Tax Litigation

Introduction On February 1, 2023, Minister of Justice Simon Jolin-Barrette introduced and tabled in the National Assembly Bill 8 entitled An Act to improve justice efficiency and accessibility, in particular by promoting mediation and arbitration and by simplifying civil procedure in the Court of Québec1 (hereinafter the “Bill”). The Bill makes amendments to several laws, including the Courts of Justice Act2 and the Professional Code3. We are particularly interested in those relating to the Code of Civil Procedure (“C.C.P.”),4 and more specifically to proceedings pending before the Court of Québec of which practitioners and persons subject to trial will want to take note. Proposed Amendments to the Code of Civil Procedure Most of the amendments to the C.C.P. will come into effect on June 30, 20235. We note the following, in particular: Jurisdiction of the Court  Exclusive jurisdiction granted to the Court of Québec to hear applications in which the amount claimed or the value of the subject matter of the dispute is less than $75,000,6 instead of $85,000, which is the limit in effect on the date of this bulletin. However, the Court of Québec will continue to hear applications under the $85,000 limit that were filed prior to June 30, 2023, and these will remain governed by the provisions of the C.C.P., as they read before June 30, 2023;7 Concurrent jurisdiction with that of the Superior Court granted to the Court of Québec where the amount claimed or the value of the subject matter of the dispute is equal to or exceeds $75,000 but is less than $100,000.8 Case management The Bill also introduces a special procedure for applications in civil matters brought before the Court of Québec in which the amount claimed or the value of the subject matter of the dispute is less than $100,000:9 The preparation of a case protocol will no longer be necessary, as set time limits will now apply to all recourses;10 Originating applications must not exceed five pages in length;11 Preliminary exceptions must be disclosed within 45 days of filing an application;12 A defendant’s arguments must be disclosed within 95 days of filing an application;13 Settlement conferences will be held automatically after trial readiness is achieved (settlement conferences may also be replaced by pre-trial conferences);14 Cases will be set down for trial and judgment by a court clerk.15 Requests for particulars as to allegations made or to strike immaterial allegations The Court of Québec will only authorize such requests by way of exception and if warranted on serious grounds.16 Examinations The limit below which holding an oral examination on discovery is not permitted will be increased to $50,000.17 Currently, the limit is $30,000; Each party will be entitled to only a single oral examination on discovery, unless the Court decides otherwise;18 Written examinations must not exceed three pages in length.19 Expert opinion Parties must seek a joint expert opinion in cases where the amount claimed or the value of the property claimed is equal to or less than $50,000, unless the Court decides otherwise.20 Small claims With the parties’ consent, the Court may render judgment on the face of the record when the matter concerns the recovery of a claim of $15,000 or less.21 Adjustments Each of the monetary limits for the Court of Québec’s jurisdiction will be adjusted annually.22 Conclusion The proposed measures will significantly impact how lawyers will now handle and manage disputes in which the amount claimed is less than $100,000. The concurrent jurisdiction of the Court of Québec with that of the Superior Court for cases with a value equal to or exceeding $75,000 but less than $100,000 is interesting: Although the procedure for conducting proceedings in the Court of Québec has been simplified for such cases, it is likely that many cases will nonetheless be instituted in the Superior Court, as its procedural process is a little less intrusive, particularly with respect to joint expert opinions, mandatory settlement conferences and the number of examinations. The Minister of Justice is hopeful that the amendments to the Act will improve access to justice for persons subject to trial, thanks to faster and less costly justice services, among other things. While these amendments will allow for more out-of-court settlements and prevent costly trials, we believe that there is still some uncertainty as to how accessible the expedited process will be, given the current staffing shortages in courthouses. 1. An Act to improve justice efficiency and accessibility, in particular by promoting mediation and arbitration and by simplifying civil procedure in the Court of Québec, Bill 8 (Introduced — February 1, 2023), 43rd Legislature, 1st Session (Qc) (“B.”). 2. Courts of Justice Act, CQLR c. T-16. 3. Professional Code, CQLR, c. C-26. 4. Code of Civil Procedure, CQLR c. C-25.01. 5. Transitional provision: claims of $85,000 initiated in the Court of Quebec before June 30, 2023 will continue under the provisions in effect prior to the coming into force of the PL amendments (PL, s 44). 6. B., s. 3; C.C.P., art. 35. 7. B., s. 44. 8. B., s. 3; C.C.P., art. 35. 9. B., s. 8; C.C.P., art. 535.1. 10. B., s. 8; C.C.P., art. 535.2. 11. B., s. 8; C.C.P., art. 535.3. 12. B., s. 8; C.C.P., art. 535.5. 13. B., s. 8; C.C.P., art. 535.6. 14. B., s. 8; C.C.P., art. 535.12. 15. B., s. 8; C.C.P., art. 535.13. 16. B., s. 8; C.C.P., art. 535.11. 17. B., s. 7; C.C.P., art. 229. 18. B., s. 8; C.C.P., art. 535.9, para. 2. 19. B., s. 8; C.C.P., art. 535.9. 20. B., s. 8; C.C.P., art. 535.15. 21. B., s. 15; C.C.P., art. 561.1. 22. B., s. 3; C.C.P., art. 35.

