An Overview of Partnership Taxation in Canada
Types of Partnerships A partnership is a business arrangement between two or more people who do business together for profit (section 2, Partnerships Act, R.S.O. 1990, c. P.5). Notably, a partnership is not a separate legal entity from its partners. Certain legislation, however, such as the Excise Tax Act, R.S.C. 1985, c. E-15, may effectively treat a partnership as a person or other legal entity for the purposes of the applicable statute. How Partnerships and Their Partners are Taxed For the purposes of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (Income Tax Act), a partnership is not a taxable entity. The income or loss of a partnership, on the other hand, is calculated as if it were a distinct person living in Canada whose taxation year was its fiscal year (section 96(1)(a), (b), Income Tax Act). The partnership’s net revenue or loss for each fiscal period is subsequently awarded to the partners (and, in some cases, former partners). As an exception to these basic ideas, certain partnership resource expenditures are not subtracted in calculating partnership revenue but are instead distributed to the partners directly for purposes of computing the income of the respective partners. A partner’s share of the partnership’s revenue for a fiscal period must (or may, according to the at-risk provisions mentioned below) be included (or deducted) in calculating the partner’s income (or loss) for the taxation year that includes the partnership’s fiscal year-end. However, in certain circumstances: An unreasonable allocation of partnership income (including an allocation of income from one or more specific sources agreed to primarily to reduce or postpone tax) is prohibited; and Partnership income must be allocated in a manner determined to be reasonable in the circumstances. The income of a partnership is determined in line with the precise procedures outlined in the Income Tax Act for calculating business income. Because a partnership is considered as a distinct person for income purposes, the decision to take discretionary deductions, such as capital cost allowance (tax depreciation or CCA), is decided at the partnership level rather than by the partners individually. However, deductions for most expenses, including scientific research and experimental development (SR&ED), are not discretionary and must thus be claimed by the partnership for the period in which they are incurred. In general, a partner’s share of any income or loss from a partnership from a specific source or location is treated as if it were the partner’s income or loss from that specific source or location, and any provisions of the Income Tax Act applicable to that type of income or loss apply to the partner (sections 96(1)(f)-(g), Income Tax Act). Taxable dividends, capital dividends, and net capital gains and losses earned or realized by a partnership, for example, will retain its character in the hands of the partners. Dividends received from a corporation resident in Canada through a partnership by a Canadian resident partner who is an individual are treated as dividends received by the partner and are subject to the normal rules in the Income Tax Act applicable to dividends, including the enhanced gross-up and dividend tax credit for […]
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Blockchain and Cryptocurrency Taxation in Canada
Government Attitude and Definition The federal government of Canada is experimenting with blockchain technology in many sectors. The National Research Council is testing blockchain to disseminate real-time research award and financing information.[i] The Canada Border Services Agency is taking part in a blockchain-based pilot project to improve data accuracy and expedite the transit of commodities.[ii] The Bank of Canada is currently researching the impacts of implementing a central bank digital currency. Senior authorities have suggested that there are two key scenarios that may justify the creation of a central bank digital currency: when the usage of physical cash is decreased or abolished, and when private currencies make significant inroads.[iii] Officials believe that “stablecoins” — crypto assets backed entirely or partially by cash or commodity holdings – are the most promising of these private currencies.[iv] According to the Bank of Canada, “stablecoins have better chances for general acceptance and more capacity to significantly revolutionize the world of money and payments” than earlier kinds of cryptocurrencies. The Bank of Canada cites the Facebook-connected “Libra Coin” as a “strong example of a disruptive technology that influences how the Bank must respond to the future of money.”[v] The Bank of Canada has also been participating in “Project Jasper,” a research program developed in collaboration with Payments Canada and TMX Group to experiment with the usage of distributed ledger technology in the context of payments. In Canada, cryptocurrencies are not considered legal cash. Section 8 of the Currency Act states that coins produced by the Royal Canadian Mint under the Royal Canadian Mint Act and notes issued by the Bank of Canada under the Bank of Canada Act are legal currency. Taxation Background The taxation of cryptocurrencies in Canada remains uncertain, with no legal authority or administrative direction. The Canadian federal tax authority (the Canada Revenue Agency, or “CRA”) has expressed high-level views on the classification of certain payment tokens (such as Bitcoin) and the potential income and sales tax implications of crypto mining and certain commercial transactions involving tokens; however, these views are extremely limited.[vi] Furthermore, while the Canadian federal government has made effort to fill the hole and clear up certain uncertainties, considerable work has to be done to cement the underlying tax structure. Much of the current study of the prospective tax treatment of bitcoin transactions in Canada is based on an extrapolation of these administrative stances and weak legal framework to situations that Canadian lawmakers and tax administrators have not explicitly explored. It is envisaged that in the near future, further clarification will be offered that will not be restricted to Bitcoin/payment instruments, but will also address more recent breakthroughs in cryptocurrency technology and their expanding distribution to, and usage by, the public, including ICOs. How Cryptocurrency is Treated for Income Tax Purposes Currently, the CRA maintains that, despite its name, a cryptocurrency (particularly, a payment token such as Bitcoin) is not a “currency” for income tax purposes. Rather, such a cryptocurrency is analogous to a commodity (although a “intangible”), the value of which is determined by external variables such as investor mood and simple supply/demand. According to this viewpoint, this […]
