Taxes And Wealth Management May 2014

PRESERVING WEALTH FOR PEOPLE AND PRIVATE COMPANIES
TAXES & WEALTH
MANAGEMENT
IN THIS ISSUE
Editors: Martin Rochwerg, Miller Thomson LLP;
David W. Chodikoff, Miller Thomson LLP;
Hellen Kerr, Thomson Reuters
THE MOVEMENT TOWARD USING
HIGH TAX JURISDICTIONS FOR
INTERNATIONAL TAX PLANNING: THE
COUNTER-REVOLUTION HAS BEGUN
By N. Gregory McNally, N. Gregory McNally & Associates Ltd.
INTRODUCTION
At their recent summit in St. Petersburg, the G20 members issued a
communique stating that they will be commissioning recommendations to
set up a system so that profits would be taxed “where economic activities
deriving the profits are performed and where value is created.”
1
Leaders at
the summit also stated that they expect to begin exchanging information
automatically on tax matters among G20 members by the end of 2015.
These measures have been principally crafted by the OECD and are aimed at
traditional offshore finance centres (OFCs). On its web site, the OECD states
that “The OECD and the G20 have a mutually beneficial relationship in the
area of taxation. While the G20 has incentivised changes in OECD standards
and initiatives, the OECD has in turn helped push forward cutting-edge
issues on the G20 tax agenda.”
2
The OFCs are also facing accusations from EU officials who state that they
are complicit in assisting large multi-national companies and individual tax
cheats in defrauding their member states from over 1.3 trillion Euros per
year.
3
The EU’s taxation Commissioner, Algirdas Semeta, stated that, “the
EU, the world’s largest economy, is determined to push for a tough global
automated exchange of banking information to catch tax cheats holding
undeclared assets abroad. In the area of automatic information exchange we
have the experience, the expertise and the collective weight to considerably
influence the international environment.”
4
1 “G20 leaders vow to crack down on tax evasion by multinationals”, online at: http://
www.cbc.ca/news/business/g20-leaders-vow-to-crack-down-on-tax-evasion-by-
multinationals-1.1699277.
2 “OECD and the G20”, online at: http://www.oecd.org/g20/topics/taxation/.
3 “EU Ministers Seek to Strengthen Tax Evasion Fight”, online at: http://abcnews.
go.com/International/wireStory/eu-ministers-seek-ways-fight-tax-evasion-20256281.
4 Ibid.
The Movement Toward Using High
Tax Jurisdictions For International Tax
Planning: The Counter-Revolution Has
Begun .................................................................. 1
Use Behavioral Finance To Manage Risk........... 10
Are You A Serial Entrepreneur or a
Closet Venture Capitalist? .................................. 11
Retirement’s Volatility Bogeyman ..................... 14
A Taxpayer’s Last Resort: The Remission
Order ..................................................................17
Canada’s Anti-Spam Legislation (Casl)
Is Coming Into Force On July 1, 2014:
Why You Should Pay Attention And
Some Suggestions For Compliance
Preparation ....................................................... 19
Daimsis v. The Queen, 2014 TCC 118:
Findings Based On Credibility: It Is Not
As Easy As You Might Think ............................ 21
MAY 2014 | ISSUE 7-2

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TAXES & WEALTH MANAGEMENT MAY 2014
In addition to regulatory pressure from the various
supranational organizations, the OFCs are facing initiatives
from individual nations, such as France, which has recently
added Jersey, Bermuda and BVI to its blacklist of uncooperative
tax havens. “Being on the ‘blacklist’ triggers the application of
75 percent withholding taxes on French source flows to those
territories and the strengthening of anti-abuse mechanisms.”
5

This was done despite the fact that both Jersey and Bermuda
signed tax information exchange agreements with France in
2010 and have complied with every request for information.
6
As if this were not enough, various NGOs have also taken
aim at the OFCs, including the Tax Justice Network and the
International Consortium of Investigative Journalists, which
blame OFCs for helping to reduce the standard of living in
developing nations.
7
Papers get published by these NGOs,
which are then reported on by various media outlets, often
supplementing stories based on government press releases on
tax avoidance and OFCs.
The practical result of all of this attention is the isolation of
the OFCs by individual financial service providers around the
world. Certain banks in North America, Europe and the Middle
East will not open accounts for, or transfer money to, entities
based in traditional OFCs.
So what is the solution for the many professionals and business
owners practising and operating in the OFCs?
One answer may be to co-opt a high tax jurisdiction in
international tax and estate planning platforms. The concept is
to use flexible laws (such as agency and trust law) from a high tax
jurisdiction and amalgamate those with established operations
based in the various OFCs. The process should start by finding
an appropriate high tax jurisdiction as a potential partner.
An appropriate high tax jurisdiction (“HTJ”) should be one
with the common law as its basis for legal forum. The common
law provides individual flexibility through case law that is not
supported in civil law regimes. This flexibility supports concepts
like trusts and arguably provides a greater scope in respect of a
concept such as agency.
Next, the ideal HTJ should likely be a high-ranking member of
the G20 to give it enough political power to withstand pressure
from the OECD and larger countries.
One possible HTJ candidate might be Canada. Canada has the
11
th
largest economy in the world and is one of the original G7
5 “France adds Jersey, Bermuda to tax-haven blacklist”, online at:
http://www.reuters.com/article/2013/08/29/france-tax-jersey-
idUSL6N0GU3PR20130829.
6 Ibid.
7 “Secrecy for Sale: Inside the Global Offshore Money Maze”, online at:
http://www.icij.org/offshore.
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members.
8
Canada is also a common law country drawing on
judgments going back to UK decisions, which still hold certain
authority in Canadian courts.
By using Canadian agency and trust law in conjunction with
implementation from organizations based in the traditional
OFCs, clients can continue to access legitimate tax, estate and
business succession plans, without encountering newly-formed
compliance barriers.
AGENCY LAW IN CANADA
Like the UK, Canada has always had a legal basis to support
the concept of an agent to act as nominee or intermediary
on behalf of a third party principal. However, one of the main
issues is how such an arrangement may, or may not, be treated
for tax purposes in Canada. Agency, for tax purposes, can be
analyzed both in terms of the role of the “agent” and in terms
of who has “beneficial ownership” of income derived from an
asset or a business transaction conducted by the agent.
STATUTORY REFERENCES
The terms “agent” and “nominee” are not defined in the
Canadian Income Tax Act, R.S.C. 1985, c.  1 (5th Supp.) (the
“Act”). In fact, the term “nominee” is used only once and it is
in conjunction with “agent” and both are used in the context
of a legal representative.
9
The term “agent” is used numerous
8 “The 40 Biggest Economies in the World”, online at: http://www.
businessinsider.com/largest-economies-world-gdp-2013-6.
9 Act, s. 237(4)(b)
TAXES & WEALTH MANAGEMENT MAY 2014
3
times in the Act, both as a title, such as real estate agent, and
as a description for a legal representative.
10
However, while it appears that the Act recognizes the concept of
agents acting as legal representatives on behalf of third parties,
this alone does not prove that agents are not liable for taxes levied
in respect of transactions or income attributable to third parties.
The main charging provision for taxation under the Act is found
at s.  2, where income tax shall be paid on taxable income
earned by resident Canadians or in respect of income earned
in Canada by, or from taxable Canadian property attributable
to, non-residents. It should therefore follow that the taxable
income must be earned by the agent, or the agent must be
responsible for a taxpayer’s liability on a third party basis.
Barring specific references to the latter, which would be self-
evident in the Act,
11
general liability for taxation falling to an
agent can only happen if the income is earned by the agent.
To determine whether income is earned by an agent, it may be
helpful to analyze any reference to “beneficial ownership” or
“beneficial interest”.
The terms “beneficial owner” and “beneficial ownership” are
used in the Act, but are not specifically defined. However, in
s.  248, which is the interpretation section of the Act, the term
“disposition” of any property includes a transaction entitling
a taxpayer to the proceeds of the disposition, but exempts
(subject to certain exceptions) dispositions where there is
no change in beneficial ownership. The Act, therefore, links
taxable transactions to beneficial ownership and to a right to
the proceeds of the disposition of property.
Further, “beneficially interested” is defined in the context of a
trust beneficiary at s.  248(25). Under this definition, a person
has a beneficial interest in a trust where he or she has a right
(widely defined) to the income or capital of the trust. Although
this definition is used only with respect to the taxation of trusts
under the Act, it clearly links the word “beneficial” (its root
word being “benefit”) to the corpus of property in the trust or
income derived therefrom, keeping in mind that legal title to
the capital and income is in a third party’s name. Of course
what follows from this definition is the nexus for taxation
elsewhere in the Act.
So while there is no specific definition of agency in the Act, there
are numerous examples where the term is used in the context
of legal representative, such that it appears to recognize the
concept. Further, while there are a few specific references to tax
liability or penalties for agents in the Act, there are no general
taxing provisions in relation to agents. The general taxing
provision of s. 2 of the Act uses the term “earned by” as the nexus
10 See s. 115(2)(b), s. 128(1), s. 222(7) and s. 124(3) of the Act as examples.
11 See s. 215 of the Act.
to taxation by a taxpayer, and if the Act recognizes agents as
distinct entities from their principals, then it should follow that
income cannot be earned by both the taxpayer and the agent.
The use of the terms “beneficial ownership” and “beneficially
interested” in the Act seem to support this interpretation as they
link taxation to a beneficial right to the capital of, or income
derived from, a property which the agent does not possess.
ACADEMIC ANALYSIS
Bowstead and Reynolds on Agency describes the basic notion of
agency as follows:
The mature law recognises that a person need not
always do things that change his legal relations himself:
he may utilise the services of another to change them, or
to do something during the course of which they may be
changed. Thus where one person, the principal, requests
or authorizes another, the agent, to act on his behalf,
and the other agrees or does so, the law recognises
that the agent has power to affect the principal’s legal
position by acts which, though performed by the agent,
are to be treated in certain respects as if they were acts
of the principal.
12
Furthermore, Bowstead goes on to state that under the
common law there is no requirement for the agent to purport,
or make express, that he is acting on behalf of a principal.
13
With respect to remuneration, Bowstead explains that the
agent’s relationship with the principal is commercial, but
should not be commercially adversarial between the two
parties. “But its [the remuneration’s] essence is that it is not
an independent profit taken by the agent, but rather a fee paid
to him by the principal in return for acting on his behalf.”
14
This
concept of remuneration has significance when considering a
taxing authority’s position on the attribution of income to the
agent. There is no support for allocating a share of the profits,
only an arm’s length fee.
With respect to the difference between an agent and a trustee,
Bowstead states that while the legal concepts underlying their
functions may overlap, agents act on behalf of other persons
and their rights are primarily personal. Whereas, trustees hold
money or property for the benefit of other people, and their
rights are primarily proprietary rather than personal, “... if he
[an agent] does receive money from or for his principal, he may
merely be in the position of debtor to his principal in respect of
it, and if he receives goods he may hold them as bailee only.”
15
12 Bowstead and Reynolds on Agency (19
th
ed., P. Watts, et al.), 2010
Thomson Reuters, at par. 1-005.
13 Ibid., at par. 1-008.
14 Ibid., at par. 1-015
15 Ibid., at par. 1-028

