Legal newsletter for business entrepreneurs and executives, Number 22

September 16, 2014

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GST/QST Election: Get Ready for 2015
“Laying Yourself Bare” to Get the Best Insurance Coverage! Clear Communication Between the Client and the Insurance Broker: The Key to Success

GST/QST Election: Get Ready for 2015
Carolyne Corbeil and Emmanuel Sala

Generally, certain corporations or partnerships within a same group who are engaged exclusively in commercial activities, may make intra-group supplies of taxable goods or services without having to collect or remit the GST/QST otherwise applicable to such supplies. This tax relief is possible thanks to the joint election made under subsection 156(2) of the Excise Tax Act (Canada)¹ (“ETA”) and the first paragraph of section 334 of the Act Respecting the Québec Sales Tax (“QSTA”)² (hereinafter the “section 156 election”). More specifically, by making this election, the consideration for most supplies of taxable services or goods between the qualifying corporations of the same group is deemed to be nil (certain types of supplies are excluded from the section 156 election, particularly a supply by way of sale of real property). Recently, following the tabling of the 2014 federal budget, several major amendments were made to the section 156 election, including the fact that corporations benefitting or seeking to benefit from this election will henceforth be required to file it with the tax authorities on or after January 1, 2015, failing which the election will not be valid. Similarly, Quebec’s 2014-2015 budget announced that amendments would be made to the same election under the QSTA for purposes of harmonizing the QST with the GST.

According to the current provisions of the section 156 election, “specified members” of a “qualifying group”, as defined by the ETA, may file the election jointly. Generally speaking, a specified member is a corporation resident in Canada or a “Canadian partnership” which is a GST/QST registrant, and which is engaged exclusively in commercial activities. A qualifying group is a group of corporations each member of which is closely related for purposes of the ETA.³Closely related members include, in particular, two corporations one of which, either directly or indirectly, holds not less than 90% of the value and number of shares of the other corporation (i.e. parent-subsidiary), or sister corporations of which not less than 90% of the value and number of shares are held by the same person. Currently, the section 156 election is made or revoked by the members of the qualifying group on a prescribed form (i.e. Form GST25), which need not be filed with the appropriate tax authorities, but simply kept in the records of the corporations concerned in the event of an audit. The section 156 election remains in effect until it is revoked by the parties, or when one of the corporations ceases to be a member of the qualifying group. Moreover, it is important to mention that, where a new specified member joins the qualifying group, the section 156 election must be amended in order to be valid in respect of any supplies made to or by this new member. Conversely, where supplies are made to or by a corporation that has left the group (for example, following a reorganization in which the percentage of share ownership in said corporation has changed) the section 156 election automatically ceases to be effective and the GST/QST becomes applicable to the taxable supplies.

According to the proposed amendments to the relevant provisions of the ETA, in order to be effective for GST/QST reporting periods subsequent to January 1, 2015, the section 156 election, or revocation thereof, must henceforth be filed with the appropriate tax authorities before the first day on which any of the parties to the election must file its GST/QST return for the period. For example, if one member of the group has a monthly reporting period, the entire group must file their section 156 election with the tax authorities by no later than February 28, 2015, if supplies are made on January 1, 2015. However, the amendments to the ETA give some relief to corporations already having a section 156 election in effect prior to 2015 by enabling them to file the election with the appropriate tax authorities by no later than December 31, 2015 instead. It is important to note that having a valid section 156 election in your file for 2014 has no effect on your obligation to submit the section 156 election on the prescribed form to the tax authorities at some time between January 1, 2015 and December 31, 2015. Lastly, please note that the section 156 election cannot be filed prior to January 1, 2015, since it will not be recognized by the tax authorities. Consequently, where the group of corporations makes an unofficial section 156 election (i.e. where the parties act as if an election was made, without signing the prescribed form), it will henceforth only be valid if it is presented to the tax authorities in accordance with the prescribed requirements.

