News of Note
CRA finds that the wind-up of FA2, owed an upstream loan by the taxpayer, into FA1 held by the taxpayer did not constitute a repayment of the loan for s. 90(8)(a) purposes
Email this ContentCRA found that where a foreign affiliate (FA2), which was owed an undocumented loan by a Canadian corporate taxpayer, was wound up into a US LLC (FA1) held directly by the taxpayer, this did not result in the repayment of such loan for purposes of the rule in s. 90(8)(a), which effectively required that the loan be repaid within two years - even though the taxpayer issued a note evidencing the loan now owing by it to FA1. CRA stated:
Where there are no changes to the terms of a loan other than the identity of the creditor … an assignment of the loan to a new creditor would not generally cause an extinguishment of the loan or substitution for a new one.
However, CRA accepted that the loan was repaid as a result of FA1 paying a dividend to the taxpayer through the issuance of a promissory note, with that note then being set off against the loan owing by the taxpayer to FA1. In particular, s. 90(8)(a) did not require the repayment to be made to the original creditor.
Although in fact this repayment by set-off occurred many years after the initial loan, a transitional rule deemed that loan to have been issued on August 19, 2014, which was less than two years before the set-off transaction.
Neal Armstrong. Summary of 24 July 2023 Internal T.I. 2020-0841891I7 under s. 90(8)(a).
Income Tax Severed Letters 29 April 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Identifying an imported mismatch arrangement may require complex or impossible determinations as to foreign arrangements
A general discussion of the second package of hybrid mismatch rules released on January 29, 2026 includes a discussion of the imported mismatch arrangement rules.
The proposed rules in ss. 18.4(15.91) to 18.4(15.95) to deny deductions for payments arising under an imported mismatch arrangement would apply to mismatch arrangements that are offshore, i.e., there is no Canadian entity directly party to the offshore mismatch, so that the deduction/non-inclusion (D/NI) or double deduction (DD) mismatch is not otherwise neutralized in Canada or under a foreign hybrid mismatch rule.
This result is accomplished through the concepts (in s. 18.4(15.92)) of an “importing payment”, i.e., a payment that is deductible in Canada made to an entity not resident in Canada, and a “mismatch payment,” i.e., a payment giving rise to an “offshore hybrid mismatch amount” – which, as determined under s.18.4(15.91), is a hybrid mismatch in respect of a payment where the payer or recipient is not a resident of Canada.
An imported mismatch arrangement may also apply in cases of payments that are indirectly related to an offshore mismatch. This is achieved through referring in s. 18.4(15.92) to the situation where there is an indirect link between the mismatch payment and the importing payment involving a chain of payments starting with the importing payment and ending with a payment made to the payer of the mismatch payment.
It is observed that:
The imported mismatch rules may deny a deduction in Canada in respect of a payment that is directly or indirectly connected to the offshore mismatch. This broad extension of the rules requires tracing payments made in offshore structures, identifying any D/NI and DD mismatches under foreign tax laws, assessing the operations of foreign hybrid mismatch rules in all affected jurisdictions, and identifying the linkage to any deductible payment supporting that offshore mismatch. … This is in contrast with the BEPS Report, which intended for imported mismatch arrangement rules to apply only where the taxpayer and the parties to the imported mismatch arrangement were part of the same control group.
Neal Armstrong. Summary of Tessa Reah and Brian Leslie, “From Instruments to Entities: Canada Expands Its Hybrid Mismatch Rules,” International Tax (Wolters Kluwer), February 2026, No. 146, p. 1 under s. 18.4(15.92).
The s. 88(1)(c)(vi) bump-denial rule can be a trap for the unwary in post-mortem plans involving grandchildren
The bump-denial rule in s. 88(1)(c)(vi) provides that a person who was a specified shareholder at any time during the series of transactions and before the parent last acquired control of the subsidiary cannot receive bumped property unless that person is also a specified person. This rule can be a trap for the unwary in post-mortem situations involving grandchildren.
As an example, the son (“Son”) of the deceased was entitled to 60% of the estate (holding the shares of Sub), and the children of the daughter (“Daughter”) of the deceased were entitled to 40%. In a pipeline transaction, the estate transfers all of Sub’s shares to a newco (“ParentCo”) for ParentCo shares, ParentCo and Sub amalgamate, and Amalco distributes property to the estate.
Under the related person test in s. 88(1)(c.2)(ii), the estate was deemed to be a corporation owned on a 60/20/20 basis by the beneficiaries. Furthermore, under s. 88(1)(c.2)(i)(B)(II) (deeming the children of a deceased individual to be related to their siblings - and to their nephews and nieces, but only if the latters’ parent is also deceased), the children of Daughter were not related to Son because Daughter was still alive. Consequently, the children would not be related to the deemed corporation, and their receipt of any of the bumped property would violate s. 88(1)(c)(vi) so as to deny the whole bump.
Neal Armstrong. Summary of David Carolin, Marissa Halil, and Manu Kakkar, “Grandchildren Can Trump the Bump?,” Tax for the Owner-Manager, Vol. 26, No. 2, April 2026, p. 6 under s. 88(1)(c)(vi).
