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GAARbage in… GAARbage out? – Even if you follow the letter of the tax law, can you pass the “smell test”?

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  • GAARbage in… GAARbage out? – Even if you do everything by the letter of the tax law, can you pass the “smell test”? – A June 2018 Federal Court of Appeal ruling might make it difficult?

    By Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr – President & Founder of CGL Strategic Business & Tax Advisors.

    No, those aren’t typos. For the non-tax nerds (ie: normal people) reading this, GAAR is the General Anti-Avoidance Rule under Section 245 of the Income Tax Act. More commonly referred to as “the smell test.” In other words, even if you do everything by the letter of the law, if it looks and smells funny, the government might not agree with you and you might be reassessed.

    To the tax nerds, I will be simplifying this article but with a few legislative references to keep you happy.

    This smell test brings us to the Pomerleau v Canada (2018 CAF 129) ruling issued in French on June 29, 2018 by the Federal Court of Appeal.

    To put this in context, the transactions occurred in 2004 and 2005. We are now looking at items that are 13-14 years old, that were also common practice among many tax practitioners back then.

    Let’s take a high-level approach to see how we got here:

    The taxpayer, Pomerleau, and his family sought tax advice on how to transfer the $3 million family owned business from the parents to their children. There are many provisions that allow us to do this on a tax-deferred (not tax-free) basis.

    The advisors had developed a plan to pass on the family business on this tax-deferred basis, but also thought they had discovered a way to reduce the amount of that deferred tax as well.

    Layman Technical Background

    In tax planning with company shares we have two types of adjusted cost bases (ACB) referred to as “hard ACB” and “soft ACB”. Hard ACB is when tax was fully paid on the transfer or was acquired from someone not related to you. Soft ACB is when you have bought the shares from a related person and that person had used part of their Lifetime Capital Gains Deduction on the sale.

    Hard ACB can be planned with to eventually convert into a shareholder loan without triggering a dividend under 84.1, whereas soft ACB cannot.

    What happened?

    In 1995, the family started to reflect on the continuity of the business. Several decisions were taken. One of those decisions was that the business would be divided among the original shareholder’s four children. As a result, the business was divided as follows: the two daughters obtained part of the business, which consisted of real estate, and the two sons obtained the other part, which consisted of the construction business.

    As part of this transfer of the family business, which had been in the works for over 10 years, a series of transactions was undertaken in 2004 and 2005.

    One of the transactions was the redemption by Pomerleau’s holding company (HoldCo) of its shares. The ACB and the paid-up capital (PUC) of these shares totaled $2 million.

    If the ACB was considered hard ACB, then Pomerleau could sell the shares to a new corporation for a $2M Promissory Note, have the old corporation redeem the shares, pay the $2M to the new corporation (inter-corporate dividends from connected corporations don’t create tax) then use the $2M to pay out the promissory note.

    This is similar to what is done as a pipeline transaction for deceased persons after capital gains have been triggered on death.

    If the ACB is soft ACB, then the transactions above would actually cause a taxable dividend under 84.1 of the Income Tax Act.

    How did we get to $2M of PUC and ACB?

    In 1989 (likely under fears that the capital gains deduction may be eliminated in the next federal election) Pomerleau, his mother, and his sister, all increased their ACB in their Operating Company (OpCo) shares utilizing a provision of the Act under Section 85, that (with a lot of complexity) allows you to sell shares to a corporation in exchange for more shares. If done properly, you can do this with your own corporation and trigger capital gains on purpose in order to use your lifetime capital gains deduction under 110.6 (as was the case here).

    Some of these shares were eventually transferred to Pomerleau from his mother and sister in taxable events. As a result, the shares had both soft and hard ACB at this point.

    Fast forward 15 years.

    Those previously mentioned shares of OpCo were eventually transferred to HoldCo.

    In 2004, as the sole shareholder of HoldCo, Pomerleau wanted to split his $3M company among his children. He had $1M in soft ACB with only $15,000 of PUC (the tax-free amount you can get back) tied up in Class G Preferred Shares (Class G) and had at least $2M in value of Class A common shares with $1M in hard ACB.

    The Transactions and Application of Law

    On January 3, 2005, HoldCo repurchased the $1M of Class G shares that the taxpayer owned, this triggered a deemed dividend under 84(3) and was taxable to Pomerleau.

    When a deemed dividend occurs, the shares are considered to be sold for zero proceeds. Since there was ACB of $1M on those shares, this would be a capital loss.

