News of Note
CRA issues a new Folio on the shareholder loan rules
CRA has issued a new Folio on the shareholder loan rules in s. 15(2) et seq. A few of the points covered include:
- Although a loan made for the purpose of refinancing an existing indebtedness that was previously incurred by an employee to acquire a dwelling will generally not meet the requirement under s. 15(2.4)(b) of having been made to enable or assist the acquisition of the dwelling, there is an exception for where the lender made a commitment to an individual on or before the individual's acquisition of the dwelling to provide permanent financing and in the interim, the individual used interim financing, such as construction financing, to construct or otherwise acquire the building.
- Regarding the requirement for bona fide repayment arrangements in s. 15(2.4)(f), at the time the loan is made, the arrangements for repayment must be such that it is possible to determine, with some certainty, the period within which the loan will be repaid.
- However, when trade debts are not paid according to the creditor's normal payment terms but they are settled within 12 months of being incurred, bona fide arrangements are considered to have been made at the time the debt arose for purposes of s. 15(2.3).
- CRA has carried forward most or all of its positions regarding the s. 15(2.6) rule including regarding when there is series of loans or other transactions and repayments, for instance that:
- repayments are applied on a first-in, first-out basis (i.e., to the oldest loan first) when a shareholder has more than one loan outstanding at the time of repayment, unless the facts clearly indicate otherwise;
- repayments can be made by applying dividend, salary, or bonus payments against an outstanding loan; and
- a repayment may be considered to have been made as part of a series of loans or other transactions and repayments where the proceeds of a new loan are used to repay an existing shareholder loan.
- CRA has also carried forward its generous policies on the deferred timing for the recognition of a Part XIII remittance obligation on a benefit subject to such tax under s. 214(3)(a).
- Furthermore, if a PLOI election is available in respect of a loan but has not yet been filed, the CRA will assess Part XIII withholding tax only after the time period described in s. 15(2.6) has elapsed.
- In a situation where a loan amount that is owed by a non-resident borrower has been assigned by the original lender to a new lender and the borrower subsequently repays the loan to the new lender, the borrower may still be entitled to a refund of the Part XIII tax previously assessed.
Neal Armstrong. Summaries of Income Tax Folio S3-F1-C1, Shareholder Loans and Debts, April 10, 2025 under s. 15(2), s. 15(2.17), s. 15(2.3), s. 15(2.4)(b), s. 15(2.4)(c), s. 15(2.4)(a), s. 15(2.4)(f), s. 15(2.4)(e), s. 15(2.6), s. 20(1)(j) and s. 214(3)(a).
Additional difficulties can arise in making a VDP disclosure on behalf of a deceased taxpayer
Additional challenges often arise where a voluntary disclosure is made by an executor in respect of a deceased taxpayer:
- In light of the requirement to make payment of the unpaid taxes with submission of the disclosure package, the estate funds might be in an offshore account, payments from which would trigger international reporting to CRA (thereby alerting it prematurely, i.e., before submission of the package).
- Making a voluntary disclosure generally will result in the estate owing more tax, which could increase potential liability to the executor under s. 159 or 160.
- The executor may often lack information regarding the extent of the non-disclosure by the deceased, for example, how long an offshore account was held or how much income was generated therefrom, thereby creating a risk that CRA may not consider that its requirement for reasonable efforts to estimate income for the voluntary disclosure has been satisfied.
- The executor may not be aware of the reasons why the deceased had not fully complied with the applicable tax obligations and, therefore, may not be in a position to demonstrate that the disclosure should be accepted under the more favourable general program.
- IC00-1R6 states that enforcement action taken against a taxpayer will also invalidate the voluntariness of disclosure by related taxpayers, including those related through trust-specific relationships. Accordingly, in a situation where voluntary disclosure by an estate is also required, for example, where an undisclosed offshore account was not identified until a number of years after the death, a non-compliance letter issued by CRA to the estate (or the deceased) will invalidate the pending voluntary disclosure by the deceased (or the estate).
Neal Armstrong. Summary of Dean Blachford and Ella Sui, “Filing a Voluntary Disclosure for a Deceased Taxpayer,” Tax for the Owner-Manager, Vol. 25, No. 2, April 2025, p. 14 under s. 220(3.1).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in September of 2000. Their descriptors and links appear below.
These are additions to our set of 3,174 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 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
It may be possible to effect an estate freeze on a TC as part of a series entailing a butterfly split-up
There are some contrasts in the ability to carry out an estate freeze following a spin-off in intended reliance on the s. 55(3)(a) exception, and following a butterfly spin-off. Here is one example.
