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Tax – Settling a Shareholder Dispute under a Unanimous Shareholders Agreement is taxed as a Restrictive Covenant – Tax Court of Canada

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  • Tax – Settling a Shareholder Dispute under a Unanimous Shareholders Agreement is taxed as a Restrictive Covenant – Tax Court of Canada

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

    From the WTF (Weird Tax Findings) department…

    Consider this, you have three shareholders with a Unanimous Shareholder Agreement (USA) that says you can’t sell shares to a third party without consent of the other shareholders. Pretty standard stuff in agreements that I’ve seen.

    Now if two of the shareholders want to sell, and one does not want to agree. What do you do?

    In the Tax Court of Canada ruling in Pangea v The Queen (2018 TCC 158) that came out July 31, 2018, it became a little murkier.

    The day-to-day common understanding of the Restrictive Covenant rules was that it was mainly for things like Non-Competition Agreements when selling a business, etc.

    In this case, a shareholder that did not want to sell received an amount from the other shareholders. Basically, they paid him to go along with the sale of the shares and not exercise their right to veto the sale.

    Now to a Canadian shareholder, such a payment could be also taxed as business income as an “inducement payment” so it really doesn’t matter the characterization. However, to a non-resident shareholder, inducement payments could be treaty exempt as business profits, but restrictive covenant payments are not. This was the case for Pangea, and why it went to court.

    The commentary provided by the Tax Court of Canada however got me to thinking how far does this reach, and is there something else that could have been done?

    You see, the agreement between the disputing shareholders does not have to be a formal agreement. The restrictive covenant rules say that it can be an “agreement”, “undertaking”, or “waiver of an advantage or right” whether legally enforceable OR NOT.

    This wording makes me concerned.

    So even if the other two shareholders, tied me up, held a gun to my head, and made me agree under duress to accept the payment and sell my shares, I would still be taxed as though I was a willing participant?

    Now, this didn’t happen (I think) in this case, however, it begs the “what if” question, and brings a whole new meaning to “shotgun clause” in Unanimous Shareholder Agreements.

    So what if the transaction would have been structured differently?

    The interpretation by the tax court, although likely correct based on the extremely broad wording of the provisions, begs the question “what if” when viewing this scenario.

    The questions below do not imply that they would have been viewed favourably by the CRA or the Tax Court Justice, but it makes me wonder how they would view it.

    What if, instead of the amount being to agree, it was an outright sale of the right from Pangea to the other shareholders to veto the sale? Would the result be different? Would it be considered a disposition of property and exempted from the restrictive covenant rules? The Tax Court Justice hinted that this didn’t occur, so he does not have to consider it, but what would the ruling be if he did?

    What if the purchaser agreed to pay more for the shares held by Pangea than the amount paid to other shareholders?

    What if the other two shareholders assigned some of the sale proceeds directly to Pangea instead of receiving it first? Would it change the outcome?

    If the two shareholders committed a criminal act (which they didn’t) in forcing Pangea to agree under duress, would the CRA and Tax Court still enforce the restrictive covenant rules? It appears that they could.

    Unfortunately, this ruling raises more questions than answers with disagreeing shareholders tied to a Unanimous Shareholder Agreement trying to solve a dispute.

    One can only pop some popcorn and stay tuned…

    Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr is the President & Founder of CGL Strategic Business & Tax Advisors; member of CPA Alberta Tax Working Group advisory panel; and recently, moderator at the 2018 Canadian Tax Foundation Prairie Provinces Tax Conference in Saskatoon, SK; and Master of Ceremonies at the 2018 Canadian Association of Farm Advisors Alberta Update


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    Local Business

    High Performance Leaders Need Rest and Play

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  • It’s’ spring!

    With the change of season, it’s a great time to reflect on how you might want to adjust using your time and energy.

    How many of us have forgotten how to REST? How many of us have forgotten how to PLAY?

    I am guilty of not being aware of play or creating the rest I needed. I spent YEARS breathing way too fast, racing from task to task and event to event.

    I somehow believed that my worth was attached to what was accomplished. Leaving something undone was actually painful.

    Rest and play are not just important, they are critical.

    Researcher Stuart Brown says that the opposite of play isn’t actually work, it’s depression. Sadly, I know this all too well too.

    What happens to us when we don’t rest and play? Creativity suffers. Relationships suffer. Effectiveness suffers. Clarity and purpose suffer. Decision making ability suffers. Our overall capacity for resilience suffers.

    Can you relate?

    There is one simple metaphor that helps me choose when REST and PLAY are important: an elastic band.

    When we work so hard, give and parent, the elastic band is stretched with each new effort. Some elastics have far more “give” and can stretch great distances, much like each persons ability to work.
    Be careful to not let pride and ego take over here…. elastics have a breaking point. So do we.