In conclusion, the new requirements for filing the section 156 election present an excellent opportunity for reviewing the relevance, and especially the eligibility, of such election that one has made to date. Since it is impossible to file the section 156 election in advance, it is strongly recommended that one set a reminder to do so in the new year.

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¹ ETA (R.S.C.,1985), c. E-15.
² CQLR c T-0.1.
³ We will not describe the concept of “closely related” under the ETA in detail herein, or its application to partnerships, since the complexity thereof would exceed the scope of our text. Please contact the authors should you require more information.

“Laying Yourself Bare” to Get the Best Insurance Coverage! Clear Communication Between the Client and the Insurance Broker: The Key to Success
Jonathan Lacoste-Jobin with the collaboration of Léa Pelletier-Marcotte, student-at-law

It is before the occurrence of a loss that businesses should ensure they have adequate insurance coverage which meets their needs and their specific characteristics, and which is adapted to the market in which they operate. This can save them a lot of trouble.

However, it can be difficult to find your way in the world of insurance; hence the interest in doing business with a broker whose mandate is to assess the client's needs and offer insurance coverage which best fits those needs.

Brokers have a two-tiered duty of advice toward their client.¹ On the one hand, they must personally gather the information that will enable them to offer their clients a product meeting their specific needs. On the other hand, they must adequately inform and advise their clients so that they can make informed and considered decisions.² The broker must therefore be able to describe the insurance product being offered as accurately as possible, while also clearly explaining its terms, conditions and exclusion.³

The broker [translation] "is not a mere vendor or conduit between the insured and the insurer, but an insurance professional."⁴ He must be proactive in the pre-contractual period, that is, before the insurance policy is issued, for example, by informing himself of the nature of the business and its insurance needs. He must also stay abreast of the needs of his clientele after the conclusion of the contract and make adjustments as those needs change.

However, this duty to advise is largely dependent on the nature of the mandate given to him by the client, the client's general conduct, and the information provided^5.It is therefore important for the client to act diligently in his interactions with the broker.

Since the broker recommends an insurance product based on the information provided to him, the client should accurately describe the nature of the activities and characteristics of his business. It is not up to the broker to guess the client's needs, but rather the client to communicate his expectations to the broker. While the broker's primary duty is to advise, the client's duty is to inform his broker accurately and unambiguously of what he needs⁶.

One should also keep in mind that the broker does not necessarily have the requisite knowledge to handle all the aspects of a file. For example, the appraisal of the value of the property being insured is not within the purview of the broker. The client is responsible for obtaining an accurate appraisal, preferably by a certified appraiser, so that the broker can obtain sufficient insurance coverage⁷.

We also recommend that the client pay attention to the documents provided by the broker, including the coverage summaries as well as the insurance policies, and properly understand their terms and conditions before signing them. In case of uncertainty, many problems can be avoided by asking questions and requiring clarifications⁸. It is also important to properly document your file and keep records of the various exchanges with your broker for future reference, particularly since losses often occur many months or even years after your discussions with the broker.

In summary, the basis of proper insurance coverage is clear communication to your insurance broker of the specific needs of your business and its activities. When in doubt, do not hesitate to ask questions and require any necessary clarifications. As the saying goes: too much is always better than not enough!

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¹ See the Act Respecting the Distribution of Financial Products and Services, chapter D-9.2; Code of ethics of the Chambre de la sécurité financière (D-9.2, r. 3); Regulation Respecting the Issuance and Renewal of Representatives’ Certificates (D-9.2, r. 7) and the Regulation respecting the pursuit of activities as a representative (D-9.2, r. 10).
² 125057 Canada inc. (Tricots LG ltée) c. Rondeau, 2011 QCCS 94 (C.S.).
³ Baril c. L’Industrielle Compagnie d’assurance sur la vie, [1991] R.R.A. 191 (C.A.).
⁴ Ibid.
⁵ 2164-6930 Québec Inc. c. Agence J.L. Payer Compagnie Ltée, [1996] R.R.A. 549 (C.A.).
⁶ Les marbres Waterloo Ltée c. Gérard Parizeau ltée, [1987] R.R.A. 938 (C.A.).
⁷ See, for example, Renaud c. Promutuel Dorchester, société mutuelle d’assurances générales, [2006] R.R.A. 641 (C.S.).
⁸ For example, 2751-9636 Québec Inc. c. Cie d’assurance Jevco, [2004] R.R.A. 954 (C.S.).