Suppose that Dad and Son, who are the 50-50 shareholders of Opco, effect a split-up reorganization in favour of Dadco and Sonco. However, as part of the same series, Son freezes Sonco in favour of Son Trust but retains control of Sonco. If even one of the beneficiaries of the trust was not related to Son (e.g., a nephew or cousin), Son Trust would be deemed pursuant to s. 55(5)(e)(ii) and (iii) not to be related to Sonco, so that the freeze would result in an increase in interest described in s. 55(3)(a)(ii) or (v), i.e., the s. 55(3)(a) exemption would not be available.
Suppose instead that the 50-50 shareholders of DC are Brother and Sister who, by virtue of s. 55(5)(e)(i), are deemed to be unrelated, and that they effect a split-up butterfly in favour of their respective TCs. In this context, s. 55(3.1)(b)(i) relevantly provides that, except in specific carve-out situations, any person who disposes of property within the butterfly series must be related to the acquirer of the property. Furthermore, s. 55(3.1)(b)(i)(C) establishes a continuity rule requiring that where property is disposed of within the butterfly series in succession (i.e., where there is a disposition of property, substituted property, or of any further substituted property in a continuous sequence), the final acquirer in that chain must be related to the original vendor at the start of the succession.
If the TC of Brother effects an estate freeze in favour of a trust, it would appear that s. 55(3.1)(b) would not apply because the trust would subscribe for shares rather than receiving them in substitution for other shares—and that this could be the case even if some of the beneficiaries of the trust were not related persons.
Neal Armstrong. Summaries of David Carolin and Manu Kakkar. “Freezes and Butterflies: Who Said Freezes are Easy?”, Tax for the Owner-Manager,” Vol. 25, No. 2, April 2025, p. 9 under s. 55(3)(a)(ii) and s. 55(3.1)(b)(1)(C).
RRSPs are utilizing Reg. 4900(1)(i)(ii) to facilitate real estate investments by their annuitants
The following arrangement is now being marketed as a structure for RRSP funds to be invested in real estate:
- Pubco, whose shares listed on a designated stock exchange in Canada, subscribes for voting preferred shares of a Canadian private corporation (Realtyco) so that it is controlled by Pubco.
- The RRSPs of various investors subscribe for interest-bearing debentures of Realtyco, with Realtyco using such funds to acquire real estate.
- Such investors subscribe for the common shares of Realtyco outside of their RRSPs.
Under Reg. 4900(1)(i)(ii), debentures issued by a corporation controlled by a corporation whose shares are listed on a designated stock exchange in Canada are qualified investments for most registered plans including RRSPs.
If Pubco ceases to control Realtyco, or its shares are delisted, the debentures will become non-qualified investments.
Neal Armstrong. Summary of Chris Lang and Keaton Buchberger, “The RRSP Trap: A Cautionary Illustration of the Risk of Non-Conventional Investment Structures,” Tax for the Owner-Manager, Vol. 25, No. 2, April 2025, p. 7 under Reg. 4900(1)(i)(ii).
CRA finds that a s. 132.2 exchange of MFC shares for MFT units precluded a s. 88(1)(d) bump of the MFT units
Parent acquired all the shares of another taxable Canadian corporation (the Subsidiary), whose only property was a share of a mutual fund corporation (MFC) with a low ACB.
One month later, the Subsidiary exchanged its MFC share on a rollover basis pursuant to a s. 132(2) qualifying exchange for two units of a mutual fund trust (MFT) to which all the MFC assets were transferred. One month later, there was a short-form amalgamation of Subsidiary with Parent described in s. 87(11).
In finding that the s. 88(1)(d) bump was not available respecting the MFT units because the Subsidiary did not satisfy the requirement in the s. 88(1)(c) midamble that it have held, without interruption, those units between the acquisition of control of the Subsidiary and the distribution of the units on the amalgamation, CRA noted that there was no continuity rule deeming the MFT to be a continuation of the MFC after the qualifying exchange, nor was there any rule deeming the MFT units to be the same property as the MFC share held prior to the qualifying exchange.
Neal Armstrong. Summary of 4 March 2025 External T.I. 2024-1009691E5 F under s. 88(1)(c).
Income Tax Severed Letters 16 April 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
1084204 B.C. – BC Court of Appeal finds that an acquisition of a BC residential property by a foreign entity merely as agent for a resident was subject to 20% LTT
The respondent (“108”) was a BC company whose shareholder was a foreign national (Mr. Oeri), so that 108 was a “foreign entity” for purposes of the Property Transfer Tax Act (BC) (the “PTTA).
