TITLE:

Harmonization of Québec Civil Law and Federal Legislation: Beneficial Ownership in Canadian Income Tax Law.

AUTHOR(S): 

Brender, Mark D.

EDITOR:

Department of Justice Canada

This research report inspired an article that was published in:

• Brender, Mark D., "Beneficial Ownership in Canadian Income Tax Law:  Required Reform and Impact on Harmonization of Quebec Civil Law and Federal Legislation".  Canadian Tax Journal, Canadian Tax Foundation, Toronto, 2003, Vol. 51, No. 1, pp. 311-354 .

PAGE(S):

SERIE(S):

Canadian Tax Journal – Special Edition on Canadian Bijuralism and Harmonization

SUBJECT(S):

Canadian Bijuralism
Tax law

ABSTRACT:

The abstract is an exact copy taken from the Canadian Tax Journal, 2003, Vol. 51, No. 1.

This article examines the concept of beneficial ownership and whether it can be applied consistently under the Income Tax Act in Quebec and the common law provinces.  This examination is conducted in the context of the harmonization project implemented by the minister of justice of Canada; that project seeks to ensure that the provisions of the Income Tax Act are applied consistently throughout Canada and that the legal traditions and terminology of the common law and civil law provinces are respected.

Currently, the Income Tax Act relies on subsection 248(3) to bridge the gap between the common law and the civil law in the application of the concept of beneficial ownership.  The author argues that the language in subsection 248(3) may be insufficient for the purposes of achieving the goals of harmonization for three reasons.  First, there is a debate in the common law provinces as to the meaning of the concept of beneficial ownership, thus making the concept difficult to apply in both the common law and the civil law provinces.  Second, Quebec does not recognize the concept of beneficial ownership, and therefore its application in that province does not respect the civil law traditions.  Third, subsection 248(3) may yield inconsistent results in the common law and civil law provinces.

Under the Income Tax Act, beneficial ownership in relation to Quebec entails a determination of whether the beneficiary has “a right as a beneficiary in a trust”.  That determination involves an analysis of the Civil Code of Quebec provisions respecting trusts.  Under common law, there is no obvious meaning of the term “beneficial ownership”.  Some common law writers are of the view that a beneficiary will be considered the beneficial owner of property if that beneficiary has a sufficiently direct interest in the trust, which itself entails an analysis of the rights of the beneficiary.  Consequently, it is possible that the threshold for beneficial ownership may not be the same for Quebec and the common law provinces.  Therefore, it is conceivable that the same set of circumstances could result in different conclusions with respect to beneficial ownership.  This, the author submits, is inappropriate from a harmonization perspective, because the Income Tax Act should not treat differently people who are similarly situated.

The author also examines the concept of “change in beneficial ownership” as it is used in the Income Tax Act and the difficulties that can arise in attempting to define the circumstances in which a change in beneficial ownership occurs when there is no clear definition of beneficial ownership itself.

The author concludes that paragraph 248(3)(f) may be deficient in achieving the objectives of harmonization.  The problem with paragraph 248(3)(f) is that it is built on concepts that are not clear at common law and therefore it cannot be an effective building block.  The author suggests possible solutions for achieving harmonization of the concept of beneficial ownership under the Income Tax Act as it applies to holding property directly and holding property through a trust.  In the context of holding property directly, the author suggests that references to beneficial ownership can be replaced by a specific definition of the attributes of ownership and provide an exception for nominal ownership.  With respect to property held through a trust, the author suggests that neutral concepts be developed that encompass the intended substantive effects of the concepts of “beneficial ownership” and “no change in beneficial ownership”, without employing such terms.

TABLE OF CONTENTS:

INTRODUCTION

I. HARMONIZATION of benefical ownership

II. Beneficial Ownership Explored

2.1  Beneficial Ownership of Property Held In Trust

2.1.1 Beneficial Ownership in the Common Law Provinces

2.1.1.1 Change in Beneficial Ownership

2.1.2 Beneficial Ownership in Québec

2.1.3 Deemed Beneficial Ownership in Québec

                        2.1.3.1 Default Beneficiaries

                        2.1.3.2 Potential Appointees/Discretionary Beneficiaries

                        2.1.3.3 Contingent or Absolute Rights under the Trust

2.2 Beneficial Ownership of Property Held Directly

2.3 Issues Arising from the Concept of Beneficial Ownership and Change in Beneficial Ownership

                2.3.1 Trusts

                2.3.2 “Controlled” in Subsection 186(2)

                2.3.3 Foreign Share for Share Exchanges

                2.3.4 Tax Treaties

                2.3.5 Foreclosures

2.4 Subsection 248(3)

2.5 Construction Bérou and Wardean Drilling

III. PREVIOUSLY PROPOSED SOLUTIONS

        3.1 Neutral Terms, Defined Terms, “Duet

        3.2 Subsection 248(3)

IV. RECOMMENDATIONS

        4.1 Transfers to Trusts for the Sole Benefit of the Settlor and Deemed Dispositions

                4.1.1 Transfers to Self-Benefit Trusts

                4.1.2 Qualifying Dispositions

                4.1.3 Exceptions to Dispositions

                4.1.4 Inadequate Consideration and Security Trusts

                4.1.5 Deemed Dispositions

        4.2 Foreclosures

        4.3 Share for Share Exchanges

        4.4 Advertising Expenses

        4.5 Other contexts

CONCLUSION