Inside. Lipson (SCC) A Unanimously Divided Number 1924 Supreme Court. Introduction. The Facts in Lipson. January 22, 2009

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1 January 22, 2009 Lipson (SCC) A Unanimously Divided Number 1924 Supreme Court Introduction It seems that the entire tax community is aflutter over the Supreme Court s recent decision against the taxpayers in Lipson, 1 a case often likened to Singleton. 2 And rightfully so this is the first General Anti-Avoidance Rule ( GAAR ) 3 case to be heard by the Supreme Court of Canada (the SCC ) since its unanimous decisions in Canada Trustco 4 and Mathew. 5 Rendered on January 8, 2009 by a majority of four justices (out of a panel of seven), 6 with two dissenting groups, the decision in Lipson surprises by an unprecedented for a tax case level of discord at the Supreme Court. Although there are certain helpful elements in the decision, much of Lipson is very controversial and it is hoped that the Supreme Court will soon find an opportunity to express a less divided view on the GAAR. The Facts in Lipson The facts in Lipson are similar in many respects to those in Singleton. Mr. and Mrs. Lipson wished to purchase a house. He owned all the outstanding shares of a private corporation. She borrowed from a bank to purchase a certain number of those shares at their fair market value of $562,500. The proceeds from the sale were used by Mr. Lipson to finance the purchase of the house. The next day, the couple obtained a mortgage loan secured against the house and the proceeds of the borrowing were used to repay Mrs. Lipson s bank loan. Inside CRA Q&A for Amateur Athletic Trusts... 5 Revised Guides... 6 Revised Forms... 6 Commentary Revisions 6 Recent Cases... 6 Digests for seven recent Tax Court of Canada cases on issues such as vicarious liability under section 160, support payments, unreported income, employment benefit for board and lodging, and gains on sale of flow-through shares. 1

2 Tax Topics 2 From a tax perspective, these transactions operated as or a misuse of the provisions relied upon by the taxpayers, follows. Upon selling the shares to his wife, Mr. Lipson under subsection 245(4), thus triggering the application of chose not to elect out of the rollover rule in subsection the GAAR. 73(1) and, thus, the sale was deemed to take place at Mr. Lipson s adjusted cost base, with any future income or loss Tax Court of Canada realized by Mrs. Lipson on the shares sold being attribu- The TCC concluded that the arrangement impletable to him. Mr. Lipson complied with the attribution rules mented by the taxpayers had frustrated the purpose of in section 74.1 by reporting dividend income and paragraph 20(1)(c) and subsection 20(3) in that the overall deducting the interest on the mortgage loan. In this purpose of the arrangement was the deduction of interest respect, the interest on the mortgage loan was deductible on money borrowed to purchase a house. The TCC further pursuant to paragraph 20(1)(c) and subsection 20(3), as the concluded that section 74.1 was also misused insofar as it original bank loan was used by Mrs. Lipson to purchase the was used to attribute the interest deduction to Mr. Lipson shares. and therefore to achieve the aforementioned misuse of The CRA denied the deduction originally on the basis paragraph 20(1)(c) and subsection 20(3). The TCC therefore of the true economic purpose of the transactions, but applied the GAAR, stating, in addition, that [t]his case is... subsequently, after the SCC judgment in Singleton was ren- an obvious example of abusive tax avoidance and that dered, argued abuse under the GAAR. Based on the judg- [i]f there ever was a case at which section 245 was aimed, ments of the lower courts, it does not appear that other it is this one. 7 bases for assessment were raised by the Crown. Decisions of the Lower Courts As the taxpayers had conceded that there was at least one avoidance transaction which resulted in a tax benefit, as understood at subsection 245(3) of the Act, the only issue before the Tax Court of Canada (the TCC ) and, subsequently, before the Federal Court of Appeal (the FCA ) was whether the transactions resulted in an abuse TAX TOPICS Published weekly by CCH Canadian Limited. For subscription information, see your CCH Account Manager or call or (416) (Toronto). Federal Court of Appeal The FCA affirmed the reasoning of the TCC and held that while, taken individually, each provision relied upon by the taxpayers operated as intended by Parliament, the overall purpose of the series of transactions, which was to make the house mortgage interest deductible, was relevant to the analysis under subsection 245(4). Decision of the Supreme Court