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Income tax is complicated.  As such, mistakes in transactions are liable to occur from time to time, especially when professional advisors do not consult tax specialists prior to undertaking transactions.  The Court of Queen’s Bench of Alberta (“QBA”) has added another arrow to taxpayers’ quivers when mistakes lead to unintended tax consequences.  In Stone’s Jewellery Ltd. v. Arora 2009 ABQB 656, a well thought out and structured judgment by Madam Justice Strekaf, the taxpayer sought an order to rectify or rescind two transactions involving the transfer of land that resulted in the unanticipated assessment of more than $6 million in taxes.  The Canada Revenue Agency (“CRA”) opposed the taxpayer’s action. 

For many years, accountants for Canadian-controlled private corporations (“CCPCs”) have followed the old adage of advising their clients to “bonus down” to the Small Business Limit (the amount of active business income earned in Canada that is subject to the lowest corporate tax rate), as it generally provided the owner-manager/shareholder with higher after-tax cash than the alternative of paying tax in the corporation, and then ultimately paying dividends to the owner-manager/shareholder. This is because corporate income subject to the general tax rate was poorly integrated when such income was eventually paid as a dividend to the owner-manager/shareholder. Table 1 roughly displays the lack of integration for a corporation earning $1,000,000 of taxable income in the late 1990’s.

Further to our Blog of October 27, 2009, Bill 53 – Professional Corporations Statutes Amendment Act – has received Royal Assent today and is expected to be proclaimed (pursuant to an Order-in-Council) soon. As previously discussed, these long awaited changes allow for common law partners / spouses and children of a professional and/or a special purpose trust (of which minor children of the professional can be the only beneficiaries) to own non-voting shares of a professional corporation.

As mentioned in our blog of September 29, 2009, one of the most common errors that we identify during our review of private corporations is the corporate ownership of personal use assets.  The shareholders of the corporation will often believe that it is tax efficient to purchase assets inside the corporation that would otherwise involve the withdrawal of funds from the corporation to purchase such assets (which would be a taxable withdrawal).  Unfortunately, the tax consequence of the acquisition of personal use property by a corporation is not pretty.  We often see vacation homes, automobiles, boats, art collections, etc. owned by the corporation.  Certainly the most common examples we see are vacation property and in some unusual cases the primary residence of the shareholder(s).

By Nicolas F. Baass  LL.B., LL.M. (Tax) and Kim G C Moody  CA, TEP

Good news for Alberta professionals who are regulated by the Health Professionls Act (doctors/dentists/chiropractors/optometrists), Legal Profession Act (lawyers), Medical Profession Act and Regulated Accounting Profession Act (accountants).  On October 26, 2009 Bill 53 – Professional Corporations Statutes Amendment Act, 2009 passed first reading in the Alberta Legislative Assembly.  This Bill, if enacted, will have some significant repercussions on how professionals set up their business affairs in order to minimize income taxes.