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Tax Law – Patrick Westaway

Much of a detailed and technical nature has been written about the new so-called Foreign Affiliate Dumping Rules. But what, in plain English, are these rules about? Who is affected? The purpose of this blog is not to provide a detailed discussion of these rules but merely to enable the non-tax advisor to recognize when the rules might apply and so to seek the appropriate tax advice.

Simply stated, these rules target foreign corporations that finance other foreign corporations through Canadian subsidiaries. Advisors should therefore look for Canadian corporations with both: (i) a foreign controlling shareholder; and, (ii) investment (debt or equity) in a foreign affiliate.

If this description fits and no exemption is available then the primary effect of these rules is to deem, in effect, the amount of the investment to be a taxable dividend payable by the Canadian subsidiary to its foreign parent. Alternatively, that amount is applied to reduce stated capital—in tax parlance, paid-up capital—and so to reduce the amount available to be distributed as a non-taxable return of capital in future. In either case, the end result is the application of Canadian withholding tax.

While the relevant rules surrounding potential exemptions—as set out in the October 15, 2012 draft legislation—are detailed and extensive, the general tenor is to exempt investment by a Canadian subsidiary in a foreign affiliate if the transaction is not entered into primarily for tax planning purposes. Further discussion of these exemptions is beyond the scope of this blog.

The following is a typical structure targeted by the new rules. A Canadian-resident corporation (CanCo) purchases shares of a foreign affiliate from its foreign parent (ParentCo). CanCo does not pay ParentCo and, instead, the amount of the purchase price becomes an interest-bearing debt. CanCo now has an interest deduction to apply against other income. CanCo does not, however, have an offsetting income inclusion if the foreign affiliate pays only dividends and those dividends are paid out of after-tax profits. The result is a net tax benefit to CanCo. In addition, ParentCo will be exempt from Canadian withholding tax on those interest payments if ParentCo resides in the U.S. (Canada’s tax treaty with the U.S. exempts interest payments from the 5% or 10% withholding tax otherwise applicable to dividends).

In this situation, the Foreign Affiliate Dumping Rules would apply to re-characterize the amount of the purchase price for which CanCo is indebted to ParentCo as a taxable dividend. This deemed dividend would arise at the time of the share purchase. At that time, then, ParentCo would be subject to Canadian withholding tax on that amount at the (typical treaty-reduced) rate of 5%. Conversely, CanCo would be denied deductions on future interest payments since the debt obligation would not exist for Canadian tax purposes.

Taking the above example further, there may be situations in which the Canadian corporation is ultimately controlled (for example) by a German corporation which flows interest through a U.S. affiliate able to shelter that interest income from U.S. income tax. Distributions of that interest by the U.S. affiliate to the German parent would then be exempt from U.S. withholding tax pursuant to a treaty exemption similar to that arising under Canada’s treaty with the U.S.

Other examples of affected structures as described by Canada’s Department of Finance on March 29, 2012 are as follows:

  • a Canadian subsidiary acquires shares of a foreign affiliate using that subsidiary’s own funds (a mechanism is then available for the foreign parent to extract earnings from the Canadian subsidiary without attracting Canadian withholding tax otherwise applicable to dividends);
  • a Canadian subsidiary acquires treasury shares of a foreign affiliate, either by using that subsidiary’s own funds or by using borrowed funds, when that subsidiary’s foreign parent (or another foreign member of the corporate group) already owns shares in that foreign affiliate;
  • a Canadian subsidiary acquires shares of a foreign affiliate from a foreign subsidiary of the foreign parent; and
  • a Canadian subsidiary acquires shares of a foreign affiliate from an arm’s length party at the request of the foreign parent.

Notwithstanding these specific examples, Canadian advisors should be vigilant for any structures that follow the basic pattern described in the second paragraph, above. If the basic pattern fits then Canadian tax counsel must be consulted to determine whether the rules do indeed apply and, if so, whether an exemption or other solution is nevertheless available.

The Foreign Affiliate Dumping Rules received first reading in the Commons on October 18 and apply retroactively to investments made after March 28, 2012—subject to limited grandfathering for pre-existing contractual commitments.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

 

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a full service law firm based in Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such as corporate tax planning, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, personal tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax planning practice.

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Tax Law – Patrick Westaway

The tax aspects of holding, selling and licensing intellectual property may appear at first instance to be a confusion of rules further obscured by the jargon of accountants. Fortunately, the rules are few and the jargon easily explained. What follows is a brief summary of the taxation of patents, copyrights and trade-marks for the non-tax practitioner.

