News of Note
Income Tax Severed Letters 15 April 2025
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA has expanded its mandatory disclosure guidance
CRA has made a few additions to its webpage on the mandatory disclosure rules, for instance:
- Reporting persons may file an optional disclosure (so as to avoid the GAAR penalty or the extended statute-barring period) even where the subject arrangement is one which CRA has stated, for example, on its GAAR web page, that it could apply GAAR to the arrangement (para. 16).
- A professional would not be considered an advisor for s. 237.4 purposes if the professional did not provide any assistance or advice with respect to creating, developing, planning, organizing, or implementing the notifiable transaction (para. 76).
- For example, in the context of NT-2023-02 (regarding avoidance of the 21-year trust rule), where a professional issued a letter to a trustee recommending that the Old Trust should never make a distribution designated under s. 104(19) or a capital distribution under s. 107(2) to a corporation in which a New Trust or a non-resident beneficiary is a shareholder, the professional will not be considered an advisor for purposes of s. 237.4 where such a distribution in fact was made (para. 77).
- CRA has issued the following further exception to NT-2023-02:
In a tiered structure, where Opco has two shareholders (100 Class “A” Common Shares owned by Trust X, 100 Class “B” Common Shares owned by Holdco), Holdco has two shareholders (100 Class Common Shares owned by Trust Y, 100 Preferred Shares - aggregate redemption value $1,000,000 - owned Ms. X) and Opco pays a $1,000,000 dividend on its Class “B” Common Shares to Holdco who then uses the proceeds to redeem all the preferred Shares held by Ms. X, the transactions would not be considered substantially similar to NT-2023-02.
Neal Armstrong. Summaries of Mandatory disclosure rules – Guidance, 26 April 2026 CRA Webpage including under s. 245(5.1), s. 237.4(1) – advisor and s. 237.4(3).
CRA reverses its position that partnerships can be resident in Canada for CRS purposes otherwise than on the basis of their place of effective management
On December 19, 2025, the CRA amended its “Guidance on the Common Reporting Standard” (CRS) to add a position that a partnership will be considered to be resident in Canada for purposes of the CRS rules if it was formed under provincial law, or all its partners were residents. This expansion of scope was relevant to Ontario or other provincial limited partnership that had been used by non-resident investors as a convenient vehicle to invest in non-Canadian assets, or to a limited partnership that had only Canadian partners, including a general partner that was deemed to be resident in Canada due to its Canadian incorporation but with its central management and control (and that of the partnership) outside Canada.
CRA has now reverted to the previous version of the relevant paragraph, which read (and now again reads) as follows:
3.32 A Canadian financial institution can take the form of a partnership. If the place of effective management of a partnership's business is situated in Canada, the partnership is considered resident in Canada under Part XIX.
The amended version of the Guidance continues to be dated December 19, 2025, i.e., this change is retroactive.
Neal Armstrong. Summaries of Guidance on the Common Reporting Standard, Part XIX of the Income Tax Act, 19 December 2025 including under s. 270(1) – Canadian financial institution – (a).
Where a post-mortem pipeline entails an s. 88(1)(d) bump, any CDA from life insurance should be paid out before Newco is introduced to the structure
In post-mortem pipeline transactions, the estate might transfer shares of “Investco” to “Newco” in exchange for a Newco promissory note, with Investco and Newco subsequently being amalgamated, thereby permitting access to bump treatment under s. 88(1)(d). However, the availability of the bump may be adversely affected if life insurance proceeds received by Investco were distributed out of its capital dividend account (CDA) to Newco (in turn, distributed by Newco to the estate).
In this regard, s. 88(1)(d)(i.1) provides that the cumulative bump room will be further reduced by not only taxable dividends that are deductible under s. 112 but also capital dividends received. Accordingly, the payment of a substantial capital dividend out of the CDA of Investco arising from the life insurance death benefit may entirely eliminate the bump room pursuant to s. 88(1)(d)(i.1)(B).
