What is a Power of Attorney
A power of attorney is a legal document that you sign to give one person, or more than one person, the authority to manage your money or property on your behalf. In most of Canada, the person you appoint is called an "attorney." (That person does not need to be and is generally not a lawyer.) A power of attorney is often an indispensable instrument in estate planning. However, it might give rise to unexpected consequences if not carefully drafted. As we will explain, it is very important to seek proper advice and assistance from an experienced Canadian tax lawyer prior to granting a power of attorney.
Potential associated corporations and subsection 256(1.4) of the Income Tax Act
Subsection 256(1.4) of the Income Tax Act (the "Tax Act") is a provision that may trigger unintended consequences with powers of attorney:
- For the purpose of determining whether a corporation is associated with another corporation with which it is not otherwise associated, where a person or any partnership in which the person has an interest 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, or to acquire, shares of the capital stock of a corporation, or to control the voting rights of shares of the capital stock of a corporation, the person or partnership 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, and the shares shall be deemed to be issued and outstanding at that time;
- Canada Revenue Agency (the "CRA") expressed its view of the provision in Technical Interpretation 9623675 that a power of attorney, unless it restricts the attorney in his or her ability to vote shares, can be caught by the above-noted provision thereby resulting in the attorney so appointed being deemed to control any corporation that is already controlled by the person making the appointment. This means under certain conditions where the appointed attorney owns shares in other corporations, stepping into the shoes of the grantor in his or her capacity as shareholder might result in a deemed association of corporations that were not previously associated. For example, suppose you and your 70-year-old neighbour each owns shares of a different corporation. If your neighbour has appointed you as his power of attorney, then you may be deemed to control the shares of both corporations. In that case, CRA may reassess you based on this new situation and require you to pay additional tax as the two corporations are now deemed to be associated which would reduce the deduction of small business deduction under the Tax Act.
The Exception to The Provision is "Permanent Disability"
According to the CRA, the only exception to the effect of Subsection 256(1.4) is "permanent disability" instead of inability to manage his or her affairs. Therefore, it is possible to provide a temporary solution by structuring the power of attorney document in a way that it would not be operative until such permanent disability occurs. However, this type of structuring would defeat the purpose of a power of attorney which is usually intended to come into effect when the grantor is unable to manage his or her affairs, even if it is only temporary. Furthermore, since there have been cases where people in a coma eventually recovered after a number of years, it is very hard to predict whether a doctor would declare any patient to be "permanently disabled".
Tax Tip – Powers Of Attorney Are A Potential Tax Minefield
One could argue that when the Department of Finance drafted the provisions, they never intended to trigger associations between corporations by simply appointing a power of attorney. Unfortunately for you to the flawed wording of the provision, CRA would almost certainly reassess every time a situation like this occurs. Before any legislation amendment is made, the best practice is to either conduct due diligence to make sure that the appointed attorney does not own shares of any corporation, or lessen the chance by appointment multiple attorneys with a special provision that requires them to act unanimously. However, both measures would add more burden to the person drafting the power of attorney. Since the unintended tax consequences of deemed association through a power of attorney can be expensive, it is important to consult with one of our top Canadian tax lawyers when drafting a power of attorney.
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.