CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
The second category of transactions that are sub - ject to the rules is “notifiable” transactions. These transactions are specific transactions that have been identified by the CRA as requiring notification. On 1 November 2023, the CRA designated five transactions and series of transactions as “notifiable transactions”. The consequences of failing to report a notifiable transaction are largely the same as the penalties for failing to report a reportable transaction. While the application of the reportable and notifiable transaction rules still contains several uncertainties, parties who undertake commercial transactions in Canada should be aware of the possible application of the rules. In particular, any transaction that involves one or more specific steps to address tax planning should be carefully reviewed to assess the applicabil - ity of the rules. The GAAR was significantly broadened for transac - tions occurring on or after 1 January 2024 with penal - ties applying to transactions occurring after 20 June 2024. The new GAAR penalty is 25% of the amount of the increased tax as a result of the application of GAAR less any gross negligence penalties that are applicable. The amendments significantly expand the definition of “avoidance transaction” to include trans - actions where one of the main purposes of the trans - action is to obtain a tax benefit and to include a new economic substance test in the GAAR analysis. These changes could result in the GAAR being applicable to more transactions than would have been caught in the prior language. The normal reassessment period was also extended by three years for GAAR assessments unless such transactions were disclosed to the CRA. Very generally, Canadian-controlled private corpora - tions (CCPCs) are Canadian private corporations that are not controlled by one or more public corporations or non-resident persons, and are subject to certain benefits under the Income Tax Act (Canada) (ITA). Such benefits include a lower rate of tax on qualify - ing active business income, enhanced investment tax credits and the potential for shareholders to benefit from the lifetime capital gains exemption on capital gains realised on the sale of their shares.
However, CCPCs are subject to additional taxes on their investment income, which includes income from property and capital gains. Such additional taxes are generally wholly or partially refundable following the payment of taxable dividends by the CCPC. The policy behind the refundable taxes is to eliminate any tax-deferral opportunity on investment income earned in a corporation compared to circumstances where individual shareholders earn the investment income directly. For CCPCs, the combined federal and provincial corporate tax rate on investment income is therefore approximately equal to 50% (and 25% for capital gains). In comparison, non-CCPCs (such as public corporations or corporations controlled by non-res - idents of Canada) are not subject to the aforemen - tioned refundable tax on similar investment income, thus resulting in a tax rate of approximately 25% (and 12.5% for capital gains), depending on the province of residency. Planning in private equity sale transac - tions was developed to take advantage of this dis - crepancy, and was achieved by signing a purchase and sale agreement pursuant to which a non-resident or public corporation (the “Purchaser”) would acquire a right to acquire control of a CCPC (the “Target”) from Canadian sellers (the “Sellers”), thereby resulting in the loss of CCPC status and a deemed tax year- end for the Target immediately before the signing of the agreement. Prior to the closing of the sale, latent capital gains attributable to depreciable assets would be realised by the Target, thereby resulting in corpo - rate taxes (calculated based on the lower non-CCPC rate), and in an equivalent reduction of the purchase price of the Target’s shares for the Purchaser. Such gains would also generate tax attributes which, in some circumstances, could be used by the Sellers to increase the cost of their shares in the Target and thereby reduce the capital gains they might otherwise have realised on the sale of the Target shares. The result was that a significant portion of the gain realised by the Sellers would be taxed at 12.5%, rather than 25%. In addition, the transactions undertaken had the effect of increasing the future amortisable basis of the depreciable assets of the Target, to the benefit of the Purchaser.
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