Capital Property, Inventory and Eligible Capital Property

In order to understand the tax treatment of patents, copyrights and trade-marks, one must first understand the distinction between capital property, inventory and eligible capital property. Briefly, a capital property generates income without being sold. Premises, tools and equipment are simple examples. Inventory, on the other hand, must be sold in order to generate income.

Eligible capital properties belong to a third class of assets which, prior to 1972, were tax “nothings”. Their cost was not deductible and the proceeds from their disposition were not taxable. Examples include goodwill and, as we shall see, copyrights and trade-marks that are not inventory. Special rules now apply to eligible capital properties as is briefly discussed below.

The Tax Treatment of Patents, Copyrights and Trade-marks

Patents

In most cases, a patent will be held on capital account and depreciated at a rate of 25% per annum on a declining balance basis. However, the taxpayer can elect to deduct the patent’s cost over the life of the property on a straight-line basis. If the patent is later sold, the amounts previously deducted as depreciation will be added back into income and be fully taxable. This is known as “recapture”. To the extent that the sale proceeds exceed the original cost amount, such excess will be treated as a capital gain, only one-half of which would be taxable. For example, assume that a patent cost $10,000.00, that $5,000.00 was deducted as depreciation and that the patent was then sold for $15,000.00. The first $5,000.00 would be tax free, given an undepreciated cost amount of $5,000.00; the second $5,000.00 would be fully taxable, given that it had previously been deducted from ordinary income; and, the third $5,000.00 would be one-half taxable as a capital gain.

Copyrights

It is difficult to generalize whether copyrights tend to be held on capital or income account. A taxpayer might well have used a copyright as an income-producing property with no initial intention of selling, in which case the copyright would likely be held on capital account. Courts are apt to find, however—particularly in the case of software developers—that a copyright is held as inventory, even though the copyright is retained by the developer and only licences are given. Careful consideration must be given as to whether a particular copyright is held on income or capital account.

If a copyright is held as inventory then its cost would, in effect, be fully deductible in the year of acquisition and the proceeds from its sale would be fully taxable. If a copyright is held on capital account then, unlike a patent, it would be an “eligible capital property” and its cost amount would be an “eligible capital expenditure”. Three-quarters of eligible capital expenditures are pooled and depreciated at a rate of 7% per annum. The remaining one-quarter would be neither deductible nor subsequently taxable on a disposition. It would remain a tax “nothing”. When the copyright is later sold, one-half of the sale proceeds would be deducted from the balance of the pool and, to the extent that a negative balance is obtained, would be included in income. Therefore, if a copyright cost $10,000.00, only 7% of $7,500.00 could be deducted each year on a declining basis. If the copyright is sold after an aggregate of $3,000.00 had been deducted, $5,000.00 (one-half of $10,000.00) would be deducted form the pool of $4,500.00 ($7,500.00 minus $3,000.00) resulting in an income inclusion for the vendor of $500.00. The tax treatment of copyrights upon disposition is more favourable than for patents since eligible capital expenditures previously deducted are only one-half taxable instead of fully taxable as recapture.

Trade-marks

In most cases, a trade-mark will be held on capital account. This simply recognizes that most trade-marks are created by the taxpayer in the course of developing goodwill rather than bought and sold as inventory. Like copyrights, however, trade-marks are not capital assets per se but are instead eligible capital properties. The above comments in relation to copyrights held on capital account apply equally to trade-marks.

Licensing versus Sale

The foregoing discussion assumes that the intellectual property is to be sold. Frequently, however, intellectual property is licensed instead. Licence fees, or “royalties”, are fully taxable as income. The one benefit they offer from a tax perspective, however, is that royalties are taxable in the year in which they are earned. In this connection, it should be noted that reserves are only available for proceeds from the disposition of capital property, not eligible capital property. Consequently, proceeds from the disposition of copyrights and trade-marks (but not patents) are taxable in the year of the sale notwithstanding that they are not receivable until future years. Instead of selling a trade-mark or a copyright for $15,000.00 and being taxable in the current year on $7,500.00, one could earn annual royalties of, say, $3,000.00 per annum for five years. Unfortunately, the cost of recharacterizing a sale as a licence is to convert gains which are only one-half taxable into fully taxable royalties.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

 

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a full service law firm based in Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such as corporate tax planning, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, personal tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax planning practice.

