News of Note
Supreme Court grants leave in the BNS case
Email this ContentThe Supreme Court has agreed to hear the appeal of the Bank of Nova Scotia case.
In 2015, the Bank had requested the carryback of a non-capital loss from its 2008 taxation year to its 2006 taxation year to offset a transfer-pricing adjustment. CRA calculated interest on the increased balance of tax owing for the Bank’s 2006 year (before application of the loss carryback) for the period of approximately eight years ending, pursuant to s. 161(7)(b)(iv), with the date of the Bank’s carryback request, rather than (pursuant to s. 161(7)(b)(ii)) with the return filing date for the loss year. The Bank had unsuccessfully submitted that s. 161(7)(b)(iv) was inapplicable because the reassessment of its 2006 year did not occur “as a consequence of [its carryback] request” as required by s. 161(7)(b)(iv) but “[r]ather, the reassessment was made in order to process the audit adjustment”.
Summary of Bank of Nova Scotia v. Canada, 2024 FCA 192, leave granted 22 May 2025 (41643) under s. 161(7)(b)(iv).
Vortex – Tax Court of Canada characterizes purported SR&ED as routine engineering conducted by trial and error
In confirming the denial of the claim of the taxpayer that it had engaged in experimental development in building mobile direct-contact water heaters for use in fracking, Spiro, J. found inter alia that there was an absence of any expert evidence demonstrating technological risks or uncertainties which could not have been removed by routine engineering or standard procedures, and that the work could instead be characterized as routine engineering that was conducted by trial and error.
Neal Armstrong. Summary of Vortex Energy Services Ltd. v. The King, 2025 TCC 63 under s. 248(1) – SR&ED.
CRA accepts capital gains and then capital loss treatment of an asset sale made on a reverse earnout basis, where the targets were not achieved
On the closing date for the sale by Opco of the assets, being capital property with an ACB of $150,000, of one of its two businesses to an arm's length purchaser, it was agreed that the purchaser: would pay $3,500,000 on the closing date, plus an adjustment a few months later (based on the finalized financial statements), which turned out to be $150,000; and would pay two further deferred amounts 12 and 18 months after the closing date of $300,000 and $200,000 if, in each case, the purchased business achieved targeted customer retention rates.
The two deferred payments were not made on the agreed dates because of disagreements about the method for their computation. 21 months after the closing date, the parties agreed that a deferred payment of $50,000, rather than $200,000 + $300,000, would be paid.
CRA indicated that, based on IT-462, para. 9, s. 12(1)(g) would not apply to the maximum amount provided for in the contract (here, of $4,150,000), provided that it was equal to the FMV of the sold business’s assets on the closing date.
Accordingly, Opco realized a capital gain of $4,000,000 in its taxation year of the closing and therefore had appropriately paid a capital dividend of $2,000,000 shortly after the date of the payment of the $150,000 adjustment. Furthermore, when it was agreed that the deferred payments would be reduced to $50,000, at that point, Opco incurred a capital loss of $450,000. This reduced Opco's CDA by $225,000 at that time, but did not affect the validity of the $2,000,000 capital dividend previously paid (even if that capital loss was carried back).
No capital gains reserve could be claimed in the taxation year of the closing since the $4,150,000 sales proceeds were not “determinable” (i.e., were subject to a contingent reduction).
Neal Armstrong. Summaries of 2 April 2025 External T.I. 2019-0818321E5 F under s. 12(1)(g) and s. 40(1)(a)(iii).
Income Tax Severed Letters 21 May 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
STEP Canada requests CRA comments on the application of the EIFEL "excluded entity" definition to an “eligible group entity” that is a discretionary trust holding a US residence
The Tax Technical Committee of STEP Canada requested a technical interpretation regarding the situation where a discretionary personal trust for the benefit of the spouse and child of the individual (Mr. X) controlling various Canadian real estate corporations constituted an “eligible group entity” in respect of those corporations under the EIFEL rules.
Would such trust qualify for the exemption in s. (c)(i) of the excluded entity definition if its only asset was a US personal residence? Ideally, CRA will indicate that the ownership of personal property outside Canada by a trustee in Canada will constitute a Canadian activity or undertaking of the trust for these purposes if any decisions that are made regarding the personal residence are made by the trustee while in Canada.
The Committee also asked CRA if it would make any difference if there was incidental rental income earned by the property.
Neal Armstrong. Summary of 21 April 2025 letter of Tax Technical Committee of STEP Canada to the Income Tax Rulings Directorate entitled “Technical Interpretation Request Relating to EIFEL and Cross-Border Trust Holding Foreign Personal Use Property” under S. 18.2(1) - Excluded Entity - Subparagraph (c)(i).
We have translated 7 more CRA severed letters
We have translated a CRA ruling released last week and a further 6 CRA interpretations released in August of 2000. Their descriptors and links appear below.
These are additions to our set of 3,202 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).
