Pangaea One Acquisition Holdings XII S.À.R.L. v. The Queen

Pangaea One Acquisition Holdings XII S.À.R.L. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2018-07-31
Neutral citation
2018 TCC 158
File numbers
2016-1480(IT)G
Judges and Taxing Officers
Guy R. Smith
Subjects
Income Tax Act
Decision Content
Docket: 2016-1480(IT)G
BETWEEN:
PANGAEA ONE ACQUISITION
HOLDINGS XII S.À.R.L.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 16, 2018, at Montreal, Quebec.
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellant:
Pierre Martel
Nicholas Grenier
Counsel for the Respondent:
Yanick Houle
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the assessment pertaining to Part XIII of the Income Tax Act is dismissed, with costs to the Respondent, to be calculated in accordance with Tariff B.
Signed at Ottawa, Canada, this 31st day of July 2018.
“Guy Smith”
Smith J.
Citation: 2018 TCC 158
Date: 20180731
Docket: 2016-1480(IT)G
BETWEEN:
PANGAEA ONE ACQUISITION HOLDINGS XII S.À.R.L.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Smith J.
I. Introduction
[1] Pangaea One Acquisition Holdings XII S.À.R.L. (“Pangaea” or the “Appellant”) was incorporated under laws of Luxemburg and is a non‑resident of Canada for income tax purposes.
[2] It appeals from an assessment made pursuant to Part XIII of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the “Act”) wherein the Minister of National Revenue (the “Minister”) denied its application for a refund of $750,000 withheld from a payment made by a resident of Canada.
[3] The issue in this appeal is whether the payment was properly characterized as a “restrictive covenant” pursuant to subsection 56.4(2) of the Act and whether the amount paid to the Receiver General of Canada, as noted above, was properly withheld pursuant to paragraph 212(1)(i) of the Act.
II. The facts
[4] The material facts are not in dispute and the parties prepared the Partial Agreed Statement of Facts attached hereto as Schedule “A”.
[5] Pangaea, Thomvest Seed Capital Inc. (“Thomvest”) and Mr. William T. Dodds (“Dodds”) owned all the issued and outstanding shares of Public Mobile Holdings Inc. (“Public Mobile”) that were sold to Telus Communications Inc. (“Telus”).
[6] Pangaea, Thomvest and Dodds were signatories to a Unanimous Shareholder Agreement (“USA”) dated June 5, 2013 which governed the ownership of shares held in Public Mobile. It provided, inter alia, that the shares could not be transferred without the prior written consent of the “Special Majority Shareholders”. Pangaea was one of those shareholders.
[7] In the context of the discussions and negotiations that led to the sale of the shares of Public Mobile to Telus, Pangaea and Thomvest entered into an agreement on September 23, 2013 (the “Letter Agreement”). It provided that Thomvest would pay a certain amount of money (the “Payment Amount”) as consideration for Pangaea’s agreement to execute the share purchase agreement (“SPA”) involving the sale of the subject shares to Telus.
[8] It was clear on the face of the Letter Agreement that the Payment Amount was to be paid by Thomvest “as consideration for Pangaea’s agreement to execute the SPA”. The amount was established on closing to be $3,000,000.
[9] On September 30, 2013, the shareholders, including Pangaea, executed the SPA with Telus and the transaction closed on November 29, 2013.
[10] The Letter Agreement, as described above, included a provision that Thomvest would “withhold from the Payment Amount, the amount required by applicable law to be withheld and remit same to the appropriate governmental authority (…)”. Thomvest did so and on December 16, 2013, remitted the sum of $750,000 (representing 25% of the Payment Amount) to the Receiver General of Canada pursuant to subsection 215(1) of the Act.
[11] Thereafter, on January 16, 2014, Pangaea filed an application for a refund of the tax withheld under Part XIII of the Act, indicating that the amount had been a “payment under 56.4 of the Income Tax Act” and that the reason for the request for a refund was that it was “entitled to a treaty exemption under Article #7 as a resident of Luxemburg at the time of payment”.
[12] The Minister eventually issued an assessment pursuant to subsection 227(7) of the Act, denying the refund on the basis “that the payment was a restrictive covenant payment per subsection 56.4(1) of the Act” that did “not benefit from any treaty relief”.
