News of Note
2585929 Alberta – Alberta King’s Bench declines to clarify the tax treatment of an RVO
Email this ContentAlmost two years previously, the Court granted a reverse vesting order (RVO) pursuant to bankruptcy proposal proceedings that provided that certain liabilities and assets would be transferred to a newly established “Residual Co,” and that the shares of the principal debtor corporation (AMI) would be cancelled for no consideration. The trustee, in order to clarify the tax treatment of the distributable proceeds, now sought a declaration that the RVO should be interpreted as providing that such proceeds were received as proceeds of disposition of the AMI shares.
Johnston J. found that she had the jurisdiction to grant such an interpretation, given that no tax return for the applicable taxation year had yet been filed, let alone any tax dispute having arisen, and that this application related to the interpretation of the RVO. However, she declined to grant the requested interpretation, given the paucity of evidence that the parties intended for the RVO to be interpreted in the manner urged by the trustee, that the Court was now being asked, almost two years after the RVO was issued, to provide the requested declaration to achieve the most tax-advantageous treatment and that it was being asked to read in language that was not argued when the RVO was granted.
Similar reasons also prompted her to reject the bolder request, in the alternative, that the RVO be amended (rather than merely interpreted) to add the requested language.
Neal Armstrong. Summary of 2585929 Alberta Ltd (Re), 2026 ABKB 75 under BIA, s. 187(5).
Re: 1000156489 Ontario Inc. – Ontario Superior Court confirms that it could not exempt a CCAA monitor from liability under, e.g., ITA s. 159(3) for making CCAA distributions without withholding
Myers J. refused a request to provide, in an order made by him pursuant to CCAA proceedings respecting an insolvent company, that failure of the monitor to withhold in accordance with ITA s. 159 and comparable provisions of various other federal and Ontario statutes, would not give rise to liability of the monitor under those statutes. He stated that he knew “of no basis to find that paramountcy invalidates the provincial tax laws or that the CCAA renders the federal tax laws of general application inapplicable.”
Neal Armstrong. Summary of Re: 1000156489 Ontario Inc., 2026 ONSC 610 under s. 159(3). See also Freedom Cannabis.
Chamandy – Court of Quebec finds that borrowings to acquire equity of a holding company that would use exempted profits of a CFA to fund only RoC payments had non-deductible interest
The taxpayer used the proceeds of a loan received from the National Bank of Canada pursuant to monetization transactions to form a Canadian holding company (“TOGI”) which, in turn, funded a newly-formed Barbados bank (“OBT”). OBT then generated substantial profits and gains from its investment portfolio that were exempted from Canadian income tax by virtue of exceptions to the application of the FAPI rules. TOGI over the course of the 2005 to 2014 taxation years used distributions out of profits and gains derived from OBT to make paid-up capital distributions to the taxpayer totaling $118 million, which he used for personal purposes.
In finding that the taxpayer was not entitled to deduct his financing costs (primarily interest) of approximately $57 million incurred over those years in computing his income, Bourgeois JCQ stated:
The modus operandi followed by TOGI, namely the absence of dividend declarations to the plaintiff for nearly 10 years, clearly demonstrates that the latter could not have intended to derive non-exempt income from his investment in TOGI.
Neal Armstrong. Summary of Chamandy v. Agence du revenu du Québec, 2026 QCCQ 311 under s. 20(1)(c)(i).
CRA indicates that a corporation can seek a dividend refund for a deemed dividend arising in a year from an s. 184(3) election if no dividend refund claim had previously been made for that year
Did CRA have the authority to reassess a taxation year of a corporation that had paid an excessive capital dividend in order to reflect the resulting dividend refund to the corporation from the deemed payment of a taxable dividend pursuant to an s. 184(3) election?
CRA indicated that the normal reassessment period for Part I tax purposes is separate from the normal redetermination period for a dividend refund. Thus, if the corporation had previously filed a T2 return for the year that did not report a dividend refund within the required s. 129(1) limitation period, then for a dividend refund, would not yet have commenced. Accordingly, a request for a determination of a dividend refund could be made by the corporation in an amended return.
If a dividend refund had been declared in the previously filed T2 return of the corporation, then the normal redetermination period for a dividend refund would have commenced on the date that an original notice of determination (or original notification that no dividend refund was payable) was sent to the corporation. If this normal redetermination period had expired before the corporation's s. 184(3) election had been processed, then the corrected balances of the ERDTOH, and NERDTOH accounts could be used in subsequent taxation years, keeping in mind that the dividend refund computed in the year of the deemed dividend under the s. 184(3) election would not in fact reduce those balances until the refund in fact had been made.
Neal Armstrong. Summary of 23 July 2025 Internal T.I. 2025-1056911I7 under s. 152(1.2).
Income Tax Severed Letters 4 February 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms the application of s. 75(2) to a trust settled by an Indian band
An Indian band received a milestone payment under an agreement with a resource company in respect of the use of lands, which it settled on a new trust of which it was the sole beneficiary. The band settled a trust with the milestone payment. Most of the milestone payment would then be distributed on an equal per capita basis to the band members (but with minors not receiving until they attained 18).
CRA ruled that s. 75(2) would attribute any income, from the investment by the trust of the non-distributed portion of the milestone payment, to the Indian band. However, any income generated from reinvested income would not be subject to s. 75(2) – but the trust would be entitled to a s. 104(6) deduction for the distribution of such income, which was payable annually to the band. In this regard, the trust would annually issue a promissory note to evidence any income that was payable in the year but not yet distributed. There was no apparent concern about a promissory note being issued to a non-legal entity (the band).
