Canada: An Expensive Power Of Attorney, Courtesy Of The Income Tax Act

John Smith is 65 and married. He has no children. John owns all of the issued shares of John Smith Manufacturing Limited, a highly profitable manufacturer of widgets. He owns no shares of any other corporation, except what may be in his portfolio of investments, managed by the investment arm of a Canadian bank. Canada Revenue Agency recently conducted a "routine" audit of John's company.

Paul Brown is 40. He is the husband of John's wife's great niece. Paul runs a very successful chain of ladies wear stores, through Paul Brown Stores Limited, all of the issued shares of which are owned by him. Despite the difference in ages, he is very close, personally, to John. They met at a family celebration some years ago. They had discovered that both had a deep interest in stamp collecting. This led to frequent get-togethers to discuss their hobby and look at stamp albums, and in turn, to a strong friendship. John realized, some time ago, that Paul was not only very clever, but also felt a warm attachment to the Smith family.

There is no business connection between John Smith Manufacturing Limited and Paul Brown Stores Limited. The men know nothing about each other's business, except for what is in the public domain. They never discussed business.

Two years ago, John had engaged in some estate planning. His wife was to be his sole beneficiary, with gifts to family members if she predeceased him. Because they had no children and no other friends would be able, practically, to look after John's estate and because John knew of Paul's abilities, John had executed a Will naming Paul as the sole executor and trustee. As a natural part of the planning, he also had executed an unconditional enduring power of attorney, naming Paul as attorney.

Last week, both John Smith Manufacturing Limited and Paul Brown Stores Limited received a Notice of Reassessment from CRA. The amounts claimed as owing by each corporation were substantial. The reassessments were based upon CRA's statement that the two corporations were associated under the provisions of the Income Tax Act!

"How on earth can that be?," John exclaimed when he phoned Paul on receipt of the Notice.

Each of them consulted their respective accountant.

Quite puzzled, the accountants conferred with each other and then contacted CRA, believing that some gross error had occurred.


CRA politely replied that:

(a)  in the course of its audit of John Smith Manufacturing Limited, the CRA auditor had, when reviewing some correspondence files at the company, coincidently, come across a copy of the power of attorney executed by John in favour of Paul; and

(b)  pursuant to subsection 256 (1.4) of the Income Tax Act, for the purpose of determining whether a corporation is associated with another corporation, Paul was deemed to own the issued shares in John Smith Manufacturing Limited. Thus, that corporation and Paul Brown Stores Limited were associated!

Subsection 256 (1.4) reads:

"For the purpose of determining whether a corporation is associated with another corporation with which it is not otherwise associated, where a person ......has a right at any time under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently,

(a)  to...... control the voting rights of shares of the capital stock of a corporation, the person......shall, except where the right is not exercisable at that time because the exercise thereof is contingent on the death, bankruptcy or permanent disability of an individual, be deemed to own the shares at that time, or"

(b)  [irrelevant for this discussion]

After Smith hurriedly consulted his counsel, they pointed out to CRA that the "offending" power of attorney had, upon signing, been deposited immediately with Smith's lawyers, under a written direction, to be held in escrow and not released by them, unless they received a certificate from a physician licensed to practice in the jurisdiction where Smith then resided, to the effect that it was that physician's opinion, upon examination of Smith, that he "cannot manage his affairs."

The lawyers argued, first, that the power of attorney was not currently in effect. Secondly, it would not be released and would only become effective if, as and when the stated physician's certificate was received. And that may never happen! Brown could not now vote the shares.

As to the question of delivery of the power of attorney and it not being in effect, CRA pointed to the fact that it could "contingently" become operative. Thus, it fell within the wording of Subsection (1.4).

As to the fact that the power could not be released by the law firm, nor used, unless Smith could not "manage his affairs," CRA stated that the only exception to the effect of the Subsection is to be found in Subsection (1.4) (a), which refers only to "permanent disability," not to "cannot manage his affairs"!

 "But, how can anyone determine that there is permanent disability?," argued the lawyers. "We have all heard of people in a coma and then, even years later, recovering."

"Not our problem," responded a sympathetic CRA agent.

This tale of woe, though hypothetical, could easily occur.

A lawyer preparing a power of attorney may well know if the client controls a corporation. However, lawyers likely do not enquire if the individual proposed to be named as attorney controls a corporation! Should lawyers now be careful to pose that question? Certainly.

Is it feasible, though, to expect that an attorney will never control a corporation? Even if it were to be practical to ask the intended attorney to be careful and never control a corporation – which it isn't – to stretch a point, it is possible that the attorney might become a beneficiary of controlling shares from an estate, or by gift, or by becoming an attorney or personal representative of another person controlling a corporation and, thus, triggering association.

Another issue. What competent lawyer would recommend to a client that a power of attorney should be stated to become effective only if the client became "permanently disabled"? It is usually intended to have the power of attorney come into effect upon the grantor's inability to manage affairs, even if temporarily. The grantor might be hospitalized and be unable to manage affairs while there. And, in any event, is it probable that a physician will opine that a patient is permanently disabled?

One might assume that neither CRA nor the Ministry of Finance intended that the innocent appointment of an attorney in a document that might never become effective – or, if it did, not for some considerable time in the future – would trigger associated corporation status of totally unconnected or "unrelated" corporations. However, that is what can easily occur under the present legislation. And that has long been the opinion of CRA. See Technical Interpretations 9106955, 972653 and CRA Views, 1998 Round Table, 9814370.

Is it not appropriate that submissions be made to the Ministry of Finance in this regard, with a view to there being some amending legislation? As a matter of fact, 21 years ago, at the end of the response by the representative of CRA at the Round Table referred to above, there was a virtual "invitation" to raise any concern that one might have with the policy behind those Income Tax Act provisions with the Ministry of Finance.

Unless, and until the legislation is amended, one must lessen the chances of falling afoul of it, by ensuring that either (i) the attorney does not individually control any corporations (and hope that will never occur) or, (ii) more than one attorney be appointed, with the provision that the attorneys must act unanimously. Those protective measures, however, may eliminate appointing the only appropriate person as a sole attorney, or may create an impossible or burdensome situation of having to find at least two such people.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions