Source: http://taxinterpretations.com/tax-topics/general-concepts/illegality
Timestamp: 2019-04-21 06:59:57+00:00

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A Quebec company (“PPP”) through car dealers offered motor vehicle replacement “warranties,” which, in the event of the loss of the vehicle through accident or theft, would cover the difference between the depreciated value of the vehicle (which was covered by the regular insurer) and the cost of a new replacement vehicle.
[I]n civil law, it is quite possible to have an insurance contract without having a qualified or accredited insurer. The nature and purpose of the contract is in no way affected.
A financial institution, which was controlled by a non-resident, acquired an option to subscribe at a future date for the majority of the equity of a holding company for an Opco which, if actually exercised by it, would have violated a prohibition in the Act respecting financial services (Quebec) against it acquiring greater than a 20% stake in the company. Noël CJ affirmed the finding of Rip J below that a mere option did not violate such Act. The effect of finding the option to be valid is that the Opco did not qualify as a Canadian-controlled private corporation, so that capital gains deductions claimed at a higher level in the structure were properly denied.
The zero-rating of controlled drugs in Sched. VI, Part I, s. 2(d) would apply to dried marihuana if it is viewed as a drug which may only be sold to a consumer under an "exemption" from Health Canada. After noting the Crown’s concession that marihuana is a “drug,” Rennie JA found that "Authorizations to Possess" (ATPs) issued by Health Canada were not such exemptions, so that marihuana did not come within this carve-out for drugs which could be sold only with an exemption.
It would be illogical to tax a drug that may be lawfully sold to a consumer, (i.e., all the drugs captured by the carve out) but to exempt from taxation a drug that is not lawfully sold.
The taxpayer ("Envision") was formed on the amalgamation under the Credit Union Incorporation Act (B.C.) (the "CUIA") of two credit unions. S. 23(b) thereof provided that "the amalgamated credit union is seized of and holds and possesses all the property ... and is subject to all the debts ... of each amalgamating credit union."
The taxpayer sought to avoid having this qualify as an amalgamation described in s. 87(1) of the Act (which required that all property of the predecessors, other than intercompany shares or debts, become property of the amalgamated corporation). To this end, a beneficial interest in some "surplus" real estate was conveyed to a numbered corporation subsidiary at the exact stipulated time for the amalgamation in the amalgamation agreement.
Although there is extrinsic evidence that the predecessors intended to prevent Envision from being seized of the surplus properties, such an arrangement would be in violation of s. 23(b) of the CUIA. When a contract may be construed in two ways, a lawful interpretation ought to be preferred over an unlawful one: G. McMeel, The Construction of Contracts: Interpretation, Implication, and Rectification (2nd ed. 2011), at para. 7.31. Accordingly, the words of the contract (as opposed to the intention of the parties with respect to tax consequences) are best interpreted as merely ensuring that the surplus properties were sold at the time of the amalgamation. This interpretation is consistent with s. 23(b) of the CUIA. As a result, the amalgamation agreement is not invalid.
"That, however, does not solve the problem for the purposes of the section of the Income Tax Act in question. The covenant is a subsisting one: no one has yet challenged it and until that is done it is binding on the parties."
There was no dispute that the participation by the taxpayer, as a partner, in a partnership for a four-day period resulted in a breach by its parent (a bank) of s. 174(2)(i) of the Bank Act, which prohibited the direct or indirect investment or participation in a partnership by a bank. The majority found that the unlawfulness of the investment by the bank and the taxpayer did not affect the legality of the partnership's business or of the taxpayer's participation in the partnership. Furthermore, considerations of public policy required that breaches of the Bank Act not lead to the invalidation of contracts and other transactions because "to unravel commercial transactions on the basis that a corporate actor breached a statute is to introduce uncertainty into the affairs of individuals and businesses" (p. 6509) and, furthermore, s. 20(1) of the Bank Act (which stated that no act of a bank was invalid by reason only that the act was contrary to the Act) supported the view that Parliament never intended breaches of the Bank Act to render bank transactions null and void.
A wholly-owned subsidiary ("Lone Rock") of the taxpayer held a 99.9% limited partnership interest in a partnership between Lone Rock and a subsidiary of Lone Rock ("Newco"). Lone Rock assigned its limited partnership interest in the partnership to the taxpayer, the taxpayer on the same day caused Lone Rock to be wound up, and the following day Newco and the taxpayer signed a distribution agreement whereby the partnership assigned all its assets to the taxpayer.
The taxpayer was found not to have become a member of the partnership because the assignment of Lone Rock's limited partnership interest had not complied with provisions of the partnership agreement that required: the assignee of the interest to agree in writing to be bound by the terms of the agreement; the execution by the assignor to be guaranteed by a Canadian chartered bank; and all requisite filings as required by the Partnership Act (Alberta) to be made. There could be no finding of an implicit consent of the parties to these breaches because the partnership agreement also provided that no amendment thereto would be effective unless it had been approved by an extraordinary resolution.