The current crisis caused by the COVID-19 pandemic has already caused, and will continue to cause, significant liquidity problems for some businesses. Companies whose financial difficulties threaten their very existence will have to restructure in order to avoid bankruptcy, either by availing themselves of the protection of the Companies' Creditors Arrangement Act1 (the "CCAA") or by using the proposal mechanism of the Bankruptcy and Insolvency Act2 (the "BIA").  Tax considerations related to an arrangement or a proposal accepted by creditors  Making use of the provisions of the CCAA or the BIA entails tax considerations for the debtor corporation that directors and owner-operators need to consider. Some of these tax considerations are discussed below.  In the context of the restructuring of a debtor company, creditors may accept a partial settlement of their claim or a conversion of their claim into shares in the debtor company. If a corporation is not bankrupt within the meaning of the Bankruptcy and Insolvency Act, the settlement of a debt for an amount less than its principal will have tax consequences for the debtor corporation. For example, certain tax attributes of the debtor corporation such as the balance of loss carryforwards, the undepreciated portion of the capital cost of depreciable property or the adjusted cost base of capital assets will be reduced by the amount of the reduction in the receivable, if any.   In certain cases, if the tax attributes of the debtor corporation are insufficient to absorb the amount of debt forgiven, inclusion in the calculation of its taxable income may occur, creating a tax liability.  Several strategies can be adopted to limit undesirable consequences in the context of a restructuring under the Companies' Creditors Arrangement Act.  As mentioned, it may be possible, among other things, to convert the debt into shares of the debtor company without causing adverse consequences, if the fair market value of the shares issued upon conversion of the debt is equal to the principal of the debt.   In some cases, a debt held by a shareholder of the debtor company could be written off without consideration and without the need to issue shares.  Finally, it may be possible, in certain situations, to avoid inclusion in the income of the debtor corporation through the use of certain reserve mechanisms or through tax deductions.  Insolvency is a delicate situation for any business. Proper tax planning will allow the debtor company to maximize the effectiveness of the restructuring process offered by the CCAA.  Our taxation team can help you set up effective planning in this context.   R.S.C. 1985, c. C-36 and amendments R.S.C. 1985, c. B-3 and amendments

A recent Ministerial Order1 from the Minister of National Revenue has formally extended certain deadlines under the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”). The Order is retroactive to March 13, 2020. The extension is 6 months or until December 31, 2020, whichever is earlier. This Ministerial Order will have various implications for taxpayers and registrants, in particular in terms of limitation periods. For example, notices of reassessment may be issued until December 31, 2020, for taxpayers whose reassessment period under the ITA expired between May 20, 2020, and December 30, 2020, even in circumstances where there is no misrepresentations attributable to negligence, carelessness or wilful default in tax returns and no waivers of the regular reassessment period have been signed. As a result, the taxation years subject to the Order (in particular 2016 or 2017, depending on the taxpayer) and reporting periods would not be statute-barred in these circumstances. Reporting periods and taxation years that became statute-barred on or before May 19, 2020, are not subject to the Order. It remains to be seen how the Canada Revenue Agency (“CRA”) intends to apply the Ministerial Order. The CRA has stated that “generally, taxpayers would be informed of the details of a potential (re)assessment, including whether or not the CRA is applying an extension to a (re)assessment period under the Ministerial Order.”2 Time limits extended by 6 months The period for claiming SR&ED expenditures (Form T661), normally 12 months after the corporation’s filing due date for a return;3 The period