    It’s impossible to know when an elastic has reached it’s breaking point. There are clues, but sometimes they surprise us.

    What clues are in your life? Are you paying attention to the clues? Have you already learned this lesson, but need to learn it again?

    Better than stretching an elastic to breaking point, is a the use of an elastic to stretch and release. Work and rest. Play.

    Referring back to the body of research by Dr. Stuart Brown, play is time spent without purpose; time spent when we can lose track of time and self consciousness.
    For me, that usually involves being in nature or in water…. and that is where I find hope, rest, creativity and a tonne of joy.

    Where do you feel like you lose track of time and self consciousness?

    That’s your zone.

    Find it and make sure you refuel.

    The purpose of an elastic is to stretch. For that it must contract.

    Work can be immensely satisfying. For that we must find rest.

    We cannot give something that we don’t have.

    What do you find restful? Where do you lose track of time?

    What resources do you have to employ a period of rest?

    Are your holidays restful and playful for you or are they a different form of work?

    Do you have any practices in place that allow you to shut off your phone?

    Give yourself what you need if you’re feeling stretched and ask yourself what is important. Get curious. Then breathe deep and make some choices.

    There may be hard choices at first. As you get better at playing and resting, you’ll become better at it.
    You’ll thank yourself.


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    Branded Content

    Todayville Top 5 features five facts about favourite fooderie… Earls

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  • Todayville Top 5 is a sponsored segment produced by Jock Mackenzie (learn more about Jock below).   In this feature we learn (you guessed it) 5 things about some really cool aspects of Red Deer that make this city, our home.

    If our very first segment, Jock features a staple in Red Deer’s dining scene since it opened in … well let’s leave that up to Jock.  Welcome to the Todayville Top 5 with Jock Mackenzie.

    Todayville Top 5 Featuring Earls Restaurant

    1 Heritage

    Earls in Red Deer was the seventh-ever Earls in existence. Bill and Rhonda Olafson purchased the franchise and opened the current restaurant in 1984. Chef at the time, Andrew Lam, is still involved. Over the years, additions to the west and north have been added as has the covered, heated patio. The patio is unparalleled by other outdoor dining facilities for comfort and its Hawaii-like greenery. Today there are over 70 Earls restaurants across Canada and the United States. The founder, Leroy Earl “Bus” Fuller, brought A & W to Canada and is also the founder of the Fuller’s and Corkscrew restaurant chains. 

    2 Community Support

    Giving back to the community is a cornerstone of the Earls Red Deer philosophy. Those in need come first: rebuilding the youth camp at Camp Alexo, the Youth and Volunteer Centre, support for the Women’s Shelter at their annual gala, title sponsorship for the last six years at Rotary’s Black Tie Bingo, a 5-year ongoing plan to support the new Child Advocacy Centre, wine and wine service at the preview dinner for the Festival of Trees since the Festival’s inception . . . and many more.

    3 People

    With over 80 people on staff, Earls has provided employment for high school and college students over its 35 year history. The Earls philosophy, the practical skill set, and menu knowledge make up the intensive training each support staff and server undergo. Consistency is a hallmark. Numerous staff members have made life careers at Earls–and that’s one reason why you can count on a great meal every time. 

    4 Menu

    Fresh ingredients are key! The kitchen deals with “just in time” orders so that produce and proteins (delivered three times per week) come fresh to each table. The menu is becoming more and more inclusive–it meets an ever-increasing variety of dietary needs: numerous gluten free and plant-based options are available.             

    5 Interesting tidbits

    Beer? Earls brews its own Rhino beers (pale ale, lager and a seasonal beer) in Surrey, BC at Central City Brewery. There are also local products from Troubled Monk, Blindman and Snake Lake as well as a wide variety of domestic beer.

    Four Earls “Test Kitchen” chefs travel the world looking for new ingredients and dishes. A “Test Kitchen” in Vancouver will roll out a new dish and tailor it to an appropriate market in the 70 locations across North America–the furthest away is Miami. 

    Want to know more?  Click to go to https://earls.ca/locations/red-deer 

     

    Todayville Top 5 features the freelance writings of Jock Mackenzie.

    Jock is an original Red Deerian!  Educated at Lindsay Thurber and Red Deer College (with a stint at the U of A), he became an educator himself, spending 31 years with the Red Deer Public school system.

    It’s safe to say Jock knows Red Deer about as well as anyone (OK.. maybe not Michael Dawe).   As a confirmed life-long learner, Jock never tires of getting to know his surroundings even better.  That’s where the Todayville Top 5 comes in.  In each feature, Jock shares a few ingredients that go into the mix that makes this delicacy called Red Deer the place we want to call home.  As a well organized person who knows you’re busy, he’s choosing just 5 juicy tidbits to share each time.

    If you’d like to be featured by Jock Mackenzie on the Todayville Top 5, just contact us at info@todayville.com.

     


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