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Jonathan Lacoste-Jobin
Partner, Lawyer

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Uncovering the intricacies of sports infrastructure financing

Two Montréal landmarks have proudly hosted some of the city’s most memorable sporting events. The Olympic Stadium (Figure 1) and the IGA Stadium, which have been and remain quintessential in our sporting history, are in need of renovations so that sports fans can continue to “raise the roof” for years to come. Figure 1: The Olympic Stadium: A prominent feature of the Montréal skyline. These stadiums may be iconic, but the issues with their roofing systems—or lack thereof—have plagued the Montréal news for over 30 years. It is estimated that installing a retractable roof over the centre court at IGA stadium could cost $70 million, and replacing the Olympic Stadium’s roof and support ring, no less than $870 million.1 These projects may be considered priorities,2 but the skyrocketing construction and renovation costs are already causing a stir.3 And to make matters worse, the problem will not be solved definitively, as the lifespan of the new Olympic Stadium roof is estimated at 50 years.4 These projects are just the tip of the iceberg when it comes to our sports infrastructure. According to the Minister responsible for Sport, Recreation and Outdoors, Isabelle Charest, “This is a huge endeavour. A good part of the infrastructure could use some work and revamping. And in some cases, we need new infrastructure, period.”5 In other words, the needs are varied and many. Investing in charming small, local skating rinks, multi-purpose municipal sports facilities and even towering stadiums used by professional sports leagues is essential to fostering physical well-being and keeping the population healthy ... or simply entertained. Mindful of the importance of physical activity as well as voters’ appreciation for sports, the Quebec government invested $300 million in the Programme d’aide financière aux infrastructures récréatives, sportives et de plein air (PAFIRSPA, financial aid program for recreational, sporting and outdoor activity infrastructure).6 One component of this program provides financing for up to two-thirds of the cost of renovating, upgrading, building or developing sports and recreational facilities, up to a maximum amount of $20 million per project. Applicants seeking financing from the program had to submit their applications by December 5, 2023. While the PAFIRSPA may seem ambitious, the projects it covers are obviously far less expensive than modern professional sports arenas, which have become true engineering and technological marvels over the years. The cost of building Tottenham Hotspur Stadium in London in 2019, for instance, has been estimated at £1.1 billion,7 which itself is a pittance compared to the US$5.5 billion needed to build the SoFi Stadium in Los Angeles, where the football teams Rams and the Chargers have been playing since 2023.8 As in most situations, money matters when it comes to sports infrastructure. A winning financing strategy is not everything—it’s the only thing. In this first instalment of our series of articles on sports law, we will focus on sports infrastructure financing and examine what lies beneath the surface, as we begin to uncover the challenges, strategies and issues. The Rules of the Game Sports infrastructure financing lies at the crossroads of the entertainment business and the public interest, and it differs from other types of financing in a number of ways. On one hand, the public’s ever-growing appetite for sporting events over the years has spawned numerous colossal projects requiring financing packages similar to those for public or industrial infrastructure projects of the same scale. On the other, the economic benefits and social impact of projects of various sizes often warrant the use of public funds, and the involvement of local communities may be imperative in the case of facilities where utility takes precedence over profitability. In addition, a wide range of financing mechanisms can be used, depending not only on the sums involved, but also on the identity of the infrastructure owners. For the purposes of this article, we will consider financing in relation to three types of ownership: (i) wholly private, (ii) public and private, and (iii) wholly public. We will be taking a closer look at specific financing options and associated issues in our next sports law article. Wholly Private Ownership Financing This refers to infrastructure owned by a private entity and operated by a private administrator, which may or may not be the same entity. One example is the Bell Centre (Figure 3), privately owned by Groupe CH, which is in turn owned by the Molson family and other investors. Figure 3: The 2022 National Hockey League Draft was held at the Bell Centre. This type of ownership usually involves