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The Assignment of Commercial Contracts in Legal Practice
Contracts are a prime example of intangible property. Parties to commercial contracts, like other property owners, frequently want to transfer their property to a third party. The transfer of a contract refers to the assignment of some or all of a party’s rights or the delegation of some or all of a party’s performance, or both, to a non-party to the agreement. Some common instances in which a contracting party in a commercial context may desire to assign contractual rights, performance responsibilities, or both are as follows: In an asset sale, a corporation sells parts or all of its company. A contractor who subcontracts its work under certain projects. A business conglomerate that is going through an internal corporate reorganization. The borrower who offers its lender a security interest in its assets. A manufacturer who sells its receivables to a third party. In any of these cases, the non-transferring party may object to assignment or delegation for a variety of grounds, including: The desire to choose the party with whom it does business. Concern that a different obligor or obligee may jeopardize the non-transferring party’s capacity to benefit from the contractual deal To decide whether the transferring party (also known as the transferor) can execute the proposed transfer without gaining the non-transferring party’s approval, the transferring party must turn to relevant legislation and the plain text of the contract. If consent is necessary and not obtained, the transferring party faces the following risks: Violation of the contract. Making an ineffective and invalid transfer. The Definitions of Assignment and Delegation Each party to a contract is an: Obligee in terms of its contractual rights; and Obligor in terms of its contractual performance responsibilities. Contract “assignability” is a term frequently used by contracting parties and practitioners. While they may expressly address the assignment of a party’s rights under the contract in some contexts, they frequently use the term “assignment” to refer to both: The delegation of duty to perform. The assignment of rights to obtain performance. However, assignment and delegation are two distinct legal concepts that must be treated individually due to the fact that they might have different outcomes. What is an Assignment? Assignment is the transfer of some or all of an obligee’s (assignor’s) rights to receive performance under a contract, generally but not always to a non-party (assignee). A contract benefit is a right (a chose in action) that, in theory, may be delegated by the benefiting party to a non-party. For clarity purposes, this informative piece will assume that the assignee is a non-party, although the rights and responsibilities of the parties addressed apply equally to an assignee who is also a party to the agreement. When these rights are assigned, the assignor no longer has any claim to the advantages of the given rights, which are completely passed to the assignee. Technically, a contract’s burden cannot be assigned under the law (see National Trust Co. v. Mead[i] and Irving Oil Ltd. v. Canada[ii]). Transferring performance responsibilities under a contract requires the approval of all parties, making such a transfer a novation. In practice, parties frequently refer […]
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The Legal Implications of Cryptocurrency and Blockchain Technology in Canada
What is Cryptocurrency? Cryptocurrency is a type of digital asset that employs blockchain technology to record transactions and control the issue and transfer of the cryptocurrency in a decentralized way, and thus, preventing fraudulent transactions. Bitcoin, which debuted in 2009, has grown to become the most commonly used and accepted cryptocurrency. Other popular cryptocurrencies include Ethereum, Ripple, Stellar, Cardano, and Litecoin, although there are presently over 1,000 alternative cryptocurrencies that have been founded for a variety of purposes. Cryptocurrencies are avidly traded through online exchanges. Blockchains Blockchains are a distributed ledger system of technology, which implies that several persons or organizations maintain copies of the ledger at the same time, and no copy is the master or lead copy (hence, blockchain technology is distributed and decentralized). It is an immutable method of sending and receiving data in various forms. Notably, this results in the creation of a permanent record that cannot be modified or erased. Blockchains can be distributed publicly or privately, and they may be owned publicly or privately. Blockchain transactions are regulated by consensus and verification processes that include the blockchain’s participants, eliminating the need for any central authority or third-party intermediary, such as a financial institution or clearinghouse. Every record in the blockchain (called a “block”) has a timestamp and a unique cryptographic code, and it is digitally linked to the immediately preceding block by a unique “hash” code, making the ledger an auditable, immutable record of all