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TAXES & WEALTH MANAGEMENT MAY 2014
between the spouses would substantially lower the taxes paid
due to graduated tax rates.
The tax payer won at the Income Tax Appeal Board level, but
subsequently lost before the Exchequer Court and the Supreme
Court of Canada (the “SCC”).
The SCC ruled that income tax is imposed on a person and
not on property, and the person who must pay the tax is that
person who has unfettered use of the income. The wife’s claim
to the property, and therefore the income derived from it, was
not absolute until dissolution of the marriage. Further, the
husband enjoyed unrestricted use of the income on his own
account. Therefore, the Court did not find that he acted as
agent or fiduciary on behalf of his wife.
20
Sura was then applied in Brookview Investments Limited et al.
v. M.N.R.,
21
with the opposite result. In Brookview, a group of
resident taxpayers used an Ontario corporation called Armley
Investments Limited to acquire a 60% interest in 200 acres of
real property from two vendor corporations.
A portion of the purchase price was paid to the vendors directly
from the taxpayers, with the balance of the purchase price being
a debt owed from Armley Investments to the vendors, which
was secured by a mortgage on the property. The taxpayers
then failed to provide subsequent payment to the vendors as
provided for in the mortgage and the vendors foreclosed on the
property, taking title back from Armley Investments.
The Minister of National Revenue held that the loss was
attributable to Armley Investments, which had no income to
offset the losses. However, the Exchequer Court found that
the original purchase and sale agreements made specific
mention that the ultimate purchasers were to be represented
by a company “to be incorporated”, i.e., Armley Investments.
Further, there was an internal agreement between the
taxpayers that clearly stated that Armley Investments would
deal with the property at the direction of the group.
Therefore, the Court held that Armley was acting as bare trustee
for the group and the loss belonged to the individual taxpayers
for the purpose of their tax filings, and not the company.
22
A more recent case dealing with beneficial ownership in the
context of international tax planning is Prévost Car Inc. v. Her
Majesty the Queen.
23
In Prévost, the Canada Revenue Agency
(“CRA”) levied withholding taxes on dividends paid by a
Canadian subsidiary to its Dutch parent company (Prévost
Holding B.V., “PHBV”) at higher rates consistent with the
20 Ibid., at p. 69.
21 63 D.T.C. 1205, [1963] C.T.C. 316 (Ex. Ct.).
22 Ibid., [1963] C.T.C. 316, at 325.
23 2008 TCC 231, [2008] 5 C.T.C. 2306, 2008 D.T.C. 3080; aff’d 2009 FCA 57.
The term “bare trustee” is sometimes used in the same context
as agency. “Bare trustee” is not used in the Act whatsoever.
However, it is defined in Waters’ Law of Trusts in Canada as “a
trust where the trustee or trustees hold property without any duty
to perform except to convey it to the beneficiary or beneficiaries
upon demand.”
16
While this definition does not speak to the
attribution of income or capital gains, it does convey the concept
of beneficial ownership of the asset to which income or gains
should follow, subject to an overriding agreement.
With respect to the term “agent”, Waters states that:
The agent for the trustees is in the same position as all
other agents. He acts as a conduit, putting his principals,
the trustees, in a contractual relationship with third parties.
Thereafter, the agent drops out: no liability attaches to him
in respect of the third parties or beneficiaries.
17
Again, while this reference does not specifically address the
attribution of income and capital gains in relation to assets held
by an agent, it does speak to the nominee role that an agent
would have under Canadian law. Therefore, the attribution of
income and capital gains should similarly follow, not to the
agent, but rather to the principal.
In addition to academic references, definitions in Black’s Law
Dictionary are often cited in Canadian judgments. The definition
of “Agency” contained in Black’s Law Dictionary includes the
following quotation from The Law of Agency and Partnership § 1, at
3 (2d ed. 1990) by Harold Gill Reuschlein and William A. Gregory:
The basic theory of the agency device is to enable a
person, through the services of another, to broaden
the scope of his activities and receive the product of
another’s efforts, paying such other for what he does but
retaining for himself any net benefit resulting from the
work performed.
18
The academic analysis as offered from Bowstead, Waters and
Black’s should be persuasive on Canadian courts in attributing
income and capital gains from assets legally held in the name
of an agent or bare trustee to a principal or beneficial owner.
CASE LAW
In Sura v. The Minister of National Revenue,
19
a tax resident
husband argued that income derived from rental properties in
his name should be attributed equally between himself and his
wife, as his wife was entitled to 50% of the properties under
provincial matrimonial law. Being able to divide the income
16 Waters’ Law of Trusts in Canada (3
rd
ed., D. Waters et al., eds., 2005), at 32.
17 Ibid., at 61-62.
18 Black’s Law Dictionary (7
th
ed., B. Garner et al., eds., 1999).
19 [1962] S.C.R. 65; online at: http://scc.lexum.org/decisia-scc-csc/scc-
csc/scc-csc/en/6535/1/document.do
TAXES & WEALTH MANAGEMENT MAY 2014
5
However, certain provinces, such as New Brunswick and British
Columbia, do not require resident Canadian directors, which
may provide some practical benefits to the planning.
Unlike many OFCs, no Canadian jurisdiction allows corporate
directors. All directors must be individuals.
The shareholder of the CNC can be a non-resident of Canada
and the principal or another third party may have certain
control with respect to assets registered in the name of the
CNC (i.e., through a power of attorney), but care must be
taken not to subject the CNC to common ownership with the
principal. Common ownership by the principal of the CNC
and the assets registered in the name of the CNC may result
in income or capital gains tax being attributable to the CNC,
if the Canadian tax authorities take the position that the
assets were contributed to the company. At the very least, the
dealings with the assets by the CNC could be subject to one of
the approximately 145 references to arm’s length or non-arm’s
length transactions contained in the Act, including possible
reporting obligations under s. 233.1.
The best scenario is to have an independently owned and
managed CNC acting on behalf of a Principal on an arm’s length
basis. As such, the CNC and the Principal would enter into a
formal agency agreement specifying the scope of the agency
relationship and what the CNC is entitled to do on behalf of the
Principal. The Principal may supplement the scope of agency
with ad hoc directions to the CNC at any time. The CNC may
also provide powers of attorney to the Principal or to any third
parties to perform certain of its obligations under the agency
agreement, so long as such assignment is not prohibited in the
original agency mandate.
The CNC can open bank and investment accounts in its name
and take title to assets, including real property, although all
properly regulated financial institutions will require a source
of funds declaration or Ultimate Beneficial Owner disclosure.
The CNC can also enter into commercial contracts on behalf of
the Principal, receiving and paying consideration. The CNC can
also perform certain discretionary activities in relation to the
Principal’s assets, but care should be taken not to create trusts
that may be taxable in Canada (see Schedule A).
Where it is properly acting as an agent on behalf of a Principal,
the CNC will not be subject to Canadian tax on any income
or gains on assets held in its name or revenue generated by
any contracts it enters into. The CNC will only be subject to
Canadian tax on the fees it receives to act as agent.
There is no concept of a percentage attribution of income (i.e.,
10%) in relation to the fee earned by the CNC, as is sometimes
quoted in relation to the UK agency company. The fee paid to
Canada/UK and Canada/Sweden tax treaties. It did so because
PHBV was itself a subsidiary of two companies, one being
a UK company and the other being a Swedish company. The
Canada/Netherlands tax treaty provides for 0% withholding
tax payable on dividends from a Canadian company to a Dutch
parent, whereas the Canada/UK and Canada/Sweden tax
treaties provide for 15% and 10%, respectively.
The issue before the Tax Court of Canada was, “Who was the
beneficial owner of the dividends?”
CRA argued that PHBV was only a holding company and
that the term “beneficial owner” in relation to the Canada/
Netherlands tax treaty should be defined as the entity (or
entities) that ultimately benefit from the dividend payments,
i.e., the UK and Swedish companies.
Since “beneficial owner” is not defined in the Canada/Netherlands
tax treaty, the Tax Court of Canada had to look at Canada’s
domestic law to make its determination. At paragraph 100 of the
judgment, Rip A.C.J. stated, “The person who is beneficial owner
of the dividend is the person who enjoys and assumes all the
attributes of ownership… and this person is not accountable to
anyone for how he or she deals with the dividend income.”
Conversely, Rip A.C.J. went on to state that “Where an agency
or mandate exists or the property is in the name of a nominee,
one looks to find on whose behalf the agent or mandatory is
acting.… [The agent will not be considered to be the beneficial
owner if the agent] has absolutely no discretion as to the use
or application of funds put through it as conduit, or has agreed
to act on someone else’s behalf pursuant to that person’s
instructions without any right to do other than what that
person instructs it”.
24
Rip A.C.J. found no evidence of an agency mandate. He therefore
declared that PHBV was the true beneficial owner. His judgment
was upheld by the Canadian Federal Court of Appeal.
While the facts in Prévost determined against the existence
of an agency arrangement, the case nonetheless proves that
Canadian courts at the highest level respect the concept of
agency and will attribute income and capital gains for tax
purposes only to the beneficial owner of the assets and not the
agent or bare trustee.
THE CANADIAN NOMINEE COMPANY
The Canadian Nominee Company ("CNC") is a Canadian
company that can be used to hold assets or enter into business
transactions on behalf of a principal, who may otherwise have
used an OFC entity. The company can be incorporated in any
one of the Canadian provinces, or under Federal legislation.
24 Ibid., at par. 100.