wholly private financing, with the owner injecting the funds required to carry out the desired work. According to media reports, the owner of the Bell Centre invested $100 million in 2015 to renovate it.9 This amount came from Groupe CH and its investors alone. Needless to say, with this type of ownership, any kind of financing is possible, including shareholder equity investment, the issuance of bonds to private subscribers and all forms of bank debt. Combining several of these options is not at all uncommon. In the case of debt financing in particular, making lenders feel as comfortable as possible can be a challenge, and the magnitude of this challenge will depend on the amounts involved. Just how profitable a project will be hinges on whether it can be completed at the agreed-upon cost and whether it will be a commercial success once completed. Generally speaking, using a project’s assets as collateral will not be enough to get lenders on board, and they will require other forms of security, such as shareholder guarantees, fixed-price or capped construction contracts, or the involvement of subordinated lenders. When economic spinoffs are expected to benefit the community, public authorities can also be called upon to guarantee part of the loan repayment or offer various forms of public funding, including forgivable loans, thus reducing the risk assumed by lenders. Efforts to reduce the risk incurred by lenders should, in theory, result in significantly lower financial costs, or in some cases, in obtaining the required financing. Other projects rely on government procurement. Olympique Lyonnais became the first French professional soccer club to be listed on the stock exchange in 2007, when the club’s shares were put up for sale on the Euronext market in Paris. The funds raised in this way were put towards the club’s development projects, including the financing of its new stadium, which opened in January 2016. This financing package consisted of a combination of equity (including proceeds from stock issues), bank loans, traditional bonds and mandatory convertibles.10 Other supplementary yet substantial financing arrangements, such as naming rights agreements, may be used to enhance financing packages. Under such an agreement, a company can acquire naming rights to an arena for a predetermined period, generally between 3 and 20 years, in consideration of a substantial sum of money. In 2017, Scotiabank agreed to pay $800 million over 20 years to rename the building that houses the Toronto Maple Leafs hockey club the “Scotiabank Arena.”11 In addition to renaming facilities, it is possible to sell perimeter advertising or solicit individual donors to purchase a plaque bearing their name at the entrance to a field, in rows or in the bleachers. Read our latest bulletin on this topic Promoters’ financial models are routinely enhanced by other creative revenue streams, including catering concessions, box rental agreements or preferred memberships, parking spaces, boutiques and advertising. Other sources of income include leasing agreements for various uses of the facilities. Some manufacturers in the sports field construction industry even offer financing packages whereby the purchase and installation can be paid for in monthly, quarterly or annual installments, thus reducing the amount of debt or investment required. Signing the relevant contracts before building or renovating the facilities improves the financing package for the project and increases its chances of success. Public ownership financing Ownership of infrastructure by a public entity, regardless of whether it is operated by a private entity or not, can have a significant bearing on the options available and the type of financing selected. Public and private ownership involves an owner from the public sector and a private administrator. The Videotron Centre in Québec City (Figure 4), home of the Québec Remparts hockey club of the Quebec Maritimes Junior Hockey League, is an example of this type of ownership. It is owned by Québec City and managed by Quebecor Media. Figure 4: The Videotron Centre in Québec City, inaugurated on September 8, 2015. Generally speaking, infrastructure owned and operated in this way is financed jointly using public and private funds. Although the Videotron Centre has not required major renovation work so far, the initial construction of the stadium is an example of public-private financing. It cost a total of $370 million to build. A sum of $185 million came from the Quebec government, and $15.4 million from J’ai ma place, an organization set up specifically to finance the Videotron Centre using funds from the Quebec population. Québec City provided the remaining $169.6 million, which included the $33 million that Quebecor Media paid in 2015 to acquire naming rights (which was transferred to its subsidiary Videotron for an undisclosed sum), $50 million in cash and $86.3 