III. Position of the Parties
A. Position of the Appellant
[13] The Appellant acknowledges that subsection 56.4(2) of the Act requires that the grantor of a “restrictive covenant” include the full amount received as income and that where the amount is paid to a non‑resident of Canada, paragraph 212(1)(i) imposes a 25% withholding tax.
[14] The Appellant argues, however, that this excludes “an agreement or undertaking (…) that disposes of the taxpayer’s property” relying on paragraph 56.4(1)(a). The Appellant argues that the Letter Agreement is an agreement that “affects or is intended to affect (…) the acquisition or provision of its property or services”, being the shares in Public Mobile. As such, it is excluded from the definition of a restrictive covenant”. The rationale for this is that the gain is subject to taxation as a capital gain.
[15] The Appellant also argues that the definition of “property” in subsection 248(1) includes “a right of any kind whatever, a share or a chose in action”, and also includes the veto rights established by the USA.
[16] The Appellant relies on RCI Environmental, infra (in particular paras. 69‑71) and argues that since the veto rights were exclusive to the Appellant, they were “property” for the purposes of the Act. The disposition of such rights and the consideration received should be treated as a disposition of property resulting in a capital gain.
[17] The Appellant argues, finally, that the property disposed of is not a “taxable Canadian property” as defined in subsection 248(1) of the Act and as such the gain is not taxable in Canada pursuant to paragraph 2(3)(c).
B. Position of the Respondent
[18] The Respondent argues that by entering into the Letter Agreement, the Appellant waived its right under the USA to block the sale of shares in Public Mobile to Telus. In that sense, the Letter Agreement “affected (…) the provision of property” by the Appellant to Telus. As a result, the Payment Amount received in exchange for the Appellant’s waiver of its veto rights is subject to Part XIII tax pursuant to paragraph 212(1)(a) and subsection 56.4(2).
[19] The Respondent argues that the enactment of subsection 56.4(2) was intended to address concerns arising out of certain decisions (as noted below) that an amount received in respect of a restrictive covenant was neither income nor property for income tax purposes.
[20] The Respondent argues that the definition of a restrictive covenant was intended to be broadly construed to include not just negative covenants but also a positive promise to do a particular act. In the end, the Respondent argues that the enactment of subsection 56.4(2) was intended to capture payments received by a taxpayer that are not otherwise included in income.
[21] The Respondent argues that the Letter Agreement is not an “agreement or undertaking (…) that disposes of property” and therefore is not excluded from the definition of “restrictive covenant”. Rather, the Appellant’s waiver of its right to block the sale of the shares in Public Mobile was a covenant that affected the acquisition or provision of property, being the shares of Public Mobile.
[22] The Respondent refers to paragraph 12(1)(x) of the Act which seeks to tax amounts received by a taxpayer “in the course of earning income from a business or property” that are paid as an “inducement”, as further defined therein. By virtue of subparagraph 12(1)(x)(v.1), amounts paid as a restrictive covenant and taxable pursuant to subsection 56.4(2) are excluded. The Respondent argues that the Payment Amount was not received by the Appellant “in the course of earning income from a business or property” such that it is not taxable pursuant to that provision. Subsection 56.4(2) was intended to fill the gap and capture the subject payment which could otherwise be characterized as an “inducement”.
IV. The Relevant Statutory Provisions
[23] Part XIII of the Act is titled “Tax on Income from Canada of Non‑resident Persons”. Subsection 212(1) provides as follows:
212(1) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, (…)
[24] This provision imposes a tax of 25% (often reduced by tax treaty) on a wide variety of payments to non‑residents including management fees, interest, rent, royalties, pension benefits, as further defined therein, and includes “restrictive covenants”. Paragraph 212(1)(i) provides as follows:
212(1)(i) — an amount that would, if the non-resident person had been resident in Canada throughout the taxation year in which the amount was received or receivable, be required by paragraph 56(1)(m) or subsection 56.4(2) to be included in computing the non-resident person’s income for the taxation year;
[25] Subsection 56.4(2) is located in Part 1 of the Act under Subdivision d titled “Other Sources of Income”. It provides as follows:
56.4(2) There is to be included in computing a taxpayer’s income for a taxation year the total of all amounts each of which is an amount in respect of a restrictive covenant of the taxpayer that is received or receivable in the taxation year by the taxpayer or by a taxpayer with whom the taxpayer does not deal at arm’s length (other than an amount that has been included in computing the taxpayer’s income because of this subsection for a preceding taxation year or in the taxpayer’s eligible corporation’s income because of this subsection for the taxation year or a preceding taxation year).
