Category Archives: Shareholder Benefit

Tax Planning Gone Wrong (and how to avoid it) – Sas Ansari

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Tax Planning Gone Wrong (and how to avoid it)

Golini v The Queen, 2016 TCC 174

What is the difference between “smoke and mirrors” and “structured transactions” in the tax world? How does a taxpayer ensure that s/he is on the correct end of the spectrum that divides that chasm?

Tax planning transactions must ensure that the wording in individual steps of the overall plan do not present the circumstances of the transaction to be other than the whole taken together.  Otherwise, the transactions are a sham and the words mere “smoke and mirrors”.   Even if most transactions are legally enforceable and presented in their legal reality, those that stretch legal reality to breaking doom a tax plan.

A sham allows the court to determine tax consequences on the basis of the real transactions, not the ‘legal’ ones hiding such a sham.

Sometimes tax planners tie themselves into a knot trying to get a no-tax outcome and, in doing so, go beyond legal reality. Ensure that all transactions part of the tax plan have a primary business purpose, reflect proper value, do what they purport to do, and are legally effective.

The case is lengthy but worth a deep read by tax planners.


[please read the case to understand the lengthy facts, – they are not fully represented here]

The taxpayers, as part of estate and shareholder planning, engaged in a number of transactions on the advice of professional advisors.  Specifically , they engaged in a Retirement Compensation Arrangement though an estate freeze and an Optimizer Plan.  The Tax Court held that the taxpayers were guided by the professionals entirely (including the use of lenders, etc), and were not aware of what the professionals did in the background (including incorporating companies for the purpose of this transaction).

The plan involved:

  • S 85 roll-over into a new holdco;
  • a bridge loan from an offshore financial institution;
  • Redemption of shares using the bridge loan amounts;
  • purchase of an annuity linked to a life insurance policy (with a death benefit);
  • Provision of a limited recourse loan connected to the preceding transactions;
  • Use of limited recourse loan to subscribe for shares, with investment used to repay bridge loan;

The ultimate result was the creation of an interest deduction for Sr and a stepped up PUC for Jr.

The CRA took the position that either:

  • The transactions were a sham such that there was a failure to report a deemed dividend or benefit; or
  • There was a shareholder benefit to Sr; or
  • The transactions created a “tax shelter”; or
  • The carrying charges are unreasonable; or
  • GAAR applies to deny the tax benefit.


The Court did not hold the transactions to be a sham, but did find that they are subject to GAAR. However, there was no need to rely on GAAR as the ITA adequately covered these transactions.

There was a shareholder benefit to Sr. under 15(1).   The shareholder received immediate access to $6M tax-free with an obligation to only pay $40K guarantee fee and $80K in interest per year for 15 years. The corporation took on the obligation to repay the loan to the shareholder by assigning the annuity and insurance proceeds it purchased.  The facts in this case did not make the corporation’s actions a contingent assignment or a collateral guarantee (Alberta (Treasury Branches) v MNRToronto Dominion Bank v MNR, [1996] 1 SCR 963).

The Court, in reaching this conclusion took a bird’s eye view (para 94), and was not distracted by the specific wording in particular provisions of the various agreements. The court recognised that it could not ignore legal realities (Shell Canada Ltd v The Queen, [1999] 3 SCR 622), but stated that the documents make it clear that the loan would not have to be repaid – in determining whether there was a benefit to the shareholder, the court felt it was not to get hung up on distinctions between conditional or absolute assignment where the wording of the contracts does not contradict the bird’s eye view conclusion (para 96).  The court stated (para 98):

I grant the documents may be interpreted as not constituting an absolute assignment, but they can as readily be interpreted to do exactly what the parties intended, and that is to relieve Paul Sr. of his burden of repayment and have Holdco repay the loan with insurance proceeds – pure and simple. So while the documents may be written to avoid the interpretation of an absolute assignment, they’re equally written to ensure Paul Sr. does not have to repay the loan and therefore has an immediate benefit from the receipt of $6,000,000 used to acquire the Ontario Inc. shares. [emphasis added]

The court looked at the economic reality of a rational person entering into the overall series of transactions and was not distracted by the possibility of the taxpayer acting irrationally and against his self-interest in determining whether or not there was a benefit and what the value of the benefit to the shareholder was.

