ARTICLE: LA SURVIVANCE CAPITAL GAINS EXEMPTION DECISION

La Survivance v. The Queen - Comments

by David Louis, B. Com., J.D., C.A., Tax Partner
Minden Gross LLP, a member of MERITAS Law Firms Worldwide.

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In November, CCH Canadian Limited published the second edition of the highly acclaimed Tax and Family Business Succession Planning, by David Louis and Samantha Prasad of our firm. Included in Chapter 4 is a discussion of the ramifications of a recent case, La Survivance v. The Queen, on the ability of an individual to claim the capital gains exemption, where shares are sold to a public company and/or non-resident. In a nutshell, the capital gains election may be lost unless a special election is made (under subsection 256(9) of The Income Tax Act). On March 5, the CRA issued a Technical Interpretation (Doc. No. 2006-0214781E5) confirming the issue, thus putting Canadian taxpayers and their advisors “on notice” of this problem.

The Technical Interpretation and the book are featured prominently in the March 13th edition of Tax Topics, CCH’s main tax planning newsletter.

The following is a discussion of the issue, from Tax and Family Succession Planning, click here for the Tax Topics article itself.

Tax and Family Succession Planning also contains extensive discussion on the tax consequences of a change of trustees, alter ego and joint partner trusts, valuation of an interest in a discretionary trust, family shareholders’ agreements and their tax consequences, and many other topics.

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Canadian-Controlled Private Corporation Status. Where the type of purchaser would change the status of the corporation, i.e., if it is a public company or a non-resident, consideration should be given to a recent case what may adversely affect the required CCPC status at the time of disposition,. Subsection 256(9) provides that, unless there is an election to the contrary, a change of control takes place at the commencement of the day in which control is acquired, rather than the actual time. In view of this, La Survivance v. The Queen[1] indicates that, when the actual disposition takes place – later in the day - the corporation may no longer be a CCPC. La Survivance involved a public company that sold shares of a subsidiary to a private corporation and claimed an ABIL based on this provision; of course, an ABIL would not be available if, at the point of sale, the target corporation was controlled by the public company. The argument above was put forward: since control was acquired at the commencement of the day of sale of the sub, at the actual time of the sale, the sub was no longer controlled by the vendor public company. By that time, the sub had therefore changed its status so that it qualified as a small business corporation; accordingly, the public company could claim an ABIL in respect of the sale. The Federal Court of Appeal accepted this argument, overturning the Tax Court of Canada[2].

It seems that if a CCPC is being sold to a public company or non-resident purchaser, La Survivance would mean that, at the point of sale, technically speaking at least, the corporation being sold would no longer be a CCPC, since, by virtue of subsection 256(9), control is deemed to be acquired at the beginning of the particular day. (Paragraph 110.6(14)(b), which is designed to preserve the capital gains exemption by ignoring rights under a purchase and sale agreement relating to shares in the determination of CCPC status does not appear to be of assistance.) Consideration should therefore be given to filing an election to override this deeming rule.[3]

[1] 2007 DTC 5096, Federal Court of Appeal.

[2] The Federal Court of Appeal held that the Tax Court judge erred in his analysis of the subsection 256(9) presumption when he concluded that the purchaser was deemed to have acquired control of the target corporation at the commencement of the date of sale, but the vendor was not affected by the same presumption. The Court of Appeal indicated that this interpretation of subsection 256(9) was not in line with its ordinary meaning in context, whereby the subsection was intended by Parliament to apply to both the corporation acquiring control and the corporation relinquishing control. Therefore, the vendor, La Survivance, was deemed to have relinquished control of the target at the commencement of the date of sale. The target was therefore a CCPC when the vendor disposed of its shares, and vendor was therefore entitled to the ABIL deduction claimed.

[3] It should be noted, however, that the CRA’s position is that, at the actual point of sale, notwithstanding the deeming rule in subsection 256(9), the target corporation may be subject to de facto control by the vendor. In Technical Interpretation No. 2006-0195961C6, October 6, 2006, the CRA indicated that this position was not argued in La Survivance. (See also question 19 of the CRA round table at the 2007 STEP National Conference which expresses a similar view.) However, it is not clear that this would be of assistance in respect of asserting that CCPC status is retained by the vendor: rather than the vendor having de facto control, it must be established, per the definition of “Canadian-controlled private corporation” in subsection 125(7), that the purchaser did not have control.