B.C. court rectification order jeopardizes $17.6M CRA assessment

In Lau v. Canada (Attorney General) 2014 BCSC 2384, the individual taxpayer implemented a plan that involved repayment of a debt through a combination of a stock dividend, sale of shares, and assignment of notes between companies he or family members either controlled or acted as directors or officers of (the exact inter-relationships between the taxpayer and the various entities is unclear from the B.C. Supreme Court's decision).  At the end of the transactions, a debt of more than $17.6 million owed by the taxpayer to a company he was a director and officer of was repaid (again, details regarding the nature of the debt and how it arose and was reported are not provided). 

Divorce: legal fees incurred to split assets may be capitalized

In a recent decision, Kondor v. The Queen (2014 TCC 303) the taxpayer/husband spent approximately $12,000 in legal fees to a divorce lawyer in dividing property (mainly private company shares) with his former spouse. Notably, most of the fees related to delay tactics in stretching out for 3.5 years the negotiations with his former spouse.  The delay was apparently necessary because the company - DPX Capital Inc. - invested in risky securities and was highly leveraged.  Withdrawing funds (or presumably, selling shares) too quickly might negatively impact the value of the shares and the company's margin position, or so it was argued.

Paying Family Members: A Paper Trail is Worth 1000 Words

In Dimane Enterprises Ltd. v. The Queen [Amended Judgment] (TCC) 2014 TCC 334, the taxpayer (an engineer) operated a Calgary home-based consulting business with major oil and gas companies as clients.  He put his spouse and four children, aged 13 through 21 on the payroll.  The children carried out duties such as mowing the lawn, shovelling the walk, sorting mail, shredding documents, and taking out the garbage around the family home/home-office.  For their efforts, the children were paid modest wages of between $600 and $1200 per year.  In addition, the spouse and children were collectively allocated much more significant sums - up to $158,000 per year - out of an Employee Profit Sharing Plan (EPSP) established by the engineer.

Rectification: Notice to CRA may not be required

Last December, the SCC stated that parties are free as between themselves to amend or annul contracts and fix errors, subject to the rights of third parties (Quebec (Agence du Revenu) v. Services Environementaux AES inc. 2013 SCC).  This is contrary to the CRA's administrative position, which is to accept rectification orders as binding retroactively, provided advance notice and an opportunity to make submissions is given.  The Ontario Superior Court recently rejected the CRA's position on notice, and clarified when the CRA is entitled to notice of a court application that may potentially correct errors and circumvent, reduce or eliminate a tax bill.