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TAXES & WEALTH MANAGEMENT MAY 2014
the CNC need only be what can be negotiated at arm’s length
between two independent parties.
Income or gains in the name of the CNC cannot benefit from
Canada’s tax treaty network. However, CNCs should still be able
to benefit from Canada’s Foreign Investment Promotion and
Protection Agreements, which dissuade foreign confiscation of
assets and provide compensation in cases where expropriation
on a legal basis takes place.
Lastly, the CNC will not have any audit or reporting obligations
in Canada in relation to any assets held in its name or income
or gains derived therefrom, unless, as noted above, there is
common ownership with the CNC. No personal information on
the principal is required to be made public. The only material
information concerning the CNC that is made public is the
names of its directors.
TAXATION OF TRUSTS IN CANADA
Income and capital gains generated by trust assets will only be
subject to tax under the Act if:
a. the trust is, or is deemed to be, resident in Canada for
purposes of the Act;
b. the trust is in receipt of taxable income earned in
Canada, such as income from a business carried on in
Canada, or taxable capital gains from the disposition
of taxable Canadian property; or
c. the trust is in receipt of Canadian source income that
is subject to withholding tax under Part XIII of the Act,
including dividends paid or credited by a corporation
resident in Canada.
The scope of this article will be restricted to the analysis of the
application of trust residency for taxation purposes in Canada,
as noted in subparagraph (a) above, which can be applied
either by statute or by common law.
COMMON LAW RESIDENCY
Until last year, the common assumption in Canada was that,
subject to specific deeming provisions, a trust is resident for
tax purposes where its trustee resides. However, in the case
of St. Michael Trust Corp., as trustee of the Fundy Settlement v.
The Queen
25
(referred to herein as “Fundy Settlement”), the SCC
ruled that the residence of a trust for tax purposes should be
determined by the principle that a trust resides at the location
where the central management and control of the trust actually
takes place, regardless of whether that central management
and control is exercised by the trustee or by some other person.
25 2012 SCC 14.
In Fundy Settlement, a reorganization of a Canadian company
called PMPL Holdings Inc. (“PMPL”) occurred, wherein two
trusts (the “Trusts”) with Canadian beneficiaries were settled
by an individual resident in St. Vincent with the sole trustee of
each trust being St. Michael Trust Corp., a professional trustee
resident in Barbados (the “Trustee”).
As part of the reorganization, the Trusts each subscribed
for shares of a newly incorporated Canadian corporation
(collectively the “Holdcos”) and the Holdcos in turn subscribed
for new common shares of PMPL (the old common shares
being converted into fixed priced redeemable preferred shares
held by the taxpayers). The new common shares were issued
for nominal consideration and the price for the redeemable
preferred shares was set at CAD $50,000,000.
Shortly thereafter, the Trusts disposed of the Holdcos,
realizing a combined capital gain of over CAD $450,000,000.
Withholding tax was remitted to the Canadian government
pursuant to s.  116 of the Act, and the Trustee filed tax returns
on behalf of the Trusts the following year, attempting to receive
a refund for the withholding tax by claiming exemption under
the Canada-Barbados Double Tax Agreement.
26
However, CRA
denied the refund requests and the Trustee appealed CRA’s
decision to the Tax Court of Canada (“TCC”).
At the TCC, CRA argued that the exemption did not apply for a
number of reasons, the main ones of which are as follows:
1. although the corporate trustee of the Trusts was
acknowledged to be resident in Barbados, the central
management and control of each trust was in Canada;
2. the Trusts were deemed resident under the Act for
having received property from a Canadian resident;
3. the Trusts were not validly constituted; and
4. the General Anti-Avoidance Rules (“GAAR”) in the Act
would work to deny the exemption.
On evidence provided, the TCC found the following facts
applied to the role of the Trustee in the case:
1. the Trustee was simply a subsidiary shell of a multi-
national accounting firm, with no personnel and no
expertise;
2. internal memoranda setting out the Trustee’s role
made it clear that the Trustee’s participation would be
limited — even more so than that provided for under
the subject trust indentures;
26 Online at: http://www.treaty-accord.gc.ca/text-texte.aspx?lang=eng&
id=102234.
TAXES & WEALTH MANAGEMENT MAY 2014
7
3. the protector mechanism under the trust indentures
effectively enforced the subordination of the Trustee
to the protector and ultimately to the taxpayers; and
4. no evidence existed, either written or oral, to
demonstrate that the Trustee had taken an active role
in managing the Trusts.
Conversely, in relation to the taxpayers the TCC found that:
1. the taxpayers made all of the investment decisions
for the Trusts, including the sale of the shares in the
Holdcos; and
2. the tax advisors of the Trusts were under the specific
direction of the taxpayers.
Prior to Fundy Settlement, the leading case on the residency of
trusts for Canadian tax purposes was Trustees of the Thibodeau
Family Trust v. The Queen
27
(“Thibodeau”). In Thibodeau, two of
the trustees were resident in Bermuda and the third trustee
was resident in Canada. The Federal Court held that the trust
was resident in Bermuda because the majority of the trustees
resided in Bermuda and the trust document allowed for
majority decision-making.
In Fundy Settlement, the TCC ruled that Thibodeau could be
distinguished upon the facts of that case. Moreover, it rejected
the obiter dictum of the Court in Thibodeau, which stated that
the central management and control test could not be applied
for purposes of determining a trust’s residence, because a
trustee cannot adopt a “policy of masterly inactivity” with
respect to its fiduciary duties. Justice Woods, on behalf of the
TCC, stated that in rejecting the central management and
control test, the Court must have assumed that a trustee would
always be compliant with their fiduciary obligations, which is
not always the case.
28
The TCC ultimately found in favour of the CRA assessments on
the basis of the central management and control test as being
the appropriate test for determining trust residence and that in
the subject case, that test applied to make the Trusts resident
in Canada for tax purposes.
The TCC felt that using a similar test for determining the
residency of trusts and corporations promoted consistency,
predictability and fairness, which are all fundamental principles
underlying the Canadian tax regime. While acknowledging
that there are significant differences between the nature of a
trust and a corporation, Justice Woods stated that “from the
point of view of determining tax residence, the characteristics
are quite similar. The function of each is, at a basic level, the
27 78 D.T.C. 6376 (Fed. T.D.).
28 Garron Family Trust v. The Queen, 2009 TCC 450, at par. 143.
management of property.”
29
Moreover, she was not satisfied
that there were good reasons to establish different tests of
residence for trusts versus corporations.
Interestingly, in relation to the other arguments presented
by CRA noted above, the TCC felt that the Trusts were validly
constituted and that they did not receive property from a
Canadian taxpayer, such as to invoke the deeming provisions
of the Act. Also, the TCC did not find that the GAAR in the Act
applied as they were argued by CRA.
The case was then appealed to the Federal Court of Appeal
(“FCA”), which found in favour of the TCC’s main reason that
the central management and control test should govern the
basis of residency of a trust for tax purposes. However, they
disagreed with the trial judgment on the application of the
deeming provisions of the Act, finding that the Trusts would
have been taxable in Canada as having received contributions
from Canadian tax residents.
On further appeal to the Supreme Court of Canada, the SCC
stated that subsection 2(1) of the Act is the basic charging
provision, and its reference to a “person” must be read as a
reference to a taxpayer whose taxable income is being subject to
income tax. In relation to the taxation of trusts, “person” means
the trust itself, which is deemed by subsection 104(2) of the Act to
be an individual in respect of the trust property, notwithstanding
that a trust is not considered to be a person at common law.
While subsection 104(1) of the Act states that a reference to a trust
shall, unless the context otherwise requires, be read to include a
reference to the trustee, the SCC agreed with the finding of the
FCA that subsection 104(1) was for administrative purposes to
enable trusts to be taxed despite the absence of legal personality,
and does not create a rule of law that the residence of a trust must
be the residence of the trustee in all cases.
The SCC went on to find that there are many similarities between
trusts and corporations that would justify the application of the
common law rule regarding central management and control
test. Some of these similarities include:
1. Both hold assets that are required to be managed;
2. Both involve the acquisition and disposition of assets;
3. Both may require the management of a business;
4. Both require banking and financial arrangements;
5. Both require the instruction or advice of lawyers,
accountants and other advisors; and
29 Ibid. at par. 159.

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TAXES & WEALTH MANAGEMENT MAY 2014
6. Both may distribute income, corporations by way of
dividend and trusts by distributions.
30
It concurred with Justice Woods that “The function of each is, at
a basic level, the management of property.”
31
The SCC determined that as with corporations, residence of a
trust should be determined by the principle that a trust resides
for the purposes of the Act where the central management and
control of the trust actually takes place. They further endorsed
wording in a previous decision, which described central
management and control as “where its real business is carried
on”.
32
“This is not to say that the residence of a trust can never
be the residence of the trustee. The residence of the trustee will
also be the residence of the trust where the trustee carries out
the central management and control of the trust, and these
duties are performed where the trustee is resident.”
33
The SCC dismissed the taxpayers’ appeal, finding that the
Trustee had a limited administrative role in respect of the Trusts
and that the central management and control was carried on
by the taxpayers. Given that it had dismissed the appeal on
these grounds, it refrained from commenting on the arguments
of deemed taxation under the Act, as was found by the FCA,
or taxation based on GAAR, which was again argued in the
alternative by the Minister of Revenue.
STATUTORY RESIDENCY
The Act does not contain a statutory definition or rule for
determining the residency of a trust. However, s. 94 of the Act
deems a trust to be resident in Canada for tax purposes if it
receives a contribution from a Canadian resident taxpayer, or
an individual that was previously a Canadian resident taxpayer
for more than five years and has been non-resident for less than
60 months (except in the case of a testamentary trust, where
the time period is shortened to 18 months), and in respect of a
non-resident contributor, there is a resident of Canada who is
beneficially interested in the trust.
THE CANADIAN TRANSNATIONAL TRUST
A company can be incorporated in Canada to act as a private
trust company (“PTC”). The PTC would then act as trustee
in relation to a trust either on declaration or settlement.
Thereafter, the PTC would engage a co-trustee or a trust
administrator from outside of Canada to perform the day-to-
day management of the trust. Provided the trust is exclusively
managed and controlled at all times outside of Canada, any
30 Fundy Settlement, at par. 14.
31 Ibid.
32 De Beers Consolidated Mines, Ltd. v. Howe, [1906] A.C. 455, at p. 458
(U.K. H.L.).
33 Supra, at par. 15.
income or gains earned in the trust will not be subject to tax in
Canada.
Canada does not have specific PTC legislation, which creates
both opportunities and challenges. One issue is trustee
licencing. While most provinces do not have express exemptions
for non-commercial trustees, Ontario does. This makes Ontario
more attractive as a jurisdiction for the incorporation of the
PTC.
Some provinces like British Columbia and New Brunswick have
no resident director requirements. However, Ontario requires
that at least 25% of the Board of Directors be resident in
Ontario. Therefore, the PTC should have one director resident
in Ontario and two or three resident outside of Canada.
There are no foreign ownership restrictions for Ontario
companies. Therefore, an Ontario PTC could be owned by the
client directly or indirectly by some sort of foreign entity, such
as a corporation, trust or foundation (see Schedule B).
Control of the trust by the client is often a worry, hence the
delineation of reserved powers in a number of trust acts.
However, a review of the facts in Fundy Settlement reveals a
high tolerance by Canadian courts for third party involvement
in managing a trust, without ruling the trust a sham.
Involvement by a non-resident Canadian (such as a client)
in the management and control of a TNT only helps the tax
position of the trust.
Provided the TNT is exclusively managed and controlled at all
times outside of Canada and receives no contributions at any
time from a current or recently former Canadian resident, the
trust will not be treated as resident in Canada for tax purposes.
Income or gains received by the TNT will not be subject to
Canadian tax provided such income does not arise from a
Canadian source. Also, given that the TNT is not subject to tax
in Canada, there is no requirement to file a tax return or any
sort of foreign asset information return.
In contrast to the TNT, the PTC will be subject to tax in Canada
on the fees it receives in acting as trustee for the TNT. A tax
return must be filed annually on behalf of the PTC, but it will
not have to file any foreign asset information return, as it is not
the beneficiary of any assets in the TNT.
Unfortunately, the TNT cannot access Canada’s treaty network
as it is not resident in Canada for tax purposes. However, multi-
national tax planning can be accomplished where required by
having the PTC own (on behalf of the TNT) a corporation or
other entity in a foreign jurisdiction with a favourable tax treaty.
Although the TNT does not qualify for Canada’s treaty network,
it would qualify for protection under Canada’s network of
Foreign Investment Promotion and Protection Agreements.
TAXES & WEALTH MANAGEMENT MAY 2014
9
TNT assets resident in countries that have an investment
protection treaty with Canada cannot be expropriated by those
foreign governments without due compensation to the TNT.
CONCLUSION
In this author’s opinion, the evidence is irrefutably clear.
Despite the overwhelming compliance over the years by the
OFCs to OECD standards of anti-money laundering and tax
transparency, the professional advisors and service providers
in the OFCs will not survive in isolation. They must incorporate
entities based in HTJs to continue to provide planning tools and
services.
Based on the criteria outlined in the introduction, Canada is
an excellent candidate as an HTJ jurisdiction. Moreover, unlike
New Zealand and Barbados, Canada’s new trust laws are not
based on ring fencing concepts (which are highly criticized by
the OECD) and Canada is much stronger in the international
political arena.
34
That does not mean that Canada would not
implement a recommendation by the OECD to further the
interests of its high tax jurisdiction colleagues, but it would not
likely do so if it were detrimental to its own tax administrative
practices. Canada’s agency and trust laws are primarily based
on its own domestic economic drivers. It would be difficult and
complicated to change those simply to protect the tax base of
third party countries.
Gregory McNally, BA, LL.B, MBA, JD, LL.M (Int’l Tax), TEP, N.
Gregory McNally & Associates Ltd.
Greg can be reached at [email protected]
34 “Canada seen as holdout on G8 pledge for tax reform”, online at:
http://www.theglobeandmail.com/report-on-business/international-
business/european-business/g8-seen-striking-pact-aimed-at-cracking-
secret-havens/article12630105/; “Canada’s ‘No’ to Iraq War a Defining
Moment for Prime Minister, Even 10 Years Later”, online at: http://www.
huffingtonpost.ca/2013/03/19/canada-iraq-war_n_2902305.html.
SCHEDULE A


SCHEDULE A
ILLUSTRATION 1;



Agency Agreement



ILLUSTRATION 2;

Bank /Investment Account Discretionary Manager

Agency Agreement

ILLUSTRATION 3;


Agency Agreement



Purchase/Sale Purchase/Sale Agreement
Agreement


Resident
Shareholder
Corporation
Canadian Nominee
Company
Non-Resident
Directors
Client

Int’l Asset
Managers
Canadian Nominee
Company
Client
Client
Canadian Nominee
Company

Seller

Buyer
SCHEDULE B


SCHEDULE B

ILLUSTRATION 1;






ILLUSTRATION 2;







ILLUSTRATION 3;




Administration
Agreement
Canadian
Transnational
Trust
Grantor or Settlor
(must be non-
resident)
Non-resident
Beneficiaries
Ontario Private
Trust Company/
Trustee
Canadian
Transnational
Trust
PTC Shareholder
(Can be non-
resident)
Ontario Private
Trust Company/
Trustee
Majority
Non-resident
Directors
Canadian
Transnational
Trust
Ontario Private
Trust Company/
Trustee
International
Administrator