The chambers judge had found that an acquisition of a BC residential property by 108 was not subject to the additional transfer tax (“ATT”) of 20% imposed under the PTTA for acquisitions of such a property by a foreign entity because inter alia 108 acquired the property as agent for the common law spouse of Mr. Oeri (Ms. Sui), who was a Canadian permanent resident.
In reversing this finding and concluding that the purchase was subject to the ATT, Horsman JA referred to prior BC cases that “establish that, subject to statutory exemptions, property transfer tax is payable by the person to whom the legal estate is transferred (the 'transferee'), regardless of whether another person has beneficial ownership” and concluded:
Regardless of whether 108’s relationship with Ms. Sui could be characterized as an agency or a trust, or both, 108’s liability to pay the ATT arose on the registration of the transfer of the legal estate to 108.
Neal Armstrong. Summary of British Columbia v. 1084204 B.C. Ltd., 2025 BCCA 110 under PTTA, s. 1 – taxable transaction – (a)(i).
A retroactive amendment to s. 212.1(6)(b) is intended to accommodate a pipeline transaction by a GRE with a non-resident beneficiary
In a pipeline transaction where an estate with a non-resident beneficiary transfers its shares of Opco to a Newco in consideration for a note of Newco, Newco will be deemed under the current version of the s. 212.1(6)(b) conduit rule to pay to the non-resident beneficiary a dividend (subject to Part XIII tax) based on the note amount, that is generally proportionate to the relative FMV of that beneficiary's interest in the estate. If the Opco shares instead are transferred by the estate to Newco for high-PUC Newco shares, that PUC will be suppressed by the same amount.
An August 12, 2024 draft amendment to s. 212.1(6)(b) would (retroactively to the February 26, 2018) exclude, from the application of the above look-through rule, dispositions of shares by a graduated rate estate (GRE) which had acquired those shares upon the death of a Canadian resident individual.
Observations include:
- This amendment applies, in the case of resident trusts, to trusts that are GREs at the time of the share disposition, so that the amendment will not provide relief if the transfer occurs after the 36-month period for being a GRE has expired (or GRE status is otherwise compromised), or the subject shares are held in an alter ego, spousal, or joint partner trust.
- The amendment will provide no relief if the deceased was a non-resident on death, even if the estate is resident in Canada because of Canadian-resident executors.
- The amendment only applies to shares "acquired... on and as a consequence of" the individual's death. Accordingly, if the shares acquired by the GRE on death are then exchanged before the pipeline transaction, for example, on a share-for-share exchange to isolate value in new preferred shares, the amendment may not apply.
The amendment also extends the deadline for a refund application under s. 227(6) to 180 days from the date on which the amendment receives royal assent.
Neal Armstrong. Summary of Kyle Lamothe and Alexander Demner, “Retroactive Relief from section 212.1 ‘Look-Through’ Rules Proposed for Post Mortem Pipelines,” Tax for the Owner-Manager, April 25, 2025, Vol 25, No. 2, p. 4 under s. 212.1(6)(b).
Sura – Court of Quebec finds that the conversion of apartment buildings to condo units did not trigger a change of use – and that CAE rather than IT-218R would apply re change of use
In 1981, 10 individuals acquired as co-owners two adjoining rental buildings containing a total of 82 apartments. In 2006, in order to make their interests more marketable, they converted their undivided interests into 82 separate condominium units while continuing to rent them out. Between 2010 and 2013 (the taxation years under appeal), they disposed of 12 of the condo units, and reported capital gains.
Revenue Quebec applied the position in IT-218R on change of use and treated such gains as consisting of a capital gain, computed on the basis of a notional disposition of the properties for their FMV the time of their change of use from capital property to inventory (in 2005, when the decision to convert was taken) and, as to the balance (representing post-2005 appreciation), as business income from the disposition of inventory.
In confirming the taxpayers' position that all of their gains were capital gains, Bourgeois, JCQ, indicated inter alia that the Latulippe decision, where the Quebec Court of Appeal found that simply transforming from undivided to divided ownership in order to sell at a better price did not have the effect of converting capital property into inventory, “was quite similar”.
Regarding the purported application by Revenue Quebec of the CRA position in IT-218R (which now was not relevant given his finding of no change of use), Bourgeois JCQ noted that this approach had been overruled in the CAE case, which found that gain would be realized in the taxation year of change of use pursuant to ITA ss. 13(7) and 45(1).
Neal Armstrong. Summary of Sura v. Agence du revenu du Québec, 2025 QCCQ 1127 under s. 45(1).