[26] The term “restrictive covenant” is defined in subsection 56.4(1):
restrictive covenant, of a taxpayer, means an agreement entered into, an undertaking made, or a waiver of an advantage or right by the taxpayer, whether legally enforceable or not, that affects, or is intended to affect, in any way whatever, the acquisition or provision of property or services by the taxpayer or by another taxpayer that does not deal at arm’s length with the taxpayer, other than an agreement or undertaking
(a) that disposes of the taxpayer’s property; or
(b) that is in satisfaction of an obligation described in section 49.1 that is not a disposition except where the obligation being satisfied is in respect of a right to property or services that the taxpayer acquired for less than its fair market value. (clause restrictive)
[27] It is worth noting that the above‑noted provision was first introduced on October 7, 2003 but the final bill only received Royal Assent on June 26, 2013. A full version is attached as Schedule “B”.
[28] Where an amount is to be paid by “a person resident in Canada” to a “non‑resident person” pursuant to subsection 212(1), subsection 215(1) (also located in Part XIII of the Act) provides that the payee shall “deduct or withhold from it the tax and forthwith remit that amount to the Receiver General on behalf of the non‑resident person (…)” who may then file an application, as Pangaea has done in this instance, requesting a refund of the tax paid on its behalf.
[29] Where the Minister is not satisfied that “the person was not liable to pay any tax (…)”, she shall assess an amount payable and send a notice of assessment, as was done in this case, resulting in the assessment of December 11, 2014 that is the subject of this appeal.
V. The Relevant Case Law
[30] There have been few, if any, reported decisions on subsection 56.4(2) but at least three decisions that pre‑date the provision are relevant to this analysis.
[31] In Fortino v. R., [1997] 2 C.T.C. 2184 (confirmed by the Federal Court of Appeal: [2000] 1 C.T.C. 349) (“Fortino”), the appellants had sold their shares in a business to an entity controlled by the grocery‑store Loblaws and executed non‑competition agreements (“NCA”) in exchange for which they each received a payment (“NCA payment”). The consideration received for the sale of shares was reported as a capital gain but the NCA payment was not reported.
[32] The appellants were reassessed and at the hearing of the appeal the Minister argued that the NCA payment should be taxed as income pursuant to section 3 of the Act; alternatively as eligible capital property under subsection 14(1) and in the further alternative as capital gains. The appellants argued that there was no provision in the Act which rendered the payments taxable.
[33] Justice Lamarre (as she then was) stated that the initial step to determine whether the receipt was taxable as income, was “to establish the nature and character of the receipt” (para. 37), noting that section 3 of the Act identifies “five primary sources from which income can be derived: office, employment, business, property or capital gains” (para. 29). She found that by giving the covenant not to compete, the appellants had “surrendered a potential source of profit” (para. 49) and therefore that “the amounts should not be taxable under section 3” (para. 53).
[34] Justice Lamarre then considered whether the NCA payment should be treated as eligible capital property, indicating that this required a finding that the payments were made “for the purpose of gaining or producing income from a business” as set out in subsection 14(1). Since it was the corporation whose shares had been sold, and not the individual shareholders, who operated the business, she concluded that the payments could not be considered eligible capital property.
[35] The respondent argued that the NCA payment “constituted disguised proceeds of disposition of the shares” (para. 78) and should taxed as capital gains pursuant to sections 38 and 39 of the Act. Justice Lamarre declined to consider that argument since it had not been properly pleaded and concluded, in dictum, that the payments “were more in the nature of a capital receipt” (para. 54). In the end, she concluded that the NCA payments were non‑taxable receipts.
[36] In the later decision of Manrell v. R., [2002] 1 C.T.C. 2543, 2002 D.T.C. 1222 (“Manrell”) the appellant and others had sold their shares in an operating business and agreed to execute NCAs for which they received a payment. Relying on Fortino, supra, the appellants argued that the payment given in exchange for their agreement not to compete was non‑taxable.
