Another reason not to behave badly

It never ceases to amaze me that some people think they can shirk their responsibilities when dealing with the CRA. For example, I've heard of several instances where certain taxpayers filed Notices of Objection just to hold off that agency's collection activity for months or even years, without raising legitimate issues. I hasten to add that I was not working for any of them!

That is not a good idea, especially if you have a history of risky behaviour. CRA always has the option to secure a jeopardy order from the court in order to initiate collection activity during that standstill period, if they believe you are in the process of wasting, liquidating or transferring property in order to make it unavailable to satisfy your tax liability. The following factors may provide support for the application for the order where a taxpayer has:

• acted fraudulently or has been involved in illegal activities;
• engaged in the liquidation or transfer of his or her assets so  as to put the assets out of the Minister’s reach;
• engaged in unorthodox behaviour that raises a reasonable apprehension that funds may no longer be available to satisfy the tax debt (ie, keeping large amounts of cash in one’s residence or safety deposit box, or investing in significantly risky ventures);
• engaged in tax evasion tactics, such as the failure to report income to the Canada Revenue Agency accurately;
• a significant amount of debt in comparison with his or her income; or
• assets that could potentially decline in value, deteriorate, or perish over the ordinary course of time.

There is a very good summary of the topic that can be seen here. Needless to say, I'm not in favour of any of the above tactics, not least because undertaking them really does take a significant amount of time and effort. Compliance is always cheaper and a more efficient use of your time.

Cases where things have gone right

Another year is close to an end, and another birthday has come and gone. This time, there were some interesting observations about how smoothly some technological innovations have been implemented.

Reservations

My wife decided to treat me to a birthday lunch at the CN Tower. It was originally intended to be a supper on the night before, but I wondered whether we could just walk in and get a table. On investigation (and Google does make that easy to do), we discovered that the restaurant, which is now known as 360, has set up automated reservations via Opentable.com. We were able to confirm that all tables were booked for that Saturday night, as well as for Sunday noon, but slots were still available for 11:30, 11:45, 12:15 and 12:30.

We opted for the 11:45 booking, and instantly received a confirmation with a reference number, which was also sent out by e-mail. Upon arrival, we walked straight over to the restaurant's reception desk and showed our confirmation, which allowed us to bypass the regular queue and go straight to a dedicated elevator to go up to the restaurant. I must also note that the food and the service were excellent.

Several days later, an e-mail arrived from Open Table, asking for a review and giving an option for the restaurant to reply back.

I liked how the entire process worked, and the Open Table site appears to make it easy for other restaurants to sign on. Of course, this calls for integration of their software into a restaurant's table management system, and in this instance it was very smoothly implemented.

Cross-border reverse logistics

On the other hand, I must confess that, two weeks before, I had gone down to visit family in Stratford, and took the Nikon digital camera with me. There was a fresh snowfall the night I arrived, and there were many stunning pictures as a result. The following day, I had the misfortune of dropping the camera, and the aperture and zoom controls were damaged.

The one saving grace was that this occurred just prior to the warranty's expiry. There was one slight complication, however: the camera was purchased in the US during last year's Black Friday sales in the Boston area.

During the following week, I did some investigation to see how Nikon handles their warranty claims. In summary, Nikon's policy is that repairs are handled in the country where the camera is purchased. It doesn't matter whether it is under warranty or not, and Nikon Canada is one of the most stringent enforcers of the policy.

Fortunately, their procedure for initiating and processing cross-border returns is quite well thought out, and following it eliminated any hassles with US Customs and Border Protection:

1. Register the claim with Nikon US on their website (and make sure you input the correct model and serial numbers), and print out the resulting forms package.
2. Place the claim sheet, together with a copy of the warranty (which contains the serial number) and proof of purchase, inside the box with the camera.
3. Pack that box inside a shipping box, and attach the shipping label generated in the forms package on the shipping box.
4. Take it to the nearest UPS shipping outlet. This is important, as Nikon has worked out an arrangement with UPS for handling these shipments, and the shipping label is designed to accommodate it. For shipping, you must fully describe what you are sending (ie, "Nikon digital camera, Model X, Serial #, Warranty repair"), and you have to agree to pick up the freight and inbound customs clearance to the US. That part is crucial, as Nikon will otherwise refuse to accept delivery.
5. As I discovered later, for clearance purposes Nikon supplies UPS with confirming data from the original claim you filed, in order to have it cleared as an item that will be undergoing repair. That is necessary in order to prevent it from being rejected at the border, and to have it cleared duty-free.
6. From shipment to arrival at Nikon in Los Angeles took exactly one week. This is amazing, considering I sent it out on Cyber Monday, which would have meant it would be caught in the onslaught of the other traffic happening at that time.

The complete documentation will allow the camera to return duty-free as well, and Nikon will pick up the freight on the return leg. I am currently awaiting for that to occur, and will discuss that process in a forthcoming post.

