News of Note
Explanatory Notes cast a pall on reliance on the intergenerational transfer rules
Email this ContentThe Explanatory Notes on s. 84.1(2.31)(g) express a warning regarding the situation where the substantive transfer of business ownership and management to the children has already occurred before the share sale transaction to them, and state:
However, if other hallmarks of a genuine intergenerational business transfer under subsection (2.31) have already been fulfilled prior to the disposition time (such as a child who already controls the subject corporation prior to the disposition time), a question may arise under the general anti-avoidance rule regarding whether the disposition of the subject shares to the purchaser corporation was undertaken for the purpose of transferring a business to the next generation or merely to facilitate the payment of a corporate distribution in the form of a capital gain.
A similar comment is made on s. 84.1(2.32)(h).
These comments arise against the backdrop of sustained CRA and Finance warnings about surplus stripping, and the Deans Knight finding that the rationale of provisions can depart from their precise words, and create uncertainty as to when taxpayers can rely on having technically complied with the intergenerational business transfer rules.
Neal Armstrong. Summary of Simon Pereira, “Finance Signals Potential GAAR Scrutiny for Technically Compliant Intergenerational Business Transfers,” Canadian Tax Focus, Vol. 16, No. 3, August 2026, p. 2 under s. 84.1(2.31)(g).
The expanded s. 104(5.8) signifies that a small s. 107(2) distribution to a beneficiary in which a second trust had a small investment would taint the second trust
Bill C-31 would expand s. 104(5.8) so that it would apply not only where a trust transferred capital property, land, inventory, or resource properties to another trust under s. 107(2), but also where it transferred such property under s. 107(2) “to a taxpayer that is a beneficiary under the transferor trust … if an interest in the taxpayer is held directly or indirectly by another trust at the particular time.”
Suppose that “Old Trust” distributes its portfolio of marketable securities with an FMV of $5,000 to Holdco as a discretionary beneficiary, and that “New Trust,” with a $5 million portfolio of marketable securities, owns a 1% equity interest in Holdco, with the remaining 99% interest held by another party. Although the interest of New Trust in Holdco is insignificant, the expanded s. 104(5.8) would apply to subject the entirety of New Trust’s $5 million portfolio to an accelerated deemed disposition under s. 104(4).
It is also noted that, although in this example it is clear that an interest in the taxpayer (i.e., Holdco) is “held directly or indirectly by another trust” (New Trust, a Holdco shareholder), the concept of an "interest" is broad enough that the application of s. 104(5.8) potentially could be engaged by various types of direct or indirect legal, equitable, or economic entitlements.
Neal Armstrong. Summary of Taylor Grenning and Ergi Thodhori, "Trusts and the 21-Year Deemed Disposition Rules: The Evolving Reach of S. 104(5.8)," Canadian Tax Focus, Vol. 16, No. 3, August 2026, p. 1 under .s. 104(5.8).
Salehi – Tax Court of Canada finds that a builder’s certification of the home’s HST exemption engaged s. 194 liability, and that he otherwise was liable under an HST-inclusive clause
Ezri J found that the taxpayer sold a new home, a few months after completing its construction, as a “builder,” so that the sale was a taxable supply. The sale agreement provided:
If the sale of the property … is subject to … HST … then such tax shall be included in the Purchase Price. If the sale of the property is not subject to HST, Seller agrees to certify, on or before closing, that the sale of the property is not subject to HST.
At closing, the taxpayer certified that the sale was an exempt supply pursuant to Part I of Schedule V of the ETA and did not involve a taxable supply. Ezri J found that this was a certification within the meaning of s. 194, and rejected a submission that s. 194 did not apply because the certification failed to specify particular ETA provisions that provided an exemption. As the certification was incorrect, the taxpayer was liable for the HST on the sale.
Ezri J went on to note that, in the absence of s. 194, the purchaser would have been required, by the HST-inclusive clause referred to above, to reduce its payment to the taxpayer by the (13/113) amount of HST included in the purchase price and remit such HST to CRA. However, the purchaser did not do so because of the certification. Thus, the purchase price paid to the taxpayer included HST, which the taxpayer was required, pursuant to ss. 225(1) and 228(1), to remit to CRA, which he had not done. Accordingly, Ezri J rejected the taxpayer’s argument that s. 221(2) relieved him of tax because it was the purchaser who, as a registrant, was responsible to pay the tax on the purchase.
Neal Armstrong. Summaries of Salehi v. The King, 2026 TCC 139 under ETA s. 123(1) – builder – (f), s. 194 and s. 221(2).
Income Tax Severed Letters 5 August 2026
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms the double-erosion of CDA additions where there are multiple corporate beneficiaries of a policy that was transferred at its CSV prior to 2016
Mr. X transferred a $2,000,000 term-to-100 life insurance policy in January 2015 to his wholly owned corporation, Holdco, for cash proceeds equal to its fair market value of $400,000. Under s. 148(7), the proceeds were deemed to be the lesser of the policy's adjusted cost basis (ACB) of $126,000 and its cash surrender value (CSV), of nil.
