News of Note
CRA finds that the holding of a US cottage by a discretionary family trust that was an eligible group entity of real estate Cancos likely would taint the latter under (c)(i) of “excluded entity”
Email this ContentA discretionary personal trust for the benefit of the spouse and child of the individual (Mr. X) controlling various Canadian real estate corporations (so that the trust was an “eligible group entity” in respect of those corporations) held, as its principal asset, a US cottage used primarily for personal use of the spouse and child, with Mr. X occasionally contributing funds to the Trust to cover the operating costs, and making substantially all of the decisions regarding the cottage in Canada. STEP Canada asked whether the Trust’s ownership of the US cottage caused the Trust (and, therefore, the corporations) to fail to meet the requirement of s. (c)(i) of the “excluded entity” definition that “all or substantially all of [its] undertakings and activities … [be] throughout the taxation year, carried on in Canada”?
CRA responded unfavourably:
Where the undertaking and activities of a taxpayer include the holding of real estate, relevant factors to be considered would include the place where the property is situated and where related undertakings or activities occur like the operation and use of the property, its maintenance and upkeep, its management, administration and financial management.
In the case of a trust holding a real property that is situated in the US, it is reasonable to consider that the facts might indicate that significant activities related to the holding and operation of the property take place in the US. Given the Trust only owns the US Cottage and a US bank account containing funds necessary to operate the US Cottage, the Trust (and therefore all Cancos) would likely not meet the “all or substantially all” requirement in subparagraph (c)(i) … .
Neal Armstrong. Summary of 25 June 2030 External T.I. 2025-1056861E5 under s. 18.2(1) - “excluded entity” – s. (c)(i).
Income Tax Severed Letters 20 August 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
BMO - Tax Court of Canada finds that arrears interest on US assessments of US branch taxes was non-deductible in computing BMO’s income
BMO was assessed in 2004 and 2006 for additional U.S. federal (and NYC) income tax and interest on business profits attributed to its US branch operations for its 1997 to 2001 taxation years.
In confirming (in the context of a Rule 58 question) the CRA denial of the deduction claimed by BMO for such arrears interest, MacPhee J found that the tax arrears did not satisfy the income-producing purpose test in s. 18(1)(a) because such tax was not incurred to earn income but instead was incurred as a consequence of BMO having earned income. As the tax arrears thus were not deductible pursuant to s. 18(1)(a), it followed that the deduction of the arrears interest thereon was also denied pursuant to s. 18(1)(a), i.e., it was “an expenditure which would not have been incurred except for the income earned by [BMO]”.
It did not matter that the deduction was not specifically denied by s. 18(1)(t) (which refers only to amounts payable under the Act).
Neal Armstrong. Summary of Bank of Montreal v. The King, 2025 TCC 113 under s. 18(1)(a) – income-producing purpose.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in April of 2000. Their descriptors and links appear below.
These are additions to our set of 3,290 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Oldcastle Building Products – Tax Court of Canada finds that s. 152(9) “allow[s] the Minister to support a reassessment using the broadest range of possible alternative approaches”
After discoveries had been completed for the taxpayer’s appeal of reassessments that inter alia denied interest on a $300 million borrowing on the basis that it was not used for an income-producing purpose, the Crown sought to amend its pleadings to identify the thin capitalization rules as an alternative argument or basis for disallowing the taxpayer's interest expense.
Before finding that the post-2016 version of s. 152(9) did not preclude this requested amendment, and allowing it, Yuan J stated that s. 152(9) now “allow[s] the Minister to support a reassessment using the broadest range of possible alternative approaches, subject to the express limitations set out in paragraphs 152(9)(a) and (b), provided that the amount payable under the reassessment does not increase.”
He also indicated that “the 2016 amendments … overrode the requirement from prior case law that the tax under the alternative argument had to be derived from the same transaction that produced the originally assessed tax” – but went on to find that, in any event, here the alternative bases for denying the interest expense were based on the same transaction, being the borrowing.
Neal Armstrong. Summary of Oldcastle Building Products Canada Inc. v. The King, 2025 TCC 107 under s. 152(9).