million in the form of a bank loan. Public ownership means that the sports infrastructure is owned and administered by one or more public entities. In such cases, standard-sized infrastructure can generally be financed entirely using public funds. This is where Quebec’s PAFIRSPA, mentioned above, comes in. For more costly projects, including a public entity in the ownership group—be it public and private or wholly public—opens the door to a range of options. In the United States, this includes using municipal taxes or issuing municipal bonds to finance infrastructure. Construction of the Barclays Center in Brooklyn, New York, which began in 2010 and was completed in 2012, was financed in part by tax-exempt municipal bonds issued by the Brooklyn Arena Local Development Corporation, an entity formed by an agency of the State of New York for financing purposes.12 Nearly 500 million U.S. dollars were raised, covering a significant portion of the arena’s construction costs, as part of a larger redevelopment effort known as Pacific Park Brooklyn (formerly Atlantic Yards). The Barclays Center is now home to the Brooklyn Nets basketball team of the National Basketball Association. We will conclude our overview with a few words on public-private partnerships (PPPs), which are particularly well suited to high-cost infrastructure projects. Under a PPP, the government or another public entity partners with a private company to develop a public infrastructure or services project. PPPs combine the resources, expertise and capabilities of the public and private sectors to deliver projects that benefit the community. PPPs take many different forms and can cover a wide range of activities, from project design and construction to operation and, in some cases, financing. In the design-build-finance (DBF) model, for example, the PPP includes the design, construction and financing of the infrastructure. Bidders participating in the call for proposals must include a project financing package in their proposal. The private company ultimately selected for the project will be responsible for both the design and construction, as well as the initial or ongoing financing of the project. Bidders must therefore negotiate with financial institutions before being awarded the construction contract in order to include a financing package in their proposal. These financial institutions will then closely monitor how the loaned funds are used and how the project is managed. The private company selected at the end of the call for proposals must therefore make undertakings both to the public authority and to its lenders concerning deadlines, construction costs and financing costs as soon as the contract is awarded. This is why the DBF model generally allows for greater efficiency in executing projects, certainty over construction costs and better management of financial risks. One example is the Stade de France, a stadium that can accommodate 81,338 spectators in a football or rugby configuration and was built for the 1998 FIFA World Cup in France. It is located in Saint-Denis, Seine-Saint-Denis, and is owned by the French government, which awarded a 30-year concession contract expiring in 2025 to the Vinci-Bouygues consortium, as part of a scheme almost identical to today’s PPP schemes. Conclusion The investments required for certain multipurpose amphitheatres and other sports facilities are comparable to those for transport infrastructure, energy projects or industrial plants. This, of course, means that sports infrastructure projects can also rely on a similar set of financing packages, along with a few additional ones specific to sports, such as sponsorship advertising in all its forms. Public authorities are more likely to get involved in projects that include ownership by a public entity or have a major social impact. This opens the door to a wide range of financing packages, tailored to each project’s specific needs. Having now covered the basics, we look forward to examining some of these packages in greater detail in future articles. Zacharie Goudreault, Le toit fixe proposé pour le Stade olympique déchire les experts, link TVA Sports, Stade IGA : le toit doit être une priorité pour Montréal selon Legault, Le journal de Québec, August 13, 2023, link Philippe Teisceira-Lessard, Le cauchemar continue, La Presse, July 27, 2023, link Goudreault, op. cit. Gabriel Côté, Québec investit 300 M$ pour les infrastructures sportives, Le journal de Québec, June 19, 2023, link link link Christopher Palmeri, Rams Owner Stan Kroenke Debuts His $5.5 Billion Dream Stadium, Bloomberg, September 10, 2020, link Maxime Bergeron, 100 millions investis au Centre Bell, La Presse, October 14, 2015, link Bouclage du financement du stade des Lumières, Décideurs, August 7, 2013, link link; Pete Evans, Scotiabank pays big for arena naming rights, but did it break the bank?, CBC News, September 4, 2017, link link