In insolvency, trigger clauses have their limits

I have observed many situations where very large corporations have dropped the ball in drafting their contracts.  Employment contracts contain many dumb errors, which I should expand upon in a later post. In this one, I want to talk about how Bell Mobility discovered how a clause in their contracts that aimed to limit its liability could be easily set aside by the courts. McCarthy Tétrault discussed it recently (as seen here), concerning the case of Aircell Communications Inc. v. Bell Mobility Cellular Inc. (2013 ONCA 95 (CanLII)).

Aircell, a dealer of Bell's products and services, was experiencing financial difficulties. Its agreement with Bell provided that:

• upon its expiry, or 
• if Bell terminates the Agreement as a result of Aircell’s failure to remedy a default in payment within 30 days after notice of default, or 
• otherwise in accordance with the Agreement, 

 all of Bell’s obligations to pay commissions “shall cease immediately”.

At the time in question, Aircell was holding CAD 64,000 of Bell's product, and Bell owed Aircell CAD 188,981 in commissions. Aircell held a meeting, at which a Bell representative was present, to explore restructuring options, and Bell gave notice at the end of that meeting that it would terminate the agreement within 30 days if payment had not been made in full. Unbeknownst to Bell, Aircell had already filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act. It was deemed to be bankrupt before the end of the 30-day notice period.

The bankruptcy trustee for Aircell successfully sued Bell Mobility for the difference between the value of the inventory held  and the amount of commissions owing, and the ruling was upheld by the Ontario Court of Appeal last February.

The ruling was based on the common-law principle of "fraud against the bankruptcy law", which was imported into Canadian bankruptcy law in the case of CIBC v. Bramalea Inc. (1995 CanLII 7420 (ON SC)). In that case, a clause in a partnership agreement provided that, in the event of default by an insolvent partner, a non-insolvent partner would have the right to purchase the other's partnership interest at the lower of net book value and fair market value. The Supreme Court of Ontario held that such a clause was void as being contrary to "the public policy of equitable and fair distribution amongst unsecured creditors in insolvency situations."

CIBC dealt with this principle in the case of the direct consequence of insolvency. Aircell has extended it to indirect cases as well. All businesses should be aware of the impact this may have on business arrangements they have entered into, or are contemplating to undertake. At the very least, trigger clauses may need to be framed to occur only in cases that fall outside the Canadian definition of insolvency.

Another reason to keep your affairs in order

The Globe and Mail recently published an article relating to the long-arm powers available to the Canada Revenue Agency to collect its debts. In this case, it concerns the transfer of property in non-arm's-length transactions where the transferor has outstanding tax liability, which, under s. 160 of the Income Tax Act, will attract liability in the hands of the recipient.

S. 160's reach is quite broad:

• it captures the transfer of property, either directly or indirectly, by means of a trust or by any other means whatever, to
• a person's spouse or common-law partner, anyone under the age of 18, or anyone not being dealt with at arm's length,
• resulting (before taking into account the effect of the income attribution rules in the Act) in both the transferor and transferee being jointly and severally liable for the amount (in excess of the fair market value of any consideration given) in order to satisfy the outstanding tax liability in question.

What constitutes a "transfer of property?" It can be:

• a gift or bequest,
• a deposit into the transferee's bank account,
• releasing an interest in a joint bank account or a joint tenancy to the other titleholder,
• making payments on another person's mortgage,
• a tax-debtor corporation issuing dividends to related shareholders who are in a position to control the corporation, or
• a series of transactions from one non-arm's-length person to another (in which case the joint and several liability applies to all parties!)

but it does not include payments made under a court order or separation agreement (by virtue of s. 160(4)).

Two recent cases at the Federal Court of Appeal help to explain s. 160's scope:

• Canada v. Livingston, 2008 FCA 89 (CanLII), [2008] 3 CTC 230(which addresses the key criteria for s. 160 assessments)
• Yates v. Canada, 2009 FCA 50, [2010] 1 FCR 436, [2009] 3 CTC 183(which calls for strict interpretation of the section)

There is no limitation period by which such an assessment can become statute-barred, and the effects do not end there:

• s. 325 of the Excise Tax Act provides that, where there is an amount by which such an undervalue transaction exceeds the liability that can be assessed under the ITA, it is available for similar assessments to satisfy any outstanding liability for GST/HST.
• s. 96 of the Bankruptcy and Insolvency Act provides similar recovery powers in the event of certain undervalue transactions occurring prior to bankruptcy (within the previous year, or the previous five years if the transaction was not at arm's length) where the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or the debtor intended to defraud, defeat or delay a creditor.

I have published several posts recently on the need to prove a genuine business case before undertaking transactions that are not at arm's length. This is an addition to what should be kept in mind.

You always need a business case...

Many readers in the business world will know of instances where corporations they were working for, or dealing with, have indulged in oppressive or abusive behaviour. The larger ones are more likely to have internal procedures or protocols to mitigate such effects, but the SMEs have tended to be more reckless.