CRA characterizes giving access to CPD programs as a supply of IPP for ETA purposes
The “Party”, which was some sort of non-profit professional body (e.g., perhaps something like a provincial law society), agreed with the “Company” (also a registrant and, apparently, a non-resident) that the Company, which operated a website that provided on-demand video content, would post videos of conferences or programs (presented by Canadian residents) that qualified for continuing professional development purposes so as to allow Canadian professionals to access such content.
Regarding the treatment of such royalties, CRA indicated that the supply of a right to use intellectual property, such as video content, where the supplier retains ownership of the content, is characterized as a supply of intangible personal property (IPP) for GST/HST purposes. Because the Party's supply of a licence or right to use its content would generally be considered a supply of IPP and, because the supply of the IPP could be used in whole or in part in Canada, the place of the supply was in Canada. Thus, royalties paid by the Company to the Party (which, in turn, were a percentage of the royalty charges by the Company to the Canadian professional users) were subject to GST/HST under the ETA s. 142(1)(c) rule.
In addition, the provincial place of supply rules in s. 8(b) of the New Harmonized Value-added Tax System Regulations would generally apply.
Neal Armstrong. Summary of 25 October 2024 GST/HST Interpretation 247380 under ETA s. 142(1)(c).
PepsiCo – High Court of Australia declines to recharacterize, as a royalty, FMV sales proceeds of concentrate paid to an Australian sub of PepsiCo, the trademark licensor
A U.S. company (“PepsiCo”) entered into an “exclusive bottling appointment” (“EBA”) with an arm’s-length Australian bottling company (“SAPL”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to SAPL for bottling and sale, and granted SAPL the right to use the Pepsi and Mountain Dew trademarks in this regard. A Singapore company in the PepsiCo group produced the concentrate, and sold it (at a 0.05% mark-up) to an Australian company in the PepsiCo group (“PBS”) which, in turn, supplied it to SAPL and invoiced SAPL therefor.
At issue was whether any portion of the payments made by SAPL constituted a royalty “derived” by PepsiCo from an Australian resident (SAPL), so as to be subject to Australian withholding tax. A “royalty” was relevantly defined as amounts paid or credited as consideration for the use of or the right to use various listed types of intellectual property, including trademarks.
In concluding that the amounts paid by SAPL to PBS were not a royalty, the majority stated:
The Commissioner did not dispute that [the concentrate price] was an arm's length price, or a fair price … . When the price paid for goods has those characteristics, it cannot be said that a part of the price paid for those goods is payment of a royalty for the use of intellectual property applied to products partly made with those goods.
Regarding the question of whether, if instead payments by SAPL had been a royalty, PepsiCo would have derived any amount as a royalty (which the Commissioner accepted required that there have been an antecedent obligation between PepsiCo and SAPL which was being satisfied by payments made under direction), the majority noted that although the ERB had required SAPL in the future to enter into a contract to buy concentrate on specified terms, such clause “did not change the parties to the subsequent transactions for the sale of concentrate, namely PBS and SAPL” so that “[i]f SAPL failed to pay for the concentrate supplied by PBS, it was PBS as the contracting party that had an action for debt under those sale transactions.”
The Commissioner's appeal was dismissed.
Neal Armstrong. Summary of Commissioner of Taxation v PepsiCo Inc, [2025] HCA 30 under s. 212(1)(d).
CRA has released the official version of the 2025 IFA Roundtable
The table below provides links to the official versions of the May 28, 2025 IFA Roundtable items together with summaries of the CRA answers which we provided in the week following that conference.
