News of Note
CRA notes that the s. 129(6) income recharacterization rule is not relevant to whether a corporation carries on an active business for purposes of being a relevant group entity
Email this ContentMr. X owned all the voting shares (with a nominal value) of A, B and D, and held preferred shares of A with a substantial value. D carried on an active business in a building leased by it from C, which was wholly-owned (as its only asset) by B . The assets of A consisted exclusively of advances to B, C and D. Upon the disposition by Mr. X of his shares of A to a “Buyco” owned and managed by his adult children, the family trust holding non-voting common shares of A, B and D will distribute its shares of A and D to Buyco.
In finding that B and C likely would not be relevant group entities (RGEs) in respect of the disposition to Buyco (so that it would not contravene s. 84.1(2.31)(c)(iii) for him to retain the voting control of B and, thus, of C), CRA stated that, although s. 129(6) might deem the rental income earned by C to be income from an active business for s. 125 purposes, this would not result in C being deemed to carry on an active business for the purposes of s. 84.1(2.31)(c)(iii). Since C did not carry on an active business, it could not be an RGE, whose definition relevantly refers to any person—other than the subject corporation and the purchaser—that, at the time of disposition, carries on an active business that is relevant to determining whether the subject shares are QSBCS.
Neal Armstrong. Summaries of 15 December 2025 External T.I. 2025-1062551E5 F under s. 84.1(2.31)(c)(iii) and s. 256(5.1).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released yesterday and in September and August of 1999. Their descriptors and links appear below.
These are additions to our set of 3,501 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 26 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Income Tax Severed Letters 11 March 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Joint Committee notes scope concerns over the expanded hybrid mismatch rules
In addition to pointing out numerous substantial anomalies and technical difficulties, including various inappropriate departures from the more limited scope of the BEPS Action 2 Report, the Joint Committee submission on the January 29, 2026 extension of the hybrid mismatch rules makes a spirited submission on a particularly fundamental scope issue.
The Committee submits that the application of withholding tax under s. 214(18) to hybrid payer situations is an unwarranted and unnecessary extension of the ambit of the Action 2 report. The mischief addressed by the rules is unrelated to profit distributions or disguised payments, and is wholly addressed by denying the excess deductions.
Similarly, the application of withholding tax to interest paid under reverse hybrid arrangements seems inappropriate given that the deduction/non-inclusion mismatch arises from the hybrid tax status of the recipient, rather than the hybrid tax treatment of the arrangement (i.e., it is not an arrangement in which payments are treated as interest for Canadian, and dividends for foreign, tax purposes.) The interest payments do not represent disguised distributions out of the Canadian tax system, as the recipient's status as a reverse hybrid entity generally results from ownership by Canadian residents.
Even if withholding tax were to be applied to hybrid payer arrangements, withholding tax should not apply to ordinary arm's length borrowings. Although s. 214(18)(b) limits deemed dividend treatment to arm's length non-residents unless the non-resident is a “party” to a structured arrangement, this concept turns in part on being aware of the mismatch in tax outcomes, which will be readily evident whenever, for example, the borrower is a hybrid entity.
Arm's length lenders will not accept any withholding tax risk that arises simply because the borrower is a hybrid entity, a dual resident, or has a foreign branch.
Neal Armstrong. Summaries of Joint Committee, “Submission on Hybrid Mismatch Arrangements - Technical Comments and Recommendations,” 10 March 2026 Joint Committee submission under s. 18.4(1) – ordinary income, dual income inclusion, structured arrangement, hybrid entity, s. 18.4(5.6), s. 18.4(7.1), s. 18.4(15.1), and s. 214(18).
CRA finds that when Canco confers a benefit on its NR parent by selling a capital property at an undervalue, the s. 247(12) deemed dividend is only half of the benefit
In 2021, the Canadian-resident taxpayer purchased a non-depreciable capital property from its non-resident parent for $20 million, when the arm's length price was $15 million (Situation 1). Alternatively, the taxpayer sold a non-depreciable capital property to the parent for $15 million, when the arm's length price was $20 million (Situation 2).
