Tax Considerations for Business Lawyers
| Author | Ronald Durand and Jason Brock |
| Pages | 69-88 |
Tax
law is a
moving target.
Tax
specialists
spend
a
considerable amount
of
time keeping
up
with
the
latest developments.
As
business lawyers
know
all too
well,
tax
considerations
can
have
ramifications
that
go
beyond
the tax
field,
often
influencing
key
business decisions. Many
business lawyers have neither
the
time
nor the
inclination
to
grapple
with
the
nuances
of
taxation
and tax
planning. Fortunately,
a few key
tax
topics surface
in the
business
context time
and
again.
The
generalist
lawyer serves
his or her
clients well simply
by
developing
an
awareness
and
sensitivity
to
these
fundamental
tax
issues.
Two
such issues
are
dis-
cussed
in
this paper:
the
deductibility
of
interest
and
other expenses,
and the
application
of the
general anti-avoidance rule
(GAAR).
In
addi-
tion,
it
often
pays
for the
generalist
to be
aware
of
recent developments
in
taxation. Therefore, this paper also highlights
a
number
of
legislative
developments
within
the
past year that should
be of
interest
to
business
lawyers
and
their clients. These developments include
the
taxation
of
non-competition payments,
foreign
investment entity
and
non-resident
trust
legislation,
the
scheduled elimination
of
federal
capital tax,
changes
to the
small business deduction,
and the new
resource
tax
regime.
Ronald Durand
is a
partner
at
Stikeman
Elliott
LLP
specializing
in tax law and
corporate taxation
and
director
of the
Toronto
office
tax
practice. Jason Brock
is an
associate
at
Stikeman
Elliott
LLP
specializing
in
corporate
taxation.
69
Tax
Considerations
for
Business
Lawyers
Ronald
Durand
and
Jason
Brock
70
RONALD DURAND
AND
JASON BROCK
A.
DEDUCTIBILITY
OF
INTEREST
AND
OTHER
EXPENSES
1)
Overview
Very
generally,
interest
and
other
expenses
of a
business
are
deductible
under
the
Income
Tax
Act
(Canada)1
only
if
they
are
incurred
for the
pur-
pose
of
earning
income
from
a
business
or
property. Where
an
expense
represents
an
outlay
on
account
of the
capital
of the
business,
it is
deductible
in
computing profit
from
the
business only
if a
specific pro-
vision
of the Act
permits
the
deduction.
As
confirmed
in the
recent deci-
sion
in
Gifford
v. R.
(discussed
below),2
interest
is
generally,
but not
always,
a
capital expense. Where interest
is a
capital expense, section
20(l)(c)(i)
of the Act
provides
a
deduction
of a
reasonable amount
in
respect
of
interest paid
or
payable
in
respect
of
borrowed money used
for
the
purpose
of
earning income
from
a
business
or
property.
In
October 2003,
the
Department
of
Finance announced proposed
amendments
to the Act
that would limit
the
ability
of
taxpayers
to
rec-
ognize losses
from
business
or
property,
for
taxation years beginning
after
2004.
Ostensibly,
the
proposals
are
meant
to
clarify
how the Act
links
the
deductibility
of
expenses, such
as
interest,
to a
taxpayer's
prospects
for
profit.
As
drafted,
however,
the
proposed amendments
represent
a
limitation
on
losses that encompasses virtually
all
expenses
incurred
by
taxpayers
in
earning income
from
a
business
or
property.
In
effect,
the
proposals would create
a
loss denial rule that would depend
on the
application
of a
reasonable expectation
of
profit
test. Business
lawyers, particularly those dealing with small business start-ups
or
other risky ventures, should
be
aware
of
these proposals.
The
genesis
of the
proposed amendments
can be
found
in the
sup-
plementary material tabled with
the
2003
federal
budget, which stated
that
the
Department
of
Finance
was
reviewing
the
deductibility
of
inter-
est and
other expenses.
The
Department
of
Finance
was
apparently dis-
satisfied
with recent court decisions
in
this area that,
it
believed, could
lead
to
"inappropriate
tax
results."
While
no
specific cases were identi-
fied,
the
discussion
strongly
suggested
that
the
decisions
of the
Supreme Court
of
Canada
in
Ludco
Enterprises
Ltd.
v.
Canada,3
Stewart
v.
1
R.S.C.
1985,
c. 1
(5th
Supp)
[Act].
2
2004
SC
C 15
[Gifford].
3
(S.C.C.)
[Ludco].
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