If you're dealing with an American corporation, the rules will more than likely operate in their favour. If the corporation has been established in Canada, you can fight back through the oppression remedy available under the various corporation laws. This is an innovation that has developed in many countries of the Commonwealth, but it has attained significant breadth of scope here.

What types of behaviour can be addressed under an oppression claim? Basically, it can be potentially used by any stakeholder to deal with any type of unfair conduct by a corporation, and the definition is "wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company whether de facto or de jure" (as noted in the English case Re HR Harmer Ltd, [1959] 1 WLR 62 at 75,  by Jenkins LJ). In Canada, stakeholders include:

• a current or former registered security holder,
• a current or former director or officer,
• the Director appointed under the CBCA, or 
• "any other person who, in the discretion of a court, is a proper person to make an application under this Part" (which can cover creditors, debtors or employees)

The types of behaviour that can be addressed, and the scope of the remedies available, are breathtaking:

• Claims can extend to an affiliate not incorporated under the same Act 
• It has been used to enforce unpaid judgments against the corporation's directors, where the corporation had been subject to asset stripping 
• It has also been used in conjunction with other remedies — including the threatened winding up of a company by the court — in order to resolve shareholder disputes in closely held companies. 
• The Crown has employed the oppression remedy in its status as a creditor under the Income Tax Act, in order to set aside dividend payments that rendered a corporation unable to pay its tax liability. 
• Where a company has made excessive salary payments to a controlliing shareholder, a judgment creditor has been permitted to be a complainant in order to recover the excess amounts. 
• A wrongfully dismissed employee can make a claim in order to thwart a corporation from conducting asset stripping in order to make itself judgment proof. 

What can a company do to protect itself against such claims? The Supreme Court of Canada, in BCE Inc. v. 1976 Debentureholders, stated that, where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation. There are no absolute rules and no principle that one set of interests should prevail over another. Under the business judgment rule, deference should be accorded to the business decisions of directors acting in good faith in performing the functions they were elected to perform.

Therefore, the directors really need to do their job properly in looking after the corporation's interests first, being aware that evasion of liabilities and condoning disputes among shareholders and other key players do not make for good business, and documenting the business case for undertaking any fundamental changes to their corporate and cost structures. Well-written business agreements will also go a long way to address key concerns.

Your presence on the web: what's best for your needs?

While Facebook and Twitter are receiving excellent visibility in the media — as they very well should — there are other options somewhat less ephemeral but nevertheless worth considering in getting your message across.

Personal websites

Options that are available at Google Sites, LinkedIn, VisualCV and the like are somewhat static, but they can help focus your message to specific audiences. I particularly like Google Sites, as you can create multiple pages and filing cabinets in order to individualize your presentation.

Blogs

Both Blogger and Wordpress have impressive options relating to widgets and templates, as well as the ability to incorporate specialized scripts. I particularly like MathJax, which I have put into Blogger in order to properly construct mathematical expressions for some of my articles. You can also arrange to publicize your new posts to Facebook and Twitter as well, in order to spread the word.

I have opted to split my postings into two blogs — Blogger for particularly professional statements, and Wordpress for personal viewpoints and recollections. That is a personal choice, but it seems to fit into the tools that are available for each, and it gives me a chance to experiment with what can be done. Besides, it's fun!

Wikis

I have been doing some editing on Wikipedia, and I am finding that wikis can be very powerful tools, especially in an organizational context:

• as any article can be edited by anyone,  a topic can be quickly created and refined where there is a critical mass of knowledge that can be drawn upon (ie, the wisdom of crowds)
• an article can be promptly updated when updated information becomes available
• it can provide a reasonable replacement for the organization manuals that can otherwise be subject to the obsolescence of the printed word in a fast-changing environment
• all previous versions of the article are still available to be consulted, in order to review for reasonableness and to provide document control (which can be critical for complying with documentation requirements such as those found in ISO 9001)
• footnotes and bibliographies can be easily constructed, together with hyperlinks to related articles and to reliable external sources
• when appropriate policies are instituted relating to the enforcement of reliability and the observance of intellectual property rights, proper administration and supervision of the wiki will result in a reliable body of information that members of the organization will be willing to rely on

MediaWiki, the platform on which Wikipedia is based,  is free to download and to implement. Just make sure you check all the other notes relating to installation requirements and compatibility. There are other wiki platforms as well, so see which one would work best for you.

I still can't believe this

The story that came out several days ago about top Liberal staffers in the Ontario provincial government — including those in the Premier's office — caught deleting e-mails from their systems is wrong on multiple levels:

• it runs contrary to the desire to keep all such communications as part of the historical record
• retention is mandated under the province's Archives and Recordkeeping Act, 2006
• even if the Act's penalties are weak, observance is the honourable thing to do
• there are relatively cheap means that could have been implemented to ensure that deletion could not have taken place (I particularly recommend the solution provided by Mailstore, but there are others)

There have been many spectacular stories in recent years about how this province's government has been mismanaged, but this story serves as a microcosm for the entire affair.