A discretionary personal trust for the benefit of the spouse and child of the individual (Mr. X) controlling various Canadian real estate corporations (so that the trust was an “eligible group entity” in respect of those corporations) held, as its principal asset, a US cottage used primarily for personal use of the spouse and child, with Mr. X occasionally contributing funds to the Trust to cover the operating costs, and making substantially all of the decisions regarding the cottage in Canada. STEP Canada asked whether the Trust’s ownership of the US cottage caused the Trust (and, therefore, the corporations) to fail to meet the requirement of s. (c)(i) of the “excluded entity” definition that “all or substantially all of [its] undertakings and activities … [be] throughout the taxation year, carried on in Canada”?

CRA responded unfavourably:

Where the undertaking and activities of a taxpayer include the holding of real estate, relevant factors to be considered would include the place where the property is situated and where related undertakings or activities occur like the operation and use of the property, its maintenance and upkeep, its management, administration and financial management.

In the case of a trust holding a real property that is situated in the US, it is reasonable to consider that the facts might indicate that significant activities related to the holding and operation of the property take place in the US. Given the Trust only owns the US Cottage and a US bank account containing funds necessary to operate the US Cottage, the Trust (and therefore all Cancos) would likely not meet the “all or substantially all” requirement in subparagraph (c)(i) … .

Neal Armstrong. Summary of 25 June 2030 External T.I. 2025-1056861E5 under s. 18.2(1) - “excluded entity” – s. (c)(i).

BMO was assessed in 2004 and 2006 for additional U.S. federal (and NYC) income tax and interest on business profits attributed to its US branch operations for its 1997 to 2001 taxation years.

In confirming (in the context of a Rule 58 question) the CRA denial of the deduction claimed by BMO for such arrears interest, MacPhee J found that the tax arrears did not satisfy the income-producing purpose test in s. 18(1)(a) because such tax was not incurred to earn income but instead was incurred as a consequence of BMO having earned income. As the tax arrears thus were not deductible pursuant to s. 18(1)(a), it followed that the deduction of the arrears interest thereon was also denied pursuant to s. 18(1)(a), i.e., it was “an expenditure which would not have been incurred except for the income earned by [BMO]”.

It did not matter that the deduction was not specifically denied by s. 18(1)(t) (which refers only to amounts payable under the Act).

Neal Armstrong. Summary of Bank of Montreal v. The King, 2025 TCC 113 under s. 18(1)(a) – income-producing purpose.

After discoveries had been completed for the taxpayer’s appeal of reassessments that inter alia denied interest on a $300 million borrowing on the basis that it was not used for an income-producing purpose, the Crown sought to amend its pleadings to identify the thin capitalization rules as an alternative argument or basis for disallowing the taxpayer's interest expense.

Before finding that the post-2016 version of s. 152(9) did not preclude this requested amendment, and allowing it, Yuan J stated that s. 152(9) now “allow[s] the Minister to support a reassessment using the broadest range of possible alternative approaches, subject to the express limitations set out in paragraphs 152(9)(a) and (b), provided that the amount payable under the reassessment does not increase.”

He also indicated that “the 2016 amendments … overrode the requirement from prior case law that the tax under the alternative argument had to be derived from the same transaction that produced the originally assessed tax” – but went on to find that, in any event, here the alternative bases for denying the interest expense were based on the same transaction, being the borrowing.

Neal Armstrong. Summary of Oldcastle Building Products Canada Inc. v. The King, 2025 TCC 107 under s. 152(9).

A U.S. company (“PepsiCo”) entered into an “exclusive bottling appointment” (“EBA”) with an arm’s-length Australian bottling company (“SAPL”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to SAPL for bottling and sale, and granted SAPL the right to use the Pepsi and Mountain Dew trademarks in this regard. A Singapore company in the PepsiCo group produced the concentrate, and sold it (at a 0.05% mark-up) to an Australian company in the PepsiCo group (“PBS”) which, in turn, supplied it to SAPL and invoiced SAPL therefor.

At issue was whether any portion of the payments made by SAPL constituted a royalty “derived” by PepsiCo from an Australian resident (SAPL), so as to be subject to Australian withholding tax. A “royalty” was relevantly defined as amounts paid or credited as consideration for the use of or the right to use various listed types of intellectual property, including trademarks.

In concluding that the amounts paid by SAPL to PBS were not a royalty, the majority stated:

The Commissioner did not dispute that [the concentrate price] was an arm's length price, or a fair price … . When the price paid for goods has those characteristics, it cannot be said that a part of the price paid for those goods is payment of a royalty for the use of intellectual property applied to products partly made with those goods.

Regarding the question of whether, if instead payments by SAPL had been a royalty, PepsiCo would have derived any amount as a royalty (which the Commissioner accepted required that there have been an antecedent obligation between PepsiCo and SAPL which was being satisfied by payments made under direction), the majority noted that although the ERB had required SAPL in the future to enter into a contract to buy concentrate on specified terms, such clause “did not change the parties to the subsequent transactions for the sale of concentrate, namely PBS and SAPL” so that “[i]f SAPL failed to pay for the concentrate supplied by PBS, it was PBS as the contracting party that had an action for debt under those sale transactions.”

The Commissioner's appeal was dismissed.

Neal Armstrong. Summary of Commissioner of Taxation v PepsiCo Inc, [2025] HCA 30 under s. 212(1)(d).