We have translated 5 more CRA interpretations
We have translated a further 5 CRA interpretations released in June of 1999. Their descriptors and links appear below.
These are additions to our set of 3,540 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).
Legault – Court of Quebec finds that a Canadian diplomat who had been living mostly abroad for many years was factually resident in Quebec
The taxpayer, who had spent her childhood in Quebec, then spent most of her time abroad, including being employed by the Department of Foreign Affairs in various diplomatic functions. From 2016 to 2020, she served as the Canadian ambassador to Barbados and then, after several days in Quebec, in January 2021 took up her position as the Canadian ambassador to Mali.
She was reassessed by the ARQ for her 2018 and 2019 taxation years on the basis that she was a resident of Quebec. For those years, she had filed federal income tax returns (also paying the additional federal tax in lieu of being resident in a province), but not Quebec returns.
In finding that the taxpayer was a resident of Quebec for the two taxation years at issue, Chalifour JCQ first stated that “leaving Quebec for work reasons does not generally constitute a breaking of residence ties with Quebec.” Throughout the period, the taxpayer had been the owner of a residence in Quebec and, in September 2019, her daughter, who had been studying in Barbados while staying with her mother, took up her studies in Quebec. Furthermore, the taxpayer had a Quebec driver’s licence, Quebec-registered vehicle, Quebec health card, and Quebec credit cards and bank account. It was not decisive that her life partner resided in France rather than Quebec.
Before concluding that the taxpayer was factually resident in Quebec during the 2018 and 2019 years, Chalifour JCQ referred to s. 8(1)(c) of the Taxation Act (Quebec) which (similar to ITA s. 250(1)(c)) deemed an individual to be resident in Quebec throughout a taxation year if, at any time in the year, the individual “was an ambassador … of Canada … and was resident in Québec immediately prior to … employment or appointment by Canada.” Chalifour JCQ stated that “for section 8 to apply, the taxpayer must, in fact, no longer reside in Quebec.” As she also concluded that the taxpayer was factually resident in Quebec, s. 8(1)(c) did not apply.
It would have been more accurate to state that the taxpayer would have been deemed by s. 8(1)(c) to be resident in Quebec if she had been factually resident in Quebec immediately before her appointment, years before, to the federal government.
Neal Armstrong. Summaries of Legault v. Agence du revenu du Québec, 2026 QCCQ 1320 under s. 2(1) and s. 250(1)(c).
Glencore v. FTI – BC Court of Appeal finds that a recipient could not set off HST owing by it to a supplier (who never remitted that HST) against a debt owing by the supplier to it
Glencore relied on a set-off clause in the long-term metals supply contract between it and an arm’s length mining company (“TNB”) to pay amounts (including HST) owed by Glencore to TNB for such TNB metals supplies by way of set-off against most of the amount owed by TNB to Glencore for “Replacement Costs” incurred by Glencore due to TNB’s failure to make earlier deliveries under the contract. After TNB has gone into CCAA proceedings, CRA assessed TNB for its failure to remit the HST which Glencore had purported to pay to TNB by way of set-off.
Fisher JA, after referring to the requirement of TNB to collect HST as agent for CRA under ETA s. 221(1) and to remit it to CRA under s. 222(1), indicated that he saw no error in the judge's description of the HST as a debt owed by the recipient (Glencore) to CRA, which the supplier collected on behalf of CRA as agent. Furthermore, s. 224 did not deem Glencore to owe the HST to TNB in its personal capacity because TNB had not paid such tax to CRA.
Because TNB owed the Replacement Costs to Glencore in its personal capacity, whereas Glencore (given the non-application of s. 224) continued to owe the HST at issue to TNB in TNB's capacity of trustee, there was no mutuality necessary for legal or equitable set-off to occur.
Since Glencore had not paid the HST, the judge had appropriately exercised her discretion under s. 11 of the CCAA to order Glencore to pay the HST to TNB as CRA's agent. It did not matter that, pursuant to s. 222(1.1), TNB was no longer deemed to hold any HST collected in trust for CRA after the commencement of the CCAA proceedings – so that this order allowed the receiver to receive such funds and distribute them among the creditors in accordance with the CCAA.
Neal Armstrong. Summaries of Glencore Canada Corporation v. FTI Consulting Canada Inc., 2026 BCCA 167 under ETA s. 221(1) and s. 224.
Heydary - Tax Court of Canada finds that a failed law firm in trusteeship could not claim ex-client receivables over 3 years old as bad
The appellant, a law firm, went into Law Society of Ontario (LSO) trusteeship when it was discovered that its founder had absconded in November 2013 with trust funds of over $3 million. Over half of the client's accounts receivable that had been outstanding in November 2013 were claimed in the appellant's June 2017 return as bad debts.
In confirming the Minister's denial of the s. 231 HST credit, Russell J found that none of the three main conditions for s. 231 to apply had been met.
First, regarding the requirement that the receivable “had become a bad debt,” Russell J stated that “a debt becomes ‘bad’ when, despite reasonable steps having been taken to collect, the debt remains uncollected.” He noted that the evidence of collection for the 50 receivables included in the claim involved only four emails seeking payments and two statements of claim. He stated (at para. 24) that the receivables did “not become bad debts because the appellant is unwilling to properly pursue them with phone calls, letters and court proceedings if necessary.”
