The taxpayer, which was a trust that was factually resident in Panama but was deemed under ITA s. 94(3) to be resident in Canada because it had a resident contributor who resided in Quebec, was assessed for federal surtax under s. 120(1) and was denied the Quebec abatement under s. 120(2), on the basis that, as per Reg. 2601(1), it was not resident in Quebec (or any other particular province) on December 31 of the particular taxation years and thus did not have any "income earned in the year in a province" as defined in s. 120(4). However, because the resident contributor was a resident of Quebec, the trust was also subject to taxation on its income under the Taxation Act (Quebec), notwithstanding the absence of relief from the federal surtax or through the Quebec abatement.

In confirming the federal reassessments and in rejecting the trust’s submission that it was resident in a province (Quebec) for purposes of Reg. 2601(1) because it was deemed to be resident in Quebec for TA purposes, Clark J stated:

The use [in Reg. 2601(1)] of the word “resides” refers to established principles of residency under the Income Tax Act. While taxpayers may be deemed resident in Canada under various provisions such as paragraph 94(3)(a), those provisions do not apply for the purpose of Regulation 2601(1) because they do not refer to any particular province.

Regulation 2601(1) [only] applies if the individual is factually resident in a province on December 31 of a particular taxation year. …

Federal and provincial tax liabilities remain separate jurisdictional issues.

Neal Armstrong. Summary of Chobham Corporation Ltd. v. The King, 2026 TCC 127 under Regulation 2601(1).

The Minister's reassessments of the taxpayers were made on the assumption that their offshore corporations generated unreported employment and business income, and capital gains, to them. After the taxpayers had appealed, the Attorney General filed Replies asserting that income of controlled foreign affiliates of the taxpayers constituted foreign accrual property income (FAPI) to them.

Clark J noted that Walsh (2007 FCA 222) had “held that the pre-2016 version of subsection 152(9) did not permit the Minister to include in its alternative argument transactions which did not form the basis of the taxpayers' reassessment” and that the 2016 amendments (expanding s. 152(9) to permit the advancing of an additional source of income) should be narrowly construed on the basis that “Parliament is taken to have been aware of the jurisprudence limiting subsection 152(9) to the transactions that formed the basis of the taxpayers' reassessment.” She stated:

I find it plain and obvious that amended subsection 152(9) does not enable the Minister to raise new arguments and bases arising from an entirely new set of transactions. An assessment of tax liability under the FAPI rules requires a determination of the income of a Canadian taxpayer's foreign affiliates. The Minister made no such … determination … prior to reassessment.

The FAPI pleadings were struck.

Neal Armstrong. Summaries of Liu v. The King, 2026 TCC 126 under s. 152(9), Rule 8 and Statutory Interpretation – Prior Cases.

CRA ruled on classic postmortem pipeline transactions under which:

• Holdco, holding portfolio investments, will repurchase and redeem a portion of its shares held by the estate, with the resulting deemed dividends designated as eligible dividends, and the resulting capital loss carried back under s. 164(6);
• the estate will transfer all its common shares of Holdco on an s, 85(1) rollover basis to a Newco in consideration for a demand promissory note and preferred shares;
• after one year, Holdco and Newco will amalgamate to form Amalco; and
• Amalco will gradually repay the note held by the estate at a rate of 1/3 of the original principal amount each year.

Neal Armstrong. Summary of 2024 Ruling 2024-1031041R3 F under s. 84(2).

This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.