[37] McArthur J. of this Court, found that the NCAs were “property” within the meaning of subsection 248(1) of the Act. He found that the appellants had disposed of their right to compete which was “inextricably connected to the payment for the shares” (para. 22), resulting in a taxable capital gain.
[38] The Federal Court of Appeal did not agree (Manrell v. R., 2003 FCA 128), and found that an agreement not to compete does not constitute property. The court noted that the definition of “property” in subsection 248(1), which includes “a right of any kind whatever, share or a chose in action”, does not extend the common law meaning of property.
[39] Sharlow J.A. found in particular that while the word “property” had “a very broad meaning” (…) it was “not a word of infinite meaning” and could not “include every conceivable right” (para. 50). Noting that the result was unsatisfactory from a policy point of view, she nonetheless concluded that there was no basis upon which to conclude that “payments received under the non‑competition agreements were proceeds of disposition” (para. 68). As a result the payments were found to be “non‑taxable capital receipts” (para. 69).
[40] In the decision of RCI Environment Inc. v. R., 2007 TCC 687 (“RCI”), the appellants had acquired business assets and obtained a NCA from the vendors. As a result of a merger with a US based company, the vendors were later found to be in breach of the NCA. Following an out-of-court settlement, it was agreed that the appellants would receive a payment of $12,000,000 to terminate the NCA.
[41] At issue was the tax treatment of the amount received. The appellants claimed that the amount received was neither business income nor a taxable capital receipt noting that the NCAs “were not property (…) and that there had been no disposition for purposes of the Act” (para. 14).
[42] Archambault J. observed that “the purpose of the non‑competition agreements was to preserve the goodwill acquired” and that this was “an advantage of an enduring nature” and on that basis should be viewed as “a capital asset” (para. 28). Having rejected the further argument that the NCA payment was a non‑taxable windfall gain, he concluded that it was taxable as an eligible capital property pursuant to subsection 14(1).
[43] On appeal to the Federal Court of Appeal (2008 FCA 419), the court agreed that the NCA was property since it “clearly resulted in preserving the goodwill acquired (…)” (para. 38). Noël J.A. (as he then was) added that:
39 As to the notion of "property" under the Act, it has been recognized for a long time that the concept of "property" under the Act is a large one that can extend to contractual rights (Canada v. Golden, [1986] 1 S.C.R. 209, at page 214). A number of decisions rendered since have applied the concept of property to contractual and even personal rights (see, for example, Valley Equipment Ltd. v. The Queen, 2008 FCA 65, paragraph 26; Nadeau v. The Queen, 2003 FCA 400, paragraph 28; Kieboom v. M.R.N., [1992] 3 F.C. 488 (F.C.A.), pages 499 and 500; Sani Sport Inc. c. La Reine, [1990] 2 C.T.C. 15 (C.A.F.), page 23; La Capitale, Cie D'assurance générale v. The Queen, 98 DTC 6215 (F.C.A.), page 6221; Rapistan Canada Ltd. v. M.R.N., [1974] 1 F.C. 739 (F.C.A.), page 742; Pe Ben Industries Co. v. The Queen, 88 DTC 6347 (F.C.T.D.), page 6351, 3rd paragraph before the end).
40 Moreover, as explained by the TCC judge, this Court's decision in Manrell v. The Queen, 2003 FCA 128, [2003] 3 F.C. 727, does not help counsel for RCI (2006) at all (Reasons, paragraphs 61 to 63). The principle arising from that decision is that only a right that makes it possible to make a claim against someone else is "property". The right given to RCI and CTVNS under the non-competition agreements was clearly of that nature.
41 As to the concept of "disposition", the TCC judge did not err in referring to that word's usual meaning for the application of section 14. That is what the Supreme Court did in Compagnie Immobilière BCN, cited above, where it decided that the word "disposition" in English ("aliéné" in French) was sufficiently broad to include the extinguishment of a right granted by a lease (ibidem, pages 878 to 879).
42 The TCC judge was correct from the outset to conclude that, for the purposes of the provisions relating to capital gain, there had been a "disposition" according to the definition provided in paragraph 54(a), according to which this word includes "any ... event entitling a taxpayer to proceeds of disposition of property". I would add that, in terms of tax policy and principles, there is no reason to treat the concept of "disposition" differently depending on whether the property in question falls under section 38 or section 14.
