May 2016 Newsletter

Foreign rectification order not legally binding for canadian income tax purposes

In certain cases, taxpayers can apply to a provincial superior court for a rectification order in respect of their transactions. If granted, the order will retroactively change the contracts or transactions to reflect the parties’ intention if the relevant documents did not accurately reflect that intention. Rectification orders are normally sought where the parties intended a transaction to occur in a more tax-beneficial manner than that provided under the documentation that was actually signed.

Where the rectification order is granted by a Canadian court of proper jurisdiction, the CRA is obligated to abide by its terms and accept the income tax treatment that applies to the rectified transaction.

In the recent Canadian Forest Navigation case, the taxpayer’s foreign affiliate corporations in Barbados and Cyprus obtained rectification from courts in those countries, effectively recharac-terizing dividends paid to the taxpayer as loans. That recharacterization, if valid, would have been beneficial for Canadian income tax purposes. The CRA did not accept the effect of the foreign rectification orders. The taxpayer and the CRA then brought a motion in the Tax Court of Canada, to rule on whether the rectification orders were legally binding on the CRA.

The Tax Court determined that the CRA was not legally bound by the foreign rectification orders. For the order to be legally binding, the orders would have to be affirmed by the Canadian provincial superior court.

However, the Court held that, even without such affirmation, it was open to the taxpayer to present the foreign orders as factual evidence in the tax appeal regarding the characterization of the payments from the foreign affiliates. The court hearing the tax appeal could then determine how much weight to give to the orders.

Legal costs for payer of child support not deductible

Generally, the recipient of child support is allowed to deduct legal fees incurred in contesting or varying the support. The rationale behind the deduction is that the legal fees are incurred to protect the right to receive the child support, which is income from property, and legal fees to preserve such a right to income are normally deductible.

In the recent Grenon case, the taxpayer attempted to deduct legal fees incurred in contesting the amount of child support he was obligated to pay. He argued that, since the recipient of child support can normally deduct legal fees, it only made sense that the payer of child support should be entitled to deduct his legal fees as well. His position included a technical tax argument as well an argument under the Charter of Rights and Freedom.

Both the Tax Court of Canada and the Federal Court of Appeal dismissed the taxpayer’s appeals. The Courts held that there were no provisions under the Income Tax Act that allowed the deduction. Furthermore, the taxpayer’s Charter argument was not persuasive because the non-deduction of support did not discri-minate against a defined group of individuals.

Last modified on May 12, 2016 12:00 am
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