CRA“) to disallow all of the benefits they received. Subsequently, the Lembergs learned that Perris had received a “secret commission”
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by Douglas J. Powrie and Stephanie Wong of Borden Ladner Gervais LLP
The Canadian courts have recently considered appeals of several cases in which the Crown has invoked the general anti-avoidance rule (GAAR) to challenge tax avoidance transactions. In Lehigh Cement, the Crown was unable to apply the GAAR because it could not meet its burden of establishing the taxpayer’s abusive tax avoidance in the context of planning that had interest paid (free of withholding tax) to an arms-length bank in respect of principal owed to an affiliated corporation. In Collins & Aikman, the Crown was similarly unable to meet its burden in seeking to apply the GAAR to
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By Pierre Alary of Gowling Lafleur Henderson LLP
I. Introduction
Sometimes, two is better than one. A company in dire straits can potentially attain success by dividing itself into two separate entities. Whether the issues plaguing the company are financial or philosophical in nature, a separation of the business should be considered by corporations and practitioners alike. In addition to making good business sense, a divisive reorganization, or “corporate divorce”, can be structured to benefit both parties from a tax perspective. In other words, a corporate divorce does not need to be a painful experience. This article will conduct a brief overview of the well-known butterfly transactions, but will primarily focus on an alternative method, the “McMullen Method”, which was approved by the Tax Court of Canada in recent years.
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On October 6, 2010, in Seier v. The Queen, the Tax Court of Canada provided us with one more example of a lender and corporate director who must pay the GST and payroll withholdings arrears of a failed business.
In this case, a lender, by realizing on his security, becomes the sole director and shareholder of the borrower corporation. He then fails to monitor the corporation’s compliance with the various GST and payroll tax requirements. As a result, the corporation accumulates in these accounts $60,000 outstanding for which the lender, as corporate director, is assessed.
The Court’s decision is instructive since it paints a picture of absentee management that is common and likely found within your own experience.
Lenders (who upon a liquidation are liable for such debts out of the proceeds) and directors (who are directly liable for such debts) must have monitoring systems in place to limit this risk.
I suggest that some combination of the following could be used to reduce risk:
- Use of a third-party payroll service, with all remittances to be made by the service.
- All payroll and GST/HST assessments and statements are forwarded for review immediately upon receipt.
- An independent accountant is engaged by the lender/director for periodic review of underlying calculations with the accountant’s fees reimbursed by the corporation.
- The lender’s/director’s own bookkeeper/accountant provides this periodic review.
If you are using any of these controls, or some other one, please share it by clicking on “Leave a comment” at the top of this post.
In Fairbanx Corp. v. Royal Bank of Canada, the Ontario Court of Appeal considered a contest between two registrations under the Personal Property Security Act (Ontario) (“PPSA“): a registration made by Fairbanx to perfect its purchase of accounts receivable from the bankrupt debtor and a registration made by Royal Bank of Canada (RBC) in respect of security for a loan to the debtor. While Fairbanx filed first and would therefore normally have ranked ahead of RBC, it made a mistake in recording the debtor’s name in its PPSA financing statement. The debtor’s correct legal name was “Friction Tecnology Consultants Inc.”, spelling “Tec[h]nology” without the “h”.
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