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TAXES & WEALTH MANAGEMENT MAY 2014
According to prospect theory, even though the investor is
presented with the same mutual fund, he or she is more likely
to buy the mutual fund from the first advisor, who expressed
the rate of return as an overall 8% gain over five years, rather
than a combination of both high returns and losses.
Regret Aversion
Investors act to avoid feeling the pain of regret resulting from a
poor investment decision. It is not just financial loss they regret:
it is also the feeling of responsibility for the decision that gave
rise to the loss. Regret aversion also causes herding behavior.
Investors tend to seek comfort in crowds and invest in the same
companies. That way, if the stock price falls, they can eliminate
one part of regret aversion – that of feeling responsible for the
poor decision. In other words, how can everyone be wrong?
Mental Accounting
Economist Richard Thaler established the concept that human
beings compartmentalize their lives into separate “mental
accounts”. As a result, investors tend to treat each element of
their investment portfolio separately, a propensity that can lead
to inefficient decision-making. For example, an individual may
borrow at a high interest rate to buy a car while earning a low
interest rate on a GIC. Mental accounting has implications for
portfolio rebalancing as well: investors may be unwilling to sell
a losing investment because its “account” is showing a loss.
Overconfidence
People tend to be overconfident in their own abilities, including
their skill at predicting the markets.
Overconfidence applies to professional analysts as well, who
are often reluctant to revise their opinion on a stock’s prospects,
even when confronted with new and contradictory information.
Representativeness
Representativeness refers to the tendency to assume that
recent events will continue into the future. This is one reason
why investors chase hot stocks and shun stocks with poor
recent performance.
CONCLUSION
Risk has different meanings for each of us. Moreover, it is a
moving target and, as such, can never be completely mastered.
A good grasp of behavioral finance can help investors pinpoint
market trends that may have to do more with human psychology
than with fundamental reasons. More importantly, it can allow
us to recognize our own irrational behavior from time to time
and therefore save us from making poor investment decisions.
USE BEHAVIORAL FINANCE TO
MANAGE RISK
By Tina Tehranchian, Senior Financial Planner and Branch
Manager, Assante Capital Management Ltd.
The stellar performance of North American, Japanese and
European markets in 2013 has put the issue of risk on the
backburner for many investors, but it has also started to create
anxiety for some investors who fear imminent pull backs and
corrections in the near future to bring returns back to normal
historical levels.
In general, human beings lack the ability to accurately
measure risk and reward. Of course, understanding the basic
mathematical underpinnings of risk management would help
greatly, but not all of us may be mathematically adept enough
to be able to gain such an understanding. Failing that, gaining
knowledge of our own, as well as other people’s, perceptions of
risk can also give us the upper hand when it comes to investing.
In the early 1970s, Amos Tversky and Daniel Kahneman,
pioneers in the field of behavioral finance, investigated
apparent contradictions in human behavior. They discovered
that when offered a choice phrased one way, subjects might
display risk aversion, but when offered essentially the same
choice phrased in a different way, they might display risk-
seeking behavior. Kahneman cites the example of people who
will drive across town to save $5 on a $15 calculator, but won’t
drive across town to save $5 on a $125 coat.
In 1979, Kahneman and Tversky called their studies of how
people manage risk and uncertainty “Prospect Theory”. Key
concepts addressed by this theory as well as other important
behavioral finance theories that effect the decision-making of
investors include:
Loss Aversion
People place different weights on gains and losses: they are more
distressed by losses than they are made happy by equivalent
gains. Individuals also respond differently to the same situation
depending on whether it is presented in the context of a loss or
a gain. On the whole, people make financial decisions based on
the fear of losing rather than the hope of winning.
To demonstrate the point, let’s take an example where one
investor was presented with the recommendation to buy the
same mutual fund by two different financial advisors. The first
tells the investor that the mutual fund has had an average
annual return of 8% over the past five years. The second
advisor tells the investor that the same mutual fund has had
above-average returns compared to its peer group in the past
five years but has been declining in the past eighteen months.
TAXES & WEALTH MANAGEMENT MAY 2014
11
As Walt Kelly (1913 – 1973, creator of Pogo) said, “We have met
the enemy and it is us”.
Sources:
- Thaler, R.H., 1999. Mental Accounting Matters. Journal of
Behavioral Decision Making.
- Kahneman, Daniel and Amos Tversky (editors), 2000. Choices,
Values, and Frames, Cambridge University Press.
- www.behaviouralfinance.com
Tina Tehranchian, MA, CFP, CLU, CHFC, is a Branch
Manager and Senior Financial Planner with Assante Capital
Management Ltd., located in Richmond Hill, Ontario, and can
be reached at 905-707-5220 or through her web site at www.
tinatehranchian.com.
Assante Capital Management Ltd. is a member of the Canadian
Investor Protection Fund and is registered with the Investment
Industry Regulatory Organization of Canada.
ARE YOU A SERIAL
ENTREPRENEUR OR A CLOSET
VENTURE CAPITALIST?
Editor’s Note: A Love of Tax and Providing Tax Advice That
Does Not Quit – I am delighted to share with our readers an
article prepared by Gerald Courage. Gerald (known to his
colleagues and friends as Gerry) has been a tax lawyer for
over 35 years. Following his distinguished service as Chair
of the law firm of Miller Thomson LLP, Gerry returned to his
first love – the practice of tax law and the rendering of tax
planning advice to both domestic and international clients.
Upon his return to practice and after hibernating in his office
for months to “bone up” on the law, Gerry, in an elegant,
succinct article, discusses one of the lesser known income
tax savings provisions – the small business rollover.
David W. Chodikoff, Miller Thomson LLP
By Gerald Courage, Partner, Miller Thomson LLP
As our readership will be well aware, Canadian federal and
provincial tax legislation supports and encourages small
business in a variety of ways too numerous to mention. One
less well-known incentive for investment in small business is
the so-called small business rollover contained in section 44.1
of the Income Tax Act (Canada) (the “Act”). This is a useful tax
deferral provision that can be used in conjunction with or as
an alternative to the better known $750,000 (proposed to be
$800,000) capital gains exemption on disposition of qualified
small business corporation shares (although the rules to
qualify for the capital gains exemption and the small business
rollover do differ). To qualify, the small business rollover
basically requires that a vendor reinvest the proceeds from the
sale of shares of a small business corporation in what are called
“replacement shares”. Since tax can be avoided on the initial
disposition, the entrepreneur will have more cash available to
invest in replacement shares. Thus, the share business rollover
is a tax efficient way for entrepreneurs to get back “in the
game” for those who still have the entrepreneurial itch.
THE BROAD CONCEPT
Reduced to its essentials, if an individual (other than a trust)
has made a “qualifying disposition” (essentially of a qualifying
small business corporation share discussed in more detail
below), the individual’s capital gain for the year from such
disposition will be reduced by the individual’s “permitted
deferral” (essentially proceeds of disposition reinvested into
other qualifying small business corporation shares) and the
adjusted cost base of the “replacement shares” will be reduced
by the amount of the permitted deferral. (There are rules to
allocate the adjusted cost base reduction if investments are
made in multiple corporations.) In other words, the capital
gain is deferred to the extent of the amount of the reinvested
proceeds until the replacement shares are sold (unless those
proceeds are also reinvested in other replacement shares). A
very simple example will illustrate the point:
Individual holds qualifying shares with an adjusted cost
base of zero and sells them for $1,000,000. Absent the
small business rollover, the individual would be required
to take $500,000, the taxable capital gain, into income.
Instead, the individual reinvests the $1,000,000 proceeds
in qualifying replacement shares within the time period
required. The result is that the $1,000,000 capital gain
is deferred and the $1,000,000 adjusted cost base
which would otherwise arise for the replacement shares
is reduced to zero. Thus, on a subsequent sale of the
replacement shares at $1,000,000 with no reinvestment
of the proceeds, a taxable capital gain of $500,000
would result and the deferral of the original taxable
capital gain of $500,000 would end.
Assuming the individual is willing to reinvest in the small
business sector, this deferral can be a useful alternative or
a supplement to the capital gains exemption where both
provisions are applicable.
WHAT SHARES QUALIFY FOR THE ROLLOVER?
(a) When the Original Shares are Acquired
There are several requirements for shares to qualify for the
small business rollover. First, the shares must be “common