The purpose of s. 88(1)(d)(i.1) is to prevent the payment of tax-free dividends without any corresponding reduction in share basis so as to artificially increase the available bump room. However, applying s. 88(1)(d)(i.1) to capital dividends arising from life insurance implicitly assumes that a tax-free distribution has reduced inside basis without affecting outside basis, where, in fact, no outside basis was ever attributable to the insurance proceeds, i.e., the provision does not distinguish between capital dividends representing previously taxed economic value and those arising solely from statutory non-taxable amounts.
This anomaly can be avoided if the life insurance proceeds are paid out of the Investco CDA to the estate before Newco is introduced as part of the pipeline transaction.
Neal Armstrong. Summary of Henry Shew and Florence Marino, ”The interaction between corporate-owned life insurance and bump transaction,” Tax for the Owner-Manager, Vol. 20, No. 2, April 2020, p. 3 under s. 88(1)(d)(i.1).
We have translated 6 more CRA interpretations
We have translated a CRA interpretation released last week and a further 5 CRA interpretations released in June of 1999. Their descriptors and links appear below.
These are additions to our set of 3,530 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).
There is no bump on the amalgamation following an intergenerational business transfer
In an intergenerational business transfer (“IBT”), there generally is no acquisition of control of the target company (“Targetco”) for tax purposes because its shares are sold to a corporation controlled by the seller's children (“Childco”), who are related to the sellers.
Accordingly, when there is a vertical amalgamation of Targetco and Childco, the cost of the target corporation's eligible assets cannot be bumped by virtue of the s. 88(1)(d.2) rule – which provides that if control of the target corporation was transferred between related persons, the relevant acquisition of control date for purposes of the bump calculation is the date of the last transfer between arm's length parties (generally establishing the historical cost), rather than the most recent transfer between non-arm's length parties.
S. 88(1)(d.3), which deems control to have been acquired by an unrelated person at the time of death, has no application to an IBT.
The absence of a bump is significant, for example, for agricultural corporations, where a substantial portion of the share value is often attributable to farmland.
Neal Armstrong. Summary of Julien Théberge, “Intergenerational Business Transfer: Appearance of Parity with a Third-Party Sale?”, Tax for the Owner-Manager, Vol. 20, No. 2, April 2020, p. 2 under s. 88(1)(d.2).
Parliament did not require the correction of subsequently-discovered errors in a return
It can be inferred that Parliament did not intend to impose an obligation to correct a subsequently discovered error in an income tax or GST/HST return given that it could have specified, and chose not to – see, for example:
- S. 32.2 of the Customs Act (requiring an importer who discovers a past error in reporting an importation to correct it); and
- Reg. 8401(6) (requiring the correction and reissuance of a T4 if a pension adjustment is altered for certain reasons, and there is a change in the amount of employment income previously reported).
It is suggested that it follows that a failure to correct such a subsequently discovered error is not a criminal offence (e.g., under ITA s. 239(1)(d), making it an offence to wilfully evade payment of taxes), and it should not trigger penalties that did not already apply at the time of filing. Such failure also is not a ground to permit the CRA to reassess beyond the normal reassessment deadline if the original filing had not constituted a misrepresentation attributable to carelessness or neglect (see ITA s. 152(4)(a)(i) and ETA s. 298(4)).
There remains the question of whether a lawyer or CPA would be in violation of any professional conduct rules by not addressing a subsequently discovered error, but it would seem that if the client is not obligated to act, nor should the advisor. Also note, for example, that an Ontario lawyer “must endeavor to obtain for the client the benefit of every remedy and defence authorized by law” under the Law Society of Ontario, Rules of Professional Conduct, Commentary to Rule 5.1-1.
Neal Armstrong. Summary of David Sherman and Balaji Katlai, “Is a taxpayer required to correct a past error?” Tax for the Owner-Manager, Vol. 20, No. 2, April 2020, p. 1 under s. 239(1)(d).
CRA indicates that a nursing home is not, and a typical rooming house is, a “housing unit” for flipped property purposes
Regarding whether a nursing home or a rooming house was a flipped property, CRA first indicated that it considered that a “housing unit is normally represented by a room, or a group of rooms, used for residential purposes, occupied by a person or group of persons, and which includes a certain number of characteristics such as a kitchen, bathroom, etc.”, and that the term “housing unit” was restricted to single housing unit.