(My Emphasis.)
VI. Analysis
i) Statutory Interpretation
[44] Since subsection 56.4(2) has not been judicially considered to date, it is worth noting at the outset, the oft‑repeated rule of statutory interpretation that “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament (Elmer A. Dreidger, Construction of Statutes, 2nd ed., Toronto, Butterworths, 1983, at p. 87).
[45] It is now well‑established that a textual, contextual and purposive analysis also applies to tax statues, “[h]owever, because of the degree of precision and detail characteristic of many tax provisions, a greater emphasis has often been placed on textual interpretation where taxation statutes are concerned”: Placer Dome Canada Ltd. v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715, (para. 21).
[46] The above is consistent with section 12 of the Interpretation Act, R.S.C. 1985, c. I‑21, which provides that “every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects”.
ii) Was there an agreement?
[47] A “restrictive covenant”, as defined by subsection 56.4(1), can be characterized as follows:
i) an agreement entered into, an undertaking made, or a waiver of an advantage or right by the taxpayer, whether legally enforceable or not;
ii) that affects, or is intended to affect, in any way whatever, the acquisition or provision of property or services by the taxpayer or by another taxpayer that does not deal at arm’s length with the taxpayer;
iii) excluding an agreement or undertaking that disposes of the taxpayer’s property;
iv) and excluding an agreement of undertaking that is in satisfaction of an obligation described in section 49.1 (none of which has been raised in this instance).
[48] A plain reading of this provision suggests firstly, that there must be either “an agreement”, “an undertaking” or “a waiver of an advantage or right”. The listing is disjunctive such that it can be one or the other.
[49] It is not disputed that the Letter Agreement was “an agreement” between the Appellant and Thomvest, pursuant to which the Appellant agreed “to execute the SPA” involving the sale of shares in Public Mobile to Telus. The agreement to execute the SPA was given “in consideration of the respective promises, covenants and agreements” therein contained and included “other good and valuable consideration” including Thomvest’s agreement to deliver the Payment Amount on closing representing “an amount payable for Pangaea agreeing to execute the SPA”.
[50] While it could also be said that the Appellant “undertook” to execute the SPA, it is sufficient for the purposes hereof, to conclude that the Letter Agreement constitutes “an agreement”, without further analysis to determine whether it also qualifies as “an undertaking”. That issue can be left for another day.
[51] The Letter Agreement itself does not expressly refer to the Appellant’s right to block the sale of shares as a “Special Majority Shareholder”, but it was clear from the documentary and testimonial evidence that the Appellant was initially opposed to the proposed sale of shares of Public Mobile to Telus. It communicated its objection and suggested that it might avail itself of what has come to be described as its “veto right” before finally agreeing to execute the Letter Agreement waiving that right.
[52] On the basis of the above, I conclude that the Letter Agreement can be viewed as either “an agreement” or “a waiver of an advantage or right”.
[53] It should also be mentioned that the latter part of the first requirement includes the words “whether legally enforceable or not”. This suggests that “an agreement” or “an undertaking” or “a waiver of an advantage or right” that is not legally enforceable, would still be captured by this provision. In any event, for the purposes hereof, I will assume that the Letter Agreement was legally enforceable.
iii) Does it affect the acquisition or provision of property?
[54] The second requirement is that the agreement must affect or be intended to affect, in any way whatever, the acquisition or provision of property or services by the taxpayer. This suggests that there must be an obvious link or nexus between the agreement and the acquisition or provision of property or services in question.
[55] In this instance, the Appellant argues that the veto right falls within the definition of property in subsection 248(1) of the Act and that the Appellant was in fact disposing of that right giving rise to a capital gain. It relies on RCI, supra, to support the notion that the concept of property extends to contractual rights and that, by virtue of the Letter Agreement, the Appellant disposed of its veto right giving rise to proceeds of disposition and hence to a capital gain. As a result, the Letter Agreement is not captured by the definition of a “restrictive covenant”.
[56] I find that this is an attempt to re‑characterize the nature of the transaction. In particular, I find that there is no evidence to support the proposition that the veto right had been disposed of. There was no evidence of an actual transfer or conveyance or even of an assignment of that right to a third party.