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Tax Law – Patrick Westaway

The Origin …

The unlimited liability company is an archaic form of corporation tracing its origins back to the United Kingdom’s Companies Act of 1862. In these early years of the Corporation, limited liability required more than mere incorporation. It required a Royal Charter. And so, ULCs were commonplace and have endured in the U.K. to this day.

In Canada, however, the ULC was lost to history and forgotten over the intervening one and a half centuries. Then, in the mid-1990s, a U.S. tax practitioner discovered a surviving ULC in the Canadian province of Nova Scotia. Having all the criteria of a corporation except one—limited liability, this last of the Canadian ULCs had important and hitherto unforeseen uses for U.S. tax practitioners.

Since 1997, U.S. taxpayers can choose not to recognize a Nova Scotia ULC as a corporation for U.S. tax purposes. A ULC can be ignored or, in tax parlance, treated as a ‘disregarded’ entity. Thus, while a ULC is a corporation like any other for Canadian tax purposes, U.S. shareholders can deduct a ULC’s losses against their own income, just as they would the losses of a partnership or sole proprietorship. Additional uses include the step-up in the cost base of capital assets when the ULC is used as an acquisition vehicle, an increase of foreign tax credits and more besides than can be usefully described here. So popular did Nova Scotia’s ULC become, and so lucrative for that province’s government, that the provinces of Alberta and British Columbia amended their corporate statutes to reintroduce the ULC in their jurisdictions as well.

The Death…

Then, after just ten years, the situation changed. In 2007, the Fifth Protocol amended the Canada-U.S. Tax Convention (1980) to deny treaty benefits to U.S. recipients of income, profits or gains paid by ULCs. What this means is that payments of dividends, rents, royalties, interest and similar passive forms of income remain subject to the full 25% tax rate under Canada’s Income Tax Act, without the usual treaty reductions and exemptions. Effective as of January 1, 2010, this change sounded the death knell of the ULC. But, is the ULC truly dead?

And the Resurrection

The Canada Revenue Agency has endorsed a seemingly superficial solution to the Fifth Protocol. According to its plain wording, the treaty amendment applies only to amounts that would be treated differently for U.S. and Canadian tax purposes by reason of the ULC being ‘fiscally transparent’ (a disregarded entity) under U.S. law. Consequently, this limitation can be avoided, first, by increasing stated capital by the amount that would otherwise be distributed as a dividend and then distributing the amount of this increase as a non-taxable return of capital.

The addition to stated capital results in a taxable dividend for Canadian tax purposes. Since this is a non-taxable event in the U.S. regardless of whether the ULC is fiscally transparent, it cannot be said that the treatment differs in the U.S. by reason of the ULC being a disregarded entity. The treaty therefore continues to apply, reducing the applicable rate from 25% to either 5% or 15%, according to whether the dividend recipient owns more or less than 10% of the ULC’s voting shares. Next, the subsequent distribution of stated capital is a non-taxable event in both jurisdictions, regardless of the disregarded nature of the ULC. Treaty protection at this stage is therefore both available and unnecessary.

One may rightly wonder why this particular treaty amendment was made at all.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

 

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a full service law firm based in Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such as corporate tax planning, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, personal tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax planning practice.

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Tax Law – Patrick Westaway

Non-residents of Canada who sell Canadian assets must determine whether such sale gives rise to a Canadian tax liability. If it does, it is important to obtain what is colloquially called a section 116 certificate, in reference to the governing provision of Canada’s Income Tax Act.

What kinds of property are taxed?

Canada claims jurisdiction to tax non-residents on sales only of “taxable Canadian property” (“TCP”). TCP generally includes Canadian real estate, assets used in a business in Canada or private company shares (or interests in a trust or partnership) that derive more that 50% of their value from Canadian real estate (or certain resource properties) at any time in the past five years. Shares of a public company or mutual fund are treated the same as private company shares if the taxpayer together with non-arm’s length persons owns 25% or more of the issued shares or trust units.

What is the relevance of Canada’s tax treaties?

TCP used to include all private company shares, which were then exempt under Canada’s tax treaties provided that they did not derive their value from Canadian real estate, as above. Section 116 certificates were required in those situations in order to invoke the treaty exemption and avoid the tax. Now that treaty-exempt categories of assets are generally excluded from the definition of TCP to begin with, the reason for obtaining a section 116 certificate is to reduce rather than avoid the amount of Canadian income tax on the sale.

What is the benefit of a section 116 certificate?