CRA then stated:
Although a nursing home may contain elements of a housing unit (such as a kitchen, bathrooms, etc.), it is our view that a nursing home would generally not be considered a flipped property.
It is unclear whether this is reflecting a view that a nursing home is a care rather than residential facility (see Blanche’s Home Care).
Turning to a rooming house, where individual rooms are rented out but the residents share a kitchen and bathroom facilities, it stated:
[W]e would generally consider the rooming house to be a property that is one housing unit for purposes of the flipped property rules – i.e., it is a room or group of rooms used for residential purposes, occupied by a person or group of persons, with a certain number of elements such as a kitchen, bathroom, etc.
Even if each bedroom went beyond basic furnishings to include a mini fridge, table and basic cooking setup such as a small stove or hot plate, CRA considered that such room would not constitute a housing unit, so that the property would not be excluded from “housing unit” status through having multiple housing units.
Neal Armstrong. Summary of 18 December 2025 External T.I. 2025-1055741E5 under s. 12(13)(a).
CRA indicates that shares designated under s. 7(1.31) are not excluded from being identical properties for superficial-loss purposes
On January 1, 2021, an employee acquired one share of the employer with an FMV of $60, resulting in a benefit under s. 7(1)(a) of $60. On December 1, 2021, the employee acquired three shares with an FMV and resulting benefit of $80 per share. On December 15, 2021, the employee sold three shares for $70 per share and, pursuant to s. 7(1.31), identified the three shares acquired on December 1 as those disposed of so that it had a capital loss of $30. On January 1, 2022, the employee acquired one share with an FMV and resulting benefit of $50.
In finding that the superficial loss rule applied to such loss, CRA noted that ss. 7(1.3) and 7(1.31) may dictate the ordering of dispositions, but do not deem identical properties to not be identical. Furthermore, s. 47(3)(b) (deeming securities to which s. 7(1.31) applied not to be identical for s. 47(1) cost-averaging purposes), did not apply for superficial loss purposes.
However, applying the longstanding CRA administrative formula (SL = (Least of S, P and B)/S x L)), even though the superficial loss under s. 40(2)(g)(i) was the full $30 loss, it was reduced under the formula to $20, i.e., the number of shares held at the end of the 61-day period was two-thirds of the number of shares disposed of.
Neal Armstrong. Summary of 20 October 2025 External T.I. 2023-0972451E5 under s. 7(1.31).
CRA finds that Reg. 5907(8)(a) is limited to mergers of what are already foreign affiliates of a corporation resident in Canada
A resident individual wholly owned Canco, and also wholly owned FA1 which wholly owned FA2.
In November of a particular year, FA1 and FA2 were merged, with FA1 as the survivor. Then, that December, the individual transferred all of the shares of FA1 to Canco on a s. 85(1) rollover basis.
In confirming that Reg. 5907(8)(a) would not apply in respect of that merger to deem the taxation years of the two FAs to terminate and (in the case of FA1) restart with the merger for surplus-computation purposes because, at the time of the merger, FA1 and FA2 were not yet foreign affiliates of Canco, the Directorate first noted, as relevant context, that Reg. “5907(8)(a) is relevant to the computation under subsection 5905(3) for the purpose of determining the various initial surpluses or deficits of the foreign affiliate resulting from the merger in relation to a corporation resident in Canada,” and then stated:
The grammatical and ordinary meaning of the words “foreign affiliate of a corporation resident in Canada” found in paragraph 5907(8), read in their specific context with regard to the purpose of the foreign affiliate regime and, in particular, taking into account the close link between that paragraph and subsection 5905(3), demonstrates that those words refer to a foreign corporation having that status in relation to a corporation resident in Canada immediately following the merger.
A textual, contextual and purposive interpretation of the provision does not reveal any elements supporting a conclusion that the terms of paragraph 5907(8)(a) could have retroactive effect where the status referred to in the provision is acquired at a time subsequent to the merger.
Neal Armstrong. Summary of 14 January 2026 Internal T.I. 2023-0990701I7 F under Reg. 5907(8)(a).