transactions that have occurred since the ledger’s inception. This enables users to determine if blockchain data is valid or whether it has been tampered with. A blockchain may be used for a variety of purposes, but it is best recognized as the technology that underpins Bitcoin. However, its applications in the capital markets and financial services industries are growing substantially, and applications are projected to grow into many other business and commercial areas, such as payment method applications, in the coming years. Smart Contracts Smart contracts are blockchain applications in which terms and conditions are programmed and implemented autonomously. Smart contracts allow for transaction automation, which may dramatically reduce costs, boost efficiency, and prevent fraud. Smart contracts frequently require knowledge about triggering events from external trustworthy authorities known as oracles. Cryptocurrency Mining In the case of cryptocurrencies, individuals who validate the “block” transaction (i.e., a proposed transfer of the cryptocurrency from one user to another) are known as “miners,” since they “mine” the cryptocurrency by attempting to solve complicated math problems related with the block. These math problems have solutions that are difficult to uncover but simple to verify. When a transaction is proposed, the first miner to successfully identify the answer and have it validated by the network is rewarded with a specified number of freshly generated units of the cryptocurrency in question (in addition to any fees payable by the parties to the transaction). The size of the mining award is set by an algorithm that is meant to manage the quantity of cryptocurrency distributed to miners over time in relation to the cryptocurrency’s remaining supply. Any participant in a cryptocurrency blockchain can mine that cryptocurrency, but the […]
Read moreIntentional Interference In Contractual Relations Vs. Economic Relations
If a third party interfered with your ability to conduct business, you may have a cause of action against the third party under the tort of intentional interference in contractual relations, or the tort of intentional interference in economic relations. While both the torts are intentional torts, Canadian courts have attempted to distinguish between the two. What Is the Tort of Intentional Interference with Contractual Relations? When one party, without legal justification, inhibits another party from completing their contractual responsibilities with a third party, the tort of intentional interference with contractual relations can be established. This could happen, for example, if a supplier deliberately acts to prevent a distribution company from satisfying its contractual responsibilities to deliver items to a retailer with whom they have a contract. The plaintiff must show the following to prove the tort of interference with contractual relations: There was a contract between the plaintiff and a third party; the defendant was aware of the contract; the defendant’s conduct hindered contract fulfillment; the defendant acted with the intent to interfere with the contract; and the plaintiff suffered damages as a result. While it is clear that the defendant’s primary intention must be to interfere with the plaintiff’s contractual connections with another party, provincial courts have differed in their interpretation of the required intention to establish the tort. The Ontario Court of Appeal concluded that it is insufficient for a violation to be a foreseen result of the defendant’s actions[1], however the Manitoba Queens Bench determined that recklessness as to contractual interference satisfies the requirement of intent[2]. The intentional act, however, does not have to be malicious or unlawful. What Is the Tort of Intentional Interference with Economic Relations? The tort of Intentional interference with economic relations is defined as the “intentional infliction of economic injury on the plaintiff by the defendant’s employment of unlawful measures against a third party”.[3] The tort of intentional interference with economic relations has three components: The defendant must have interfered with the plaintiff’s economic interests; the interference must have been illegal; and the plaintiff must have suffered economic harm as a result of the interference. AI Enterprises Ltd v Bram Enterprises Ltd, an unanimous Supreme Court of Canada decision, clarified that “unlawful means” refers to the defendant’s activities that might give rise to a civil claim by a third party against the defendant[4]. As a result, “unlawful means” refers to the civil damage done to a third party rather than the criminality of an action. The plaintiffs in AI Enterprises sued a joint owner who was jeopardizing the sale of a property to a third party. The tort was not established, according to the court, because the injury done to the third-party purchaser was not actionable. The tort, however, was established in Grand Financial Management Inc v Solemio Transportation Inc, where the court found that Grand Financial jeopardized the plaintiff’s business by illegitimately obtaining security interests owned by a third party[5]. If you have any questions about potential breaches of contract or intentional interference claims, contact Cactus Law today to speak with a civil litigation lawyer. Disclaimer: The information presented […]
Read moreForeign Entities Acting as Shareholders in Ontario
