News of Note
Fiducie Historia – Federal Court of Appeal finds that, notwithstanding their agreement somewhat to the contrary, trustees had not delegated their trustee function to others
Email this ContentA discretionary trust received dividend income, which it allocated and distributed to one of its beneficiaries ("Father"). In an attempt to avoid a change in control of the corporation held by the trust due to an associated redemption of shares of the corporation held by family members, the trustees entered into an agreement with two beneficiaries, who were sons of Father, under which the trustees undertook to exercise their powers according to the instructions given by the sons and to not make decisions without their prior consent – and to resign in the event of disagreement with the sons' instructions.
However, this caused CRA to conclude that the trustees had abdicated the exercise of their powers to the sons, so that the sons had become de facto trustees, contrary to Art. 1275 of the Civil Code. This, in turn, signified that the purported trust distributions were void, so that no amount was deductible under s. 104(6).
The Tax Court found that, notwithstanding this agreement, the trustees continued to exercise their powers as trustees and that the sons did not, in fact, act as trustees. Thus, there was no violation of Art. 1275.
Before dismissing the Crown’s appeal, Goyette JA first noted that the terms of the agreement with the sons were ambiguous, and then indicated that the Tax Court was called upon to take the actual facts into account, so that it was entitled to decide based on its finding that in fact their had been no abdication of the exercise of trustee powers. Furthermore, no palpable and overriding error in the Tax Court’s assessment of the facts could be identified.
Neal Armstrong. Summaries of The King v. Fiducie Historia, 2025 CAF 177 under s. 104(6) and s. 171(1).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in February and January of 2000. Their descriptors and links appear below.
These are additions to our set of 3,336 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 25 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Laurie – Tax Court of Canada finds that a taxpayer had failed to establish due diligence re a repeated failure to file T1135s
The taxpayer filed a voluntary disclosure regarding her failure for her 2012 to 2014 taxation years to file T1135 returns reporting her foreign investments, which the CRA accepted. In the course of preparing her 2021 taxation return, she realized that she had failed to file T1135 returns for her 2019 and 2020 taxation years. CRA refused a second voluntary disclosure, and she appealed the imposition on her of s. 162(7) penalties.
Graham J. found that the jurisprudence had established that a due diligence defence was available under s. 162(7). In rejecting a Crown submission that Parliament had turned its mind in s. 233.5 (respecting due diligence in seeking unavailable information) regarding the only relevant circumstances in which due diligence could be a defence, Graham J. stated (at para. 8):
I cannot see how, in providing a due diligence defence for information returns under sections 233.2 and 233.4 that were filed on time but were incomplete, Parliament could in any way be said to have indirectly precluded a due diligence defence to the late filing of all information returns covered by subsection 162(7).
However, he went on to find that in these (repeat mistake) circumstances, the taxpayer had failed to establish that she satisfied the Résidences Majeau due diligence tests.
A somewhat analogous issue arises, regarding the s. 245(5.1) GAAR penalty, as to whether the extremely narrow statutory defence under s. 245(5.2) implies that there is no Résidences Majeau due diligence defence (although the analogy is perhaps complicated by the availability of the alternative defence for voluntary disclosure under s. 237.3). The final version of the Explanatory Notes on s. 245(5.2) notably added a statement that:
It is not intended to replace any other defences that may be available under applicable law.
Neal Armstrong. Summary of Laurie v. The King, 2025 TCC 130 under s. 162(7).
CRA indicates that the later-of-incurring-and-acquiring rule in s. 127.44(9)(e) applies on an expenditure-by-expenditure basis
CRA illustrated the application of s. 127.44(9)(e), which deems an expenditure for qualified CCUS expenditure purposes to be incurred in the later of the taxation year in which it was incurred and that in which the related property was acquired.
A taxable Canadian corporation (BCo), receives initial project evaluation from Natural Resources Canada (NRCan) for its CCUS project in 2025. In 2026, it incurs $1,000,000 for detailed engineering costs relating to Class 57 equipment to be acquired by it; in 2027, it requires further Class 57 equipment for $10,000,000; and in 2028, it incurs $5,000,000 in installing the Class 57 equipment in the course of constructing the carbon capture facilities.