Finally, the CRA ruled that the per capita distribution of most of the milestone payment would not be income from a source to the band members.
Neal Armstrong. Summary of 2025 Ruling 2024-1042991R3 under s. 75(2).
CRA indicates that “fully electric” automotive equipment can include an electric cable railway car
A taxable Canadian corporation would acquire a vehicle - that used electricity supplied to it by an attached tether cable to power its fully electric motors and hydraulic pumps – to offload raw materials and move them by rail for offloading at a processing plant.
CRA noted that s. (d)(iv) of the definition of “clean technology property” in s. 127.45(1) referred inter alia to “a non-road zero-emission vehicle described in Class 56” and that Class 56 included “automotive equipment (other than a motor vehicle) that is fully electric.” In finding that the vehicle could qualify as a “clean technology property” if the other conditions were satisfied, CRA stated:
[T]he fact that the Property runs on rails and that its electricity is supplied by a tethered cable would not, in our view, prevent the Property from being considered to be automotive equipment that is fully electric.
Neal Armstrong. Summary of 3 October 2025 External T.I. 2025-1075051E5 under s. 127.45(1) - clean technology property - (d)(iv).
Verreault – Quebec Court of Appeal finds that a single-person inventor’s proprietorship was a business eligible for investment tax credits
The taxpayer, who had been a science professor at a university from 1970 to 2020, in 2010 started a proprietorship (“RVI”) focused on scientific instrumentation and software design which, among other projects, included designing a new bearing system for go-karts.
RVI generated revenues of nil, $96, and $52,054 for his 2011, 2012, and 2013, taxation years, respectively. Those years were reassessed by the ARQ to deny investment tax credits on the basis that he was not carrying on a business. However, starting in 2017, RVI began generating more significant revenues and turned a profit.
In applying the two-part test in Stewart, Bich JCA found that there was no relevant personal element to his endeavour, stating:
[T]he mere fact that a person undertakes to commercially develop an activity stemming from a personal passion (whether it involves music – as in Bodanis –, computing, video games, or karting, as in this case) … does not, in itself, allow the conclusion that this activity has a recreational aspect. Indeed, many businesses originate from such a passion … which often sustains the entrepreneur's perseverance in the face of the uncertainties of the venture. …
In further finding that the taxpayer’s activity was carried out in a sufficiently commercial manner, Bich JCA stated:
[T]here is nothing surprising about the fact that experimental development activities, which are inherently risky, do not immediately produce marketable results. … The absence of immediate profitability is neither an indication (nor proof) of a lack of reasonable expectation of income or profit. …
The activities of a single person … not producing as much or as quickly as a team of several dozen or hundreds of people is not abnormal and cannot, in itself, cast doubt on the entrepreneurial or commercial spirit of the individual (regardless of their age) nor on the existence of their business (independently of their skills in administration or business development, which is also not a relevant factor).
His appeal was allowed.
Neal Armstrong. Summary of Verreault v. Agence du revenu du Québec, 2026 QCCA 90 under s. 3(a) – business.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in November of 1999. Their descriptors and links appear below.
These are additions to our set of 3,471 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Touchette – Tax Court of Canada indicates that ITCs claimed on denied expenses were not income under s. 248(16) since the associated GST had not been expensed
Gagnon J confirmed, as to the majority of the expenses concerned, CRA assessments which denied the deduction by a corporation (“9134”) of expenses incurred by it on the basis that they were for the benefit of its shareholder (“Touchette”) and treated the amount of such expenses as a taxable shareholder benefit to Touchette.
CRA also assessed under s. 248(16) in respect of the input tax credits (“ITC”) that 9143 had claimed for the GST on such expenses, in light of such GST no longer being an (offsetting) deduction, so as to include such ITC amounts in 9134’s income. Gagnon J agreed that such ITCs received by 9134 fell within the scope of s. 248(16) as government assistance. However, he noted that, as s. 248(16) was not a charging provision, whether there was an income inclusion to 9134 turned on whether s. 12(1)(x) applied to it.
In this regard, Gagnon J stated that “paragraph 12(1)(x) can only apply if subparagraphs (v) to (ix) are met” (as to which he indicated that s. 12(1)(x)(vi) was most relevant). (With respect, this is backwards: s. 12(1)(x)(vi) is a provision which, if applicable, excludes the application of s. 12(1)(x) rather than being a provision that must be met in order for s. 12(1)(x) to apply.) He then found that the GST on the expenses had not been claimed as an expense (and instead had been netted against the ITC claims) and stated that “the absence of the GST claim as an expense prevents the application of subparagraph 12(1)(x)(vi),” so that there was no related income inclusion.
Gagnon J also reversed the application of s. 15(1.3) to Touchette (under which CRA had increased the taxable shareholder benefit to him by the amount of the GST on the expenses) without providing detailed reasons.
Neal Armstrong. Summaries of Touchette v. The King, 2025 CCI 195 under s. 248(16) and s. 15(1.3). See also Michael Lubetsky and Andrea Arbuthnot, Tax Court Rejects Grossing Up Shareholder Benefits With ITCs, 27 January 2026.
Neal H. Armstrong editor and contributor