In the absence of a section 116 certificate, the purchaser is required to withhold and remit 25% of the purchase price. Since the Canada Revenue Agency (“CRA”) will have no information as to the vendor’s cost base in the assets, this 25% rate applies to the full amount of the purchase price rather than to the amount of the capital gain alone. If the vendor obtains a section 116 certificate, it will pay to the CRA tax only in the amount of 25% of the capital gain.

How do I apply for a section 116 certificate?

Form T2062 is to be filed with the tax services office—“TSO”, as distinct from the tax “centre”—for the area in which the property is located. If the vendor is not registered for Canadian income tax purposes then the vendor must so register by filing Form RC1 at the same time as the T2062. The supporting information to be filed with the T2062 varies according to the nature of the property and vendor. A checklist is attached to the T2062 at http://www.cra-arc.gc.ca/E/pbg/tf/t2062/t2062-08e.pdf. In general, the vendor must provide identification and evidence of their cost base and anticipated sale proceeds.

As a practical matter, a vendor may not have the funds with which to pay the tax until the sale proceeds are received on closing. This creates a problem since the section 116 certificate is not issued until the tax is either paid or security acceptable to the Minister of National Revenue is given therefor. This is addressed by filing the T2062 and requesting a comfort letter in advance of the section 116 certificate. The comfort letter identifies the amount of tax payable and relieves the purchaser of liability in excess of that amount. The amount withheld and remitted is then the correct 25% of the capital gain rather than 25% of the entire purchase price. The purchaser then has 30 days following the end of the month in which the sale occurs to remit the funds and the section 116 certificate is issued following payment.

Failure of the purchaser to meet these obligations causes the purchaser to become liable for the tax, in which case the purchaser must then pursue civil remedies to recover against a vendor who may then have no further assets in Canada.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

 

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a full service law firm based in Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such as corporate tax planning, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, personal tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax planning practice.

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Tax Law – Patrick Westaway

Multinational business requires multinational tax planning, for employees as well as employers. When sending employees abroad, it is generally up to the employer to minimize the employees’ foreign taxes and to ensure that all foreign taxes are paid and filings made. The following briefly describes the tax issues to be addressed when transferring or seconding employees to Canada.

What are the thresholds below which nonresident employees are not taxable in Canada?

The general rule under Canada’s typical tax treaty is that a non‐resident employee is exempt from Canadian income tax if three conditions are met:

(i) the employee is present in Canada for no more than 183 days in any 12‐month period beginning or ending in the fiscal year concerned;
(ii) the employee’s remuneration is paid by or on behalf of an employer who is not a resident of Canada; and
(iii) the employee’s remuneration is not borne by a Canadian permanent establishment of the non‐resident employer.

183 days

On a strict reading, a non‐resident employee could be subject to Canadian income tax for two taxation years because of time spent in Canada during a single 12‐month period. This situation arises because a single 12‐month period would frequently begin in one taxation year and end in another. It is, however, understood that the Canada Revenue Agency (“CRA”) would only tax a non‐resident for a single taxation year notwithstanding that the particular 12‐month period touches upon two.

This concept of a rolling 12‐month period was introduced by the Organisation for Economic Co‐operation and Development (OECD) in their Model Tax Convention with Respect to Taxes on Income and on Capital (“OECD Model Convention”). According to the OECD’s technical notes, the phrase “12‐month period beginning or ending in the fiscal year concerned” is intended to catch situations in which the employee’s time is allocated between taxation years. Canada’s treaties that include language similar to that introduced by the OECD Model Convention include those with the U.S., France and Germany. Under Canada’s treaty with the U.K., the criterion refers to “183 days in the calendar year concerned”. A U.K. resident could therefore be exempt from Canadian income tax despite being present in Canada for 364 consecutive days if the 182nd day were December 31st.

“Employer”

Canada’s treaty with the U.S. differs from its treaties with other countries, including the U.K., France and Germany, by substituting “person” for “employer” in the second criterion. Under the U.S. treaty, then, it is irrelevant whether the Canadian‐resident payor is the employer. If a non‐resident employee exercises its employment in Canada and is paid by or on behalf of a person resident in Canada then that employee will be subject to Canadian income tax.

Under Canada’s other treaties, such as those with the U.K., France and Germany, the employee is taxed in Canada if the Canadian‐resident payor is the employer. Whether a person is an “employer” is determined under the domestic laws of the source country.

Canada’s laws in this regard apply a substance over form approach. If a Canadian resident is the employer in fact then the employee will be taxable in Canada notwithstanding formal documentation to the contrary.