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TAXES & WEALTH MANAGEMENT MAY 2014
a taxable Canadian corporation (i.e., incorporated in Canada
and not exempt from tax) all or substantially all (generally,
90% or more) of the fair market value of the assets of which is
attributable to: (i) assets used principally (i.e., more than half)
in an active business carried on by the corporation or a related
ABC; (ii) shares issued or debt owing by other related ABCs;
or (iii) any combination thereof. A Disqualified Corporation is
excluded from being an ABC. In other words, the corporation
need not remain a Canadian-controlled private corporation or
an ESBC after the shares are acquired and the business can be
carried on in part (but not primarily) outside of Canada (but see
the comments in Hold Period below).
Subsection 44.1(8) of the Act contains a relieving rule with
respect to cash. If the corporation is otherwise considered
to be carrying on an active business, a property held by
the corporation will be deemed to be used in the course of
carrying on that active business for the 36 months preceding
the acquisition of the property if the corporation issued a
share or debt, disposed of property or accumulated income in
order to acquire money for the purpose of acquiring property
to be used in an active business or any combination thereof. In
other words, provided cash is acquired or accumulated in the
manner described above in order to acquire active business
assets within a 36-month period thereafter, the cash will
be considered to be an active business asset. Otherwise, an
excessive accumulation of cash could disqualify the corporation
from ABC or ESBC status.
THE HOLD PERIOD
In order to qualify for the rollover, the shares must be held for at
least a 185-day period before the disposition by the individual.
Thus, effectively a slightly more than six-month hold period is
required.
Further, a disposition will not qualify unless the active business
of the corporation was carried on primarily (more than half) in
Canada at all times during the period the individual held the
share or for the 730 days (essentially two years) preceding the
disposition of the share, whichever is less. For this purpose, the
individual is considered to have disposed of identical shares in
the order in which the individual acquired them. In other words,
shares with the longest holding period will be considered to
have been sold first.
There are a number of special rules to provide for continuity
of the holding period where ESBC shares are transferred in
certain tax deferred circumstances. Where the individual dies,
a surviving spouse or common law partner will be considered
to have held the shares throughout the period the shares were
owned by the deceased spouse if the shares are acquired from
the deceased spouse on a rollover basis under subsection 70(6)
of the Act. A similar rule applies in the case of a child acquiring
shares”. That is, they must be “pure” common shares with
“no bells or whistles” attached, such as restrictions on or
preferential entitlement to dividends or payment on liquidation
of the corporation, convertibility, redeemability at the option of
the holder and so on. Simply put, anything that makes the share
not look like a common share is not permitted. (Full details are
contained in section 6204 of the Income Tax Regulations.)
Second, the shares must be issued by the corporation from
treasury to the individual: they cannot be acquired from
another shareholder.
Third, at the time the share is issued, the corporation must be an
“eligible small business corporation” (an “ESBC”) as defined in
subsection 44.1(1) of the Act. An ESBC is a Canadian-controlled
private corporation, all or substantially all (generally, 90% or
more) of the fair market value of the assets of which at the
time of issuance of the share are attributable to: (i) assets used
principally in an active business carried on primarily (basically
more than half) in Canada by the corporation or a related
eligible small business corporation; (ii) shares issued by or debt
owing by other related eligible small business corporations; or
(iii) a combination of the foregoing.
Excluded from the benefit of the deferral provisions of the small
business rollover are professional corporations (i.e., carrying on
the practice of an accountant, dentist, lawyer, medical doctor,
veterinarian or chiropractor), specified financial institutions,
and real estate corporations, i.e., corporations whose principal
business is leasing, rental, development or sale of real estate,
or a corporation more than 50% of the fair market value of the
property of which (net of debts incurred to acquire the property)
is attributable to real property (collectively, a “Disqualified
Corporation”).
Fourth, immediately before and after the share is issued, the
total “carrying value” of the assets of the corporation and
corporations related to it cannot exceed $50 million. Carrying
value is based on the valuation of the assets on the corporation’s
balance sheet as of the relevant time if the balance sheet were
prepared in accordance with Canadian GAAP, except that
shares or debt issued by related corporations are deemed to
have a carrying value of nil. Care therefore needs to be taken to
ensure that the subscription itself does not take the corporation
over the $50 million threshold.
(b) Requirements during the Holding Period
In addition to being an ESBC at the time of issuance of the share
to the individual, the corporation must qualify as an “active
business corporation” (an “ABC”) throughout the period during
which the individual owned the share as defined in subsection
44.1(1) of the Act. The test for being an ABC is somewhat less
onerous than that for being an ESBC. The corporation must be
TAXES & WEALTH MANAGEMENT MAY 2014
13
the remainder of the capital gain (assuming the proceeds are
reinvested appropriately in replacement shares).
ELIGIBLE POOLING ARRANGEMENTS
It is possible to engage an investment manager to invest in
replacement shares on behalf of the individual. If there is an
agreement in writing providing for the transfer of funds or other
property by the individual to the investment manager to make
purchases of ESBC shares with those funds within 60 days after
receipt thereof and the investment manager issues statements
of account monthly to the individual disclosing details of the
portfolio held and the transactions made, the transactions
are considered to be transactions of the individual and not of
the investment manager, with the result that the investments
could qualify (assuming all other requirements are met) as
replacement shares for purposes of the small business rollover.
ANTI AVOIDANCE
The Act contains provisions denying the rollover where
transactions have been entered into, one of the main purposes
of which was to permit an individual (or a greater number of
individuals) to take greater advantage of the rollover than
would otherwise have been permissible before the proscribed
transactions.
PLANNING CONSIDERATIONS
There are a number of planning considerations which must
be borne in mind in respect of the small business rollover.
First, the shares must be owned by an individual and cannot
be owned by a trust. Therefore, when structuring the initial
investment in an ESBC, one should be thinking ahead to the
disposition and how to shelter the gain. Second, care must be
taken to ensure that the shares are ESBC shares at the time of
issuance and that the corporation remains an active business
corporation thereafter. This involves monitoring the assets of
the corporation, and in particular, cash and real estate. Third,
since real estate corporations are not eligible for the rollover,
it may be prudent to hold real estate in a separate corporation
from the corporation carrying on the active business. Fourth,
before reinvesting, some due diligence should be made about
the replacement shares to make sure they qualify for purposes
of the rollover. Finally, some thought should be given to the
interplay between the capital gains exemption and the small
business rollover when planning the disposition of the ESBC
shares. Typically, the capital gains exemption would be used
first if it is available.
CONCLUSION
The small business rollover is an effective and efficient tax
deferral option. It is plainly not well known and its utilization
requires adherence to the detailed compliance rules. Moreover,
ESBC shares on the death of a parent, if the acquisition
qualifies for the rollover under subsection 70(9.2) of the Act.
Where there is a marriage breakdown and the ESBC shares
are acquired by the individual’s former spouse, the holding
period is also continued if the shares are acquired by the former
spouse on a rollover basis under subsection 73(1) of the Act.
There are also continuity of hold period rules on certain
corporate reorganization or rollover transactions. Specifically,
new ESBC shares acquired by the individual as the sole
consideration in exchange for old ESBC shares on a rollover
under sections 51, 85(1)(h), 85.1(1), 86 or 87(4) will be
considered to be owned throughout the holding period of the
individual, provided the transaction took place on a full rollover
for tax purposes. Further, on such an exchange, if the exchange
constitutes a qualifying disposition of the individual, the new
shares are deemed to be ESBC shares and shares of an ABC
owned throughout the holding period of the exchanged shares
by the individual.
A BRIEF COMPARISON TO THE REQUIREMENTS FOR THE CAPITAL
GAINS EXEMPTION
It is worth noting at this stage that: (i) the requirements at the
time of issuance of the ESBC share are more onerous than those
for the capital gains exemption; (ii) the requirements during
the holding period bear some similarity but do differ from and
are more onerous than the capital gains exemption; (iii) the
requirements for the shares at the time of disposition are similar
to the capital gains exemption; (iv) the holding period itself
is considerably shorter than for the capital gains exemption;
and (v) there is no dollar limit on the rollover (cf. $800,000 for
the capital gains exemption). Thus, in order to qualify for both
provisions, one must be mindful of the differing requirements
for each. (It is beyond the scope of this article to describe the
requirements for the capital gains exemption in any detail.)
WHAT ARE REPLACEMENT SHARES?
In order to qualify for the small business rollover, the individual
must reinvest in “replacement shares”. These must be ESBC
shares (see the requirements above) that are acquired during
the year or within 120 days after the end of the year in which
the qualifying disposition took place. Further, the shares must
be designated by the individual in the individual’s return of
income for the year to be a replacement share and a late filing
of a designation is not permitted.
It is important to note that it is possible to designate some, but
not all, of the replacement shares acquired by an individual
with the result that the individual may manipulate the
interaction between the small business deferral and the capital
gains exemption, presumably first to utilize the capital gains
exemption and then have the small business rollover apply to

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TAXES & WEALTH MANAGEMENT MAY 2014
monitoring ongoing qualification for the rollover is of vital
importance. If you think that your situation would benefit from
this tax strategy, you should consult a tax specialist.
Gerald Courage is a Partner in Miller Thomson LLP’s Tax Group.
Gerald was Chair of Miller Thomson LLP from 2008 to 2013.
Gerald can be reached at [email protected]
RETIREMENT’S VOLATILITY
BOGEYMAN
By Adam Butler, Mike Philbrick and Rodrigo Gordillo, Portfolio
Managers with Butler|Philbrick|Gordillo & Associates at
Dundee Goodman Private Wealth
Investment marketing is like watching a talented magician ply
his trade. While the marketing geniuses keep everyone focused
on the hottest new funds and stocks in an effort to chase strong
returns, people forget about the single most important thing
that matters to your retirement portfolio: volatility.
So let’s be crystal clear: retirement sustainability is extremely
sensitive to portfolio volatility. Further, volatility is the only
portfolio outcome that we can actively control. Therefore, volatility
is the critical variable in the retirement equation, not returns.
To repeat:  Volatility is the critical variable in the retirement
equation, not returns.
FORGET RETURNS: IT’S ABOUT SWR AND RSQ
If you are within five years of retirement, or are already in
retirement, it is time to learn some new vocabulary:
Safe Withdrawal Rate (SWR): The percent of your retirement
portfolio that you can safely withdraw each year for income,
assuming the income is adjusted upward each year to account
for inflation.
Retirement Sustainability Quotient (RSQ): The probability
that your retirement portfolio will sustain you through death
given certain assumptions about lifespan, inflation, returns,
volatility and income withdrawal rate. You should target an
RSQ of 85%, which means you are 85% confident that your
plan will sustain you through retirement.
Forget about investment returns! From now on, the only
question a retirement-focused investor should ask their
Investment Advisor when discussing their options is: How does
this affect my RSQ and SWR?
PORTFOLIO VOLATILITY DETERMINES RSQ AND SWR
The chart below shows how higher portfolio volatility results in
lower SWRs, holding everything else constant:
 All portfolios deliver 7% average returns.
 Future inflation will be 2.5%.
 Median remaining lifespan is 20 years (about right for
a 65-year-old woman).
 We want to target an 85% Retirement Sustainability
Quotient (RSQ).
Note how SWR declines as portfolio volatility rises.

11595785.1
Note how SWR declines as portfolio volatility rises.

The green bar marks the volatility of a 50/50 stock/U.S. Treasury balanced portfolio over the
long-term, while the red bar marks the long-term volatility of a diversified stock index. Note the
SWR of the stock/bond portfolio is 6% versus 3.4% for the stock portfolio, highlighting the steep
tax volatility levies on retirement income.
STEADY EDDY AND RISKY RICKY
This is actually quite intuitive when you think about it. Imagine a scenario where two retired
persons, Steady Eddy and Risky Ricky by name, draw the same average annual income of
$100,000 from their respective retirement portfolios. Both draw an income that is a percentage
of the assets in their retirement portfolio at the end of the prior year.
Steady Eddy’s portfolio is invested in a balanced strategy with a volatility of 9.5%, while Risky
Ricky is entirely in stocks with a volatility of 16.5%. Both portfolios earn the same return (as
they have done for the past 15, 20 and 25 years, though we will address this in greater detail
below).
Due to the lower volatility of Steady Eddy’s portfolio, his income is less volatile: 95% of the time
his income is between $82,000 and $117,000. In contrast, Risky Ricky’s portfolio swings wildly
from year to year, and therefore so does his income: 95% of the time his income is between
$67,000 and $133,000. Of course, both of their incomes average out to the same $100,000 per
year over time.
TAXES & WEALTH MANAGEMENT MAY 2014
15
amount of variability each year then you would tend to be more
conservative in your spending: perhaps you would squirrel
away some income each year in case next year’s income comes
in on the low end of the range.
This relates directly to the impact of volatility on SWRs in
the chart above. Volatility introduces uncertainty, which is
amplified by the fact that money is being extracted from the
portfolio each and every year regardless of portfolio growth or
losses.
HOW MUCH GAIN WILL NEUTRALIZE THE PAIN?
Of course, this effect can be moderated by increasing average
portfolio returns, which would then increase average available
income. The question becomes, how much extra return is
required to justify higher levels of portfolio volatility?
The chart below defines this relationship quantitatively by
illustrating the average return that a portfolio must deliver to
neutralize an increase in portfolio volatility. In this case we hold
the following assumptions constant:
 Withdrawal rate is 5% of portfolio value, adjusted
each year for inflation.
 Inflation is 2.5%.
 Retirement Sustainability Quotient target is 85%.
 Median remaining lifespan is 20 years.

11595785.1


Again, the green bar represents the balanced stock/Treasury bond portfolio discussed above,
and the red bar represents an all-stock portfolio. From the chart, you can see that the balanced
portfolio needs to deliver 6.8% returns to achieve an 85% RSQ with a 5% withdrawal rate. The
higher volatility stock portfolio, on the other hand, requires a 9.2% returns to achieve the same
outcomes.
In theory, higher returns in your retirement portfolio should equate to higher sustainable
retirement income. In reality, higher returns at the expense of higher volatility actually reduces
your retirement sustainability.
FOCUS ON WHAT YOU CAN CONTROL
There are many ways of improving the ratio of returns to volatility in a portfolio, mainly through
thoughtful diversification across asset classes (our particular specialty). However, many
investors are (perhaps rationally) concerned about diversifying into bonds now that the long-
term yield is 3% or less, so let’s see what can be done with a pure stock portfolio to take
advantage of the growth potential of stocks while keeping volatility at an appropriate level to
maximize RSQ and SWR.
What if, instead of letting the volatility of the stock portfolio run wild, we set a target volatility
for our portfolio and adjust our exposure to stocks up and down to keep the portfolio volatility
within our comfort zone.
The green bar marks the volatility of a 50/50 stock/U.S.
Treasury balanced portfolio over the long term, while the red
bar marks the long-term volatility of a diversified stock index.
Note the SWR of the stock/bond portfolio is 6% versus 3.4% for
the stock portfolio, highlighting the steep tax volatility levies
on retirement income.
STEADY EDDY AND RISKY RICKY
This is actually quite intuitive when you think about it. Imagine
a scenario where two retired persons, Steady Eddy and Risky
Ricky by name, draw the same  average  annual income of
$100,000 from their respective retirement portfolios. Both
draw an income that is a percentage of the assets in their
retirement portfolio at the end of the prior year.
Steady Eddy’s portfolio is invested in a balanced strategy with
a volatility of 9.5%, while Risky Ricky is entirely in stocks with
a volatility of 16.5%. Both portfolios earn the same return (as
they have done for the past 15, 20 and 25 years, though we will
address this in greater detail below).
Due to the lower volatility of Steady Eddy’s portfolio, his income
is less volatile: 95% of the time his income is between $82,000
and $117,000. In contrast, Risky Ricky’s portfolio swings wildly
from year to year, and therefore so does his income: 95% of the
time his income is between $67,000 and $133,000. Of course,
both of their incomes average out to the same $100,000 per
year over time.
All other things equal, which person would you expect to
be more conservative in the amount of income they spend
each year? Obviously, if your income were subject to a large

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TAXES & WEALTH MANAGEMENT MAY 2014
with the balance in cash. If stock volatility drops to 15%, our
allocation would be 10% / 15% = 66.6% invested, with the
balance in cash.
For the purposes of this example, we will assume that cash
earns no interest, because it currently does not, and we want to
focus on the effect of managing volatility alone.
More specifically, let’s assume we measure the trailing 20-day
volatility of the SPY ETF (which tracks the performance of the
U.S. S&P500 stock market index) at the end of each month, and
adjust our portfolio at the end of any month where observed
volatility is 10% above or below the volatility we measured at
the end of the prior month.
For example, if we measured volatility last month at 15%
annualized, and the volatility this month was greater than
16.5% or less than 13.5% (10% either way from the prior month),
then we adjust our exposure to the SPY ETF according to the
most recently observed volatility using the technique described
in the last paragraph. If this month’s volatility does not exceed
the threshold to rebalance, then we do not trade this month.
By using this simple technique to control volatility since the
SPY ETF started trading in 1993, we achieve 6.65% annualized
returns with a realized average portfolio volatility of 10.73%.
This compares with returns on the buy and hold SPY ETF of
7.99% with a volatility of 20%. Note that our average exposure
to the market over that period was just 69%, with the balance
earning no returns. All returns include dividends.
The chart below shows the Sustainable Withdrawal Rate for
the two portfolios: the volatility target SPY and the buy and
hold SPY.