Two wholly owned subsidiaries of Holdco, Opco A and Opco B, were each designated as beneficiaries for $1,000,000. Immediately before Mr. X's death, the ACB of the policy was $298,000.
After stating that “where there are multiple corporate beneficiaries designated under a life insurance policy, each beneficiary must apply paragraph (d) of the definition of CDA independently,” CRA computed the CDA inclusion for each of the Opcos as follows:
|
Opco A |
Opco B |
|
|
S. (d)(ii) addition: proceeds received in consequence of death |
$1,000,000 |
$1,000,000 |
|
S. (d)(iii) reduction: ACB of Holdco’s interest |
($298,000) |
($298,000) |
|
S. (d)(v) reduction: FMV of consideration given ($400,000) minus the greater of the CSV (nil) and ACB at transfer time ($126,000) |
($274,000) |
($274,000) |
|
S. (d)(vi) reduction: lesser of FMV of consideration given ($400,000) and transfer-time ACB ($126,000) minus CSV at transfer time (nil) minus inapplicable adjustment for negative ACB |
($126,000) |
($126,000) |
|
CDA inclusion |
$302,000 |
$302,000 |
It can be seen that as a result of the above CRA policy for the separate application of the s. (d) CDA adjustments that, in this example, there is a double deduction not only of the policy ACB of $298,000 but also of the $400,000 adjustment for the previous use of the old s. 148(7) transfer rule. If either Opco A or B had been the sole beneficiary, the CDA inclusion would have been $1,302,000 ($2,000,000 - $298,000 - $400,000) rather than an aggregate of $604,000.
Neal Armstrong. Summary of 5 May 2026 CALU Roundtable Q. 5, 2026-1089351C6 - Definition of Capital Dividend Account in Subsection 89(1) under s. 89(1) – CDA – (d).
We have translated 5 more CRA interpretations
We have translated a further 5 CRA interpretations released in March and February of 1999, and have also connected (and summarized) three French interpretations to the CRA translation found in another document. Their descriptors and links appear below.
These are additions to our set of 3,631 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 27 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Starton Therapeutics effectively continued to the US through creating a new Delaware Holdco to which its shareholders transferred directly or through exchangeable shares
Starton Therapeutics Inc., a BC corporation that is a clinical-stage biotechnology company, was the parent for the group. In order to effectively redomicile to the US without generating exit tax under ss. 128.1(4) and 219.1, a new Delaware corporation (the “Company”) was incorporated and the existing shareholders exchanged their shares on a taxable basis for shares of the Company, except that those electing for rollover treatment exchanged their shares under s. 85(1) for exchangeable shares of an indirect BC subsidiary of the Company which are held through a “CallCo” BC ULC direct subsidiary of the Company.
Neal Armstrong. Summary of S-1 of Starton Holdings, Inc. (the “Company”) under Other – Continuances/ Migrations – New Non-Resident Holdco.
Democracy Watch – Supreme Court finds that the jurisdiction of the Federal Courts to review the legality of every federal administrative decision cannot be ousted
The Conflict of Interest and Ethics Commissioner released a report in May 2021 concluding that Prime Minister Trudeau had not contravened the Conflict of Interest Act (the “COIA”) when he participated in two funding decisions relating to the WE Charity. Democracy Watch applied to the Federal Court of Appeal for judicial review of this decision.
The Attorney General of Canada argued that the application of Democracy Watch was barred by s. 66 of the COIA, which provided:
Every order and decision of the Commissioner is final and shall not be questioned or reviewed in any court, except in accordance with the Federal Courts Act on the grounds referred to in paragraph 18.1(4)(a), (b), or (e) of that Act.
The enumerated excluded grounds adverted to erring in law in making a decision or basing it on an erroneous finding without regard to the tribunal record or otherwise acting contrary to law (but not to acting without jurisdiction).
After finding that s. 66 purported to oust judicial review on questions of fact and law, Wagner CJ concluded that s. 66 “should be declared of no force and effect to the extent that it purports to bar judicial review on questions of fact and law.”
Before so concluding, he stated:
[68] The courts of Canada, like the courts of England, have consistently held that irrational administrative decisions are unlawful, insofar as they exceed the inherent limits of delegated authority. Irrational decisions raise the spectre of arbitrary exercises of public power; the power of the courts to protect against such arbitrariness lies, as I have explained, at the very heart of the courts’ constitutionally protected jurisdiction under ss. 96 to 101. …
[71] Legislative efforts to limit legality review are ultra vires not because reasonableness review, per se, is constitutionally entrenched, but because the Constitution guarantees the courts’ role in ensuring that all exercises of public power, as they manifest in all aspects of an administrative decision, are sourced in law. Where an administrative decision-maker acts in an official capacity and exercises a delegated power, it does not matter whether that exercise of power concerns questions of fact, of law, of fairness, or any other issue … . [T]he notion advanced by some academic commentators that judicial review is guaranteed only on questions of law has no sound historical or jurisprudential basis … . What matters, for constitutional purposes, is that the courts are constitutionally empowered to supervise the exercise of delegated power to ensure it respects the boundaries of its inherent limits. …
[73] … A privative clause that prevents the Federal Courts from exercising a component of the s. 96 supervisory jurisdiction assigned to them [under s. 101] is contrary to the Constitution Act, 1867 and of no force and effect. …
[76] [T]he legality of every aspect of an administrative decision, and every exercise of public power, is subject to the supervision of the courts.