[57] The commercial reality of the transaction and the evidence indicates that Thomvest did not acquire the veto right. It agreed to deliver the Payment Amount in consideration of which the Appellant agreed to waive that right and execute the SPA with Telus. The Letter Agreement did not have the effect of disposing of the veto right nor did it result in its extinguishment. The veto right was waived by the Appellant and it was only once the transaction involving the sale of shares to Telus was consummated, that the veto right was extinguished. Telus acquired 100% of the issued and outstanding shares in Public Mobile and having done so, there was no need for it to acquire the Appellant’s veto right. In any event, that right arose from an agreement between the shareholders of which it was never a party.
[58] On the basis of the evidence before me, I find that there was an obvious nexus between the Letter Agreement and the disposition of the shares to Telus. In fact the preamble of the Letter Agreement provides that the Appellant “proposes to, concurrently with the entering into of this letter agreement (…) enter into a share purchase agreement (…)”. I find that this is sufficient to establish that the Letter Agreement affected or was intended to affect the “provision of property”, being the sale of the shares of Public Mobile to Telus.
iv) Does the agreement or undertaking dispose of the taxpayer’s property?
[59] The remaining issue is whether the “agreement” or “undertaking” or “waiver of an advantage or right” in fact “disposes of a taxpayer’s property”. If so, then it will not be captured by the definition of a “restrictive covenant” and the proceeds of disposition will not have to be included as income pursuant to subsection 56.4(2) of the Act.
[60] I would interpret this exception to mean that where a taxpayer enters into a agreement that is intended to dispose of his property, be it all the assets required to operate a business or all the shares of an operating company, and all the monetary consideration is allocated to that property, then the “restrictive covenant” provision will not be triggered. This would be the case where, for example, in a transaction involving a sale of all the shares of an operating company, the principal enters into a NCA, but all the monetary consideration is allocated to the shares. In that instance, the “restrictive covenant” provision would not be triggered as the proceeds of disposition would generally be taxed as a capital gain. There would certainly be other variations of such a transaction but in most instances there would need to be evidence in the form of a deed or indenture to substantiate the conveyance and the consideration paid.
[61] The Appellant argues that the Letter Agreement is not a “restrictive covenant” since there was a conveyance or disposition of its veto right. This argument is separate from the argument made above, but the analysis remains the same.
[62] I find that there is no evidence of a conveyance or disposition of the Appellant’s veto right — even if it can properly be characterized as “property”. As noted above, there was no evidence of a deed or indenture or of an assignment of the veto right to a third party, which would allow the Appellant to avail itself of the exception relating to a disposition “of the taxpayer’s property”. The Letter Agreement was a distinct agreement pursuant to which the Appellant waived its veto right but there was no evidence of an actual disposition.
[63] The Appellant relies on the conclusion reached in RCI, supra, where the count determined that a contractual right was “property”. But the facts in that case were quite different. The appellant had received a large sum of money to extinguish an existing NCA. The trial judge found that this “contractual right” was “property” and that its disposition was taxable as eligible capital property pursuant to subsection 14(1). The Federal Court of Appeal agreed with this analysis. Although it is not necessary for me to do so in the context of this appeal, I am inclined to believe that the result in RCI would likely be the same today, despite the introduction of subsection 56.4(2), since the court concluded that there was evidence of an actual disposition of the appellants’ property.
VII. Conclusion
[64] In this instance, the essential nature, character and substance of the transaction was a sale of shares from the Appellant and the other shareholders of Public Mobile to Telus. The Letter Agreement by which the Appellant agreed to waive its veto right, was not a necessary precondition to that transaction though it was required to settle a disagreement between Thomvest and the Appellant. In that sense it “affected” or was “intended to affect” the proposed disposition of shares. On that basis, I find that it was a “restrictive covenant” as defined in subsection 56.4(1).
[65] For all the foregoing reasons, the appeal is dismissed with costs to the Respondent, to be calculated in accordance with Tariff B.
Signed at Ottawa, Canada, this 31st day of July 2018.
“Guy Smith”
Smith J.
SCHEDULE “A”
SCHEDULE “B”
SUBDIVISION D
Other Sources of Income
SOUS-SECTION D
Autres sources de revenu
. . .
. . .
Restrictive Covenants
Clauses restrictives
Definitions
Définitions
56.4 (1) The following definitions apply in this section.