11595785.1

Source: Butler|Philbrick|Gordillo& Associates, 2012, Algorithms by QWeMA Group.
You can see that by specifically targeting portfolio volatility our sustainable withdrawal rate
rises to 4.7% per year, adjusted for inflation (at 2.5%) versus the Buy and Hold portfolio, which
will support a withdrawal rate of 3.65% per year. This despite the fact that the Buy and Hold
portfolio outperforms the volatility-targeted portfolio by 1.35% per year.
We cannot control the returns that markets will deliver in the future, but we can easily control
portfolio volatility by observing and adapting. Withdrawal rates from retirement portfolios are
highly sensitive to this volatility, and we have demonstrated that by controlling volatility we can
increase our safe withdrawal rates, and therefore boost retirement income, by almost 30%
before tax.
Just imagine what is possible with a diversified portfolio of asset classes when you volatility-size
them (see www.darwinstrategies.ca).
Adam Butler and Mike Philbrick and Rodrigo Gordillo are Portfolio Managers
with Butler|Philbrick|Gordillo & Associates at Dundee Goodman Private Wealth in Toronto,
Canada.
Adam, Mike and Rodrigo and can be found at www.bpgassociates.com
Again, the green bar represents the balanced stock/Treasury
bond portfolio discussed above, and the red bar represents
an all-stock portfolio. From the chart, you can see that the
balanced portfolio needs to deliver 6.8% returns to achieve an
85% RSQ with a 5% withdrawal rate. The higher volatility stock
portfolio, on the other hand, requires 9.2% returns to achieve
the same outcomes.
In theory, higher returns in your retirement portfolio should
equate to higher sustainable retirement income. In reality,
higher returns at the expense of higher volatility actually
reduces your retirement sustainability.
FOCUS ON WHAT YOU CAN CONTROL
There are many ways of improving the ratio of returns
to volatility in a portfolio, mainly through thoughtful
diversification across asset classes (our particular specialty).
However, many investors are (perhaps rationally) concerned
about diversifying into bonds now that the long-term yield
is 3% or less, so let’s see what can be done with a pure stock
portfolio to take advantage of the growth potential of stocks
while keeping volatility at an appropriate level to maximize
RSQ and SWR.
What if, instead of letting the volatility of the stock portfolio run
wild, we set a target volatility for our portfolio and adjust our
exposure to stocks up and down to keep the portfolio volatility
within our comfort zone.
For example, let’s set a target of 10% annualized volatility, so if
stock volatility is 20%, our allocation to stocks =
target vol/observed vol = 10% / 20% = 50%,
TAXES & WEALTH MANAGEMENT MAY 2014
17
10 years prior to the date on which the relief is requested,
regardless of when the underlying tax liability arose. Successful
taxpayer relief requests can therefore be particularly helpful in
cases involving extenuating circumstances or lengthy delays
attributable to the actions or omissions of the Canada Revenue
Agency (the “CRA”). Nonetheless, subsection 220(3.1) of
the ITA only provides the CRA with the discretion to waive or
cancel interest and penalties, and not the underlying tax debt.
Taxpayers who, despite having exhausted the objection and
appeals process provided for under the ITA, remain unable to
effectively deal with this tax burden, may have limited options
left. In such cases, taxpayers may want to carefully consider
their circumstances and determine whether they warrant
requesting a remission order as a remedy of last resort.
REMISSION ORDERS UNDER THE FINANCIAL ADMINISTRATION
ACT (CANADA) (THE “FAA”)
Subsection 23(2) of the FAA permits the Governor in Council
(generally the Governor General, acting on the advice of the
Federal Cabinet) to cancel the collection of tax or of a penalty
when it would be unreasonable or unjust to do so, or if it would
otherwise be in the public interest to remit the tax or penalty in
question. Taxpayers, or their representatives, begin the process
of requesting a remission order by filing their submissions with
the Remissions and Delegations Section/Committee of the
Legislative Policy and Regulatory Affairs Branch of the CRA.
Taxpayers’ requests for remission orders are first reviewed by
this Committee. If approved, the requests are forwarded to the
Assistant Commissioner, Legislative Policy and Regulatory Affairs,
for review. Thereafter, if approved, requests for remission orders
are forwarded first to the Commissioner and then to the Minister
of National Revenue, for recommendation to the Federal Cabinet.
2
In determining whether to recommend the granting of a
remission order, the CRA generally follows its own internal
guidelines. As cited in Germain v. Canada,
3
these guidelines
state that the CRA is to consider each request for a remission
order on its own merits, in accordance with the broad terms set
out in subsection 23 of the FAA. However, to assist CRA officials
in their assessment, remission order requests are evaluated
against the following general criteria:
4
1. extreme hardship;
2. incorrect action or advice on the part of CRA officials;
3. financial setback coupled with extenuating factors; and
4. unintended results of the legislation.
2 See David M. Sherman, Notes to subsection 220(3.1) in Practitioner’s
Income Tax Act, 2014, 45
th
ed. (Toronto: Carswell) [Practitioner’s Act].
3 2012 FC 768.
4 Ibid. at para. 40.
A TAXPAYER’S LAST RESORT:
THE REMISSION ORDER
By Rahul Sharma, Associate, Miller Thomson LLP
INTRODUCTION
Taxpayers with substantial amounts owing to the Receiver
General of Canada often ask what can be done to reduce or
eliminate their tax debts. It is not uncommon for taxpayers
to be left with sometimes staggering debt burdens that they
simply cannot pay off, including after having been reassessed
on account of their participation in a structured plan or
arrangement that was later determined to constitute an
impermissible tax shelter.
To the extent that the amount owed by a taxpayer consists,
in part, of interest and penalties, the taxpayer may apply for
the waiver or cancellation of such interest and penalties under
subsection 220(3.1) of the Income Tax Act (Canada) (the “ITA”).
Pursuant to the 2011 decision of the Federal Court of Appeal in
Bozzer v. The Queen,
1
subject to being eligible for relief under
subsection 220(3.1), taxpayers may request to have the interest
and penalties payable by them waived for the period beginning
1 2011 FCA 186.
Source: Butler|Philbrick|Gordillo& Associates, 2012, Algorithms
by QWeMA Group.
You can see that by specifically targeting portfolio volatility our
sustainable withdrawal rate rises to 4.7% per year, adjusted for
inflation (at 2.5%) versus the Buy and Hold portfolio, which will
support a withdrawal rate of 3.65% per year. This despite the
fact that the Buy and Hold portfolio outperforms the volatility-
targeted portfolio by 1.35% per year.
We can't control the returns that markets will deliver in
the future, but we can easily control portfolio volatility by
observing and adapting. Withdrawal rates from retirement
portfolios are highly sensitive to this volatility, and we have
demonstrated that by controlling volatility we can increase our
safe withdrawal rates, and therefore boost retirement income,
by almost 30% before tax.
Just imagine what is possible with a diversified portfolio
of asset classes when you volatility-size them (see www.
darwinstrategies.ca).
Adam Butler, Mike Philbrick and Rodrigo Gordillo are Portfolio
Managers with  Butler|Philbrick|Gordillo & Associates  at
Dundee Goodman Private Wealth in Toronto, Canada.
Adam, Mike and Rodrigo can be found at www.bpgassociates.com