Neal Armstrong. Summary of Democracy Watch v. Canada (Attorney General), 2026 SCC 28 under Constitution Act, 1867, s. 101.
Wintercorn v. Global Learning – Ontario Supreme Court finds that a tax shelter tax opinion did not generate liability because it was expressly provided only to the promoter
Various of the defendants, principally, Cassels, Fasken and Evans, brought a motion to dismiss the class action brought against them by the donors to a charitable gifting tax shelter in which they had been involved: Cassels gave a tax opinion to the now-defunct promoter (“GLGI”); Fasken did the corporate legal work; and Evans provided a valuation regarding the donated software licences.
Morgan J first found that the class action had been brought within the two-year Ontario limitation period, given that it was launched 23 months after Mariano found that this tax shelter was a sham.
Before dismissing the claim against Cassels, Morgan J stated:
[N]ot only did Cassels refrain from expressing any undertaking to advise class members, but it expressly limited the scope of its undertaking to its client, GLGI. The tax opinion on its face states that Cassels is only providing the opinion to allow GLGI to structure the gift program … .
The express limitations on Cassels’ undertaking, which limits its proximity to GLGI alone, effectively negates any prospect of a duty of care owing by Cassels to the class members.
The claim against Fasken also was dismissed, as its retainer was only to provide certain corporate commercial legal services to GLGI and the taxpayers participating in the GLGI program were required to sign a disclaimer of any reliance on GLGI's professional advisors, which included Fasken.
There was a “strong triable issue” as to the liability of Evans regarding the valuation report on the licences prepared by it and provided to CRA by GLGI to support the taxpayers in their dealings with CRA. Morgan J stated :
It was reasonably foreseeable – indeed, patently obvious - to Evans and everyone else involved that the participants in the GLGI program would rely on its report in back-stopping the CRA challenges. …
Having authorized external reliance, all of the hallmarks of owing a duty of care toward class members are present.
Neal Armstrong. Summary of Wintercorn v. Global Learning Group Inc., 2026 ONSC 2728 under General Concepts – Negligence.
Goudreau – Tax Court of Canada finds that price adjustment clauses were effective to avoid the conferral of a s. 85(1)(e.2) benefit
The three taxpayers, who held all of the (Class A) common shares of their corporation (“PBI”), engaged in an estate freeze transaction in which they exchanged their shares on a s. 85(1) rollover basis for newly created Class I redeemable preferred shares of PBI, and then caused their respective family trusts to subscribe for Class A shares of PBI for nominal consideration.
The exchange occurred at a price (being the redemption value of the Class I shares) of $439,890, as determined in a one-page valuation prepared by their tax adviser (Mr. Ducharme). CRA assessed gains on them pursuant to s. 85(1)(e.2) on the basis that the fair market value (FMV) of the exchanged Class A shares was over $3.1 million.
The taxpayers now acknowledged that the exchanged Class A shares had had an FMV of $2,275,683. (Lafleur J. preferred this valuation by their expert to the higher valuation of the CRA valuator.) She nonetheless found that s. 85(1)(e.2) did not apply.
First, the taxpayers had intended for their transactions to occur at FMV. In this regard, she stated:
[N]othing indicates that the Appellants knew they could not rely on the services and advice of Mr. Ducharme, who holds the CPA designation and presents himself as a tax specialist (D.Fisc).
Second, such intention was corroborated by a price adjustment clause in the rollover agreement with PBI. This clause provided, inter alia, that if the fair market value established by a tax authority was higher than the consideration stipulated in the agreement, an adjustment would be made by issuing additional shares of PBI or by increasing the redemption value of the Class I shares.
Lafleur J, citing Shell, found that tax law should follow the legal relationships of the parties in the absence of sham. Accordingly:
The price adjustment clauses provided in the Rollover Agreements have the effect of adjusting the sale price of the Class A shares of PBI's share capital and increasing the value of the consideration paid by PBI to the Appellants as of the effective date of the Rollover Agreements.
She went on to indicate, obiter, that in fact it appeared that the family trusts had not received a benefit. This was established by the existence of a price adjustment clause in the Class I shares, which provided for an increase in the redemption value (in the event of a challenge to the agreed FMV) if agreed to by the parties or, if disputed, as finally determined by a court or through the settlement of a court proceeding.
Neal Armstrong. Summaries of Goudreau v. The King, 2026 CCI 142 under s. 85(1)(e.2) and General Concepts – FMV – shares.
Neal H. Armstrong editor and contributor