Maple Leaf Foods is proposing to spin-off its pork assets as Canada Packers
Maple Leaf Foods (or MLF) is proposing to effect a butterfly spin-off, pursuant to a CBCA Plan of Arrangement, of 84% of the shares of the subsidiary (Subco) containing its pork operation assets to a new corporation, named Canada Packers Inc., to be held by its shareholders (with the remaining 16% of Canada Packers being held by MLF). The mechanics of the butterfly essentially entail a targeted s. 86 exchange by the MLF shareholders of their “old” MLF common shares for “new” common shares (quite similar to the old common shares) and special shares, the transfer of those special shares under s. 85.1 to a Newco for Newco common shares, the transfer by MLF of 84% of its shareholding in Subco to Newco for Newco preferred shares, the redemption of the cross-shareholdings and the amalgamation of Newco and Subco to form Canada Packers. Implementation is conditional inter alia on receipt of a CRA ruling letter and on the common shares of the Newco being conditionally listed on the TSX.
The “McCain Parties” (two individuals and McCain Capital Inc.), who hold 39.6% of the MLF common shares, entered into a Tax Matters Agreement with the corporations in which they agreed that they will not within the two years following the Arrangement engage in various listed transactions that would be problematic under, or fatal to the application of, the butterfly rules and will use commercially reasonable efforts to ensure that persons with whom they do not deal at arm’s length also so refrain.
Given uncertainty regarding whether the McCain Parties could access the s. 85.1 election, Newco will jointly elect with them under s. 85(1) regarding their transfer of their special shares of MLF to Newco for Newco common shares.
Neal Armstrong. Summary of May 1, 2025 Circular of Maple Leaf Foods Inc. under Spin-offs and Distributions – Butterfly spin-offs.
CRA effectively rules that Part VI.1 tax could apply to an agreement to repurchase common shares for their current FMV, if their FMV declines by the closing time
A CCPC (B Ltd.) has two outstanding classes of common shares: the Class B common shares are held by three taxable Canadian corporations or partnerships (C, D, and E): and the Class A common shares are held by three inter vivos trusts.
Such shareholders are parties to a USA which provides inter alia that C, D, and E can each require B Ltd. to repurchase their Class B common shares for an amount not exceeding their FMV, and accords them an option to require B Ltd. to repurchase Class A common shares (i.e., of the trusts) in the event of specified deaths, for a price equal to their FMV, with the FMV in either case being determined at the time the repurchase agreement is entered into (rather than at the acquisition time).
Under the proposed transactions, the shareholders of B Ltd. will amend the USA to provide that for all such references to FMV, the reference will instead be to FMV calculated without regard to the repurchase agreement.
B Ltd. will then declare taxable dividends on its Class A and B shares, to be paid through the issuance of promissory notes and in amounts not exceeding the safe income attributable to the respective shareholdings.
CRA ruled that s. (a)(i)(B) of “short-term preferred share” and s. (f)(ii) of “taxable preferred share” will apply to such repurchases to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the repurchase agreement, on the acquisition date specified therein.
These rulings do not seem meaningful. S. (a)(i)(A) of the STPS definition provides a safe harbour for an agreement to repurchase shares within 60 days of the agreement where the repurchase price does not exceed the greater of the FMV of the share at the time the agreement was entered into and at the time of the acquisition, in each case, determined without reference to the agreement. (f)(i) of the TPS definition is similar. The rulings do not accord any benefit to the repurchase agreements occurring for the FMV determined at the time of the repurchase agreement, and effectively indicate that the STPS or TPS definition will apply if, in fact, the repurchase price exceeds the FMV of the share at the acquisition time.
The addition of the references to FMV "determined without reference to the agreement" seems pedantic. In determining the purchase price for a common share that is to be repurchased for its FMV, such determination would become circular if that determination was to be made by reference to that agreement.
Neal Armstrong. Summary of 2024 Ruling 2023-0970691R3 F under s. 248(1) – taxable preferred share – (a)(i).
CRA confirms that the Explanatory Notes on s. 87(8.4) partially conflated it with s. 87(8)
The Explanatory Notes to ss. 87(8.4) and (8.5) provided:
New subsections 87(8.4) and (8.5) allow taxpayers to elect for dispositions of taxable Canadian property (“TCP”) that is shares of a corporation or an interest in a partnership or trust to occur on a tax-deferred (“rollover”) basis, where the disposition results from a foreign merger that meets certain conditions. A disposition of property by a merging foreign corporation on a foreign merger otherwise occurs on a taxable basis; the combined effect of 87(8.4) and (8.5) is to provide tax-deferred rollover treatment in respect of a disposition of shares of a merging foreign corporation on a foreign merger, but not in respect of a disposition of property owned by the merging foreign corporations.
CRA confirmed that in order for this summary to be “technically accurate,” the italicized words should instead refer to ss. 87(4) and (8) (i.e., ss. 87(4) and (8) generally provide a rollover for shares held in a merging foreign predecessor corporation whereas ss. 87(8.4) and (8.5) provide a merger for certain assets held by it, namely, certain TCP shares or interests).
Neal Armstrong. Summary of 4 March 2025 External T.I. 2025-1053731E5 under s. 87(8.4).
Income Tax Severed Letters 14 May 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Receive News of Note
Receive free emails of each News of Note post
Editors
Neal H. Armstrong editor and contributor