In finding that the making of an interest-free loan by executors in breach of their duties under provincial law did not give rise to a benefit to the recipient, Rouleau, J. stated: "A well established principle of income tax law states that the illegality (if any) of actions of the taxpayer, in this case the payment to the Plaintiff in relation to the terms of the trust, is irrelevant in the assessment of tax liability."
The taxpayer regularly made mortgage loans at a discount and then sold them for their face amount to his company. In dealing with a submission that the mortgage discounts were not income to the taxpayer because he had an obligation, as a director of his company, to account to that company for the profits, Dumoulin J. noted that the taxpayer "had not evinced discernible signs of being prompted by any lurking urge to discharge such a belatedly invoked obligation to refund the" company. His profits were taxable.
The taxpayer and the three other members of the “Raposo clan” were involved in the sale of cocaine in the Gatineau area. The Crown took the position that, as a member of a partnership, the taxpayer was solidarily liable under ETA s. 272.1(5) for uncollected GST on the cocaine sales.
On numerous occasions, the jurisprudence has reiterated that a purpose which is contrary to the public order and which contravenes a penal provision, in the current case, of the Criminal Code, engages the absolute nullity of the contract in accordance with Article 1417 … .
It therefore follows that under Quebec law the Raposo clan did not constitute a partnership.
The ARQ obtained a search warrant for searching an Uber Canada office in Montreal. In order to be granted the search warrant, the ARQ employee laying the information was required to have reasonable grounds to believe that Uber Canada was committing an offence. The search warrant was granted inter alia on what were found to be reasonable grounds that Uber Canada was aiding the drivers in committing the offence of wilfully evading the collection of QST by virtue of its system for collecting the customer fares through the customers’ credit cards not treating those fares as being subject to QST (or GST).
As the option was valid, the corporation in question was not a CCPC, so that subsequent sale of shares in a grandparent corporation by individuals did not qualify for the capital gains exemption.
is not an indication of a sham. It is rather an indication that some persons were not legally members of the Joint Venture and were not entitled to the deductions. The Minister should have simply denied those person the tax deductions... .
Although this sanction might appear excessive or disproportionate in relation to the consequences of working in Canada without a work permit (which Mr. Coicou could easily have obtained) it is not within the courts' power to amend the Civil Code in order to adopt a scheme of sanctions different from the one enacted by the legislator. It is clear that the courts in common law provinces have the necessary latitude to adopt fairer sanctions, for there, contrary to the situation in Quebec, the doctrine of illegality is a creature of the judiciary, not a creature of the legislator. Since the provisions of the Civil Code clearly set out the consequences that stem from the absence of one of the essential conditions for the existence of a contract, that is to say, an object that is neither prohibited by law nor contrary to public order, this Court has no choice but to find that the sanction decided by the legislator, namely the nullity of the contract, must apply.
[T]he Trustee, acting as agent for the Estate, was legally entitled to carry on the undertaking in question. … In any event, I would add that the Act is not to be applied to transactions that ought to have taken place, nor is it to be applied only to transactions that could be legally carried out. In my view, the Act ought to be applied to what has actually taken place.
See summary under s. 141.01(2).
The taxpayer entered into a contract with Sun Life to provide sales services as an independent contractor. The taxpayer then agreed with a company owned by him and his family ("Lakeside") that Lakeside would receive all proceeds under the contract with Sun Life. Lakeside provided all equipment and supplies for the conduct of the sales business and paid salary to the taxpayer.
Before finding that none of the income earned under the contract with Sun Life was income of the taxpayer notwithstanding a clause in the contract with Sun Life indicating that no assignment of the benefits of the contract would be made by the taxpayer, and after noting judicial authorities that "'an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights'", Bell TCJ indicated (at p. 217) that "the issue in this appeal has nothing to do with a contractual dispute with a third party".
The taxpayer's employer issued employee stock options to the taxpayer and others. Later in the same year, the Quebec Securities Commission notified the employer that the options did not comply with the Quebec Securities Act, and the employer responded by notifying the Commission that it would treat the options that had been awarded as null and void.
In finding that the taxpayer was not entitled to any deduction under s. 110(1)(d) in respect of a lump sum she received in the following year in consideration for the waiver of her rights under the stock option, Lamarre Proulx TCJ. found that the shares subject to the option could not be prescribed shares when they could never be issued or purchased.