“Borne by”

The third criterion applies to situations in which the non‐resident employer allocates the cost of the employee’s remuneration to a Canadian branch. If the branch deducts the amount of that remuneration from its taxable Canadian income then the branch is considered to have “borne” that cost and the exemption will not be available.

De minimus exemption

Canada’s treaty with the U.S. also differs from its treaties with other countries by providing a de minimus exemption: if a non‐resident employee’s remuneration in respect of employment exercised in Canada is CDN$10,000.00 or less in a given calendar year then that employee is not subject to Canadian income tax. Unfortunately, this exemption is not available to residents of Germany, the U.K. or France.

What are the employer’s withholding and remittance obligations?

Employers are required to withhold and remit Canadian income tax regardless of whether a treaty exemption applies. If, however, a treaty exemption is available, the employee or the employer (with the employee’s authorization) may apply for a waiver. The waiver application should be made 30 days before employment in Canada begins and must provide information as to the applicability of the treaty exemption relied upon, a copy of the employment contract and sufficient information or documentation to satisfy the CRA that the employee is resident in the treaty jurisdiction. If a waiver is made after remuneration is paid to the employee then the waiver will only apply to subsequent payments.

This waiver applies only to the employer’s withholding and remittance obligations. The employer is still legally required to open a Canadian payroll account with the CRA, to issue a T4 slip to each employee who comes to Canada and to file copies, together with a T4 Summary, with the CRA. The T4 slip is the document on which an employer reports to each employee the amount of their Canadian taxable income and the amount of Canadian income tax withheld and remitted. The argument for maintaining these obligations in the face of a waiver is that employees must have their T4 Slips to file with their Canadian income tax returns—which, the CRA submits must be filed notwithstanding that no Canadian income tax is payable and the penalty for failing to file would be nil.

Regarding social security payments, Canada’s social security agreements with other countries exempt non‐resident employers from the obligation to withhold and remit contributions to the Canada Pension Plan. In order to qualify for these exemptions, the period of the non‐resident employee’s employment in Canada cannot exceed specified time limits. In respect of employees resident in the U.S., the U.K. or Germany, the period of employment is not to exceed 5 years. Under the agreement with France, the period is 3 years.

Finally, premiums are not payable into Canada’s mandatory employment insurance program if premiums in respect of the employment exercised in Canada are payable under the unemployment insurance laws of the non‐resident employee’s home jurisdiction.

What are the employee’s filing obligations?

As stated above, non‐resident employees are legally required to file Canadian income tax returns regardless of whether the above waiver has been obtained. However, since the penalty for failing to file is calculated as a percentage of the tax owing, the penalty applicable to an individual for failing to file would be zero.

In the absence of a waiver, the issue for non-resident employees is the potential for double taxation until a foreign tax credit can be obtained the following year in the employee’s home jurisdiction. A typical solution is for an employer to pay the Canadian income tax on behalf of the employee. This creates a taxable benefit which in turn increases the tax liability, the tax paid by the employer and so, again, the taxable benefit. This circularity is addressed by “grossing up” the tax payment made by the employer by an appropriate percentage. The tax cost to the employer would therefore be greater than would otherwise have applied to the employee. A more cost effective alternative is for the employer to lend the amount of the tax to the employee. The loan would be repaid upon the employee’s receipt of the foreign tax credit in their home jurisdiction.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

 

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a full service law firm based in Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such as corporate tax planning, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, personal tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax planning practice.

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Tax Law–Patrick Westaway

Tax credits represent one of the most confusing aspects of operating an animation production company; and, within the morass of jargon, rules and paperwork is one particular issue which must be understood by any animation professional thinking of going independent.

Among the potentially available credits is one familiar to every animation production company operating in Ontario: the Ontario Computer Animation and Special Effects (OCASE) tax credit. This credit represents a refund of 20% of eligible Ontario labour expenditures for eligible computer animation and special effects activities. In practical terms, labour expenditures may represent as much as 70% of the operating budget (excluding depreciation and interest and making certain assumptions regarding format, quality and, in the case of a television series, whether the production is the first or a subsequent season—all of which affects the size and salaries of the production team). In ballpark terms, then, the OCASE tax credit can represent a subsidy of as much as 14% of the entire operating budget. The OCASE tax credit is therefore essential to covering costs and turning a profit.