    40(3.6)(a) deems the loss to be zero since Pomerleau was affiliated with HoldCo because he still owned the Class A shares.

    Since it would not be fair to pay tax on a dividend for something with ACB (meaning someone likely paid tax on it before), then the Act transfers this capital loss that has been denied to ACB of existing shares owned. In this case, the ACB then moved over to the Class A shares under 40(3.6)(b) and 53(1)(f.2).

    This increased the ACB from $1M to $2M.

    So far so good right?

    All that was left was to create a pipeline transaction, so Pomerleau transferred his Class A shares to a newly created corporation using Section 85 for new shares with $2M in ACB, PUC, and Fair Market Value.

    These shares were then repurchased and eventually paid out $2M to Pomerleau with no additional tax.

    So, how was the ACB cooked? Soft or Hard?

    According to the transactions, the ACB would be considered hard.

    Enter the Canada Revenue Agency (CRA) and the smell test (GAAR).

    In order for something to be considered abusive under the GAAR in section 245, there must be:

    1) A tax benefit

    2) An avoidance transaction, and

    3) A misuse or abuse of the Income Tax Act

    Pomerleau’s position (in sort-of-simple terms) = hard ACB and no misuse of the Act

    1) The stop-loss rules of 40(3.6) converted the cost basis from soft ACB to hard ACB.

    2) Section 85 allows for transfers to another corporation, and hard ACB can be used to create Paid Up Capital

    3) 84.1 only creates a dividend for shares that have been redeemed for more than their Paid Up Capital.

    4) Although there was a tax benefit, the motivation for the transactions was to assist in the transfer of the family business.

    5) No misuse of the Act occurred, rather, to the contrary, the Act operated as written.

    The Government’s position (in sort-of-simple terms) = GAAR (it stinks)

    1) Even though you followed the law, we don’t like it and so we think it shouldn’t be treated like this, so we’re going to apply GAAR under Section 245 because we think it smells funny.

    The Lower Court Ruling

    At the Tax Court of Canada, Justice Favreau concluded that the GAAR was applicable in this case since section 84.1 of the Act prevents taxpayers from undertaking surplus stripping transactions on a tax-free basis. In the TCC Justice’s opinion this is what Pomerleau had done in this case, because the series of transactions resulted in the avoidance of the purpose of section 84.1.

    More specifically, Justice Favreau opined that the effect of paragraph 40(3.6) of the Act permitted the taxpayer to increase the PUC of the shares in a subsequent rollover and therefore to avoid the application of section 84.1 of the Act.

    As a result, this planning had the effect of circumventing in an abusive manner the purpose of section 84.1 of the Act (i.e., to prevent surplus stripping on a tax-free basis).

    As a result, the Tax Court of Canada maintained the Minister’s initial assessment, as it determined that the GAAR applied to the series of transactions so that a taxable dividend of $994,628 had to be attributed to the taxpayer.

    The Federal Court of Appeal Decision

    In paragraph 78 of their unanimous ruling, the Federal Court of Appeal asked what is the purpose and spirit of section 84.1?

    Upon analysis, the court decided that the purpose and intent of this provision, is to prevent amounts that have not been taxed to a related person from being distributed tax-free.

    Even though the letter of the law was followed by Pomerleau, the court ruled against him in deciding that the intent and spirit of 84.1 was avoided, and so the GAAR under Section 245 applied.

    Since it was a unanimous ruling, the taxpayer is not able to appeal to the Supreme Court of Canada as a matter of “right” … so we will wait to see if Pomerleau attempts to apply for a “Leave to Appeal” and if he is granted.

    Translation: the smell test said the transactions stink like GAARbage.


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    Health

    A LUXURY SPA experience in the heart of Central Alberta

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  • Safari Spas welcomed its first guests in 2003 with a goal of creating a truly exceptional luxury experience for residents in Red Deer and Central Alberta.

    Our team visits luxury spas all over the world in an effort to continually improve what we do.  We want our guests to feel like they are on a mini vacation each and every time they visit.  Our customer surveys tell us we hit the mark on a very consistent basis!

    Come relax in our beautiful spa, where we’ve created a deluxe environment: everything from glass mosaic and Italian tiles, fireplaces, frosted glass, lighted mirrors and extra plush chairs. Safari Spa & Salon offers massages, facials, manicures, pedicures, body wraps, body polishes, aromatherapy, waxing, and hair styling for men, women and children, among other services.