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TAXES & WEALTH MANAGEMENT MAY 2014
These factors differ from those the CRA generally considers
under subsection 220(3.1) of the ITA when determining whether
to provide relief from interest and/or penalties. According to
2008 presentation materials released by the CRA, cases of
extreme hardship may apply to businesses whose financial
troubles or heavy tax burden could adversely affect a large
group or community. The CRA may also recommend that tax be
remitted in cases where written or other acceptable evidence
substantiates the fact that incorrect actions were taken or that
incorrect advice was given by CRA officials. Cases involving
financial setbacks, coupled with a serious illness or other
factors beyond a taxpayer’s control, could also be legitimate
subjects for a remission order request, as well as cases involving
clearly inequitable tax consequences to a taxpayer arising from
the application of tax legislation to his or her circumstances
(until the problem can be remedied by a legislative change).
In Waycobah First Nation v. Canada,
5
the Waycobah First Nation
requested a remission order as a result of its failure to collect
harmonized sales tax (“HST”) from non-natives who bought
gasoline and tobacco from a gas station located on the reserve.
Under the terms of its treaty, Waycobah argued that it was
not required to collect HST from its customers. Accordingly,
the First Nation continued to refuse to collect HST until it
lost its judicial battle in June 2003, when the Supreme Court
of Canada denied leave to appeal the decision of the Federal
Court of Appeal (which had upheld the earlier judgment of the
Tax Court of Canada).
6
In seeking a judicial review of the CRA’s decision to not
recommend that a remission order be granted, Waycobah
argued, inter alia, that the Assistant Commissioner fettered
his discretion by treating the CRA’s remission guidelines (or
the criteria outlined above) as being exhaustive. Waycobah’s
position was that the Assistant Commissioner failed, in
particular, to refer to or adequately consider Waycobah’s
submission that, “unless its tax debt was remitted, it could
not move forward towards self-governance in accordance with
government policy.”
7
Although the Federal Court of Appeal disagreed with
Waycobah’s position, Evans J.A. noted (in obiter) that it was
“unfortunate” that the CRA’s remission guidelines were marked
“for CRA use only” and not otherwise available to the general
5 2011 FCA 191 [Waycobah].
6 By the time Waycobah’s litigation was over, as a result of having not
collected HST, its tax debt amounted to over $1.3 million in 2001,
including interest and penalties. Although Waycobah attempted to
negotiate a payment plan with the CRA, it was not able to adhere to
its terms, leaving a total debt exceeding $3.4 million in September
2009—a financial burden that the impoverished community simply
could not afford to pay.
7 Waycobah, supra note 5 at para. 21.
public.
8
Nonetheless, the Federal Court of Appeal held that it
is not unlawful for the CRA to base a decision on its own valid
guidelines or decision-making framework, provided that those
guidelines are not exhaustive. In the Court’s view, this did not
appear to be the manner in which the Assistant Commissioner
considered or applied the guidelines in relation to Waycobah’s
remission order request.
9
UPHILL BATTLE IN REQUESTING A REMISSION ORDER
Although the First Nation was not successful, Waycobah is
nonetheless a helpful decision of the Federal Court of Appeal
that clarifies any ambiguity that may have previously existed
regarding the scope of the CRA’s internal guidelines and the
extent of their application to individual cases. The Federal
Court of Appeal’s decision in Waycobah also makes it clear
that the CRA must consider other factors, circumstances and
submissions outside of its guidelines, and which may relate to
the broader language of subsection 23(2) of the FAA. This is no
doubt of benefit to taxpayers who think that their circumstances
may justify a remission order being recommended, but whose
circumstances may not otherwise fit squarely within one of the
four above-mentioned criteria.
That being said, a Canadian taxpayer has yet to be successful
in seeking a judicial review of the CRA’s decision to refuse to
recommend a remission order. Both the Federal Court and the
Federal Court of Appeal have, in large measure, showed deference
to the CRA’s decisions. This highlights the broad discretion that the
CRA has in determining whether to recommend that a remission
order be granted. Depending on their own individual facts, not
all cases will warrant the CRA recommending that tax and/or
penalties be remitted. Nonetheless, according to information
obtained pursuant to disclosure under the Access to Information
Act (Canada), in 2010-2011, the CRA’s Headquarters Remission
Committee recommended that taxes and/or penalties be remitted
in 14 of 44 total cases.
10
While this figure is by no means high, it does indicate that the
Committee made positive recommendations for the granting
of a remission order in nearly one out of every three cases.
The statistic suggests that, in cases where taxpayers face
apparently insurmountable tax debts, or legitimately believe
that they have received wrong advice or direction from a
CRA official, it may well be worth discussing the feasibility of
requesting a remission order with their tax advisors.
Rahul Sharma is an Associate in Miller Thomson LLP’s Tax and
Private Client Services Groups.
Rahul can be reached at [email protected]
8 Ibid. at para. 29.
9 Ibid. at para. 28.
10 Practitioner’s Act, supra note 2.
TAXES & WEALTH MANAGEMENT MAY 2014
19
CASL’s anti-spam provisions apply to electronic messages
that are commercial in character, and “commercial” under
CASL refers to anything that “encourages participation in
commercial activity”, including: (i) an offer to purchase, sell,
barter or lease a product, goods, a service, land or an interest
or right in land; (ii) an offer to provide a business, investment or
gaming opportunity; or (iii) advertising or promotion of these
activities or of a person carrying out or intending to carry out
these activities.
In determining whether an electronic message is “commercial”,
the Canadian Radio-television and Telecommunications
Commission (CRTC), the CASL enforcement regulator, will
look at: (i) the content of a message; (ii) the hyperlinks in a
message to content on a web site or other database; and (iii)
the contact information contained in a message. The test they
will apply is whether it is reasonable to conclude, based on
the above, that the purpose(s) of an electronic message is to
encourage participation in a commercial activity. Under CASL,
no expectation of profit is required in order for an activity to be
considered commercial in character.
CASL’s prohibition against the unauthorized altering of
the transmission data in an electronic message applies if a
computer system located in Canada is used to send, route or
access the electronic message.
CASL’s prohibition against the unauthorized installation of
computer programs applies if a computer system is located
in Canada at the relevant time or if the person installing a
computer program onto another person’s computer system
is either in Canada at the relevant time or is acting under the
direction of a person who is in Canada at the time when the
direction is given.
CASL also amends the Canadian Competition Act to address
fraudulent or misleading practices conducted through
electronic messages or web sites. CASL also amends Canada’s
private-sector legislation known as the Personal Information
Protection and Electronic Documents Act (PIPEDA). PIPEDA
now contains prohibitions against the automated collection
of electronic addresses (i.e., email harvesting) and the use of
any such collected addresses as well as the unauthorized use
of computers to collection personal information and the use of
any such collected personal information.
II. WHY SHOULD CASL MATTER TO YOU AND YOUR
ORGANIZATION?
Individuals and organizations will want to ensure that they
are CASL compliant because non-compliance may lead to
significant consequences and penalties, including:
1. Administrative Monetary Penalties (AMPs):
CANADA’S ANTI-SPAM
LEGISLATION (CASL) IS
COMING INTO FORCE ON
JULY 1, 2014: WHY YOU
SHOULD PAY ATTENTION AND
SOME SUGGESTIONS FOR
COMPLIANCE PREPARATION
By J. Andrew Sprague, Associate, Miller Thomson LLP
In December 2013, the Government of Canada announced that
the anti-spam provisions of Canada’s anti-spam legislation
(CASL)
1
will come into force on July 1, 2014, and that CASL’s
provisions relating to computer programs will come into force
on January 15, 2015.
I. WILL CASL APPLY TO YOU AND YOUR ORGANIZATION?
CASL’s broad scope and reach means that it impacts every
individual and every organization that engages in commercial
activities in Canada.
CASL contains a number of prohibitions, including:
1. the sending of commercial electronic messages without
consent and without meeting certain prescribed form and
content requirements;
2. the altering of transmission data in an electronic message
without consent; and
3. installing computer programs without express consent.
CASL’s prohibition against the sending of unsolicited
commercial electronic messages applies if a computer system
located in Canada is used to send or access an electronic
message.
Under CASL, the definition of what is considered a commercial
electronic message is very broad and includes electronic
messages such as email, text messaging/SMS, instant
messaging, social networks (Facebook®, LinkedIn®, etc.), and
other online services (e.g., web forums, portals).
1 The official name is An Act to promote the efficiency and adaptability
of the Canadian economy by regulating certain activities that discourage
reliance on electronic means of carrying out commercial activities, and
to amend the Canadian Radio-television and Telecommunications
Commission Act, the Competition Act, the Personal Information
Protection and Electronic Documents Act and the Telecommunications
Act (S.C. 2010, c. 23).

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TAXES & WEALTH MANAGEMENT MAY 2014
(a) A fine of up to $1,000,000 per violation for individuals;
(b) A fine of up to $10,000,000 per violation for any other
person (i.e., any legal entity that is not an individual);
2. Corporate officers and directors being held personally
liable for corporate violations;
3. Vicarious liability arising for violations committed by
employees or agents;
4. A private civil right of action (including the possibility of
class-action lawsuits); and
5. Reputational risks.
Liability under CASL also extends to any person who aids,
induces, procures or causes to be procured a prohibited act.
Fortunately, CASL permits a due diligence defence against
claims of non-compliance. I believe that if individuals and
organizations take proactive steps to set up appropriate
policies, procedures, and processes relating to the activities
prohibited under CASL, and properly enforce them, such
individuals and organizations may be able to use their efforts
as an aid to a due diligence defence, and such efforts may be a
factor in determining liability or damage awards arising out of
a CASL non-compliance claim.
III. NEW CONSENTS ARE REQUIRED
Consents to receive commercial electronic messages can
be express or implied under CASL. Unlike Canadian privacy
laws that permit “opt out” consent for less sensitive types of
information, such as receipt of marketing information, this
form of consent is not sufficient under CASL for the receipt of
marketing information by electronic means.
IV. EXEMPTIONS FROM ANTI-SPAM PROVISIONS
One or more exemptions from compliance with CASL’s anti-
spam provisions may be available to individuals and/or
organizations, depending on their particular circumstances.
Messages sent:
1. by a business to an existing customer;
2. internally within a business;
3. in regard to a legal obligation or a legal right;
4. to respond to an inquiry or a referral;
5. within an existing “family relationship” or “personal
relationship”;
6. where there is an “existing business relationship”; or
7. where there is an “existing non-business relationship”,
may be exempted under CASL if all of the necessary criteria are
met. Other exemptions may also be available.
V. NEXT STEPS
While developing their CASL compliance strategies, there are
a number of steps that individuals and organizations can take.
Step 1: If an individual or organization has not already done
so, he, she or it should conduct an audit/gap analysis to
collect information about his, her or its current electronic
communication practices.
Step 2: Once an individual or organization has completed
an audit/gap analysis of his, her or its current electronic
communication practices, the next step should be to consider
CASL’s requirements and assess what changes might be
required to an individual’s or organization’s current policies,
procedures, practices, processes, and/or computer systems and
networks in order to ensure that the individual or organization
is CASL compliant.
Step 3: Utilize available resources. The federal government
has two CASL/anti-spam web sites that individuals and
organizations may find of interest: fightspam.gc.ca and http://
www.crtc.gc.ca/eng/casl-lcap.htm.
Step 4: Implementation of the changes required, as determined
in Step 3, is a very important and necessary step in becoming
CASL compliant.
Step 5: If an individual or organization has not already done so,
he, she or it should also review and update his, her or its privacy
policies, including his, her or its web site privacy policies (where
applicable) and the terms of use/terms of service for his, her or
its web site (where applicable).
This article is provided as an information service and is a
summary of current legal issues. This information is not
meant as legal opinion and readers are cautioned not to act
on information provided in this article without seeking specific
legal advice with respect to their unique circumstances.
J. Andrew Sprague is an Associate in Miller Thomson LLP’s
Business Law, Information Technology Law and Intellectual
Property Law Groups.
Andrew can be reached at [email protected]
TAXES & WEALTH MANAGEMENT MAY 2014
21
the relationship went bad and that the engagement ended at
the end of 2004.
The Appellant was subject to a random audit for the years in
issue. During the course of the audit, she told the CRA auditor
that her fiancé paid for the general household expenses. She
refused to provide the name of her fiancé to the CRA. It was
her view that this information was part of her private life and
should remain private. Additionally, her fiancé refused to give
her permission to tell the authorities who he was.
Given the Appellant’s reluctance to provide information, the
CRA auditor had little choice but to use some method (in this
case, using the cash flow method) to determine the income
necessary for the Appellant to maintain her lifestyle during the
years under review as a single person. The court concluded that
the CRA officer was fair and reasonable and restrained in her
use of the cash flow method [para. 21 of the Reasons].
The identity of the fiancé became known at the trial. He was
subpoenaed but refused to show. Hence, the court issued
a warrant for arrest to bring him to court. Needless to say,
Mr.  Garfield, the fiancé, was an unwilling witness and not
very forthcoming. Documents produced during the hearing
had Mr.  Garfield living at a different address than the address
identified by the Appellant. In addition, at no time did he
report a change to his marital status and he did not claim
an equivalent to married deduction in the years in issue. In
fact, Mr.  Garfield did not file tax returns for the tax periods
under review. Even so, Mr.  Garfield did acknowledge having
paid many of the Appellant’s expenses and supporting the
Appellant while she was not working.
At the end of the evidence portion of this trial, it was clear
that since the Appellant had not adduced any documentary
evidence, the Appellant was solely relying upon her viva voce
testimony and that of Mr.  Garfield. As the court put it, “the
critical issue in this trial is that of credibility of these two
witnesses” [para. 23 of the Reasons].
What follows in the Reasons for Judgment is a succinct
summation of the judge’s role in determining credibility, and
for this reason alone, it is worth repeating. As Deputy Judge
Masse stated: “It is trite law that I can accept all of the evidence
of a witness, none of [the] evidence of the witness or I can
accept some of the witness’ evidence and reject other portions
of the witness’ evidence” [para. 24 of the Reasons].
Citing the well-known dictum of Justice O’Halloran of the
British Columbia Court of Appeal in Faryna v. Chorny, [1952] 2
D.L.R. 354 (B.C.C.A.) at pages 356-357, Judge Masse reminds
us of the challenge facing the trier of fact when making a
finding on credibility:
Daimsis v. The Queen, 2014
TCC 118: FINDINGS BASED ON
CREDIBILITY: IT IS NOT AS
EASY AS YOU MIGHT THINK
By David W. Chodikoff, Editor of Taxes & Wealth Management,
Tax Partner, Miller Thomson LLP
This rather innocuous Informal Procedure tax appeal was
decided by Deputy Judge Rommel G. Masse. It serves as a good
reminder of how a court must make a finding of credibility or
the lack of it.
This tax appeal concerned the Appellant’s 2003 and 2004
taxation years. The issue was whether the Appellant had
underreported her income for those years.
The Appellant’s theory of her case was simple. Ms. Daimsis, the
Appellant, claimed that she had reported all of her income that
she earned during those years: those amounts were $4,600 and
$24,410 for the 2003 and 2004 taxation years, respectively.
She claimed that most of her living expenses during those
years were paid by her fiancé (at the time). Her claim was also
that she and the boyfriend/fiancé were then co-habiting.
In contrast, the Minister of National Revenue (the “Minister”)
alleged that the Appellant was less than cooperative and
provided very little information, including refusing to identify
her co-habiting fiancé. As a result, the Minister had little choice
but to have the auditor perform a cash flow analysis in order
to make an estimation of the Appellant’s “real” income for her
2003 and 2004 taxation years. This analysis resulted in the
Minister issuing a Notice of Assessment for the Appellant’s
2003 taxation year, increasing her reported income by $24,412,
as well as a Notice of Reassessment for her 2004 taxation
year, increasing her income by an amount of $16,034. The
Appellant filed Notices of Objection and, with the exception of
some minor adjustments, the Appellant continued the appeal
process to the Tax Court of Canada.
There were three witnesses in this Appeal: the Appellant, the
Canada Revenue Agency (the “CRA”) auditor, and the former
fiancé.
At trial, the Appellant explained that during the relevant time
period she was engaged to be married and cohabiting with her
fiancé. She stated that her fiancé wanted her to stay at home
and he wanted to be the provider. She claimed that her fiancé
paid all of her living expenses. She said that he was making a
good living and would support her. The Appellant claimed that