Activities that qualify as eligible labour expenditures cover the full pre-production and production range. Editorial, however, is excluded, as is post-production. It should also be noted that salaries and wages of individuals whose activities are not wholly devoted to eligible computer animation and special effects activities qualify only to the extent that they are so devoted. The problem arises when any of the foregoing employees decide to go independent, incorporate a service studio and ask the production company to outsource.

The devil lies in the definition of “Ontario labour expenditure”, which includes fees paid to a company only if the company is wholly owned by one individual and that individual provides ‘principally’ all of the services personally—the OCASE tax credit differs from every other tax credit in this respect. If, therefore, one has employees or fellow shareholders, clients cannot pay the services company but must instead pay the individual. How, then, without incorporating and hiring employees, can one build a services studio beyond a one-person shop?

The solution is to discount fees to compensate the client for the loss of the tax credit. The service studio would then make up the shortfall by filing its own claim for the OCASE tax credit. It must be recognized, however, that this creates a cash-flow issue for the service studio since the OCASE claim cannot be filed until after the end of the taxation year in which the services are performed. Worse still, the queue at the Ontario Media Development Corporation (OMDC) is currently forty weeks. The OMDC’s review typically then takes one week, after which time the certificate is mailed to the studio who must then submit it, together with supporting materials, to the Film Services Department of the Toronto Tax Services Office (TSO). The policy of the Toronto TSO is to review applications within sixty days, which, if all is in order, it then sends to the Tax Services Centre in Sudbury for payment. The service studio must therefore be sufficiently capitalized to wait between one and two years for the payment of the OCASE tax credit.

This point illustrates how important it is to understand the OCASE tax credit and other available tax credits in advance of budgeting, financing and bidding for projects as well as the necessity of getting the right professional support.

 

***This article is intended only to inform and educate.  It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a full service law firm based in Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such as corporate tax planning, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, personal tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax planning practice.

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Municipal, Land Use, and Development – David Sunday and Lynn Dramnitzki

Municipalities are finding it increasingly difficult to fund the growing cost of local services and other municipal operations. Financial support from other orders of government is limited, while increases in property taxes often face stiff resistance from the electorate. While certain municipalities have been given special powers to assess and collect tax other than just property taxes, most municipalities must rely on property taxes as their principal means of funding many of the services they provide. Read more…

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

Originally published in Municipal WorldApril 2014.

Copyright Law – Susan Deefholts

The new copyright provisions under the revised Copyright Act, most of which came into effect on November 7, 2012, have a number of implications for Canadians. As discussed in our previous issue of LegalEase, copyright protects the right to copy original works. This right to copy vests with the creator of the work, but can then be assigned or licensed to other parties, such as publishers, film distributors, television stations and so on.

Almost all of us make use of copyrighted material in our daily lives, be it while reading newspapers and blogs, looking at photographs, or watching television and film. When we buy a newspaper, visit a website, purchase a song on iTunes or subscribe to a streaming service like Netflix, we are making use of copyrighted material in a legitimate way. Copying and pasting images or text without permission, downloading media such as movies, television, music and books, via “underground” services like BitTorrent, are examples of non-legitimate uses of copyrighted material. In our previous issue, we dealt with two types of permitted exceptions to the restriction on copying creative works: format shifting and time shifting.

In this issue, we will explore another important set of exceptions to the restriction on the right to copy. These uses fall under a category known as “fair dealing”. In addition to time shifting and format shifting, Canadian copyright law now contains expanded exceptions related to certain public interest outcomes. This may, for instance, result in further changes to how we, as users, will be able to borrow books from public libraries in order to ensure that there is user compliance with these new requirements, when using applications like OverDrive, which is the mobile, e-book platform used by the Kitchener, Waterloo and Guelph Public Libraries.

There are also several changes pertaining to uses of copyrighted materials by educational institutions and individuals acting under their authority. For instance, if a work is not commercially available in Canada within a reasonable timeline, for a reasonable price, then an educator can reproduce the work, or do any other necessary act, in order to display it for educational purposes. There is a significant ambiguity with regard to how “reasonable” may be interpreted, however, the introduction of this exception makes it easier for educators to be able to make use of works that they deem to be useful teaching tools without needing to expend significant time and resources trying to avoid running afoul of the Copyright Act.

Another education-related exception will be of interest to those who are enrolled in distance education classes–namely, that students are now explicitly permitted to reproduce lessons that are broadcast via telecommunications, provided that the recordings are destroyed within thirty days of the students’ receipt of their final course evaluations. These recordings cannot be distributed.