    Our level of service is over the top.

    We cater to our guests at every turn. We have created an experience within Red Deer that you would expect at a resort spa. It’s all about helping you recharge your batteries, getting your body, mind and soul back into alignment.

    We have a staff of 45, including four managers who ensure your experience is always 5 star. As long term members of our team, they care for the business as if it was their own.  Janelle has been with us since we opened. Chana started as a  hair stylist  and is now an integral part of our management team. Heather and Natasha are newer to the team and are our Customer Service gurus, always taking care of every little wish and desire of our guests.

    We are very proud of our deep roots in this community and support many worthwhile organizations and events.

    Of particular note is our annual Red Deer Festival of Trees, supporting the Red Deer Regional Health Foundation.  We’ve been an active sponsor of this amazing community event since we opened in 2003.

    We offer a variety of sublime services in a luxurious environment.  Click to take a virtual tour.

    We are proud to be the only AVEDA Lifestyle Spa in the region.

    Here are some of our most popular packages:

    Safari Ultimate $355

    Shampoo and Style, 60 minute Chakra massage, 90 minute customized facial, Aveda Spa manicure and pedicure.

    Couple’s Escape $485

    This is the perfect way to spend a relaxing day together. You will each receive a one hour relaxation massage, men’s spa facial for him, customized Aveda facial for her, then enjoy a spa snack and refreshment while sitting next to each other experiencing spa pedicures in our whirlpool pedicure spa chairs with fully adjustable heated massage chairs.

    Oasis $405

    Complete luxury in a serene atmosphere. This ultimate package includes: 1 hour relaxation massage, aromatherapy body wrap, customized Aveda facial, spa manicure, and spa pedicure. Relax in our serenity area and enjoy.

    Savanna $320

    Complete treatment for the body. One hour relaxation massage, spa facial, body polish and shampoo & style.

    Safari Indulge $300

    Sixty minute customized facial, 60 minute hot stone massage, pedicure, shampoo, condition and style.

    Safari Head To Toe $245

    Get pampered from head to toe with our customized Aveda facial, spa pedicure and one hour relaxation massage.

    Rain Forest $225

    A mini sampling of the spa experience. This package includes a customized Aveda facial, spa pedicure and spa manicure with paraffin wax.

    Gentlemen’s Oasis $245

    This package is created for the special man in your life. One hour relaxation massage, men’s spa facial and a spa pedicure.

    Stress Fix Pamper Package $230

    Stress can really take its toll on your physical and spiritual health.  Try our French Lavender infused Stress Fix Massage, pedicure and manicure to help reduce everyday stress.

    Pamper Package $195

    This is for those deserving to be pampered. Included in this package is a spa pedicure, spa manicure and one hour relaxation massage.

    Browse some photos and please click here to learn more about Safari Spa and Salon.   We are located in Unit 100, 31 Clearview Market Way, Red Deer.

    Please contact us through email clearview@safarispa.com or phone 403.314-9628.

    We have really convenient hours:

    Monday – Friday 9:00am to 9:00pm, Saturday 9:00am to 5:00pm and Sunday 10:00am to 4:00pm

    We are closed on the following days:

    • New Year’s Day
    • Family Day (February)
    • Easter Sunday
    • Labour Day (September)
    • Thanksgiving Day
    • Christmas Day
    • Boxing Day

    We are open from 9:00am -3pm on Good Friday, Victoria Day (May), Canada Day (July 1) and Heritage Day (August).

    We are open from 9-5 on Christmas Eve so you can start your Christmas celebration off right.

    Getting ready to celebrate the New Year?  We have you covered from 9-5 on New Year’s Eve.

    We open at noon on Remembrance Day so that we, along with our guests,  can attend services throughout the region.

    Please visit and let us spoil you soon!


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    Branded Content

    One Eleven Grill’s New Year’s Eve party includes a stellar band, great food and NO COVER!

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  • Let’s face it.  Making decisions about New Year’s Eve is tough, but it doesn’t have to be! We can make that decision a LOT easier!

    Join us New Year’s Eve for an amazing meal and excellent entertainment as Claude Godin and the Groove Ensemble take the stage with a combination of jazz, blues, funk, latin.  It’s going to be a fantastic night.

