Tax and Estate Planning Blog : Moodys LLP and SNC Law

Good news for Albertan professionals who are regulated by the Health Professions 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.

Currently, under Alberta law, only members of the above noted professions are allowed to hold shares in professional corporations. The use of a professional corporation does not shield the professional from personal responsibility, but it does allow for certain interesting tax benefits, such as a deferral of some income tax until amounts are paid out by the professional corporation. The proposed amendments will allow professionals, their spouse, common-law partners, children or a trust (all of the beneficiaries of which are children of the professional) to hold non-voting shares of the professional corporation. As such, holding corporations still cannot be shareholders of professional corporations.

This amendment will provide ample opportunity for income and capital gains splitting with spouses and children. Indeed, barring the application of the attribution rules and the “kiddie tax”, spouses and children of professionals will be able to receive dividends from the professional’s corporation.

One unfortunate limitation on the holdings of non-voting shares by a trust is that such a trust, as referred to above, can only have children of the professional as beneficiaries of the trust. This restriction will likely cause existing “family trusts” that have other family members as beneficiaries to be ineligible to hold non-voting shares of professional corporations.

The second limitation is that the trust will have to transfer its shares to the professional’s children within 90 days after the child or children attain the age of 18. This may have a “cooling” effect on those professionals who want to maintain some control over their children’s ownership of the shares after they reach 18.

This begs the question as to how a discretionary trust for the benefit of the children will achieve this objective as there may be no fixed interest for the child turning 18.

In addition to the above mentioned issues, practitioners will have to pay close attention as to how family members will be inserted as non-voting shareholders of the professional corporation. Some obvious options will be:

1.  Issuing non-voting shares at fair market value; and

2.  Performing an estate freeze on the professional’s existing shareholdings and then issuing new nominally valued non-voting shares to family members.

Whatever the solution a practitioner chooses, issues involving taxable benefits under sections 15 and 246 along with the attribution rules and “kiddie” tax (which will, for example, be applicable for dividends paid to minor children shareholders) must be closely considered.

Despite these limitations, these amendments will provide for interesting future tax planning opportunities for professionals. The amendments come into force on Proclamation.

Great news! Stay tuned….

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Why would we be writing a blog on future legislative amendments to the Quebec Taxation Act when we are Alberta tax advisors and most of our clients are in Western Canada? We believe the new Quebec proposals that are the subject of this blog may have national significance if the federal or provincial governments ever follow suit. Over the years, Quebec has been the subject of certain aggressive tax planning. It appears that Quebec has been seething over these aggressive transactions ever since and has finally come out with a heavy handed proverbial slap to the taxpayer's face.

On January 30, 2009 the Quebec Minister of Finance released a working paper entitled “Aggressive Tax Planning”. The purpose of the paper was to expose what the Quebec Minister of Finance considered to be aggressive tax planning (“ATP”) and actions being contemplated to curb ATP. Interested persons were asked to provide their comments on the Minister’s proposed actions up until April 1, 2009. The result of this consultation process was announced on October 15, 2009 with an information bulletin laying out Quebec’s initiative to combat ATP. While some of these measures are not as far reaching as feared, some of them have quite an impact on how tax planning advisory services may be provided in Quebec.

The following is a summary of some of the more important legislation to be enacted:

1. Mandatory disclosure transactions: The Quebec Minister of Finance has identified circumstantial factors relating to taxpayers and their advisors that are likely, in their opinion, to lead to ATP. These are confidential transactions and transactions with conditional remuneration. A taxpayer will have to disclose transactions in respect to which the taxpayer has entered into a confidentiality agreement. The de minimis threshold under which a transaction need not be disclosed is a transaction with a tax benefit of less than $25,000 or an impact on income of less than $100,000.

Taxpayers will also be required to disclose transactions for which the tax advisor’s remuneration is conditional on obtaining a tax benefit, is refundable if the expected tax benefit does not materialize or is paid to the advisor only after the expiry of the limitation period applicable to the taxation year the transaction was undertaken.

Disclosure will have to be made in prescribed form under separate cover, by registered mail or electronically, on the due date for filing the taxpayer’s tax return. Failure to disclose will result in a $10,000 penalty with an additional $1,000 per day as of the second day, to a maximum of $100,000. Furthermore, failure to file a disclosure will result in the suspension of the limitation period relating to the undisclosed transaction. A defense of due diligence and the voluntary disclosure program will apply to the new disclosure rules.

2. General Anti-Avoidance Rule: More worrisome than the above mandatory disclosure requirements is the penalty provisions being added to the Quebec GAAR. Where the Quebec GAAR applies to a transaction, the normal limitation period will be extended by three years. This same approach was adopted by Alberta, effective December 2, 2008. In addition, subject to a due diligence defense, a penalty of 25% of the amount of the tax benefit will apply if GAAR applies to the transaction. Furthermore, when GAAR applies, the promoter of the transaction will incur a 12.5% penalty on all amounts of consideration received by the promoter, subject to due diligence. None of the foregoing extended limitation period or penalties will apply if the transaction was disclosed in the taxpayer’s return of income in prescribed form.

The new legislation will be effective after the day of publication of the information bulletin (i.e. October 16, 2009) for transactions carried out on or after the date of publication of the information bulletin, but not for series of transactions that began before this date. As you can see from the foregoing, the Quebec Minister of Finance has decided to get “tough” on what they perceive as being abusive tax avoidance. It remains to be seen what impact these provisions will have on business in Quebec and on tax advisors. It also remains to be seen whether the Federal Government, or other provinces, will follow Quebec’s lead and legislate in the same direction. This is yet another clear sign that tax authorities and related organizations (including the OECD) are taking tougher positions against tax avoidance. Stay tuned …

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