LeBel, J. held for a majority of four justices that the GAAR applied. Binnie, J., on behalf of Deschamps, J. and himself, held, to the contrary, that the GAAR should not have applied, and Rothstein, J. wrote a separate dissent. For CCH Canadian Limited The Decision of the Majority SUSAN PEART, C.A., LL.M. (416) , ext The majority held that the GAAR applied in this case Susan.Peart@wolterskluwer.com because the transactions frustrated the purpose of subsec- ALINE KURDIAN, Editor (416) , ext tion 74.1(1). The basis for LeBel, J. s decision was his under Aline.Kurdian@wolterskluwer.com standing of the purpose of the attribution rules in sections ROBIN MACKIE, Director of Editorial 74.1 to 74.5: Tax, Accounting and Financial Planning (416) [T]he purpose of s. 74.1(1) is to prevent spouses from Robin.Mackie@wolterskluwer.com reducing tax by taking advantage of their non-arm s TR ISLAM, Marketing Manager length relationship when transferring property between (416) themselves. In this case, the attribution to Mr. Lipson of TR.Islam@wolterskluwer.com the net income or loss derived from the shares would enable him to reduce the dividend income attributed to PUBLICATIONS MAIL AGREEMENT NO him by the amount of the interest on the loan that RETURN UNDELIVERABLE CANADIAN ADDRESSES TO CIRCULATION DEPT. financed his wife s purchase of those shares. However, MAIN ST before the transfer, when the dividend income was in TORONTO ON M5W 1A1 circdept@publisher.com Mr. Lipson s hands, no interest expense could have been deducted from it.... The only way the Lipsons could 2009, CCH Canadian Limited have produced the result in this case was by taking 90 Sheppard Ave. East, Suite 300 advantage of their non-arm s length relationship. There- Toronto, Ontario M2N 6X1 fore, the attribution by operation of s. 74.1(1)... qualifies as abusive tax avoidance.... Indeed, a specific

3 3 Tax Topics anti-avoidance rule is being used to facilitate abusive to address the particular mischief that Parliament sought to tax avoidance. 8 [emphasis added] prevent in the context of the attribution rules. Rothstein, J. In reaching this result, LeBel, J. distinguished Singleton stated that, in his view, subsection 74.5(11) would apply to and rejected the overall purpose approach of the TCC the impugned transactions in Lipson and, hence, the GAAR and FCA. The majority also concluded that there was no would not apply on the basis that the GAAR is a provision abuse of either paragraph 20(1)(c) or subsection 20(3), of last resort, which can only be invoked when the Minister holding that [i]n the result, Mrs. Lipson financed the has no other recourse. Under an application of subsection purchase of income-producing property with debt, 74.5(11), neither the dividend income nor the interest whereas Mr. Lipson financed the purchase of the residence expense would have been attributed and would have with equity. To this point, the transactions were unimpeachable. remained in the hands of Mrs. Lipson. 9 Upon concluding that the GAAR applied, the majority Commentary Can Anything Be Gleaned determined that a reasonable outcome under subsection 245(2) was to disallow the interest deduction to Mr. Lipson from Lipson? and attribute it back to Mrs. Lipson, the whole while leaving Overall Purpose Struck Down the dividend income in the hands of Mr. Lipson. The main issue with the decisions of both the TCC and the FCA was that they both appeared to fall into a paradox Binnie, J. s Dissent in holding that, taken individually, the provisions relied upon by the taxpayers had operated as intended, but that, Binnie, J. would not have applied the GAAR to this case, taken as a whole, the overall purpose of the transactions because in his view none of the provisions relied on by the was abusive. taxpayers was abused. In addressing the majority s deci- In Canada Trustco, the SCC set forth that subsection sion, Binnie, J. stated the following: 245(4) requires a single, unified approach to the textual, [The majority s] concept of an abuse of s. 74.1(1) is so contextual and purposive interpretation of the specific probroad that it would include interspousal transfers of visions of the Income Tax Act that are relied upon by the assets at fair market value for bona fide economic reataxpayer in order to determine whether there was abusive sons. It offers, I think, too large a field of operation for the GAAR. The reality is that such a reduction in the total tax avoidance. 11 In its discussion of this approach to subamount of tax is the likely result of any interspousal section 245(4) of the Act, the SCC had warned against the rollover from a higher income spouse to a lower impossible question of how one can abuse the Act as a income spouse, a result that s plainly contem- whole without misusing any of its provisions. 