56.4 (1) Les définitions qui suivent s’appliquent au présent article.
eligible corporation, of a taxpayer, means a taxable Canadian corporation of which the taxpayer holds, directly or indirectly, shares of the capital stock. (société admissible)
eligible individual, in respect of a vendor, at any time means an individual (other than a trust) who is related to the vendor and who has attained the age of 18 years at or before that time. (particulier admissible)
eligible interest, of a taxpayer, means capital property of the taxpayer that is
(a) a partnership interest in a partnership that carries on a business;
(b) a share of the capital stock of a corporation that carries on a business; or
(c) a share of the capital stock of a corporation 90% or more of the fair market value of which is attributable to eligible interests in one other corporation. (participation admissible)
goodwill amount, of a taxpayer, is an amount the taxpayer has or may become entitled to receive that would, if this Act were read without reference to this section, be required to be included in the proceeds of disposition of a property included in Class 14.1 of Schedule II to the Income Tax Regulations, or is an amount to which subsection 13(38) applies, in respect of a business carried on by the taxpayer through a permanent establishment located in Canada. (montant pour achalandage)
permanent establishment means a permanent establishment as defined for the purpose of subsection 16.1(1). (établissement stable)
restrictive covenant, of a taxpayer, means an agreement entered into, an undertaking made, or a waiver of an advantage or right by the taxpayer, whether legally enforceable or not, that affects, or is intended to affect, in any way whatever, the acquisition or provision of property or services by the taxpayer or by another taxpayer that does not deal at arm’s length with the taxpayer, other than an agreement or undertaking
(a) that disposes of the taxpayer’s property; or
(b) that is in satisfaction of an obligation described in section 49.1 that is not a disposition except where the obligation being satisfied is in respect of a right to property or services that the taxpayer acquired for less than its fair market value. (clause restrictive)
taxpayer includes a partnership. (contribuable)
clause restrictive En ce qui concerne un contribuable, accord, engagement ou renonciation à un avantage ou à un droit, ayant force exécutoire ou non, qui est conclu, pris ou consenti par lui et qui influe, ou vise à influer, de quelque manière que ce soit, sur l’acquisition ou la fourniture de biens ou de services par lui ou par un autre contribuable avec lequel il a un lien de dépendance, à l’exception d’un accord ou d’un engagement qui, selon le cas :
a) dispose des biens du contribuable;
b) a pour objet l’exécution d’une obligation visée à l’article 49.1 qui ne constitue pas une disposition, sauf si l’obligation se rapporte à un droit sur des biens ou des services que le contribuable a acquis pour une somme inférieure à leur juste valeur marchande. (restrictive covenant)
contribuable Y sont assimilées les sociétés de personnes. (taxpayer)
établissement stable S’entend au sens qui est donné à ce terme pour l’application du paragraphe 16.1(1). (permanent establishment)
montant pour achalandage Est le montant pour achalandage d’un contribuable la somme qu’il a reçue ou peut devenir en droit de recevoir qui serait, en l’absence du présent article, à inclure dans le produit de disposition d’un bien compris dans la catégorie 14.1 de l’annexe II du Règlement de l’impôt sur le revenu, ou une somme à laquelle le paragraphe 13(38) s’applique, relativement à une entreprise qu’il exploite par l’entremise d’un établissement stable situé au Canada. (goodwill amount)
participation admissible Immobilisation d’un contribuable qui est :
a) une participation dans une société de personnes qui exploite une entreprise;
b) une action du capital-actions d’une société qui exploite une entreprise;
c) une action du capital-actions d’une société dont au moins 90 % de la juste valeur marchande est attribuable à des participations admissibles dans une autre société. (eligible interest)
particulier admissible S’entend, relativement à un vendeur à un moment donné, d’un particulier, à l’exception d’une fiducie, qui est lié au vendeur et qui est âgé d’au moins 18 ans à ce moment. (eligible individual)
société admissible Est une société admissible d’un contribuable toute société canadienne imposable dont il détient, directement ou indirectement, des actions du capital-actions. (eligible corporation)
Income — restrictive covenants
Revenu — clause restrictive
(2) There is to be included in computing a taxpayer’s income for a taxation year the total of all amounts each of which is an amount in respect of a restrictive covenant of the taxpayer that is received or receivable in the taxation year by the taxpayer or by a taxpayer with whom the taxpayer does not deal at arm’s length (other than an amount that has been included in computing the taxpayer’s income because of this subsection for a preceding taxation year or in the taxpayer’s eligible corporation’s income because of this subsection for the taxation year or a preceding taxation year).