| Topic | Descriptor | |
|---|---|---|
| 28 May 2025 IFA Roundtable Q. 1, 2025-1052641C6 - Digital Services Tax (DST) Act | Other Legislation/Constitution - Federal - Digital Services Tax Act - Section 45 | various issues re CRA administration |
| 28 May 2025 IFA Roundtable Q. 2, 2025-1052681C6 - Global Minimum Tax Act | Other Legislation/Constitution - Federal - Global Minimum Tax Act - Section 60 - Subsection 60(1) | affected taxpayers are expected to start registering for GMTA purposes in late 2025 |
| 28 May 2025 IFA Roundtable Q. 3, 2025-1055511C6 - Cash Pooling | Income Tax Act - Section 15 - Subsection 15(2.11) | PLOI election available re cross-border cash-pooling arrangement/ simplified PLOI election will be announced |
| Income Tax Act - Section 15 - Subsection 15(2.6) | frequent anticipated payments and repayments occurring in a cross-border physical or notional cash-pooling arrangement likely would be a s. 15(2.6) series | |
| Income Tax Act - Section 15 - Subsection 15(2.17) | illustration of ordering rule for determining whether s. 15(2.17) applies to a cross-border notional cash pooling arrangement | |
| 28 May 2025 IFA Roundtable Q. 4, 2025-1052581C6 - Requests for documents under section 231.1 | Income Tax Act - Section 231.2 - Subsection 231.2(1) | s. 231.1 is CRA's primary information-request power, and it uses s. 231.2 only in special situations, e.g., information about unnamed persons |
| Income Tax Act - Section 231.1 - Subsection 231.1(1) | CRA is now using s. 231.1 as its primary demand power, and is relegating s. 231.2 to special situations | |
| 28 May 2025 IFA Roundtable Q. 5, 2025-1063771C6 - Computation of FAT | Income Tax Act - Section 95 - Subsection 95(1) - Foreign Accrual Tax | formula for prorating foreign tax between a FAPI and non-FAPI business for FAT purposes |
| 28 May 2025 IFA Roundtable Q. 6, 2025-1052631C6 - Earnings of a disregarded US LLC | Income Tax Regulations - Regulation 5907 - Subsection 5907(2.03) | the opening UCC for used depreciable property of an acquired LLC for the first year of computing its (a)(iii) earnings was the lesser of UCC and FMV |
Vefghi – FCA confirms that whether a s. 104(19) dividend was received by a corporate beneficiary from a connected corporation is tested at the trust year end
Partway through its calendar taxation year, a family trust received a dividend from a family corporation, paid that dividend to a corporate beneficiary (also with a calendar year end) and in its return for that taxation year, made a s. 104(19) designation. CRA applied its published position (e.g., in 2020-0845821C6 F) that since (due to a sale of the dividend payor to a third party) the two corporations had ceased to be connected between the time of the dividend and the effective time of the s. 104(19) designation (the December 31 trust year end), the dividend was subject to Part IV tax.
A second situation was similar, except that a new taxation year of the corporate beneficiary started after the date of the payment of the dividend (on June 30, shortly preceding the dividend payer and beneficiary ceasing to be connected) and before the (December 31) effective date of the s. 104(19) designation by the trust, so that on no day in that taxation year of the corporate beneficiary was the dividend payer connected to it.
Webb JA confirmed that the determination of whether the corporate payor was connected with the corporate beneficiary was to be made at the end of the particular taxation year of the trust in which it received the dividend. Thus, since such connected status did not exist at the trust year-end, Part IV tax was payable in both cases.
In reaching this conclusion, Webb JA noted:
- Since the s. 104(19) designation “cannot be made before the end of the trust's taxation year, the last day of the trust's taxation year is the earliest date on which this designation could be made” and, indeed, “[i]t is only once the designation is made, and the corporate beneficiary is deemed to receive a dividend, that the determination of whether the beneficiary corporation is connected to the corporation that paid the dividend to the trust can be made”.
- Conversely, finding that the date the trust made the designation was the relevant date could lead to a conflict with the wording of s. 104(19), for example, if a trust with a December 31 year-end made a designation when it filed its tax return after December 31, that “would be after the taxation year of the corporate beneficiary in which the trust's taxation year ends”.
Thus, in light of these and other considerations, the only date for applying the connected test that seemed to “work” was the December 31 trust year end.
Neal Armstrong. Summary of Canada v. Vefghi Holding Corp, 2025 FCA 143 under s. 104(19).
Income Tax Severed Letters 13 August 2025
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.