12 plates. Though clearly divided on the disposition of the * * * appeal, the SCC appears to have unanimously rejected the In my respectful view, what LeBel, J. believes s. 74.1(1) is overall purpose approach of the TCC and the FCA. designed to prevent is actually a reasonable statement LeBel, J., for the majority, referred instead to the overall of what s. 74.1(1) seeks to permit. This case, as my col- result of the transactions, whether direct or indirect. 13 In league appears to acknowledge at para. 32, is not about essence, the SCC held that the analysis commanded by income splitting. subsection 245(4) was purely an objective one, with only * * * the objective results of the transactions being relevant. This is a helpful statement against a disguised eco- nomic substance approach, which essentially would amount to recharacterizing genuine and legally effective transactions prior to applying the GAAR. Certainly, the focus on the objective results of the transactions will yield an analysis that is more in line with the letter of subsection 245(4). [F]ar from constituting an indicia of abuse, the spousal relationship is precisely the reason Parliament permits the attribution of income or loss back to the transferor. In other words, in my respectful view, the tax conse- quence my colleague condemns is precisely the conse- quence called for by s. 74.1(1) unless the taxpayer opts out. 10 [emphasis added] Rothstein, J. s Dissent Rothstein, J., the only justice on the Supreme Court with significant tax experience, took the analysis in a different direction, implying that the Crown, the taxpayers, the justices of the lower courts, and his brethren had simply missed the point. In our view, his overall analysis is the most persuasive. Rothstein, J. pointed out that a specific anti-avoidance rule, at subsection 74.5(11), was designed No Abuse of Interest Deductibility Provisions The majority s conclusion that there was no abuse of either paragraph 20(1)(c) or subsection 20(3) is reassuring in that it reaffirms, perhaps even from a GAAR perspective, the direct-tracing approach to interest deductibility expressed in Singleton as unimpeachable. In light of this conclusion, the views of the SCC with respect to interest

4 Tax Topics 4 deductibility seem established, with the result that, in the the words but for this section in the text of section 245, words of Rothstein, J., [t]here is no reason why taxpayers as Rothstein, J. pointed out. 19 In addition, the 1988 Techmay not arrange their affairs so as to finance personal nical Notes to the GAAR specifically state that: assets out of equity and income earning assets out of The new rule applies as a provision of last resort after the debt. 14 application of the other provisions of the Act, including specific anti-avoidance measures. [emphasis added] Determining the Purpose of the Attribution Rules: The Rift The crux of the decision in Lipson as well as the discord between LeBel, J. s majority and the dissent led by Binnie, J. was the interpretation of the purpose of the rules in sections 74.1 to LeBel, J. and Binnie, J. adopted diametrically opposite views of the purpose of these provi- sions. The emotional nature of the disagreement is pal- pable: LeBel, J. accused Binnie, J. of gutting the GAAR and reading it out of the Act, and, in response, Binnie, J. thought that LeBel, J. s reproach to him was an apocalyptic ver- dict. 15 It is not particularly clear whether the majority led by LeBel, J. and the dissent led by Binnie, J. specifically disagreed with Rothstein, J. s view that the GAAR cannot apply where a specific anti-avoidance rule was provided by Par- liament to address the impugned transactions. Considering that subsection 74.5(11) requires a factual determination as to one of the main reasons for the particular transfer, Binnie, J. s dissent (and perhaps implicitly even LeBel, J. s majority) adopted the view that it was not open to the Supreme Court to make this additional factual determination (or inference) in light of the parties agreed statement of facts. Perhaps this is what was implied by Binnie, J. in the following statement: With all due respect, LeBel, J. s interpretation of the purpose of the attribution rules does not seem to be anchored in a unified textual, contextual, and purposive interpretation of sections 74.1 to It is altogether surprising that LeBel, J. s statement that the attribution rules in ss to 74.5 are anti-avoidance provisions whose pur- pose is to prevent spouses (and other related persons) from reducing tax by taking advantage of their non-arm s length status when transferring property between themselves 16 is not