In Situation 1, the transfer pricing capital adjustment (TPCA) was $2.5 million, which is half of the $5 million transfer pricing adjustment. In Situation 2, the transfer pricing income adjustment (TPIA) is $2.5 million, as to which the Directorate stated (quoting the TPIA definition):
[A]lthough the amount of the adjustment under s. 247(2) is $5 million, the amount “by which an adjustment made under s. 247(2) result[s] in an increase in the [Canadian] taxpayer’s income [on the sale to the non-resident]” is $2.5 million.
In Situation 1, the deemed dividend under s. 247(12)(b), being the imputed benefit to the parent, would be computed as twice the TPCA of $2.5 million. In Situation 2, the amount of the deemed dividend would be stipulated by s. 247(12)(b)(ii) to equal the TPIA of $2.5 million, rather than the $5 million deemed dividend that the CRA presumably would have assessed as a secondary benefit under s. 214(3)(a) prior to the introduction of s. 247(12) in 2012.
CRA indicated that it was “not entirely clear from a policy perspective why the amounts of secondary adjustment should differ” in the two Situations.
Neal Armstrong. Summaries of 3 February 2025 Internal T.I. 2021-0885561I7 under s. 247(1) – TPIA, and s. 247(12).
C&W Offshore – Tax Court of Canada finds that under a back-to-back rental arrangement, the immediate payee of the rentals was their beneficial owner
The Canadian taxpayer (“C&W Offshore”) subleased mooring chains from an arm's length UK company (“InterMoor UK”), which, in turn, leased the chains from its Norwegian affiliate (“InterMoor Norway”).
The Canada-UK Treaty included rentals for commercial or industrial equipment in its definition of royalties, whereas royalties under the Canada-Norway Treaty did not extend to such rentals, so that if InterMoor Norway had leased the chains directly to C&W Offshore, they would have been exempted from Canadian Part XIII tax under the Canada-Norway business profits article. C&W Offshore argued that InterMoor Norway was the beneficial owner of the royalties paid by C&W Offshore, and that the “mark-up” on the sublease from InterMoor UK represented a processing fee of InterMoor UK that was exempted under the business profits article of the Canada-UK Treaty.
In finding that InterMoor UK was the beneficial owner of the rental payments, Ouimet J indicated that under Prévost Car, “the beneficial owner is the person who receives an amount of money for their own use and enjoyment and assumes the risk and control of the amount they received”. On this basis, InterMoor UK was the beneficial owner, given that the amounts received by it were deposited into a bank account under its exclusive control, with the ability to use the funds for its own benefit and with no immediate obligation to pay the funds over to InterMoor Norway given the different payment terms for the lease and sublease. Additionally, InterMoor UK was responsible for any damage to the chains and obtained insurance to cover this risk.
The evidence also did not establish that InterMoor UK leased the chains as agent for InterMoor Norway.
In further finding that C&W Offshore had not established a due diligence defence to the imposition of penalties on it pursuant to s. 227(8)(a), Ouimet J indicated that C&W Offshore did not take any steps with respect to the possible tax implications of its payment of the rentals; and there was no evidence of it having been misled by any person or circumstance.
Neal Armstrong. Summaries of C & W Offshore Ltd. v. The King, 2026 TCC 40 under Treaties – Income Tax Conventions – Art. 13, s. 227(8)(a) and General Concepts – Agency.
CRA finds that Canadian timber royalties derived by US NPOs through a stacked partnership structure were exempted from Pt. XIII tax under XXI(1) of the Canada-US treaty
A 99% interest in a limited partnership (“Third Tier LP”) was held by two U.S.-resident non-profit organizations (the “Tax Exempt Partners”), which were exempt under Art. XXI(1) of the Canada-US Treaty and were “qualifying persons”, through two intermediate partnerships. The remaining 1% interest in Third Tier LP was held by a Canadian-resident corporation (“Canco1”), which was unrelated to the Tax Exempt Partners.