A final type of exception to the restrictions on copying can be found in the context of what is known as non-commercial “user-generated content”, and colloquially referred to as the “mash-up exception.” This refers to the types of videos that are often available on YouTube, in which the creator has spliced together clips from a variety of different films, television shows and videos, often with mixed snippets of different soundtracks, synchronized appropriately to create a new work. These derivative works are often created as a tribute to the original, or for the purposes of satire or humour. Though mash-ups are now permitted, there are a few restrictions that must be adhered to, for instance, the new work cannot be used for commercial purposes, should credit the original creator or rights holder, and should not have a substantial adverse effect, financial or otherwise, on the original work.

These additions to the fair dealings exception to the general restriction on the use of copyrighted material reflect much needed changes to legislation, especially given today’s technological advances.

For questions regarding fair dealing and the Copyright Act, please contact Susan Deefholts.

Article written by Susan Deefholts, B.A., J.DSusan was called to the bar in 2013 and is a member of the Family Law Group working out of our Guelph office.

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Family Law – Jennifer Black

Under section 24 of the Family Law Act, the court has the power to grant a married spouse exclusive possession of a matrimonial home regardless of which spouse has actual ownership of the home. This power is only available to a court where the parties are married. An unmarried spouse has no common law or statutory right to occupy his or her spouse’s property when the relationship ends.

Section 24 (3) of the Family Law Act, sets out the criteria that the court shall consider in deciding whether to make an order for exclusive possession:

a) the best interests of the children affected;
b)any existing orders under Part I (Family Property) and any existing support orders;
c) the financial position of the spouses;
d) any written agreement between the parties;
e) the availability of other suitable and affordable accommodation; and
f) any violence committed by a spouse against the other spouse or children

In determining the best interests of a child, section 24(4) of the Family Law Act, directs the court to consider:

a) the possible disruptive effects on the child of a move to other accommodation; and
b) the child’s view and preferences, if they can reasonably be ascertained.

A recent Ontario Superior Court decision of Justice Horkins, Leckman v. Ortaaslan [2013] O.J. No. 2606, examined the Family Law Act criteria in determining a Wife’s motion for interim exclusive possession of the matrimonial home. The Husband disputed the motion, seeking instead an order that the parties and the children remain together in the matrimonial home pending a final resolution of the court application.

In this case, the parties had been married in 1996 and were separated in 2012. They had two children, 16 year old Anna and 12 year old Garen. Both spouses were well educated and high income earners. The matrimonial home, worth an estimated 1.5 million, was in the Wife’s name alone and had no mortgage.

In this case Justice Horkins, analysed the applicable criteria set out in the Family Law Act. Justice Horkins acknowledged that both parties had sound financial positions and therefore rejected the Husband`s claim that he did not have the resources to afford alternate accommodations.

In assessing the issue of whether violence had been committed by a spouse, Justice Horkins confirmed that the violence referred to in s.24(3)(f) is not restricted to physical violence. Citing the court in Hill v. Hill [1987] O.J. No. 2297, Justice Horkins stated that, “violence includes a “psychological assault upon the sensibilities of (another) to a degree which renders continued sharing of the matrimonial dwelling impractical.” Where the conduct is calculated to produce and does produce an anxiety state which puts a person in fear of the other`s behaviour and impinges on that person`s mental and physical health, violence has been done to his or her emotion equilibrium as if he or she had been struck by a physical blow.

In the present case, Justice Horkins found that the situation in the matrimonial home was tense and that it was a difficult time for all and in particular for the children. The Wife described a home situation where the children felt like prisoners in their own home. She advised the court that when the Husband was home, he would give the children the silent treatment. This evidence was supported by a report from the oldest daughter’s psychotherapist which revealed that Anna constantly felt like she was “walking on egg shells” when her father was in the house. The Husband’s actions caused Anna stress, anxiety and depression.

Justice Horkin’s concluded that the Husband had verbally and emotionally abused both the Wife and Anna and that the Husband`s behaviour amounted to a psychological assault. Justice Horkins was not convinced that the children`s relationship would suffer if their father were to move out of the home.

Additionally, the court acknowledged that the children had lived in the matrimonial home for many years and that it was close to their school.

Noting the risks associated with the current living situation, Justice Horkins found that a decision regarding exclusive possession could not be adjourned or wait until trial as the situation was too dire. While the court generally prefers to make a final decision based on viva voce evidence that has been tested through cross-examination, in this case Justice Horkins found that it was in the best interest of the children to grant the Wife an interim order for exclusive possession of the home.

