Associated, Affiliated and Related:, McMillan LLP, McMillan LLP Toronto Making Sense of the Mayhem Where do the concepts of a related person, affiliated person and associated corporation fit in and why are they important? Legislative change has been continuous and the body of relevant jurisprudence and CRA administrative statements is ever-growing Core Issue: What is the appropriate taxable unit? 2
What do we hope to accomplish? Convey historical context and perspective Outline the relevant architecture of the statute Help develop operational intuition Canvass common traps Summarize recent developments 3 Warning There are no shortcuts! It is necessary to carefully trace through the relational rules in the context of every case 4
History of Legislative Change Simple Origins Limited statutory architecture Consolidated reporting permitted for a period of time 5 History of Legislative Change Evolution of a Disaggregated System of Taxation Introduction of new tax incentives Small business deduction, ITCs Associated corporations More sophisticated tax planning Affiliated person limitations Related persons as a stand-alone concept 6
Related Persons : The Fundamentals Why is the concept required? Statutory definition 251(2) Three categories of related persons Individuals Persons and Corporations Two Corporations 7 Related Persons : The Fundamentals Category #1 Individuals Key embedded concepts blood relationship marriage common-law partnership adoption Supporting definitions are expansive, inter-twined, and extremely sensitive to the applicable facts 8
Related Persons : The Fundamentals Category #2 Persons and Corporations Tests hinge on the notion of control De jure control Buckerfield s test Determinants of control (Duha Printers) Recent case law What are the parameters of effective control? (Kruger Wayagamack) 9 Related Persons : The Fundamentals Kruger Wayagamack Inc. v The Queen (2015 TCC 90) USA Kruger Inc. SGF Rexfor Inc. Service, Marketing, and Selling Agreements 51% 49% Kruger Wayagamack Inc. 10
Related Persons : The Fundamentals Category #2 Persons and Corporations cont. Group of persons Silicon Graphics Recent case law (Birchcliff Energy) Category #3 Two Corporations Complex formulations 11 Related Persons : The Fundamentals Supplementary Interpretive / Deeming Rules Paragraph 251(5)(b) Broad ambit CRA exceptions ROFRs, Shotgun clauses Recent CRA technical interpretations Letters of Intent Recent case law (Lyrtech) 12
Related Persons : The Fundamentals Special Situations Trusts and Partnerships Traps Marital status Scope of 251(5)(b) 256.1(3)(b) deeming rule 13 Affiliated Persons : The Fundamentals Purpose and History of the Concept Primary application regulation of loss and other tax attribute utilization under the Act 14
Affiliated Persons : The Fundamentals Complex Definition 251.1(1) Captures broad range of potential taxpayers (individuals, corporations, trusts, and partnerships) Key affiliation attributes Marriage / common-law partnership, 251.1(1)(a) Vertical control, 251.1(1)(b) Common control, 251.1(1)(c) Majority economic interest, 251.1(1)(e)-(h) 15 Affiliated Persons : The Fundamentals Select Discussion Points De facto control standard 256(5.1) controlled, directly or indirectly in any manner whatever direct or indirect influence (contractual, economic or moral) that if exercised would result in control in fact Exclusion of certain arm s length business arrangements (e.g., franchise), and certain indebtedness and shared investments, 256(6) 16
Affiliated Persons : The Fundamentals De Facto Control Common Indicia of Influence Shareholdings relative to other shareholders Shareholder agreements, including the holding of a casting vote Certain commercial or contractual relationships Influence of a family member Possession of unique expertise 17 Affiliated Persons : The Fundamentals De Facto Control Recent Case Law Kruger Wayagamack Inc. (CCPC) Industry knowledge of one shareholder counter-balanced by sophistication of the other Effective control vs. day-to-day operational control Lyrtech RD Inc. (CCPC) Functional and financial dependence numerous indicia Failure to document and interact in a commercially reasonable manner 18
Affiliated Persons : The Fundamentals Specialized Rules Relating to Partnerships (251.1(1)(d)-(f)) majority-interest partner (MIP) / majority-interest group of partners (MIGP) Measures status based on share of income or terminal capital entitlement from the partnership Aggregation requirements for affiliated persons produces possibility of multiple MIPs 19 Affiliated Persons : The Fundamentals Complicated Rules Relating to Trusts (251.1(1)(g), (h)) majority-interest beneficiary (MIB) / majority-interest group of beneficiaries (MIGB) FMV determined with reference to capital or income interests Aggregation requirements for affiliated persons (produces possibility of multiple MIBs) Scope of beneficiaries ( beneficially interested per 248(25)) Special deeming rules applicable to discretionary trusts (also producing possibility of multiple MIBs) 20
Affiliated Persons : The Fundamentals Common Traps and Pitfalls Complicated partnership income allocation provisions Navigating trust-related provisions FMV assessments with respect to trust entitlements Multiple majority-interest beneficiaries Breadth of beneficially interested and contributor definitions 21 Purpose of the Concept / Primary Applications Regulating access by corporations to various deductions, credits and other incentives Sharing of SBD limit SR&ED expenditure limits and tax credits Other measures 22
Overview of section 256 Limited to corporations Levers off related person rules 3 principal categories of associated corporations Association by vertical control Association by common horizontal control Association by cross-shareholdings 23 Overview of section 256 Host of ownership look-through / attribution rules for purposes of the control analysis Expanded meaning of group Anti-avoidance rule, 256(2.1) 24
Expanded Control Rules Deemed control of corporations based on FMV of shareholdings in excess of 50%, 256(1.2)(c) Prescribed valuation assumptions, 256(1.2)(g) and 256(1.6) 25 256(1.2)(c) Recent case law: Kruger Wayagamack Valuation to be conducted in hypothetical world where shareholders cannot vote Each share in measured class is of equal value ( in the absence of other factors ) Questions concerning value of put rights embedded in shares held by minority shareholder 26
Association by Cross-Shareholdings 256(1)(c) Each corporation is controlled by a person who was related to the person who controls the other, and either person owns, in respect of each corporation, 25% of the issued shares of any class (other than a specified class ) Similar rules/principles apply to specified groups, (256(1)(d),(e)) 27 Shares of a Specified Class 256(1.1) 5 conditions: Shares are not convertible or exchangeable Shares are non-voting Dividends are fixed or a fixed percentage of FMV of property for which shares were issued (original FMV) Annual dividend rate cannot exceed prescribed interest rate at time of issue Redemption entitlement cannot exceed original FMV and any unpaid dividends 28
Complicated Ownership Look-Through / Attribution Rules Applied for purposes of control determinations in s. 256 Special attribution cases include: Holding corporations, 256(1.2)(d), based on FMV Partnerships, 256(1.2)(e), based on partner income/loss entitlement Trusts, 256(1.2)(f), based on FMV (with special rule for discretionary trusts) Operate in conjunction with one another 29 Anti-avoidance measure 256(2.1) Corporations, not otherwise associated, will be deemed to be associated with each other where it may reasonably be considered that one of the main reasons for the separate existence in a taxation year of two or more corporations is to reduce taxes otherwise payable, or to increase the amount of refundable ITCs 30
Commonly Cited 256(2.1) Indicia Degree of similarity and integration of business operations Cross-share ownership around 25% Shared staff, premises, accounting, etc. Commonality of decision makers Sharing of expenses, customers, suppliers 31 Traps and Pitfalls Specified class of shares Share valuation considerations Associated corporations and trusts Options and rights, 256(1.4) Documentation and anti-avoidance rules 32