supported by any authority or analysis. Binnie, J. s analysis of the purpose of these provisions is much more convincing, given that subsection 74.5(11) expressly contemplates that section 74.1 might be used for the purpose of tax minimization. The Minister was not prepared even to argue as a matter of fact that one of the main reasons in the transfer or loan was to reduce the amount of tax that would, but for this subsection, be payable within the meaning of s. 74.5(11). The appellant taxpayer was not called on to meet a case under s. 74.5(11) and I do not believe we should assume a factual basis for the application of s. 74.5(11) ( one of the main reasons ) which none of the parties was prepared to support. 20 [emphasis added] It may, however, be difficult to reconcile this view in light of the fact that the taxpayers, in conceding the application of 245(3), had implicitly admitted the much greater threshold of the primary purpose of the impugned trans- actions. GAAR as a Provision of Last Resort The SCC in Lipson faced a difficult practical situation in that it had granted leave to the taxpayers appeal on the basis that the main question that would be submitted to it was the application of the GAAR. This is so because the only basis for the assessment by the CRA was the GAAR. Rothstein, J. s dissent raises the interesting question of whether the existence of a specific anti-avoidance rule, such as subsection 74.5(11), must preclude the application of the GAAR. Rothstein, J. stated: Section 74.5(11) is the Minister s remedy when the attribution rules are being used to reduce tax on income from transferred property and it applies [n]otwithstanding any other provision of this Act, including the GAAR. It is the remedy that Parliament provided in the circumstances. If it does not go far enough in some cases, it is up to the Minister to ask Parliament to change it. 17 [emphasis added] As noted by the SCC in Canada Trustco, the GAAR is a provision of last resort. 18 This is apparent from the use of Conclusion Clearly, the taxpayers in Lipson engaged in transactions that failed a smell test. There is no doubt that the TCC, the FCA, and the majority at the SCC did not like the result. Each level of court found a pragmatic 21 way of striking down the impugned transactions. While the SCC did offer some reassurance as to interest deductibility and struck down the overall purpose analysis adopted by the TCC and the FCA, it left open many questions as to the application of the GAAR, as well as raised new ones. At the end of the day, the decision in Lipson will likely be seen by many as being limited to its facts. Olivier Fournier and Michael N. Kandev, Davies Ward Phillips & Vineberg LLP. 22 Notes: 1 Lipson v. The Queen, 2009 DTC 5015, aff ing 2007 DTC 172(FCA), aff ing 2006 DTC 2687 (TCC). 2 Singleton v. The Queen, 2001 DTC 5533; Singleton was a pre-gaar deci- sion.

5 5 Tax Topics 3 Section 245 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act ). 3. When will this proposed measure apply? Unless otherwise indicated, all section references are to the Act. 4 Canada Trustco Mortgage Co. v. The Queen, 2005 DTC This proposed measure will apply to qualifying reve- 5 Mathew v. The Queen, 2005 DTC 5538; sometimes referred to as Kaulius. nues received in 2008 and subsequent taxation years. As 6 As Justice Bastarache was retiring, neither he nor Chief Justice McLachlin with the existing rules, these revenues will generally be took part in the case. taxed on the earlier of the following two dates: 7 Lipson (TCC), supra note 1, at para. 31 and 32. (1) the date the funds are distributed to the athlete; 8 Ibid. at para Ibid. at para. 41. (2) eight years after the creation of the trust or the 10 Ibid. at para. 76, 80, and 81. last year in which the athlete was eligible to 11 Canada Trustco, supra note 4, at para. 43. compete as a Canadian national team member 12 Ibid. at para. 39. in an international sporting event, whichever 13 Lipson (SCC), supra note 1, at para. 34 and 37. comes first. 14 Ibid. at para Ibid. at para Ibid. at para. 96. Eligible income earned in 2008 that is contributed to a qualifying arrangement before March 3, 2009, will be 17 Ibid. at para deemed to be income of the amateur athlete trust for 18 Canada Trustco, supra note 4, at para and not the athlete s income for 2008 provided the 19 Lipson (SCC), supra note 1, at para. 106 and 107. athlete elects to do so by the filing due date of the athlete s 2008 tax return (generally April 30, 2009). 