This case makes clear that although an order for interim exclusive possession of a matrimonial home should not be made lightly as it will have the effect of forcing one spouse out of the home, where evidence can be presented that there is much conflict in the home, a spouse with custody may receive an order for exclusive possession of the matrimonial home.

Article written by Jennifer Black, B.A. (Hons), LL.B. joined SorbaraLaw in July 2006. She practices in the area of family law in SorbaraLaw’s Waterloo and Guelph offices.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

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Corporate Commercial – Slonee Malhotra

We are all aware of the existence of SPAM and the need to curtail these messages. Canada’s Anti-Spam Law, (“CASL”) will be in force beginning on July 1, 2014. CASL will be one of the strictest anti-spam regimes in the world. However CASL will impact both illegitimate and legitimate commercial electronic messages. Businesses must therefore appreciate the impact of CASL on the ability to communicate with customers and clients via electronic messaging.

SPAM refers to bulk messages of an unsolicited nature which often promote products or services through electronic mail, text messages, or video messages. SPAM can be used for ill purposes by those aimed at misappropriating personal data, banking information, or credit card numbers, luring individuals into scams including identity theft schemes, or defrauding consumers via counterfeit business websites.

SPAM messages are a nuisance, a drag on online commerce, and a menace for consumers. These messages have become a vehicle for a wide range of threats related to online commerce which affect both individuals and businesses.
CASL will affect individuals, businesses, and organizations by imposing regulations aimed at limiting and controlling the messages that are distributed. It is purposed to address three broad areas:

(1) commercial electronic messages (CEMs);
(2) alteration of transmission data; and
(3) the production or installation of computer programs.

The central feature and unifying purpose of CASL is to create an opt-in, consent-based regime to the receipt of these types of messages. Essentially, if a Canadian wishes to send an electronic message to a recipient that encourages the recipient to buy, sell, or lease a product or offers to provide certain opportunities, that recipient must first provide the sender with consent.

Most businesses will be largely impacted by the provisions and regulations restricting CEMs. Generally speaking, CASL requires that consent to receive CEMs must be “express consent”. In other words, the recipient of the message must have expressly agreed to receive such a message.

Under CASL, “express consent” can be oral or written. A person who seeks express consent from a recipient must meet certain prescribed criteria. Before a sender gets consent, he must, in a clear and simple manner:
identify himself by setting out prescribed information and providing contact information which must remain valid for 60 days;

outline the purpose(s) for which the consent is being sought; and
provide a free and electronic mechanism to permit recipients to indicate a desire to stop receiving the messages.

There are a few exceptions to this requirement and there are a number of situations where consent need only be implied. Express consent is not required for personal relationships, existing business relationships that involve communications via electronic messages, or for non-business relationships (i.e. messages sent by charities).

Importantly, if a business is sold, the new owner can continue sending CEMs to existing customers who have previously given express consent.

Moreover, implied consent from the receiver will be sufficient to meet the requirements of CASL where:
there is an existing business or non-business relationship between the sender and receiver;
the receiver has published or disclosed (to the sender) the address to which the message is sent without publishing or indicating that the receiver does not wish to receive unsolicited e-mails; or the message is sent according to the Regulations.

With more and more businesses sending out electronic messages to customers and potential customers, for marketing and other purposes, the impact of CASL on these legitimate business activities must be monitored. Businesses need to ensure that CEMs are delivered in accordance with the new regulations. Failing to do so could expose the company to far reaching and significant penalties under CASL. Individuals and businesses can be fined per violation, face civil and/or criminal charges, and be subject to private actions. Where compensatory damages are not awarded, recent case law has indicated that punitive damages may be warranted.

All businesses should take steps to do the following now:

Review organizational practices to determine what existing CEMs do not fall under one of the exceptions
Consider whether consent may be implied for the messages that are sent out

If consent cannot be implied, develop a system to obtain express consent. Make sure to follow the requirements under both the Act and Regulations when sending out requests for express consent

Ensure the existence of a system to reliably record the express consents gathered
Develop another system to track messages that fit under implied consent and make certain that each consent remains valid

Implement an “unsubscribe” policy and ensure requests to unsubscribe are complied with according to the time periods outlined under the Act

Will your business be prepared once the Act comes into force? To learn more about how the new Act will impact your workplace, please contact our office to schedule a meeting with a member of our Corporate-Commercial Group.

Article written by
Slonee Malhotra

 

* * This article is intended only to inform and educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.


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