Foreign Entities Acting as Shareholders in Ontario In general, foreign entities enjoy much of the freedom that Canadians do in terms of investing in corporations as shareholders in Ontario. However, there are certain situations in which investors may be restricted or limited. Non-Residents can invest as shareholders in Ontario An individual meets the definition of a non-resident if they: (1) normally, customarily, or routinely live in another country and are not considered a resident of Canada; and (2) do not have significant residential ties in Canada, meaning they live outside Canada throughout the tax year or they stay in Canada for less than 183 days in the tax year.[1] According to the Government of Canada, “Any ‘person’ can hold shares in a corporation. In addition to an individual, a ‘person’ can include a legal entity such as trust, a mutual fund or another corporation.”[2] Because non-residents fall under this definition, they may become shareholders in a Canadian corporation. However, they may be subject to special tax laws, not to mention that foreign entities will likely be subject to special tax treatments and that the number of non-resident investors in a corporation and the control of shares may impact that company’s classification. The number of non-resident investors in a corporation may change its classification A Canadian-controlled private corporation (CCPC) is a particular type of private corporation and is subject to lower income tax rates. A CCPC is a private corporation that is not controlled, directly or indirectly, by non-residents, public corporations, or any combination of the two.[3] Notably, for a corporation to qualify as a CCPC, it does not need to be controlled by Canadian residents; rather, a lack of control by non-residents of Canada is required.[4] Therefore, a private corporation whose ownership is divided, such that 50% of the company is owned by non-residents of Canada and 50% is owned by residents of Canada, qualifies as a CCPC.[5] However, if 51% of the voting shares belongs to non-residents and/or public corporations, the corporation no longer qualifies as a CCPC and therefore may be subject to increased taxes. Conditions & Restrictions for Foreign Entities In some instances, there may be a concern that a foreign shareholder of a Canadian corporation or the non-resident corporate parent of a Canadian subsidiary may be carrying on business in Canada. However, this is not usually a concern in normal circumstances as the legal form and relationship between a Canadian subsidiary and its shareholders is one that would not result in the shareholders being considered to be carrying on business in Canada. In other words, a foreign shareholder of a Canadian corporation can not be found to be carrying on business in Canada solely by virtue of being a shareholder of that Canadian corporation. Even when a foreign shareholder has significant or even complete control of a corporation, this is usually not sufficient to draw the conclusion that the corporation’s business was actually the shareholders. However, a significant exception to this rule is where the Canadian corporation is essentially a sham or façade. As seen in Gurd’s Products Co, the court found that a US corporation was essentially operating all aspects […]
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Piercing the Corporate Veil: The Basics
There are many benefits to incorporating your business including tax benefits and reducing liability. Incorporating a business provides protection or a ‘veil’ to shareholders from personal liability, as the corporation becomes legally liable for the actions and finances of the business. Nonetheless, Canadian courts have the capacity to breakdown this veil and make individual parties liable for actions undertaken by a corporation. What does it mean to pierce a corporate veil? Piercing the corporate veil will hold individuals operating business under a corporation liable for their fraudulent actions. For example, if a creditor demands payment for a loan from a corporation, a court may “pierce the corporate veil” and hold the stakeholders, such as shareholders and directors, personally liable for the corporation’s debts. In order to “pierce the veil”, it must be established that a corporation is acting illegally, fraudulently or for an improper purpose. Usually this occurs when the corporation has only one or a few individuals acting as shareholders or directors, as it is evident who is directing the corporation’s actions. It is much more difficult to pierce the corporate veil of a large publicly traded corporation, since there are many more shareholders and other stakeholders. When will courts pierce the corporate veil? There are a few common justifications for courts to hold the individuals working under a corporation personally liable: Firstly, if there is no true separation between the corporation and its shareholders, evidenced by, for example, their financial affairs, the court can assert that the corporation is used to avail the financial obligations of its shareholders. Second, if there is evidence that the company initiates fraudulent or wrongful actions, such as entering into dealings that the corporation cannot afford, or recklessly borrowing money, the court may find individuals of a corporation personally liable for financial fraud. Lastly, if there is evidence that someone who engaged in business with the corporation is left unpaid, and one of the above scenarios is also present, a court can pierce the corporate veil to rectify the unjust actions. To avoid having a court ‘pierce their corporate veil’, small businesses should avoid commingling personal and company assets, and establish separate bank accounts that are strictly used for their respective purposes. Contact our Toronto commercial and corporate lawyer at Cactus Law to learn more about how to best protect your personal and corporate assets. Disclaimer: The information in this article is provided as general introductory information and should not be relied upon as legal advice. Author: Stephanie Lanz Editor: Mobina Basiri
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Approaching Your Contractual Obligations During COVID-19
