Principal Issues: Whether, in the context of applying subsection 84(2), CRA would differentiate between a corporation carrying on an active business and a corporation carrying on a business of earning income from property.
Position: In the context of applying subsection 84(2), the CRA would generally not differentiate between the two types of corporations.
Reasons: The CRA's view is that a broad meaning should be given to the word "business" as used in subsection 84(2) considering:
-the purpose and context of subsection 84(2);
-the rebuttable presumption stated by the Canadian Marconi Company v. The Queen decision;
-the definition of business in subsection 248(1);
-the positions previously taken.
CTF Prairie Tax Conference 2012 Round Table
Question 14
The "pipeline strategy" has been a popular method used by practitioners to mitigate the "double tax" that can arise as a consequence of the death of an individual holding shares in a corporation. While there has been a great deal of debate and CRA commentary on this issue, we would ask CRA to expand its commentary on the meaning of the words contained in subsection 84(2) "the winding-up, discontinuance or reorganization of its business" Of particular interest is CRA's view on what constitutes a business for purposes of subsection 84(2) and whether CRA would differentiate between a corporation carrying on an active business and a corporation carrying on a business of earning income from property.
CRA's answer to Question 14
In Canadian Marconi Company v. The Queen, 86 DTC 6526, the Supreme Court of Canada has held that "[i]t is frequently stated in both the English and Canadian case law that there is in the case of a corporate taxpayer a rebuttable presumption that income received from or generated by an activity done in pursuit of an object set out in the corporation's constating documents is income from a business."
Considering the purpose and context of subsection 84(2), the CRA's view is that a broad meaning should be given to the word "business" as used in that subsection. Using a broad interpretation for the purposes of subsection 84(2) would be in accordance with subsection 248(1) which defines "business" as including, inter alia, an undertaking of any kind.
Furthermore, subsection 84(2) does not refer to the more restrictive notion of "active business" defined in subsection 248(1). Also, the word "business" in subsection 84(2) is not qualified by the expression "carried on". The use of such expression with the word "business" could arguably justify a narrower interpretation depending on the facts and circumstances of the particular situation.
It should also be noted that the definition of "specified investment business" in subsection 125(7) contemplates that the principal purpose of a business may be to derive income from property.
Therefore, in the context of applying subsection 84(2), the CRA would generally not differentiate between a corporation carrying on an active business and a corporation carrying on a business of earning income from property when considering whether funds or property of a corporation resident in Canada have been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders, on the winding-up, discontinuance or reorganization of the corporation's business.
Moreover, the Federal Court of Canada, Trial Division has mentioned in Conrad David v. The Queen, 75 DTC 5136, that the word "on" used in the expression "on the winding-up, discontinuance or reorganization of its business" may possibly mean "as a result of" or "consequential to". Therefore, it could be argued that, even if no business exists at the time of the distribution or appropriation of funds or property, such distribution or appropriation could still occur "on" the winding-up, discontinuance or reorganization of the corporation's business if it happens "as a result of" or is "consequential to" the winding-up, discontinuance or reorganization of the business. For example and depending on the circumstances, subsection 84(2) could apply to the distribution by a corporation to its shareholders of funds or investments resulting from the prior sale of operating assets linked to a former business. Therefore, in the context of applying subsection 84(2), CRA's review of the relevant facts may not be limited to the situation existing at the time of the distribution or appropriation of funds or property by the corporation to its shareholders.
Sylvie Labarre
May 29, 2012
2012-044534