The fact that a transfer of property from the taxpayer's spouse to the taxpayer was void against the trustee in bankruptcy of the spouse did not prevent the application of s. 160(1) to the taxpayer given that the proper interpretation of the Bankruptcy Act was that the trustee had to do something to render the transaction void, which did not occur.
A loan made by a corporation to its individual shareholder was subject to s. 15(2) notwithstanding that the Companies Act (Quebec) prohibited a loan by a company to a shareholder.
Because the Province of Saskatchewan did not permit the taxpayer to carry on the practice of orthodontics through a corporation, income which his corporation purportedly derived from that practice was his income instead.
[T]he comments in Cooper do not extend to provide that the illegality (if any) of actions of the taxpayer may be used to obtain a tax benefit or to claim a deduction from income where such a benefit or deduction does not meet the requirements under a plain reading of the Act.
Respecting a spousal trust that was not formally varied before assets were distributed to non-spousal beneficiaries, the Directorate indicated that the distribution could not be ignored for income tax purposes, whether or not it was made legally, i.e., a disposition should not be ignored even if the trustee had no authority to distribute.
Fishing income was earned by corporations to which fishermen had leased their fishing licences, rather than by the fishermen personally, notwithstanding that corporations are expressly prohibited by law from holding such licences. The profits from a business are the income of the person carrying on the business even if the business is being carried on illegally.
RC generally would be reluctant to give its assent to a transaction prohibited by the Quebec Companies Act.
[I]n British Columbia, the restriction only applies to "a record evidencing indebtedness of the person to whom shares are to be issued" (i.e., a promissory note issued by the subscriber)….
[N]ova Scotia and Prince Edward Island's corporate legislation contains no restriction… .
The case law is divided on what results when shares are issued for less than adequate or no consideration. The two streams of cases can be described as the "Nullification Stream" and the "Contextual Stream" .[fn 13: For a more comprehensive discussion of the cases see Greg Johnson, "Recent Developments of Interest to Tax Practitioners", 2005 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2005), 18:1-27 at 18:4-8.] The genesis of the "Nullification Stream" can be traced to Professor Bruce Welling's commentary from his textbook Corporate Law in Canada, which was adopted by the Québec Superior Court in Javelin International Ltd. v. Hillier. [fn 15:  Q.J. No. 928 (Qc. Sup. Ct.),,,] In Welling's view, the use of the phrase "shall not be issued" in s. 25(3) of the CBCA (and its provincial equivalents) means that inadequate consideration results in a nullity as between the issuer corporation and the registered holder. This was also the view of the Tax Court in Ball v. MNR [fn 16: …92 D.T.C. 2123…] …. . Nullification was used in the recent Federal Court of Appeal case St Arnaud v. The Queen [St Arnaud]. [fn 18:  F.C.J. No. 338, 2013 FCA 88.]. …[T]he court found that the money paid for shares was either not received by the corporation or received simply as a conduit for the fraudster. The result was that the shares were not validly issued.
The Contextual Stream of cases posits that corporate legislation does not explicitly state what remedy is available when shares are issued without being fully paid for; thus, it is up to the courts to decide on the appropriate remedy. The result can then be nullification, director liability, or permitting the purported shareholder to pay the subscription price to validate the share issue. There are lines of cases out of British Columbia [fn 19: Davidson v. Davidson Manufacturing Co. (1977),  B.C.J. No. 60 (B.C.S.C.); Oakley v. McDougall,  B.C.J. No. 272, 17 B.C.L.R. (2d) 134 (B.C.C.A.); Re Lajoie Lake Holdings Ltd,  B.C.J. No. 137 (B.C.S.C.).] and Ontario, [fn 20: See Dunham and Pollo Tours Ltd. (No. 1),  O.J. No. 3380, 20 O.R. (2d) 3, (Ont. H.C.J.); Gillespie v. Retail Merchants' Assn. of Canada (Ontario) Inc.,  O.J. No. 956 (Ont. C.J.).] supporting this view. A more recent Alberta Court of Appeal case also adopts the contextual approach… [fn 21: Pearson Finance Group Ltd. v. Takla Star Resources Ltd.,  A.J. No. 422, 2002 ABCA 84, aff'g  A.J. No. 917, 2001 ABQB 588 [Takla].]… .
Interestingly, neither the Nullification Stream nor the Contextual Stream referred to subs. 16(3) of the CBCA or its provincial equivalents. [fn 24: ABCA, s. 17(3); SBCA, s. 16(3); MCA, s. 16(3); OBCA, s. 17(3); NBBCA, s. 14(3); NLCA, s. 29. Subsection 33(2) of the BCBCA is slightly narrower in that it only validates acts that are done contrary to the company's constating documents.] That provision states that "[n]o act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act". This wording is seemingly dispositive of the issue; yet, this is not entirely clear as ambiguity exists in the wording "by reason only"….

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