CRA noted that although there was no property acquired in 2028 (but only in 2027), s. 127.44(9)(e) would deem the related property to have been acquired in 2028, thereby permitting the definition of qualified carbon capture expenditure to apply to the taxpayer in 2028 in respect of the $5,000,000 of installation costs.
Furthermore, s. 127.44(9)(e) was to be applied separately to each expenditure such that its application to the installation cost incurred in 2028 would not adversely impact its application to expenditures incurred in the previous taxation year. For example, as for the $1,000,000 of costs incurred in 2026, they would be deemed to be incurred in the later of the year in which they were incurred (2026), and the year in which the property to which they related was acquired (2027), i.e., in 2027.
Neal Armstrong. Summary of 21 July 2025 External T.I. 2025-1068511E5 under s. 127.44(9)(e).
CRA finds that NRCan preliminary approval of a CCUS project in Year 2 can backdate qualification of a project expenditure for Class 57(a) property acquired in Year 1
In 2026. a taxable Canadian corporation (Aco) takes ownership and delivery of, and pays for, equipment described in Class 57(a) at the premises of its proposed (carbon capture) CCUS project. However, the equipment will be stored at the premises until Natural Resources Canada (NRCan) issues an initial project evaluation, which will not occur until 2027.
After noting that, unlike other clean economy investment tax credits, there is no requirement that the property acquired be available for use before the CCUS tax credit can be claimed, CRA indicated that the expenses incurred in 2026 could be considered to have been incurred “in respect of” a qualified CCUS project of ACo once ACo's project became a qualified CCUS project upon receipt of the initial project evaluation from NRCan in 2027.
Accordingly, such expenditure would be qualified carbon capture expenditures for the 2026 taxation year, i.e., once initial project evaluation occurred in 2027, the 2026 expenditure would qualify and could be claimed for 2026 (and this was so even though the special backdating timing rule in s. 127.44(9)(h) was not available.)
Neal Armstrong. Summary of 21 July 2025 External T.I. 2024-1039761E5 under s. 127.44(4).
Stackhouse - Federal Court of Appeal confirms that the farming operation of a doctor to which she devoted significant time and capital was a subordinate source for s. 31(1) purposes
After being amended to overrule Craig, s. 31(1) generally provides that where the taxpayer’s chief source of income is a combination of farming and another source, the farming loss restriction rule in s. 31(1) applies unless that other (non-farming) source is a subordinate source.
From 2007 to 2015, the taxpayer earned aggregate net income of $4.1 million from her medical practice, and incurred losses exceeding $4 million from her farming business to which she devoted substantial time and capital. In confirming the denial of farming losses claimed by her for her 2014 and 2015 taxation years, the Tax Court had found that her farming business had always been subordinate to her medical practice as a source of income and that there was no evidence that this would change in the foreseeable future.
Monaghan JA rejected the taxpayer's submission that, to determine which of the two sources was subordinate, priority should be given to time, attention, energy, and capital invested, and not actual or potential profitability. More generally, she found that there was no reviewable error in the Tax Court’s application of the relevant factors in applying the subordinate source test “including the appellant’s ‘ordinary mode of living, farming history, and expectations’: Craig at para. 42” and in its conclusion that farming was subordinate to the taxpayer’s medical practice.
Neal Armstrong. Summary of Stackhouse v. Canada, 2025 FCA 175 under s. 31(1) and Statutory Interpretation – Prior Cases.
Income Tax Severed Letters 1 October 2025
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Husky Energy – Federal Court of Appeal finds that a securities loan between residents of two Treaty countries did not change the beneficial ownership of the transferred shares
Before a Canadian public corporation (“Husky”) paid a dividend on its shares, two significant shareholders of Husky resident in Barbados (the “Barbcos”) transferred their shares under agreements styled as securities lending agreements to related companies resident in Luxembourg (the “Luxcos”). On payment to the Luxcos of a special dividend on those shares, Husky withheld at the Luxembourg Treaty-reduced rate of 5%. Pursuant to the terms of the lending agreements, the Luxcos paid dividend compensation payments to the Barbcos equal to the gross amount of such special dividends to the Barbcos, and later returned the borrowed shares to the Barbcos.