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TAXES & WEALTH MANAGEMENT MAY 2014
CASES OF NOTE
Kossow v. R., [2014] 2 C.T.C. 1, 2013 CarswellNat 4557
(F.C.A.), leave to appeal refused 2014 CarswellNat 1530, 2014
CarswellNat 1529 (S.C.C.) — Near J.A., Gauthier J.A., Evans
J.A. — Tax — Income tax — Tax credits — Charitable donations
— Whether genuine gift — The taxpayer, Ms. Kossow, made
purported donations to, and received charitable tax receipts
from, a foundation in the amounts of $50,000, $60,000
and $50,000 in the 2000, 2001 and 2002 taxation years,
respectively. The donations were funded by 20 percent cash
from the taxpayer and 80 percent from a 25-year, non-interest
bearing loan provided to the taxpayer by an initiatives funding
program. The taxpayer claimed donation tax credits in respect
of the donations. The Minister reassessed the taxpayer, and
disallowed 80 percent of the donation tax credit claimed for
2000 and 2001, and disallowed the entire tax credit for the
2002 taxation year. The taxpayer’s appeal was dismissed by
the Tax Court judge who found that the taxpayer did not make
a gift within the meaning of section 118.1 of the Income Tax
Act. The judge held that the interest-free loans constituted
significant benefits that the taxpayer received in return for
making her donations. The taxpayer’s appeal to the Federal
Court of Appeal was dismissed. The Federal Court of Appeal
concluded that the taxpayer received a significant financial
If a trial Judge’s finding of credibility is to depend solely
on which person he thinks made the better appearance
of sincerity in the witness box, we are left with a purely
arbitrary finding and justice would then depend upon the
best actors in the witness box. On reflection it becomes
almost axiomatic that the appearance of telling the
truth is but one of the elements that enter into the
credibility of the evidence of a witness. Opportunities
for knowledge, powers of observation, judgment and
memory, ability to describe clearly what he has seen
and heard, as well as other factors, combine to produce
what is called credibility, and cf. Raymond v. Bosanquet
(1919), 50 D.L.R. 560 at p. 566, 59 S.C.R. 452 at p. 460,
17 O.W.N. 295. A witness by this manner may create a
very unfavourable impression of his truthfulness upon
the trial Judge, and yet the surrounding circumstances
in the case may point decisively to the conclusion that
he is actually telling the truth. I am not referring to the
comparatively infrequent cases in which a witness is
caught in a clumsy lie.
The credibility of interested witnesses, particularly in
cases of conflict of evidence, cannot be gauged solely
by the test of whether the personal demeanour of the
particular witness carried conviction of the truth. The
test must reasonably subject his story to an examination
of its consistency with the probabilities that surround
the currently existing conditions. In short, the real test
of the truth of the story of a witness in such a case
must be its harmony with the preponderance of the
probabilities which a practical and informed person
would readily recognize as reasonable in that place and
in those conditions. Only thus can a Court satisfactorily
appraise the testimony of quick-minded, experienced
and confident witnesses, and of those shrewd persons
adept in the half-lie and of long and successful
experience in combining skilful exaggeration with
partial suppression of the truth. Again a witness may
testify what he sincerely believes to be true, but he may
be quite honestly mistaken. For a trial Judge to say “I
believe him because I judge him to be telling the truth”,
is to come to a conclusion on consideration of only half
the problem. In truth it may easily be self-direction of a
dangerous kind.
The trial Judge ought to go further and say that
evidence of the witness he believes is in accordance with
the preponderance of probabilities in the case and, if his
view is to command confidence, also state his reasons
for that conclusion. The law does not clothe the trial
Judge with a divine insight into the hearts and minds of
the witnesses. And a Court of Appeal must be satisfied
that the trial Judge’s finding of credibility is based not
on one element only to the exclusion of others, but is
based on all the elements by which it can be tested in
the particular case.
In addition to this “jurisprudential lens”, Judge Masse stated
that he (supposedly like any other judge) must assess the
credibility of the witnesses: “making use of human experience,
the knowledge of the human condition, the knowledge that
memories fade with time and the fact that human beings are
most imperfect creatures” [para. 24 of the Reasons].
A thoughtful analysis of the oral evidence of the two central
witnesses follow, with the conclusion that on balance the issue
of credibility is resolved in favour of the Appellant.
The value of the case is its reminder that the judge’s job of
determining credibility is one of balancing a variety of factors
and placing the proper weight on those various elements. It is a
very difficult task. Thankfully, more often than not, trial judges
get it right.
David W. Chodikoff is an editor of Taxes & Wealth Management.
David is also a tax partner specializing in Tax Litigation (Civil
and Criminal) at Miller Thomson LLP.
David can be reached at 416.595.8626 or dchodikoff@
millerthomson.com
TAXES & WEALTH MANAGEMENT MAY 2014
23
ON THE RADAR
Lottery Commissions
In document 2014-0522731M4 dated May 8, 2014, the CRA
outlined its revised administrative position regarding payments
to lottery ticket retailers. Before 2014, the CRA’s position
outlined in IT-404R, Payments to Lottery Ticket Vendors, was
that any prize lottery ticket retailers received in a year from a
provincial lottery corporation for selling a winning ticket was
not taxable. However, generally, prizes a taxpayer receives by
virtue of carrying on a business are taxable, as explained in IT-
334R2, Miscellaneous Receipts.
Repeated concerns over the years prompted the CRA to
review its position and, upon  review, the CRA concluded that
treating prizes paid to lottery ticket retailers as non-taxable
led to inconsistent treatment between taxpayers and was
no longer sustainable. Consequently, the CRA cancelled IT-
404R on December  31, 2013. Therefore, since January 1, 2014,
lottery ticket retailers must include in their income the amount
or value of any prize they receive in a year from a provincial
lottery corporation for selling a winning ticket, because these
amounts are received as part of their normal business activity.
As with any business income, taxpayers must report all taxable
amounts received in a year on that year’s income tax and
benefit return.
The CRA’s new position does not affect the taxation of any prize
the holder of a winning lottery ticket receives. Those who win a
prize in a lottery will continue to receive such prizes free of tax.
Unclaimed Interest Expense
In document 2014-0521341E5 dated May 8, 2014, the CRA
was asked whether a taxpayer can claim an interest expense
in a taxation year subsequent to the taxation year in which the
interest was paid.
Paragraph 20(1)(c) of the Income Tax Act provides a deduction
in a taxation year for interest paid in the year or payable in
respect of that year on funds borrowed for the purpose of
earning income from a business or property; however, it does
not permit a taxpayer to claim a deduction for interest paid in a
previous taxation year on an income tax return for a subsequent
year. When a taxpayer wishes to claim an interest deduction for
a previous taxation year in respect of which a return has already
been filed, the taxpayer may request a reassessment of the
previous year’s tax return.
A taxpayer may carry forward non-capital losses (which may
have resulted in whole or in part from interest deductions) from
previous years in certain circumstances in accordance with
paragraph 111(1)(a) of the Act.
benefit as the recipient of long-term, interest-free loans; the
benefit did not come from the donee but from the lender as a
result of the taxpayer’s participation in the donation program.
The Judge was correct in finding that the taxpayer did not make
a gift. The taxpayer’s application for leave to appeal to the
Supreme Court of Canada was dismissed on May 15, 2014.
****
Daimsis v. The Queen, 2014 TCC 118, 2014 CarswellNat 1352
(T.C.C. [Informal Procedure]) — Masse D.J. — Tax — Income
tax — Administration and enforcement — Audits — Audit
methodology — The taxpayer reported $4,600 in income on
her 2003 income tax return and $24,410 on her 2004 return.
The Minister initially accepted the returns as filed. During a
subsequent audit, the taxpayer advised the auditor that her
former fiancé paid all the expenses, but refused to provide
more than the fiancé’s first name, so the auditor conducted a
cash flow method audit based on the taxpayer’s lifestyle and
declared income. The Minister adjusted the taxpayer’s income
by adding $24,412 to her 2003 income and $16,034 to her 2004
income. The Minister later allowed the taxpayer’s objections in
part, and reduced her adjusted 2003 income by $4,568 and
2004 income by $1,583. The taxpayer’s appeal to the Tax Court
of Canada was allowed. The reassessments were referred back
to the Minister for reconsideration and reassessment on the
basis that, during the relevant period, the taxpayer was living
with her fiancé in a common law relationship, her fiancé was
paying all the taxpayer’s living expenses, and the taxpayer
reported all her income. The evidence was that, from 2003 to
the end of 2004, the taxpayer was engaged to marry her fiancé,
who was living with the taxpayer and paying all her living
expenses. The evidence of her fiancé, who was brought to court
under arrest for failing to respond to a subpoena, confirmed
that he and the taxpayer lived together and that he supported
the taxpayer during 2003 and 2004. While the auditor was fair
and reasonable in using of the cash flow method to assess the
taxpayer, and while the taxpayer failed to adduce documentary
evidence to demolish the Minister’s assumptions, the fiancé
never filed tax returns from 2002 up to 2005 and clearly had
something to hide, which was consistent with his warning the
taxpayer not to disclose anything about him to anybody. As the
fiancé had no interest in the outcome of the case, no reason
to favour either party, and no opportunity to collaborate with
the taxpayer, their testimony that he paid her living expenses
was accepted and the credibility issue was resolved in favour
of the taxpayer. It was more likely than not that the fiancé and
taxpayer cohabited throughout most of 2003 and part of 2004,
and that the fiancé paid all of the taxpayer’s living expenses
when she could not afford to do so.

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TAXES & WEALTH MANAGEMENT MAY 2014
normally be determined by reference to the cost of the inventory
to the taxpayer for income tax purposes less the amount of any
compensation received (such as insurance), if any. Where the
property is capital property, the comments in paragraph 9 of
IT-185R should be taken into account.
Where virtual currencies are acquired as gifts, IT-334R2,
Miscellaneous Receipts, provides that an amount received as a
gift is not subject to income tax in the hands of the recipient.
However, where an individual receives a “voluntary payment”
or other valuable transfer or benefit from the individual’s
employer, the amount of the payment or the value of the
transfer or benefit must generally be included in the individual’s
income pursuant to subsection 5(1) or paragraph 6(1)(a) of
the Act. Similarly, “voluntary payments” or other transfers or
benefits received by a taxpayer in respect of, or in connection
with, a business carried on by the taxpayer, must be included in
the taxpayer’s income from that business.
With respect to whether barter transaction rules apply when one
type of virtual currency is exchanged for another type of virtual
currency, IT-490, Barter Transactions, provides that in the case
of goods bartered by a taxpayer for other goods or services, the
value of those goods must be brought into the taxpayer’s income
if they are business-related. As such, an exchange of one type of
virtual currency for another in such circumstances would trigger
a disposition for income tax purposes.
Virtual Currencies (Bitcoins)
In document 2014-0525191E5 dated April 23, 2014, the CRA
provided its views regarding the income tax treatment of
various transactions involving virtual currencies such as bitcoin.
Where a taxpayer mines bitcoin in a commercial manner,
in computing the taxpayer’s income from the business for a
taxation year, the value of property described in the inventory
at the end of the year must be determined. Section 10 of the
Income Tax Act and Part XVIII of the Income Tax Regulations
set out the rules pertaining to the valuation of a taxpayer’s
inventory for this purpose. In most cases, either of the following
two methods of valuing inventory is available: (1) valuation of
each item in the inventory at the cost at which it was acquired
or its fair market value at the end of the year, whichever is
lower; or (2) valuation of the entire inventory at its fair market
value at the end of the year.
Whether a virtual currency such as bitcoin is held as
inventory or as a capital property is a question of fact. Where
such property is lost or stolen, IT-185R, Losses from Theft,
Defalcation, or Embezzlement, provides that a loss of trading
assets through theft, defalcation, or embezzlement is normally
deductible in computing income from a business if such losses
are an inherent risk of carrying on the business and the loss is
reasonably incidental to the normal income-earning activities
of the business. The amount of the taxpayer’s loss would