News of Note
CRA indicates that a trust’s distribution of a corporation to an individual beneficiary would trigger a loss restriction event unless all 3 trustees were related to such beneficiary
Email this ContentWould a loss restriction event occur where an inter vivos discretionary trust with three trustees distributes a corporation to an individual as beneficiary?
CRA indicated that, in the absence of evidence to the contrary, it would presume that all of the trustees would constitute a group controlling the corporation. In this case, there would be a loss restriction event unless the individual beneficiary was related to each of the three trustees immediately before the distribution of the shares.
CRA did not unpack this further, but presumably it considered that, even if unusually the corporation should be considered to have been controlled by only two of the trustees (A and B) who were related to each other as well as to the beneficiary (C) and the third trustee (X) was unrelated, C would necessarily be considered to be acquiring the shares from all three trustees and, thus, acquiring those shares (in part) from an unrelated person (X).
Neal Armstrong. Summaries of 17 June 2025 STEP Roundtable, Q.11 under s. 256(7)(a)(i)(A) and Interpretation Act, s. 33(2).
CRA indicates that a principal residence designation must be made on the transfer of a principal residence to a life interest trust in order for the property to qualify as such in the trust’s hands
An individual over 65 transfers both a city property and a recreational property, each of which would otherwise have qualified as the transferor's principal residence, to a life interest trust (LIT), i.e., an alter ego trust, joint spouse or common-law partner trust, or spousal trust. Must the transferor choose which of the city or recreational property to designate as a principal residence at the time of such transfer in order for the property to qualify as a principal residence of the LIT for the pre-transfer period when it ultimately disposes of that property?
CRA indicated that there was a significant difference between the scope of s. 40(2)(b)(i), dealing with a transfer to an LIT on death, and s. 40(2)(b)(ii), dealing with an inter vivos transfer pursuant to s. 73(1). Property transferred on death was deemed to be the principal residence of the transferee for each year in which it was eligible to be the deceased transferor's principal residence, rather than for each year that it actually was the transferor's principal residence in the case of an inter vivos transfer.
The stricter language regarding an inter vivos transfer effectively meant that the transferor was required to designate which of the transferred residences was the transferor's principal residence by filing the required designation in respect of that particular property in the transferor’s return for the taxation year of the transfer.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.10 under s. 40(2)(b)(ii).
CRA indicates that the s. 12(12) rules do not apply to residential capital property transferred on a full (but not partial) s. 85(1) rollover basis
An estate engaged in a post-mortem pipeline transaction in which it sold all of its shares of a corporation holding a long-term residential property to a Newco for a note then, after some time, the two corporations amalgamated to form Amalco. If Amalco sold the residential property within 365 days of the amalgamation on an s. 85(1) rollover basis to a corporation for share consideration, would such election be invalid on the basis that real property inventory could not be “eligible property” pursuant to s. 85(1.1)?
CRA indicated that the flipped property rules would not apply if the agreed amount in the election did not exceed the property's capital cost, given that such rules do not apply if the disposition of property would not, in the absence of the flipped property rules, give rise to a capital gain. However, if the agreed amount was greater than the property’s capital cost so as to realize a portion of the accrued capital gain, then s. 12(12) would apply so as to deem the property to be real estate inventory that was not an “eligible property,” thereby rendering the s. 85(1) election invalid – so that the full accrued gain would be business income.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.9 under s. 12(12).
CRA indicates that a deceased’s property can vest indefeasibly in the surviving spouse notwithstanding that spouse’s death before probate
A’s will left A's assets to A’s surviving spouse (B) provided that B survived A by more than 30 days, which occurred - but B died before A's will was probated.
CRA noted that s. 248(9.2) would deem the property to have not vested indefeasibly in B (as required in order for s. 70(6) to apply) unless the property vested indefeasibly in B before B’s death. However, B's death occurring before there was a legal conveyance of the property (but after the 30 days) would not by itself prevent s. 70(6) from being satisfied.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.8 under s. 70(6).
Income Tax Severed Letters 25 June 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that indefeasible vesting requires inter alia ascertainment but not conveyance
The will of the taxpayer provided for the residue of the estate to be held for the surviving spouse, as a spousal trust.
CRA indicated that in order for s. 70(6) to apply, the capital property of the deceased must be "transferred or distributed" as a consequence of the death (e.g., per s. 248(8), under the will), to the spousal trust within 36 months of the death, subject to extension. In this regard, Boger Estate established that a formal conveyance is not necessary to transfer or distribute the property in question, so that the absence of such a conveyance of the residue to the testamentary spousal trust would not preclude this requirement from being satisfied.