For parties who entered into commercial contracts prior to 2020, the impact of COVID-19 was unknown. Even in the first few weeks of 2020, it was unforeseeable that this outbreak would wreak havoc upon the world to this stupendous degree. Consequently, there are many uncertainties surrounding the contractual obligations of businesses. Fortunately, contract law provides us with some tools that may help parties accommodate for unexpected barriers to contractual performance. The Doctrine of Frustration Frustration of contract occurs when something unanticipated happens after entering the contract that makes its performance impossible. It is not enough to claim that the contract has become more expensive or difficult to perform. The party claiming frustration must demonstrate that the purpose of the agreement has been completely undermined by an unforeseeable event, and it would be unjust for the party to continue their contractual obligations. It is important to remember that the doctrine of frustration applies only if neither party is responsible for the interrupting event; the party responsible will bear the burden of the loss or resulting damages. Although it may be that the doctrine of frustration can aid parties facing difficult obligations amidst COVID-19, it is still uncertain if pandemics are considered capable of frustrating contracts. Courts today seldom use the doctrine to avoid helping contracting parties caught in a bad bargain searching for an escape route. Additionally, courts expect contracting parties to be accountable by making provisions to guard against unanticipated barriers to contractual obligations. Even if frustration is successfully invoked, its consequences are often inflexible, resulting in termination of contract irrespective of the wishes of the parties. However, with the novel coronavirus affecting businesses and individuals in decimating ways, the courts may consider a pandemic as sufficiently capable of frustrating a contract. Force majeure clause Alternatively, contracting parties can protect themselves by including or excluding a force majeure clause within written agreements. A force majeure clause is used to address the perceived pitfalls of the common law doctrine of frustration. A force majeure clause is meant to avoid liability for failure of performance where a party cannot meet their contractual obligations due to circumstances beyond their control, but which would otherwise fail to satisfy the rigid requirements of frustration. Similar to a frustrated contract, a force majeure clause acts to absolve the non-performing party of liability for its failure to meet contractual obligations due to unforeseen circumstances. The clause will typically include a list of events that the parties deem appropriate to warrant a change in one or both parties’ obligations. A force majeure clause should be drafted carefully so as to make clear what events will trigger its application, and the available remedies. Will the COVID-19 pandemic trigger a force majeure clause? For COVID-19 to constitute as a force majeure, it is important for the language of the clause in question to explicitly capture a pandemic event (Atcor Ltd v Continental Energy Marketing Ltd (1996)). Specific wording such as “pandemic”, “communicable disease” or “public health emergency” contained within the list of force majeure events will almost certainly include COVID-19. If a force majeure clause fails to include such explicit […]
Read moreBusiness Organizations
The three most common forms of business organizations are sole proprietorships, partnerships, and corporations. You may be exposed to different legal obligations and liabilities depending on the chosen form of business structure. It is important to consult with a lawyer before and while you carry on business to better understand your rights and responsibilities. SOLE PROPRIETORSHIPS Sole Proprietorships forms when a person (the sole proprietor) starts to carry on business activities. As a result, the sole proprietor is one and the same with the business. This has several important implications: The sole proprietor has exclusive responsibility for performing all contracts entered into by the business The sole proprietor will be liable for all torts committed by her or any of the employees, in connection with the business The sole proprietor’s personal assets may be seized to fulfil the obligations of the business While no form procedure is necessary to carry on a sole proprietorship, it is important to register the business name that you are operating under. PARTNERSHIPS A partnership is formed when two or more persons carry on business together with a view to profit. There are different types of partnerships: General Partnership: each partner is liable to contribute equally to any debt owed by the partnership. Limited Partnership: a partner shares in the profits and is liable for debts but does not participate in the operations of the business. Limited Liability Partnership: Formed by professionals such as medical engineers, accountants, lawyers, and medical professionals. It is important to remember that assets brought into the business may be considered assets of the partnerships. In order to limit future disputes, it is recommended for the parties to enter into a partnership agreement. If you are working with someone on a project but do not intend to form a partnership, it is important to take the necessary steps to distinguish the form of business. This may require a establishing a joint venture agreement or executing other contracts that establish the boundaries of the partnership. CORPORATIONS You are able to incorporate your business either federally or provincially. Once incorporated, the business becomes a separate legal entity. The property of the corporation is not the property of the shareholders and the corporation is taxed separately. This is often done to reduce liability to shareholders. Shareholders have rights to the corporation through their ownership of shares and are liable for the debts of the corporation only in as much as they have invested. Our business and corporate lawyer can help you structure your business, register your corporation, and draft the appropriate documents to protect your interests, including a shareholders agreement or partnership contracts. Contact us to learn more about business and corporate structures.
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