(2) Est à inclure dans le calcul du revenu d’un contribuable pour une année d’imposition le total des sommes dont chacune a trait à une clause restrictive du contribuable et est reçue ou à recevoir au cours de l’année par le contribuable ou par un contribuable avec lequel il a un lien de dépendance, à l’exception de toute somme qui a été incluse soit dans le calcul du revenu du contribuable par l’effet du présent paragraphe pour une année d’imposition antérieure, soit dans le revenu de la société admissible du contribuable par l’effet du présent paragraphe pour l’année ou pour une année d’imposition antérieure.
Non-application of subsection (2)
Non-application du paragraphe (2)
(3) Subsection (2) does not apply to an amount received or receivable by a particular taxpayer in a taxation year in respect of a restrictive covenant granted by the particular taxpayer to another taxpayer (referred to in this subsection and subsection (4) as the “purchaser”) with whom the particular taxpayer deals at arm’s length (determined without reference to paragraph 251(5)(b)), if
(3) Le paragraphe (2) ne s’applique pas à la somme reçue ou à recevoir par un contribuable donné au cours d’une année d’imposition au titre d’une clause restrictive qu’il a accordée à un autre contribuable (appelé « acheteur » au présent paragraphe et au paragraphe (4)) avec lequel il n’a aucun lien de dépendance (déterminé compte non tenu de l’alinéa 251(5)b)) si l’un des faits ci‑après se vérifie :
(a) section 5 or 6 applied to include the amount in computing the particular taxpayer’s income for the taxation year or would have so applied if the amount had been received in the taxation year;
a) la somme a été incluse, en application des articles 5 ou 6, dans le calcul du revenu du contribuable donné pour l’année, ou l’aurait été si elle avait été reçue au cours de cette année;
(b) the amount would, if this Act were read without reference to this section, be required to be included in the proceeds of disposition of a property included in Class 14.1 of Schedule II to the Income Tax Regulations, or is an amount to which subsection 13(38) applies, in respect of the business to which the restrictive covenant relates, and the particular taxpayer elects (or if the amount is payable by the purchaser in respect of a business carried on in Canada by the purchaser, the particular taxpayer and the purchaser jointly elect) in prescribed form to apply this paragraph in respect of the amount; or
b) la somme serait, en l’absence du présent article, à inclure dans le produit de disposition d’un bien compris dans la catégorie 14.1 de l’annexe II du Règlement de l’impôt sur le revenu, ou est une somme à laquelle le paragraphe 13(38) s’applique, relativement à l’entreprise à laquelle la clause restrictive se rapporte, et le contribuable donné fait le choix sur le formulaire prescrit, à titre individuel ou conjointement avec l’acheteur si la somme est payable par ce dernier relativement à une entreprise qu’il exploite au Canada, d’appliquer le présent alinéa relativement à la somme;
(c) subject to subsection (9), the amount directly relates to the particular taxpayer’s disposition of property that is, at the time of the disposition, an eligible interest in the partnership or corporation that carries on the business to which the restrictive covenant relates, or that is at that time an eligible interest by virtue of paragraph (c) of the definition eligible interest in subsection (1) where the other corporation referred to in that paragraph carries on the business to which the restrictive covenant relates, and
c) sous réserve du paragraphe (9), la somme se rapporte directement à la disposition, par le contribuable donné, d’un bien qui est, au moment de la disposition, soit une participation admissible dans la société de personnes ou la société qui exploite l’entreprise à laquelle la clause restrictive se rapporte, soit une participation admissible par l’effet de l’alinéa c) de la définition de participation admissible au paragraphe (1) lorsque l’entreprise à laquelle la clause restrictive se rapporte est exploitée par l’autre société visée à cet alinéa, et, à la fois :
(i) the disposition is to the purchaser (or to a person related to the purchaser),
(i) la disposition est effectuée en faveur de l’acheteur ou d’une personne qui lui est liée,
(ii) the amount is consideration for an undertaking by the particular taxpayer not to pro