Third Tier LP received timber royalties and rents (the “royalties”) from the exploitation of its Canadian real property by a corporation (“Canco2”) which was related to Canco1. None of the above partnerships carried on a trade or business in Canada, and they were treated as partnerships for US and Canadian income tax purposes.
CRA noted that:
Article IV (7)(a) might apply to deny Treaty benefits on an amount of income, profit or gain received by a resident of one of the Contracting States (e.g., the United States) through an entity that is a non-resident of the United States and that is treated as fiscally transparent in the source state (Canada) but not in the residence state (the United States).
However, that was not the case here as the partnerships were fiscally transparent for US purposes. CRA concluded that royalties derived by the Tax Exempt Partners were exempt from Canadian withholding tax under the Treaty.
Neal Armstrong. Summary of 5 November 2025 External T.I. 2020-0868261E5 under Treaties – Income Tax Conventions – Art. 4.
CRA confirms that the s. 95(2)(f.11)(ii)(D)(I) denied FAPI deduction under the EIFEL rules is not reduced by the CFA’s variable B credits
Part 2M of the schedule (Sched. 130) used for EIFEL reporting, computes the amount that is not deductible from FAPI under s. 95(2)(f.11)(ii)(D)(I) principally by multiplying the “Amounts determined for variable A in the definition of IFE [interest and financing expense] for the affiliate” by the non-deductible EIFEL proportion in the s. 18.2(2) formula.
An external stakeholder suggested to CRA that the quoted description was incorrect and should instead refer to any amounts included in the CFA’s relevant affiliate interest and financing expenses (RAIFE). Principally, this would have signified that the quoted amount is reduced by the variable B (income amount) components of the CFA’s RAIFE computation.
The Directorate rejected this suggestion, stating:
The limitation rule of subclause 95(2)(f.11)(ii)(D)(I) does not apply to a net amount of RAIFE totalling all the amounts to be considered in computing a CFA’s IFE, but only to certain amounts included in variable A of the IFE definition.
However, it added a recommendation that the quoted amount instead refer to:
“Amount determined for variable A (excluding amounts under paragraphs (h) and (j)) in the definition of IFE for the affiliate”.
Neal Armstrong. Summary of 30 October 2025 Internal T.I. 2025-1068441I7 under s. 95(2)(f.11)(ii)(D)(I).
CRA finds that the US excise tax on parachute payments is not an income tax
The taxpayer was subject to tax levied under §4999 of the Internal Revenue Code (IRC), on an excess parachute payment, i.e., compensation over a base amount paid to an employee or independent contractor on a change in control.
In finding that this tax did not qualify as “an income or profits tax” for foreign tax credit purposes, CRA stated:
T]he excise tax was essentially added to discourage the use of excess parachute payments, not as a subordinate measure that is part of a comprehensive income tax regime since that income is already taxed under the regular income tax regime of the IRC.
CRA also found that the §4999 tax did not qualify as a tax covered by Art. II(2)(b) of the Canada-U.S. Income Tax Convention (i.e., it was not a federal income tax or a substantially similar tax), so that Canada was not required to provide a credit for such tax pursuant to Art. XXIV(2)(a)(i) of such Convention.
Neal Armstrong. Summaries of 2 September 2025 External T.I. 2022-0945251E5 under s. 126(7) – non-business income tax, and Treaties - Income Tax Conventions – Art. 2.
CRA finds that the FAD rules applied where the controlling individual emigrated as part of the series involving a CRIC-to-CFA loan
One month after Canco made a $1M loan to its wholly-owned U.S. subsidiary, the individual who wholly-owned Canco ceased to be a resident of Canada as part of the same series of transactions.
CRA found that the foreign-affiliate dumping rules in s. 212.3 applied to this $1M investment since, in addition to the more routine requirements of s. 212.3(1) being satisfied, Canco became controlled by a non-resident person (the individual) as part of the same series of transactions that included the making of the investment.
Neal Armstrong. Summary of 28 August 2025 External T.I. 2022-0929921E5 under s. 212.3(1).
Neal H. Armstrong editor and contributor