News of Note
Income Tax Severed Letters 5 March 2025
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
RTI – Court of Quebec confirms that it had no jurisdiction to deal with over-remittances of source deductions
Couture JCQ confirmed that the Court of Quebec had no jurisdiction to consider a Notice of Objection of the taxpayer based on the failure of the ARQ to refund source deductions which it alleged that it had over-remitted, given that the Quebec equivalent of ITA s. 171(1) only accorded the Court of Quebec jurisdiction to deal with assessments. Here, there was no assessment that had been objected to.
Neal Armstrong. Summary of RTI Turbo Inc. v. Agence du revenu du Québec, 2025 QCCQ 231 under s. 171(1).
A convertible debenture held by a non-resident could trigger the FAD rules
Suppose that a widely-held private corporation resident in Canada (the “CRIC”) will emigrate from Canada for non-tax reasons. However, a non-resident corporation (“Forco”) that is not a current shareholder had acquired, prior to the emigration, a convertible debenture which, when converted after the emigration, results in Forco having de jure control of the CRIC.
Under s. 212.3(1)(b), the s. 212.3 rules apply to an investment made by the CRIC in a subject corporation if as part of the series of transactions that includes the making of the investment, Forco acquired control of the CRIC and at the time of the “investment”, the Forco shares represented 25% or more of the votes or value of the CRIC – with s. 251(5)(b) rights being taken into account for these purposes. Accordingly, on the conversion of the debentures after the emigration, Forco could be the parent of the CRIC for purposes of the s. 212.3 rules in respect of any investment made during the period in which it held the debentures before the emigration, if the debenture conversion occurred as part of the same series of transactions as that investment.
However, the finding in Eyeball Networks - that the concept of a “series of transactions” applies only when one or more of the transactions within the series is primarily tax driven - could be helpful in this regard.
Neal Armstrong. Summary of Mark Jadd and Daniel Safi, “When a Non-Resident Might Qualify as a “Parent” Under the FAD Rules: A Potential for Retroactive Application?”, International Tax Highlights, Vol. 4, No. 1, February 2025, p. 4 under s. 212.3(1)(b).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in December of 2000. Their descriptors and links appear below.
These are additions to our set of 3,123 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 24 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA rules on a cross-border butterfly
CRA has ruled on a relatively straightforward cross-border butterfly. Before the distribution of the shares of Foreign Spinco (holding the business to be spun-off) by its parent (Foreign Services) up the chain for distribution by Foreign Pubco to its shareholders, it was necessary for the Canadian spin business carried on through a Canadian subsidiary (Subco 1) of a Canadian subsidiary (DC) of Foreign Services to be transferred in a butterfly spin-off to a new Canadian subsidiary (TC) of Foreign Spinco.
As with other cross-border butterflies, it was required, in order to avoid Foreign Spinco becoming a deemed transferee corporation at any time in the series as a result of becoming a shareholder of DC, to accomplish the transfer of DC preferred shares to TC pursuant to a three-corner agreement among Foreign Services, Foreign Spinco and TC, i.e.:
1) Foreign Services transfers the DC preferred shares directly to TC as consideration for the shares of Foreign Spinco issued in step 3;
2) TC issues common shares to Foreign Spinco as consideration for those DC shares; and
3) As consideration for the TC shares, Foreign Spinco issues shares to Foreign Services.
DC then spins off the relevant business assets (the Subco 1 shares) to TC, and the two cross pref shareholdings are redeemed for notes, which are set-off.
Also, as in other cross-border butterflies, the shares of Foreign Spinco were effectively required by s. 55(3.1)(b)(i)(A)(II) to at no time in the series derive 10% or more of their FMV from the Canadian spin business (or the shares of TC). In this regard, CRA ruled that, for the purposes of s. 55(3.1)(b)(i)(A)(II), in determining whether 10% or more of the FMV of the Foreign Spinco common shares is derived from shares of TC or DC “any indebtedness of Foreign Spinco that is not a secured debt and that is not a debt related to a particular property will be considered to reduce the FMV of each property of Foreign Spinco pro rata in proportion to the relative FMV of all property of Foreign Spinco.”
Neal Armstrong. Summary of 2023 Ruling 2022-0943871R3 under s. 55(3.1)(b)(i)(A)(II).