In finding that the Tax Court did not err in concluding that the 5% Luxembourg Treaty-reduced rate did not apply because the Luxcos were not the beneficial owners of the special dividends, Goyette J.A. noted that they essentially had not assumed any risk with respect to the receipt of those dividends, including by entering into “perfect hedges” with respect to FX risk with related parties, or experienced any significant net monetary consequences. The Tax Court’s finding was consistent with the 2003 OECD Commentaries, which indicated that a company is not normally the beneficial owner of dividends if, though the formal owner, it only has “very narrow powers … in relation to the income concerned”.
Furthermore, the finding that the Luxcos, as the borrowers of the Husky shares, were not the beneficial owners of the dividends did not shed an adverse light on the application of treaties to true securities lending arrangements since the agreements between the Barbcos and Luxcos were not in legal substance securities lending agreements. First, the parties never intended for the Luxcos to sell or lend the borrowed Husky shares, which represented 71.5% of all the outstanding Husky shares; and, second, they had agreed that the Luxcos would not post any collateral.
The Tax Court had found that s. 212(2) imposed tax at 25% (although CRA had only assessed at 15%) on the basis of the persons to whom the dividends had in fact been paid (the Luxcos). Since the dividends had not been paid to Barbados residents (the Barbcos), the Barbados treaty rate of 15% was unavailable. Furthermore, the Luxembourg Treaty rate was unavailable because the Luxcos were not the beneficial owners of the dividends,
Goyette JA indicated that this finding was troubling, as it would suggest that a financial institution custodian resident in one country holding for the beneficial owner resident in a second country, would not be eligible for the Treaty-reduced rate applicable to the country of residence of the beneficial owner. However, it was not necessary for her to address this issue, although she should not be taken to have endorsed the Tax Court's interpretation of s. 212(2).
Neal Armstrong. Summaries of The King v. Husky Energy Inc., 2025 FCA 176 under Treaties – Income Tax Conventions – Art. 10 and s. 212(2).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in February of 2000. Their descriptors and links appear below.
These are additions to our set of 3,330 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 25 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Héroux – Quebec Court of Appeal finds that ETA s. 296(2.1) requires the acceptance of late refund claims
The taxpayer, who was not a registrant, constructed various new rental units in 2014 and 2015. After the expiry of the two-year period under the Quebec equivalents of ETA s. 257(1) for claiming input tax refunds (ITRs), and under ETA s. 256.2(7)(a)(iii) for claiming the new rental housing rebate (NRHR), the taxpayer filed QST returns in which he self-assessed QST on the fair market value (FMV) of the facilities when they were first rented out and claimed NRHR and ITR rebates, resulting in a net refund claim.
The ARQ denied the refund claims on the basis that the two-year periods for making such claims had expired. Did s. 30.5 of the Tax Administration Act (Quebec) require the ARQ to take such refund claims into account when assessing, given that para. 2(a) of that provision stipulated that such requirement did not apply where "a claim was made and not refused in respect of the refund before the day on which the Minister made the assessment"?
In finding that the 2(a) exclusion only applied where a refund claim had previously been made within the two-year normal claim period, so that it did not apply to the taxpayer whose refund claims instead had been made late, Hamilton JCA stated:
The [2(a)] exception aims to prevent double refunds: if the person has a refund claim that is pending at the time of the notice of assessment, it must, in principle, proceed. However, in this case, the refund claims were late … [and] were doomed to fail from the outset due to the expiration of the deadline. … Those claims should not, however, prejudice his rights. In other words, exception (a) must be interpreted as being limited to claims that could be accepted and could lead to double refund, and thus only to those submitted within the two-year period prescribed by statute.
After referring to the “presumption of coherence between provincial and federal statutes in GST/QST matters,” Hamilton JCA indicated that it appeared that ETA s. 296(2.1)(b) should be similarly interpreted. He did not discuss ETA s. 296(4)(b), which also could be relevant to a late claim for ITCs.
Neal Armstrong. Summaries of Agence du revenu du Québec v. Héroux, 2025 QCCA 1167 under ETA s. 296(2.1)(b), s. 225(1) - B and Statutory Interpretation – Similar Statutes.