Second, regarding the requirement that the receivables have been written off in the supplier’s books of account, he found (at para. 28) that there was no evidence of such a write-off, nor of the appellant having approached the LSO to give it temporary access to the accounts in order to make the required write-off entry.
Third, the appellant had not remitted any of the HST included in the receivables by June 2013. On this point, Russell J stated (at para. 38) that the “law is clear that the paying of net tax subsequent to the time at which the deduction claim is filed does not satisfy the requirements specified in subsection 231(1.1)”.
This decision suggests that the s. 231 requirements are a trap for the unwary, e.g., where a law firm for client relationship or other good business reasons chooses to write off a client receivable rather than pursue its collection and does not timely issue a credit note complying with the s. 232 rules.
Neal Armstrong. Summary of Heydary Green Professional Corporation v. The King, 2026 TCC 69 under ETA s. 231(1).
CRA finds that an electronic certificate to unallocated bullion represents beneficial ownership of the indicated quantity of bullion
The resident taxpayer, like other clients of a corporation resident in Canada, purchased holdings ("Holdings") evidenced by electronic records provided online to the clients. These Holdings represented a quantity of precious metals held by or on behalf of the client and stored in a vault situated outside Canada.
The taxpayer had the option to choose between Holdings in respect of registered bars or non-registered bars. In the case of non-registered metals, the Holding was stated to represent the taxpayer's proportionate, undivided interest in the weight of the metal.
After determining that the registered Holdings constituted specified foreign property under para. (b) of the specified foreign property definition as tangible property situated outside Canada, CRA further concluded that the Holdings in respect of non-registered metals constituted specified foreign property under para. (h) of that definition as an interest in tangible property situated outside Canada. CRA stated:
Where the Holding reflects non-registered metal, the Taxpayer holds a proportionate undivided interest in the weight of the metal situated abroad … [and] also bears the core attributes of beneficial ownership (control over sale/delivery, exposure to price risk, entitlement to proceeds).
… [T]he Holding is evidence of the Taxpayer’s ownership interest in the non-registered metal.
In that regard, it can be said that the Taxpayer’s proportionate undivided interest in the weight of non-registered metal that is situated in a vault outside Canada is the Taxpayer’s interest in tangible property situated outside Canada, and consequently may be considered an interest in a property that is specified foreign property.
This finding (albeit based on representations made by the taxpayer) may contradict the statement in 7-3237 that the Department had:
previously determined that a silver or gold certificate is an obligation stating the issuer's liability to deliver upon demand the bullion in exchange for the certificate. Accordingly, the holder possesses merely personal rights, (rights in personam), enforceable against the issuer, rather than real rights (rights in rem) in the commodity itself.
See also Goldcorp.
Neal Armstrong. Summary of 23 September 2025 External T.I. 2025-1064831E5 under s. 233.3(1) – specified foreign property – para. (b), para. (h).
CRA finds that the fresh-start rule re a change of an active to an investment business is inapplicable where there also is a “fundamental change” to that business
A wholly-owned foreign affiliate (FA 1) of the taxpayer had carried on a business of distributing a product that had been manufactured by another foreign affiliate of the taxpayer (Producer FA). FA 1 held the trademark and other intellectual property (IP) relating to the product, and provided a royalty-free licence to Producer FA (and another FA providing distribution services) for their use of such IP in connection with the product.
However, on the “Change-in-Business Date,” a new, wholly-owned foreign affiliate (FA 2) of the taxpayer became the distributor of the product and began making royalty payments to FA 1 for its use of the IP. As these royalties were the only income stream for FA 1 after that date, FA 1 now carried on an investment business.
Whether the fresh start rules in s. 95(2)(k.1) applied, so that the taxpayer could rely on Reg. 5907(2.9) and those rules to increase the exempt surplus of FA 1 on account of a gain realized on a deemed disposition of the IP for its FMV, turned on whether such investment business of FA 1 was to be regarded as the business that it had carried on (as an active business) prior to the Change-in-Business Date.
In rejecting this proposition, the Directorate stated:
[W]hile retaining the elements of a business, they can be so materially altered that in effect the changes give rise to a new type or new field of business. … [W]hile after the Change-in-Business Date FA 1 continued to hold the Original IP as its main asset, it no longer used it in a distribution business, but rather it used it in its new licensing business instead.
… [I]t would be reasonable to conclude that … FA 1 had a fundamental change in its business - it ceased carrying on its distribution business and entered into a new field of business, which is not of the same kind and type as, and not a continuation of, the business it carried on before the Change-in-Business Date. This change to the business operations of FA 1 … would go beyond the change in nature of a business from active to passive contemplated in paragraph 95(2)(k).
The effect of this interpretation is to render it highly uncertain when s. 95(2)(k.1) applies.
Neal Armstrong. Summary of 10 February 2023 Internal T.I. 2019-0816681I7 under s. 95(2)(k).
Neal H. Armstrong editor and contributor