20 Ibid. at para See R. Sullivan, Statutory Interpretation in the Supreme Court of 4. What are qualifying revenues? Canada, ( ) 30 Ottawa Law R. 175, regarding the pragmatic approach to statutory interpretation. Qualifying revenues include income for the year 22 Any errors or omissions are, of course, the responsibility of the authors. from endorsements, prizes, and other remuneration related to the individual s athletic endeavors and must be in respect of the individual s participation in international sporting events. CRA Q&A for Amateur Athletic Trusts On December 29, 2008, the Department of Finance released draft legislation to amend the provisions relating to amateur athletic trusts. See TAX TOPICS No Reproduced below is a series of questions and answers concerning these proposals released by the CRA on January 14, What is a qualifying arrangement? A qualifying arrangement is an account (a) with an institution that is eligible to issue Tax Free Savings Accounts (TFSA) generally financial institutions, credit unions and insurance compa- nies; 1. How are amateur athletes currently taxed? (b) that provides that only qualifying revenues can be deposited in the account; Under the existing income tax rules, amateur athletes can defer paying tax on funds that are required, (c) that provides that a third party is a mandatory under the rules of the relevant international sport federation, signatory on any payment from the account; and to be held by a qualifying organization to preserve the athlete s eligibility to compete at the amateur level. (d) that is not an RRSP or TFSA. An athlete is generally taxed on those revenues only when they are distributed to the athlete. 6. I am a qualifying athlete. How can I elect to have my 2008 eligible income that I contributed to a qualifying 2. What changes were announced by the Department of account before March 3, 2009, considered income in Finance. my amateur athlete trust in 2009 and not included in my taxable income for 2008? Under the Department of Finance proposal, the Income Tax Act will be amended to extend the rules so You can elect by including with your 2008 tax return that a broader category of amateur athletes may benefit a signed letter stating that you want to elect to take from the tax deferral. The new rules will apply to an advantage of this tax measure and including your name, amateur athlete who is, in a taxation year, a member of a Social Insurance Number, and the amount of the 2008 registered Canadian amateur athletic association and eli- eligible income that has been contributed to an eligible gible to compete in international sporting events as a account. Do not include the eligible amount on your Canadian national team member tax return.

6 Tax Topics 6 7. My international sports federation currently requires T2SCH515, Ontario Capital Tax on Other Than Financial that the funds I earn as an athlete be held by a qualifying Institutions (2009 and later tax years) organization to preserve my eligibility to compete at the amateur level. How will this legislation affect me? T2SCH516, Capital Deduction Election of Associated Group for the Allocation of Net Deduction (2009 and The proposals will not affect amateur athletes later tax years) whose international sports federation requires the funds to be held by a qualifying organization to preserve their T2SCH517, Calculation of Ontario Capital Tax Investment eligibility to compete at the amateur level. Allowance for Financial Institutions (2009 and later tax years) * * * T2SCH524, Ontario Specialty Types (2009 and later tax years) Revised Guides In this week s print report, the following revised guides have been reproduced in the Guides tab division in Volume 5: RC4227, Working Income Tax Benefit (Rev. 08) RC4466, Tax-Free Savings Account Information Sheet Revised Forms In this week s print report, the following revised forms have been reproduced in the Forms tab division in Volume 7: T2SCH504, Ontario Resource Tax Credit and Ontario Additional Tax re Crown Royalties (2009 and later tax years) T2SCH506, Ontario Transitional Tax Debits and Credits T2SCH507, Ontario Transitional Tax Debits and Credits Calculation (2009 and later tax years) T2SCH508, Ontario Research and Development Tax Credit T2SCH546, Corporations Information Act Annual Return for Ontario Corporations T2SCH548, Corporations Information Act Annual Return for Foreign Business Corporations T2SCH550, Ontario Co-operative Education Tax Credit T2SCH552, Ontario Apprenticeship Training Tax Credit T2SCH554, Ontario Computer Animation and Special Effects Tax Credit (2009 and later tax years) T2SCH556, Ontario Film and Television Tax Credit (2009 and later tax years) T2SCH558, Ontario Production Services Tax Credit T2SCH560, Ontario Interactive Digital Media Tax Credit T2SCH562, Ontario Sound Recording Tax Credit T2SCH564, Ontario Book Publishing Tax Credit T2SCH566, Ontario Innovation Tax Credit T2SCH568, Ontario