Regarding the general requirement in s. 70(6) that the property of the deceased vest indefeasibly in the spousal trust within 36 months of the death, CRA indicated that property can vest indefeasibly in a beneficiary even if the title has not yet been transferred by a legal conveyance - for example, where there is a specific, non-contingent, and uncontested bequest to a surviving spouse and it is clear that the estate has sufficient assets to allow its distribution. Regarding the residue of an estate, generally, only once it is clarified and the beneficiaries have an enforceable right to the property can those assets vest in the beneficiaries.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.7 under s. 70(6).
CRA indicates that a s. 116 certificate can cover multiple estate distributions to a non-resident beneficiary
CRA indicated that where the executor or trustee of an estate or trust will be making several capital distributions to a non-resident beneficiary (whose capital interest in the trust or estate constitutes taxable Canadian property) over multiple years, the beneficiary can apply now for a s. 116 certificate (along with payment of the tax to cover the gain on the disposition of the capital interest - or the provision of security therefor). After verification, CRA will issue a certificate of compliance. The certificate limit is based on the estimated total distributions, so that the capital distributions over time can be received by the beneficiary up to the certificate limit.
If the facts change, another T2062 application can be made with an additional payment or security to cover any increase in the tax payable. Upon review, the CRA will then issue a revised certificate.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.6 under s. 116(2).
Our translations of CRA interpretations go back 25 years
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in July and June of 2000. Their descriptors and links appear below.
These are additions to our set of 3,234 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 25 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
St-Joseph – Quebec Court of Appeal finds that the transformation of 2 floors of commercial building to residential use did not qualify as a “termination” of commercial activity for QST purposes
St-Joseph incurred costs in converting the 1st and 2nd floors of a 12-storey mixed-use tower from commercial rental use into rental seniors’ residences (RSRs). It argued based on the QSTA equivalent of ETA s. 141.1(3)(a) that it had incurred the costs “in connection with the … termination of a commercial activity” of it, so that such costs were deemed to have been incurred in the course of its commercial activity, thereby entitling it to input tax refunds under the Quebec equivalent of ETA s. 169(1) – B(c).
In rejecting this position and before dismissing St-Joseph’s appeal, the Court stated:
[Its] argument … fails to explain how the transformation aimed at a new activity is, in itself, related to the termination of the previous activity.
… [T]he expenses for the renovation and transformation into an RSR were not related to the termination of the commercial rental activity … .
Neal Armstrong. Summary of St-Joseph Immobilier inc. v. Agence du revenu du Québec, 2025 QCCA 745 under ETA s. 141.1(3)(a).
CRA finds that a vendor’s disclosing on its invoices the amount of meal allowances paid to its sales people transferred the 50% s. 67.1 denial onto the purchasers
S. 67.1(1) generally grinds the deduction for amounts payable in respect of the human consumption of food or beverages by 50% thereof. However s. 67.1(2)(c) provides an exception for:
“an amount for which the person is compensated and the amount of the compensation is reasonable and specifically identified in writing to the person paying the compensation”.
The taxpayer, which sold goods for a fixed price payable in instalments, paid reasonable meal allowances to its employees for their travel in connection with the sales (e.g., installations). These allowances were not disclosed to the purchasers except that the interim invoices for the instalments contained a note, for information purposes only, setting out the cumulative amount of the meal allowances paid to date.
Before concluding that (by virtue of the exception in s. 67.1(2)(c)) s. 67.1(1) did not limit the deduction to the taxpayer for its incurring of the meal allowances and that such 50% denial instead applied to the purchasers respecting the cumulative amount of the meal allowances referred to in the interim invoice note, CRA indicated:
- The interim billing payments of the purchasers were intended to pay or reimburse the taxpayer for the costs incurred in performing the contract, including related reasonable meal allowances; and it was unnecessary to specify their amount in the contracts or for them to be billed separately.
- A note on an invoice allowing a purchaser to determine the amount for food or beverages that was included in the total amount invoiced was sufficient to satisfy the “specifically identified in writing” requirement of s. 67.1(2)(c).
- In light of the broad interpretation of “in respect of”, the cumulative amount of reasonable meal allowances paid or payable to date referred to in such interim invoices note disclosure was “an amount paid or payable in respect of the human consumption of food or beverages” for the purposes of the application of s. 67.1(1) to the purchasers.
Will purchase agreements start prohibiting the vendor from making any disclosure of any meal allowances incurred by it?
Neal Armstrong. Summary of 21 February 2025 Internal T.I. 2021-0902871I7 F under s. 67.1(2)(c).
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Neal H. Armstrong editor and contributor