News of Note

In its 2011 returns, Royal Credit treated itself as a loan corporation (as described in Reg. 405 of the federal ITA Regulations) in its Quebec returns, and as a general corporation (as described in Reg. 402 of such Regulations) for Ontario purposes. As a result, a higher portion of its income was allocated to Quebec for Quebec income tax purposes than was allocated to Quebec for Ontario income tax purposes.

It sought to have CRA (in its capacity of agent for the Ontario Minister of Finance) resolve this double taxation issue at the intergovernmental level by initiating negotiations under the interprovincial MOU. CRA refused.

In denying this application for judicial review of that decision, Charney J found (consistent with the CRA and ARQ view) that the MOU relevantly only dealt with the situation where one province was “proposing to change the application of the allocation formula used by a taxpayer,” whereas here, neither province was proposing to change the allocation formula that the taxpayer had applied for each province.

In passing, Charney J noted that Royal Credit had recently brought a successful proceeding in the Quebec Superior Court for judicial review of the refusal of the ARQ to switch Royal Credit over to the Reg. 402 general corporation method for its 2011 taxation year, with the result that the ARQ was now required to reconsider that request.

Neal Armstrong. Summary of Royal Credit Services Inc. v. Ontario (Minister of Finance), 2026 ONSC 115 under Reg. 402.

Strathcona intended to distribute $2.14 billion of the proceeds from the sale of its Montney assets. It determined that not all shareholders would prefer to receive the distribution as a PUC distribution rather than as a taxable dividend. Accordingly, shareholders were given the choice.

Electing shareholders could opt to receive a PUC distribution. This was achieved through a s. 86 exchange under the Alberta plan of arrangement of their common shares for (newly-created) Class A common shares of Strathcona, the receipt of the PUC distribution on their Class A common shares and the subsequent s. 86 exchange of those Class A common shares back for their original common shares. (In the brief interim, the common shares had been temporarily held in treasury by Strathcona rather than being cancelled.) The Class A common shares had identical attributes to the common shares, except that they were convertible into common shares and entitled to an additional day's notice of any shareholder meeting.

One or both of the following bases was identified for considering that s. 84(4.1) did not apply to the PUC distribution. First, the special distribution was paid in connection with the reorganization of Strathcona's business into a pure-play heavy oil company and the discontinuance of its Montney business segment. Second, it represented the one-time and prompt distribution of the proceeds received by the Company on the Montney asset sales.

Shareholders who did not elect to receive the PUC distribution retained their common shares and received an equivalent taxable dividend instead, which was subject to Part XIII tax in the case of non-residents.

For U.S. tax purposes, the exchange of common shares into and back out of Class A common shares were treated as transitory steps that should be ignored, so that there was considered to be a taxable distribution, subject to the possibility in the case of non-corporate U.S. holders of being treated as a partial liquidating distribution and, therefore, as a redemption transaction.

Neal Armstrong. Summary of Management Information Circular of Strathcona Resources Ltd. (“Strathcona” or the “Company”) regarding a special distribution pursuant to a Plan of Arrangement under Spin-offs and Distributions – Other – S. 84(4.1)(a) and (b) distributions.

A REIT (i.e., a listed unit trust qualifying as a REIT for ITA purposes) indirectly purchased a property from a Canadian-resident tax-exempt corporation on the basis that such vendor would effectively take back a convertible preferred share for part of the purchase price. This was accomplished by an affiliate of the vendor, which was also a tax-exempt resident corporation (the “Vendor Affiliate”), subscribing for preferred units of a newly formed subsidiary limited partnership (“New LP” – the property purchaser), which was held directly and indirectly by the REIT.

The preferred units bore a fixed per-unit distribution entitlement on their face amount and were exchangeable, based on a largely fixed exchange ratio, at the option of the Vendor Affiliate into REIT units. At the closing time, the FMV of the REIT units, into which the preferred units were exchangeable, was substantially lower than the face amount of the preferred units. Furthermore, the purpose of the preferred units’ exchange rights is stated to be “not to create an instrument that replicates the return on or value of a … REIT Unit.”

CRA ruled that the holding of the preferred units by the Vendor Affiliate would not cause New LP to be a SIFT partnership. This ruling turned on the proposition that the preferred units did not represent “investments” in a publicly-traded entity, i.e., the REIT. The s. 122.1 “investment” definition relevantly refers to “a right that may reasonably be considered to replicate a return on, or the value of, a security of the trust.” The CRA summary simply states that this was not the case “because there is no replication.”

There was no blandishment that New LP was an “excluded subsidiary entity,” which would have depended on satisfying the more onerous test that the preferred units were not “property, the value of which is determined, all or in part, by reference to a security that is listed or traded on a stock exchange.”

The terms of the preferred units contemplated that, to the extent possible, the annual allocations of taxable income thereon would represent the same proportion of the distributions thereon as for the REIT units. It was stated that this was “intended to provide assurance that the [transactions] … have not been … entered into to circumvent subsection 104(7.1).”

Neal Armstrong. Summary of 2024 Ruling 2023-0997921R3 under s. 122.1(1) – investment – (a)(ii).

Class X shares of a corporation were convertible at the holder’s option into Class Y shares of the corporation, and those Class Y shares, in turn, were convertible at the holder’s option into Class X shares. On a winding up, holders of Class Y shares were entitled to an amount determined according to a formula in the articles, and no more. Consequently, the Class Y shares did not comply with Reg. 6204(1)(a)(ii) (i.e., their liquidation entitlement was capped) and, therefore, were not prescribed shares.

The question posed was whether the circular conversion attributes of the two classes caused the Class X shares to also not qualify as prescribed shares, notwithstanding that the rights of a Class Y shareholder were indirectly the same as those of a Class X shareholder by virtue of the conversion right.

The Directorate confirmed that the right to convert Class X shares into Class Y shares did not comply with Reg. 6204(1)(a)(iii) (because the Class Y shares were not prescribed shares), so that the Class X shares also were not prescribed shares. It stated that in light of the circular nature of the conversion rights, both Class X and Class Y shares must meet the requirements of Reg. 6204(1)(a)(iii), which was not the case here.

Neal Armstrong. Summary of 25 August 2025 Internal T.I. 2023-0974491I7 F under Reg.6204(1)(a)(iii).