Business Research Institute Tax Credit T2SCH569, Ontario Business Research Institute Tax Credit Contract Information T2222, Northern Residents Deductions (Rev. 08) T2SCH510, Ontario Corporate Minimum Tax (2009 and later tax years) T2SCH511, Ontario Corporate Minimum Tax Total Assets and Revenue for Associated Corporations (2009 and later tax years) T2SCH512, Ontario Special Additional Tax on Life Insurance Corporations (SAT) (2009 and later tax years) Commentary Revisions With this week s print report, commentary was revised for sections and 197. Recent Cases T2SCH513, Agreement Among Related Life Insurance Corporations (Ontario) (2009 and later tax years) Note that the paragraph references following the T2SCH514, Ontario Capital Tax on Financial Institutions case digests below are to paragraphs in the New (2009 and later tax years) Matters division in Volume 7. The full text of each

7 7 Tax Topics case is reproduced in the publisher s loose leaf DOMINION TAX CASES. those years (the Payments ). The taxpayer appealed to the Tax Court of Canada. The taxpayer s appeal was dismissed. The Payments Taxpayer entitled to deduct amount spent were not made under a court order or written agreement to replace deck on rental property in effect during 2002 to 2005, and hence, were not deductible unless s. 60.1(3) applied. Subsection 60.1(3) was inap- The taxpayer spent $8, to replace a deck on a plicable, since the portion of Article 2 that had been rental residential property. In assessing the taxpayer for deleted (in which the parties admitted the payment by the 2004, the Minister disallowed the deduction of this taxpayer, and the receipt by S, of spousal support pay- $8, as a current expense. The taxpayer appealed to ments made prior to 2006) was the one required by the Tax Court of Canada. s. 60.1(3). Also, the taxpayer was not entitled to the married status tax credit claimed in the alternative for 2002 to 2005 The taxpayer s appeal was allowed. The taxpayer was since he was living separate and apart from S during those merely replacing a 20-year-old deck by restoring it to its years. The Minister s assessment was affirmed accordingly. original condition with some changes. The $8, was therefore a deductible expense rather than a capital outlay 46,580, Witzke, 2009 DTC 1003 as the Minister had contended. 46,578, Lewin, 2009 DTC 1001 Cashed disability cheques delivered by taxpayer to son did not render her liable for son s tax debts During 2005 and 2006, when her son, S, was ill and unable to work, the taxpayer cashed seven $1,500 disability cheques endorsed by him (the Cheques ), and brought the cash to him at home. Because S owed tax at this time, the Minister assessed the taxpayer vicariously under s. 160 of the Act on the ground that, upon a strict interpretation of s. 160, a transfer of valuable property to the taxpayer took place when S endorsed the cheques and gave them to the taxpayer to be cashed. The taxpayer appealed to the Tax Court of Canada. The taxpayer s appeal was allowed. In cashing the Cheques and delivering the cash to S, the taxpayer did not contribute in any way to S failing to use the Cheques to pay any tax owing. Also, there was consideration within the meaning of s. 160 for all amounts that passed briefly through the taxpayer s hands when she cashed the Cheques and delivered the proceeds to S. The Minister s assessment was vacated accordingly. 46,579, Gambino, 2009 DTC 1002 Taxpayer liable for unreported income Gross negligence penalties set aside The taxpayer s sole source of income was a drywalling business operated as a sole proprietorship. She used one bank account for both business and personal matters. In reassessing the taxpayer for 2000 and 2001, the Minister assumed that she had understated her business income and overstated her business expenses. Penalties for gross negligence were also imposed. On the taxpayer s appeal to the Tax Court of Canada, concessions by both parties were made and the remaining issues were: (a) whether the tax- payer s gross income for 2000 was $100, or $97,798,10; (b) whether the taxpayer s gross income for 2001 was $98, or $88,297.75; and (c) whether the penalties were justified. The taxpayer s appeal was allowed in part. The taxpayer failed to demolish the assumptions underlying the Minister s reassessments. The evidence indicated that her gross income for 2000 was $100,408.68, but for 2001 it was $94, The penalties for gross negligence were not justified, since the taxpayer, who was unsophisticated, did not deliberately set out to conceal her income. The Min- ister was ordered to reassess accordingly. 