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FEDERAL INCOME TAX - Corporations - Small business deductions

Monday, October 07, 2019 @ 9:24 AM  


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Appeals by the corporate taxpayers from tax assessments denying a small business deduction. The taxpayers, Prairielane Holdings Ltd. (Prairielane) and Streifel Consulting Ltd. (Streifel), were shareholders in Moody's Equipment Ltd. (Moody’s). Moody’s underwent a restructuring that created a partnership and stacked corporation structure. Prairielane's subsidiary held 61 per cent, and S Ltd.'s subsidiary, held 5.5 per cent, of the interest in the partnership. The taxpayers were not able to claim a small business deduction (SBD) before the reorganization. However, after the reorganization, Prairielane was able to claim it in 2011 and Streifel was able to claim it for 2011 and 2012. The Canada Revenue Agency took the position that the main reason that the taxpayers created the stacked partnership structure was to allow them to claim an SBD which previously was not available. Therefore, as a result of the application of s. 256(2.1) of the Income Tax Act, both taxpayers were deemed to be associated with seven other corporations. The ensuing assessment had the effect of eliminating the SBD that the taxpayers were claiming. Once the corporations in question were associated, they were then characterized as large business corporations.

HELD: Appeals allowed. While the tax reduction was one consideration for the reorganization, access to the SBD for the taxpayers was not one of main reasons for the separate existence of the newly created corporations. In the planning stages, the tax planners did not find a scenario where Prairielane would be eligible for an SBD. Prairielane’s access to the SBD for one year was the result of an anomaly in the Act, of which the tax planners were not aware during the planning stages. The cost of creating the structure exceeded the SBD obtained by Prairielane. The tax planners knew that Streifel would have access to the SBD as a result of the new structure but the operating mind of Streifel was neither informed nor aware of the potential access to the SBD. The main reasons of both taxpayers for the separate existence of the other corporations were to obtain tax deferrals of up to 25 months, to be more flexible in moving partners in and out of the structure, and to be able to deal with their concerns about Moody’s continuing to be partner. The assessments were vacated.

Prairielane Holdings Ltd. v. Canada, [2019] T.C.J. No. 133, Tax Court of Canada, MacPhee J., July 26, 2019. Digest No. TLD-October72019001