Lithium Americas continued to Switzerland from B.C. and Almonty, a CBCA corp is proposing to be domesticated in Delaware
Lithium Americas continued from B.C. to Zug, Switzerland on or about January 23, 2025 and Almonty Industries is proposing to use the CBCA continuation procedures and the domestication procedures under the Delaware General Corporation Law Inc. (the “DGCL”) so as to become governed by the DGCL. Management anticipated that the Lithium Americas continuation did not result in any exit tax under s. 128.1(4)(b) or 219.1 and, similarly, the domestication of Lithium Americas is not anticipated to result in material exit taxes.
Neal Armstrong. Summary of 23 December 2024 Management Proxy Circular of Lithium Americas under Public Transactions – Other – Continuances/ Migrations and summary of 6 February 2025 Management Proxy Circular of Almonty Industries Inc. under Other – Continuances/Migrations.
CRA notes that it generally will be impossible for a resident individual to properly compute the Canadian income tax results of holding to maturity a UK endowment policy
An individual, while a non-resident, acquired in 1998 a United Kingdom mortgage endowment policy as an investment plan with a life insurance component. The policy matured in 2023 and the individual received a lump-sum amount from the policy issuer, while a resident of Canada.
CRA noted:
- It had “previously opined that a UK endowment policy would appear to be a life insurance policy within the meaning in subsection 138(12)“.
- On the immigration, the ss. 128.1(1)(b) and (c) rules would apply.
- Although a life insurance policy issued by a non-resident insurer is not specifically precluded from qualifying as an exempt policy, this would require actuarial calculations and information that only the issuing insurer will possess.
- Similarly, the determination of the amounts to be used to compute any policy gain with respect to a life insurance policy (e.g., proceeds of disposition and adjusted cost basis) generally requires information that would be available only in the accounts of the issuer of the policy (i.e., the insurer).
Neal Armstrong. Summaries of 27 January 2025 External T.I. 2024-1018491E5 under s. 138(12) – life insurance policy and s. 148(9) – ACB.
CRA confirms that an individual who is resident under the s. 250(1)(a) sojourning rule cannot be a part-year resident
CRA confirmed that an individual who sojourns in Canada for more than 183 days in a taxation year and, later in the same taxation year, becomes factually resident in Canada, will not have any period of part-year residence in that year (e.g., for purposes of s. 114)) given that the individual is deemed by s. 250(1)(a) to be resident in Canada throughout the taxation year.
Before so concluding, CRA noted that a person who is deemed to be resident in Canada and is not factually resident in Canada will generally not be resident in a particular province for provincial tax purposes. (This presumably would not be the case where the individual became factually resident in a province by December 31 of the sojourning year.)
Neal Armstrong. Summary of 18 November 2024 Internal T.I. 2024-1015501I7 under s. 250(1)(a).
Income Tax Severed Letters 26 February 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Evans – Ontario Superior Court grants an order rectifying a trust allocation resolution so as to set out specific amounts
After a discretionary family trust realized a capital gain from a share sale, the sole trustee passed a resolution in that year providing that “[t]he income of the Trust be allocated to the [three stated] Beneficiaries of the Trust payable by way of demand Promissory Note in such amounts to be determined when the income of the Trust is ascertained … .” Such promissory notes were issued three months later. CRA denied the s. 104(6) deduction for the amount of the taxable capital gain allocated to the three beneficiaries because the resolution did not specify the amounts to be payable to them.
Rady J found that the evidence established that there was an agreement to allocate at least $375,000 (equal to the taxable capital gains deduction) to each of the three beneficiaries, although there was insufficient evidence to establish that the entire taxable capital gain was agreed to be allocated to them. Accordingly, she granted an order to rectify the resolution so as to provide that $375,000 of the taxable capital gain was to be allocated to each of the three beneficiaries, stating in this regard:
I am satisfied that the applicants are not attempting to retroactively amend their agreement to achieve beneficial tax consequences. Rather, they seek to rectify the resolution itself because it did not sufficiently express the agreement they had reached.
She further indicated that the application should not be dismissed on the basis of the trust having the alternative remedy of suing the professional advisors. She described as “apt” the statement in the dissenting reasons of Abella J in Fairmont that the court should not force on the parties an alternative that is neither practical nor certain.
Neal Armstrong. Summary of Evans v. Attorney General of Canada, 2024 ONSC 1955 under General Concepts – Rectification.
Neal H. Armstrong editor and contributor