46,582, Agregan, 2009 DTC 1005 Taxpayer not entitled to deduction or married status tax credit for payments made to former spouse Taxpayers employment benefits for board and lodging reduced for loss of quiet enjoyment and privacy From 2002 to 2005, the taxpayer and his former The taxpayers were faculty and staff members at a prispouse, S, were living separate and apart. On January 16, vate boarding school. They resided on campus in accom- 2006, the taxpayer and S signed an agreement from which modations provided by the school to enable them to a portion of Article 2 (that had appeared in an earlier draft remain on the school premises in order to fulfill their of that agreement) had been omitted. In assessing the tax- employment duties. All taxpayers, with the exception of payer for 2002 to 2005, the Minister disallowed the deduc- one, included the fair market value ( FMV ) of their accomtion of spousal support payments made by him to S during modations in computing their employment incomes

8 Tax Topics 8 were therefore taxable as business income. The assess- ments were affirmed. under the Act for 1997, and were subsequently reassessed by the Minister on the basis that they had understated their reported benefits. The taxpayers appealed to the Tax Court of Canada. The issues raised concerned the FMV of the 46,584, Richer, 2009 DTC 1007 taxpayers benefits and the discounts, if any, attributable to them for the loss of quiet enjoyment and privacy by reason of the location of the residences, and, in some of the cases, for any ancillary advantage derived by the employer. Taxpayer liable in part for spouse s tax debt following transfer to her of their The taxpayers appeals were allowed in part. The tax- payers FMV valuations were accepted in the main with specific discounts applied for the loss of enjoyment and privacy based on the designation of residence categories. There was no reduction to the taxable benefits due to the employer deriving an ancillary advantage. The assessments were referred back to the Minister for reconsideration and reassessment. principal residence The taxpayer s spouse transferred his interest in a property (which included the couple s principal residence) to the taxpayer in order to avoid creditor claims. After the transfer, a charge in favour of the taxpayer s mother-in-law was registered on the property as collateral security for a promissory note, obligating the taxpayer to pay to her 46,583, Schutz et al., 2009 DTC 1006 mother-in-law the value of a contribution she had made towards the property prior to the transfer. The Minister reassessed the taxpayer under s. 160(1) of the Act, holding her jointly and severally liable for her spouse s outstanding Gains on trading flow-through shares taxable as business income The taxpayer, an investment advisor employed by a securities brokerage firm, generated income by trading flow-through shares of natural resource exploration companies, and losses trading other types of securities on his own account. In filing his tax returns under the Act for 2001 to 2003, the taxpayer reported his trading income on the flow-through shares as capital gains, and his trading losses on the other securities as business losses. In reassessing the taxpayer for those tax years, the Minister recharacterized his trading gains as business income. The taxpayer appealed to the Tax Court of Canada on the basis that his primary motivation in trading the flow-through shares was to generate a tax benefit, and the returns on the shares constituted capital gains. tax debt as a result of the transfer. The taxpayer appealed to the Tax Court of Canada on the basis that her mother-in-law held a beneficial ownership interest in the property, as a result of having made a financial contribution towards it, which consequently reduced the value of her property interest. The parties settled the issue of the prop- erty s fair market value at a pre-trial conference. The remaining issues on appeal concerned whether the debt owed by the taxpayer to her mother-in-law was assumed as consideration for the transfer, and if so, the value of the consideration. The taxpayer s appeal was allowed. The transfer was effected for consideration, which constituted the taxpayer s assumption of her spouse s share of the debt owed to her mother-in-law. Based on the value of the consideration exchanged for the transfer, the taxpayer was only liable for part of her spouse s tax debts. The taxpayer s appeal was dismissed. The taxpayer held a secondary intention of generating a profit on his trades, and his returns on the sale of flow-through shares 46,587, Bourget, 2009 DTC 1010 Notice: Readers are urged to consult their professional advisors prior to acting on the basis of material in Tax Topics. Tax Topics is a registered trademark of CCH Canadian Limited. CTOP