for claiming an SR&ED investment tax credit (Form T661 and Schedule 31 or Form T2038), normally 1 year after the corporation’s filing due date for a return; The normal reassessment period for a taxation year (normally 3 years or 4 years after the issuance of a notice of assessment under the ITA) that would normally have expired after May 19, 2020, but before December 31, 2020; The normal reassessment period for a reporting period (normally 4 years following the issuance of an assessment under the ETA) that would normally have expired after May 19, 2020, but before December 31, 2020; The deadline for applying for an extension of time to file a Notice of Objection under the ITA and the ETA that would normally have expired after March 12, 2020 (normally 1 year after the expiry of the time limit for filing a Notice of Objection), as well as the time limit for appeal of the Minister’s decision dismissing such an application with the Tax Court of Canada. Our taxation team can help you manage your deadlines and your interactions with the tax authorities.   Canada Gazette, Part I, Vol. 154, No. 37: COMMISSIONS, September 12, 2020 https://www.canada.ca/en/revenue-agency/services/covid-19-ministerial-orders/time-period-other-limits-faq.html For corporations and trusts with a tax year-end from September 13, 2018, to December 31, 2018, and an SR&ED reporting deadline from March 13, 2020, to June 30, 2020, the deadline is extended by 6 months. For corporations and trusts with a tax year-end from January 1, 2019, to June 29, 2019, and an SR&ED reporting deadline from July 1, 2020, to December 29, 2020, the deadline is extended to December 31, 2020. For individuals who operated a sole proprietorship for which the tax year ended on December 31, 2018, and whose SR&ED reporting deadline was June 15, 2020, the deadline is extended to December 15, 2020.

The Tax Court of Canada (the “Court”) recently upheld the deductibility of carrying charges incurred in connection with an issuance of shares.  In so doing, the court upheld the tax benefits arising from a common financing practice. In addition, the Court reiterated the principle in tax matters according to which, save in exceptional cases, the legal relationships established by one or more taxpayers must be respected. In this case1, Laurentian Bank (the “Bank”) issued shares from its share capital to the Caisse de dépôt et placement du Québec (“CDPQ”) and the Fonds de solidarité des travailleurs du Québec (“FSTQ”) totalling $120M, through a private placement.  In addition to assuming a portion of the costs incurred by CDPQ and FSTQ in connection with this issuance of shares, the Bank agreed to pay each of the investors, as professional fees for services rendered in connection therewith, an amount corresponding to 4% of the total amount of their investment.  The Canada Revenue Agency challenged the Bank’s deduction, over 5 years, of the total amount of $4.8M paid to CDPQ and FSTQ, in particular on the grounds that no services had been rendered to the Bank by the two investors and that the expense was unreasonable. The Court ruled in favour of the Bank and allowed it to deduct the amount of $4.8M in computing its income on the basis of paragraph 20(1)(e) of the Income Tax Act, namely, in 20% increments over five fiscal years. Not only did the Court recognize the merits of the Bank’s arguments as to the fact that it had incurred an expense for services obtained from the CDPQ and the FSTQ, but the Court also confirmed that the expense was reasonable under the circumstances. In this decision, the Court recognized the favourable tax consequences for an issuer of shares arising from a common practice in the field of financing through share issuance. It also appears that the reasons for the Court’s decision could be applied to other costs incurred in the context of financing activities and thus allow entities incurring such costs to obtain a significant tax advantage.   It is therefore to the advantage of corporations issuing shares or borrowing to carefully analyze and negotiate the financing agreements they are considering in order to maximize their tax benefits. Our taxation team can assist you in setting up a share issuance that is both successful and optimal from a tax standpoint.   Banque Laurentienne du Canada c. La Reine, 2020 CCI 73