    Claude has shared stages with many well-known musicians, including Bo Diddley, The Platters, Powder Blues Band, Jack Semple, Matt Andersen, Matt Minglewood, Kim Mitchell, Fred Eaglesmith, Ian Mitchell & the Bay City Rollers, Big Dave McLean, Amos Gareth, David Ward, Russell Broom, Donald Ray Johnson, J.W. Jones Blues Band, Elmer Ferrer, Kenny Blues ‘Boss’ Wayne, Legends of Rock N Roll, Tim Williams, just to name a few.  Seriously, this will be a total musical treat. 

    So, what do you need to do?  Simply call us at 403.347-2111 and reserve your table today.  There is no cover charge.  You can also book online, but we really want to ensure that we have your correct booking information so please make the call. It’s going to be a great night and we don’t want any surprises beyond the usual wonder that is New Year’s Eve!

    Here’s a Youtube audio track that will give you a great sense of Claude and his stellar band.

    You like to know a bit about your food? We are serious about our steak.  Watch this short video to learn about how we hand cut each and every steak we serve.

    A bit about Claude A. Godin (Saxophonist) – Biography

    A dynamic and versatile musician, Claude Godin creates mood and memories with music. Born on July 27, 1963, in Montreal and raised in the village of Robertville in New Brunswick, Mr. Godin deeply believes in sharing the gift of music. He spent much of his youth in New Brunswick and a decade in Prince Albert Saskatchewan, setting the foundation for an enduring career in the arts. He desired to see the west and later relocated to the growing suburban city of Red Deer, Alberta, Canada.

    Coming from an extremely musical family, Claude Godin was immersed in music from early childhood. Initial training began with inspiration from his father who often held jam sessions at the family home. He diligently focused on the basics and grew as a musician over the years. Focused and driven to perfect his art, Claude became well versed in Alto, Tenor and Soprano Saxophones as well as the Clarinet. He is also well versed in many other complementary instruments including: piano, guitar, bass and the drums.

    Claude invested time training with a variety of bands across the country while developing a love for what he calls ‘rootsy’ styles of music such as Jazz, Latin, Blues and Funk. He expanded his social circle to make contact with great players and producers in the local and national industry, those that encouraged his unique voice and expression.

    Claude is a promoted artist on the national scene and plays at open microphone opportunities to expose his style and the sultry pretty tones of his saxophones. He performs with several bands, some specifically designed for certain special gigs. Currently, he is excited to be forming a groove and funk band under his own name ‘Claude Godin Groove Ensemble’ and is performing with Edmonton Blues/Funk band -‘The Whisper Kings’. He has been featured as a solo artist on many albums with bands such as Greg Godovitz ‘Goddo’, produced by the Canadian rock guitarist Paul Dean of ‘Loverboy’.

    In 2011 & 2015, Claude won the prestigious ‘Saxophone Player of the Year’ from the Calgary International Blues Music Association. He has been featured in print and radio across the country and television on CBC. His enduring passion is; “To elevate the value and importance of the arts in our world, it is a gift and therefore should be treated with respect and shared freely with all humankind. If you can speak the language of music, share it with the world…it is yearning for it.”

     

     

    About One Eleven Grill:

    One Eleven Grill brings a chic, sophisticated vibe to the heart of Red Deer. Situated in the historic Old Brew Plaza building, constructed in the 1800’s, the restaurant is a combination of industrial and classic modernism. Our menu features the best market-driven, seasonal ingredients prepared in a simple yet elegant style. We use only the best Alberta Beef produced under our supervision. (read more)

    If you are looking for a restaurant with great food, great company, and an amazing atmosphere, you can find it every day or night at One Eleven Grill.


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    december, 2018

    wed21nov - 21decAll DayAlberta Sports Hall of Fame and Museum - Deck the Hall 31 Days of Giving-31 Days of giving(All Day) Event Organized By: Alberta Sports Hall of Fame and Museum

    sat15dec10:00 am- 4:00 pmParkland Garden Centre Craft and Market Sale10:00 am - 4:00 pm

    sat15dec12:00 pm- 6:00 pmArtisan Market Sale for Nuit Blanche Winter CarnivalArtisan Market12:00 pm - 6:00 pm

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    mon31dec - 1jandec 317:00 pmjan 1- 2:00 amBlack & White ballRed Deer\'s Party of the Year!7:00 pm - (january 1) 2:00 am

    mon31dec - 1jandec 317:00 pmjan 1- 1:00 amOne Eleven Grill New Year's Eve with Claude Godin and his Groove EnsembleCall 403.347-2111 to reserve for New Year7:00 pm - (january 1) 1:00 am

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