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April 26, 2024

New rules will make it easier to transfer family businesses

The 2023 Federal Budget (the “Budget”), tabled on March 28, 2023, proposes amendments to certain provisions of the Income Tax Act (ITA) that would make “genuine” intergenerational business transfers no longer subject to the anti-avoidance rules of section 84.1 and allow the transferor to benefit from their capital gains exemption. To do so, the Budget establishes new general conditions that the parties must meet, as well as specific conditions that apply to “immediate” transfers, or those made over a period of no more than 36 months, and “gradual” transfers, or those that take five to ten years to complete. The general conditions that the parties must meet when disposing of a company may be summarized as follows: The vendor must be an individual other than a trust. Immediately prior to the transfer, the vendor, alone or with their spouse, must control the currently operating company. At the time of the transfer, the purchasing company must be controlled by one or more of the vendor’s children, who must be at least 18 years of age. The notion of “child” also includes stepchildren, grandchildren and nieces and nephews. The shares of the company being transferred must be qualified small business corporation (QSBC) shares or shares of the capital stock of a family-farm or family-fishing corporation (QFFP). The specific conditions relate to the transfer of control, economic interests and management of the company, and vary from case to case. FOR AN IMMEDIATE TRANSFER (36-MONTH TEST) In the case of immediate transfers, de jure control (being the holding of the majority of shares having voting rights), and de facto control (which includes the economic influence making effective control of the company likely), must be transferred at the time of sale. Voting and participating shares not transferred to the purchasing company at the time of sale must be transferred within the following 36 months, such that after this period, the transferor may hold only preferred shares, that is, non-voting or non-participating shares for an indefinite period (vs 10 years in the case of a gradual transfer). Also, the child, or at least one member of the group of children, must participate in the family business on a regular, significant and continuous basis for a minimum period of at least 36 months after the transfer is made. Lastly, the transferor must take reasonable steps to transfer the business’s administration and know-how and completely cease to manage the business before the 36th month after the transfer was made. FOR A GRADUAL TRANSFER (FIVE–TO–TEN–YEAR TEST) If the transfer is gradual, only de jure control must be transferred at the time of disposition. The balance of the voting and participating shares not transferred at the time of disposition must be transferred within 36 months of the first transfer. However, under the rules respecting gradual transfers, the transferor will only be bound to transfer de facto control of the business within 10 years of the initial transfer. In the case of a transfer of economic interests, the vendor is expected to significantly reduce the value of the equity and advance they have invested in the business within 10 years of the initial sale. The same requirement for a child’s active participation in the company and transfer of the management of the business apply, but this time for a period of 60 months after acquisition. PREVIOUS RULES (Bill C-208) The provisions of the 2023 Federal Budget have the effect of setting aside certain requirements of Bill C-208 applicable to the realization of a capital gain. Under Bill C-208, for the transferor to benefit from their capital gains exemption, the operating company and the purchasing company could not be amalgamated within 60 months of the sale. The bill also required that an independent assessment of the fair market value of the company’s shares be filed with the Canada Revenue Agency, along with an affidavit signed by the vendor. However, as of January 1, 2024, these criteria are no longer applicable. An assessment will no longer be required, although under section 69 of the ITA, the transfer will still have to be made at fair market value. The 2023 budget (reinforced by the 2024 Federal Budget) also introduces new rules for the alternative minimum tax, a temporary tax that the transferor in an intergenerational business transfer often has to pay. To avoid having this temporary tax becoming permanent, it’s important to understand the subtleties of these new rules. Our team of tax professionals will be happy to help you and answer any questions you may have about these new legislative changes.

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