If this conclusion was wrong, the Court stated that the transactions would be a Sham – representing the transactions as something they are not. (for the law on sham see HERE at pp 26-28).  The documents misrepresented what was in effect an absolute assignment as one that was a contingent one. The court said that these transactions  abound with “Smoke and Mirrors” (para 107).  There were transactions that stretched legal reality to breaking (para 107).  Where there is a sham, the court can disregard the presented transaction and determine tax consequences by the real transaction hidden by the sham (para 109).  The taxpayer here, because of the knowledge of the overall transaction, knew the documents were not what they pretended to be (Mariano v The Queen, 2015 TCC 244).

Real transactions are legal ones, and not ones where what appears to be legal binding is undone by “nudging and winking”.  The sham here, making the legally contingent a real absolute, is the limitation of the recourse of the lender in case of default to the annuity and insurance proceeds due to the corporation.

The Court also comments on the applicability of GAAR, and finds that the underlying policy of s 84(1) was abused to obtain a tax benefit.

In conclusion, the court dismissed the appeal because the findings would result in an increase in tax liability beyond the CRA’s reassessment (something the court cannot do), and stated:

The Act is comprehensive: it has grown to be a mammoth tome attempting to cover every possible situation that taxpayers and their planners can concoct to minimize taxes – and concoct they do. Fearing plans were outwitting the legislation, the GAAR was introduced as an overriding general anti‑avoidance provision. This was not to deny a taxpayer’s right to arrange affairs to minimize taxes, but to ensure such was done within the spirit of the law, hopefully saving the need for several hundred more pages of legislation to cover off more and more complex plans. And the plans continued, in the Fisc’s eyes skirting with legitimacy, and thus the non‑legislative concept of sham got life. In these reasons I am simply attempting to make a common sense interpretation of the legislation without resort to the more nebulous concepts of sham or spirit of the law that admittedly can tie us all in knots. Subsection 15(1) of the Act taxes a shareholder benefit. I find Paul Sr. clearly benefitted as a shareholder both with respect to the $6,000,000 loan and the capitalized interest. But I also find he is entitled to deduct the cash portion of the interest.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Surrender Payment for Stock Options – Character of Receipt

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Surrender Payment for Stock Options – Character of Receipt

Rogers Estate v The Queen, 2014 TCC 348

The Estate of the deceased received a surrender payment for surrendering options granted under an employee stock option plan.  The issue was the characterization of the surrender payment for income tax purposes.

The taxpayer reported the amount as a capital gain.  The MNR included the full amount in income as either (1) income from employment under section 5 or 6(1)(a); (ii) a shareholder benefit under subsection15(1); or (iii) profit from an adventure in the nature of trade under subsection 9(1).


The Court held that:

  • A court is not bound by an abandonment of an issue by the parties where the issue is one of law or mixed fact and law;
  • A court is not bound by an agreed statement of facts, as it must make findings of fact on all of the evidence;
  • Section 7 is a complete code on dealing with employee benefits under or because of a stock option plan, excluding the application of sections 5 and 6;
  • An employee stock option plan cannot result in a shareholder benefit under 15(1);
  • The holding and disposing of an employee stock option plan can be an adventure of concern in the nature of trade, only if the conditions for an adventure of concern in the nature of trade are met;
  • Capital gains result from the disposition of ANY property (not just capital property) that are not excluded property; and
  • In this case the surrender payment was a capital gain, as it did not fall within section 7,  or subsections 15(1), or 9(1).


The Deceased was the CEO and President of the issuing corporation, and they did not deal with each other at arm’s length.  He was issued options under the corporations employee stock option plan.  The options had later attached to them a share appreciation right that, if exercised, would result in a cash payment equal to the difference between the day’s average trading price and the exercise price of the option. The share appreciation right could be refused by the corporation, forcing the option holder to exercise the option.


The Crown abandoned its argument on the “profit from an adventure in the nature of trade” argument but the Judge, after asking for submissions as to whether he was bound by the abandonment, decided to proceed and consider the abandoned argument on the facts presented at trial.

The Taxpayer argued that the Court could not consider the section 9 argument because it was abandoned by the Crown, was incompatible with the agreed statement of facts, and was an usurpation of the MNR’s assessment power (para 11).

The Crown argued that a Court may reject a party’s abandonment of argument, relying on the decision in Labourer’s International Union of North America, Local 527, Members’ Training Trust Fund v. Canada, 92 DTC 2365, where it was said:

Parties to an action may agree on certain facts and this agreement may form the basis for a judicial admission by which the presiding judge will be bound. Parties cannot, however, make a judicial admission on a point of law, because “the Court may not be bound by error in an admission by the parties as to the law…” The court is not bound by concessions on points of law. . . .

The Court noted that there was no stated assumption of fact that the surrender payment was received qua employee.  The court highlighted the importance of not conflating the granting of the option (one event) with the payment of the surrender amount on surrender (second event), as these are distinct and capable of distinct characterization (para 14).

Additionally, the court noted that  it is not bound by the Agreed Statement of Facts, but has a duty to make factual findings on the basis of the documentary evidence and the discover read-ins. (para 15).  Lipson v Canada,  2009 SCC 1, does not apply to prevent a court from considering an issue that is plead where the matter is a mixed question of fact and law, as the court is not bound by any party’s interpretation of a point of law (para 19).

Adventure in the nature of trade

A question of mixed fact and law that considers factors – see Friesen v. Canada, [1995] 3 S.C.R. 103 – including:

  • the nature of the property
  • the length of the period of ownership
  • the frequency or number of other similar transactions by the taxpayer
  • the circumstances responsible for the sale of the property
  • the taxpayer’s motive in acquiring the asset

The FCA in Baird v. Canada, 2010 FCA 35, dealt with the issue in respect of disposition of shares of a public company, and held that losses on the exercise of employee stock options were on capital account.  An “adventure of concern in the nature of trade” is “an isolated transaction (which lacks the frequency or system of a trade) in which the taxpayer buys property with the intention of selling it at a profit and then sells it (normally at a profit, but sometimes at a loss).”  (para 56). The intention to sell the shares at a profit is not determinative: Irrigation Industries Ltd. v. Minister of National Revenue, [1962] S.C.R. 346 .

The facts of this case, in light of the above factors, lead the court to conclude that the dealing in the shares were not an adventure or concern in the nature of trade.

Employees’ Taxable Benefit

The court next considered whether the carve-out in paragraph 7(3)(a) applied to prevent a surrender payment from being a taxable benefit under section 6, even-though the non-arm’s length relationship makes the taxpayer not taxable under section 7.

Sections 7 deals with taxation of benefits derived by employees from exercise or dispositions of stock options, and it is meant to, inter alia, defer recognition of the income until the amount is received in its entirety and is quantifiable (para 28).  It is a complete scheme for taxation of employee stock options, and operates in the particular circumstances in stead of section 6 – See MNR v Chrysler Canada Ltd et al, 92 DTC 6346, where it is said that a specific provision trumps  general one.  Specifically, paragraph 7(1)(b) sets out the rules when an employee disposes of right to shares and takes cash, but applies only to employee’s who are dealing at arm’s length.

The appellant argued that since the payment is not caught by 7(1)(b), it is not  benefit to the taxpayer, and relied on the FCA decision in Canada v. Quinco Financial Inc, 2014 FCA 108, where it was held that where a provision is “precisely worded, clear and unambiguous” it must be given effect even if resulting in a windfall.  In support the appellant argued that amendments adding 7(1)(b.1) in 2010 now close this loophole, which confirms that no other provision in section 7 applies to the surrender payments (para 40).

The Crown argued that a benefit not caught  by section 7 must be included in income under section 6, relying on Dundas v MNR, 90 DTC 1529, where it was stated that an employee benefit not caught by section 7 is taxable under section 6.

The court noted that just because the payment was not captured by 7(1)(b), did not mean that 7(3)(a) was not applicable. Paragraph 7(3)(a) is applicable to taxation of benefits arising under or because of stock option agreements, and is clear and unambiguous.  It specifically states that unless section 7 captures the benefit of a non-arm’s length person, it is not  benefit taxable qua employee.

The amount was also not considered to be “other remuneration” under subsection 5(1). The Court sated that “salary” and “wages” connote periodic and fixed payments for work done or services rendered, and other remuneration must (following the specific enumerations) fall within this meaning- surrender payments do not.  In Hale v. The Queen, 90 DTC 6481 (FCTD), affirmed 92 DTC 6473 (FCA), and  Hurd v. The Queen,  [1982] 1 FC 554, it was stated that “other remuneration” are sums of money received in return for services and not a benefit of employment (para 47).

Shareholder Benefit

In Del Grande v. The Queen, 93 DTC 133, where amounts received on exercise of options were not shareholder benefits within the meaning of 15(1)(c), but rather a benefit by virtue of being an officer or employee.  The Court held that the surrender payments were not shareholder benefits under 15(1).

Capital Gains

The Court held that the surrender payment was for a disposition of property, that was not excluded property (subsection 39(1)), and resulted in a capital gain. The Court noted that a capital gain is NOT limited to gains on disposition of capital property, but gains on the disposition of ANY non-excluded property.

-Sas Ansari, JD LLM PhD (exp)

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