News of Note
0808414 B.C. – Federal Court of Appeal finds that the proceeds of depreciable property were not reduced by assumed pension obligations
Email this ContentThe taxpayer sold a contract-manufacturing business to an affiliated Canadian company. Although it conceded that the FMV of the (Class 29) machinery and equipment included in the sale would have been $56.5 million if sold alone, it argued that such FMV should be reduced by the estimated amount of the pension obligations assumed by the purchaser ($8.2 million) since the business was sold as a going concern.
After referring to Daishowa‑Marubeni, Webb JA stated:
[T]he pension obligations were not imbedded in the Equipment, they arose because the vendor had pension obligations to its employees. …
[I]n applying section 69 of the Act, the proceeds of disposition are not determined for the business per se, but rather separately for each particular asset comprising the business … that was sold. The pension obligations and any other liabilities or obligations assumed by the purchaser would be part of the consideration paid for the various assets. Such obligations and liabilities would not reduce the fair market value of the Equipment.
Neal Armstrong. Summary of 0808414 B.C. Ltd. v. Canada, 2025 FCA 193 under s. 69(1)(b).
CRA finds that s. 84.1(2.31)(g)(i) accommodates a transfer of management (including part management) by a parent to both a child and a 3rd party
Aco, wholly-owned by Mr. A, held 60% of the units of a general partnership (SENC) and Bco, wholly-owned by an arm’s length third party, held the other 40%. On January 1, 2025, Mr. A sold 55% of the shares of Aco to a corporation controlled by his son (Cco) and the remaining 45% to Bco.
At issue was the condition in s. 84.1(2.31)(g)(i) (the “Condition”) which, in context, required that, within the 36 month (or longer) period following the disposition to Cco, the taxpayer (Mr. A) must have taken reasonable steps to transfer the “management” (as defined in s. 84.1(2.31(i)) of each relevant business of Aco and of any relevant group entity (SENC) to his child.
CRA stated:
In practice, it is not uncommon for more than one person to be involved in directing or supervising the activities of a business. The Condition does not require that the parent be the sole or principal person involved in the management of the business within the meaning of paragraph 84.1(2.31)(i). Nor does the Condition preclude a person from transferring the management of a business in which the person is involved to more than one person.
… If … it were shown that Child would exercise a sufficiently significant power previously exercised by Mr. A in relation to the business of Aco and SENC, either alone or with Mr. B, following the disposition of the Shares, we believe it would be possible to establish that Mr. A had transferred the management of Aco to Child for the purposes of the Condition.
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.15 under s. 84.1(2.31)(g)(i).
CRA indicates that the equivalence of cash held to future years’ expenses is insufficient to establish that such cash was used in the business
In the course of its active services business, Opco contracted to provide services to an unrelated third party in consideration for $100,000 received in cash at the time of the agreement, of which it expected to use $80,000 to cover ongoing expenses during the three-year term of the contract (for a net profit of $20,000) – but with no contractual restriction as to its use of the $80,000 cash.
In doubting that it followed from this that the $80,000 portion of the cash deposited was to be considered as an asset used principally in an active business carried on by Opco for purposes of (c)(i) of the QSBCS definition, CRA referred to the Ensite decision, and then stated:
In determining whether cash (cash on hand, short-term investments, etc.) can be considered to be an asset used principally in an ABCO [active business carried on] the test is not to compare the total amount of such cash with the potential expenses that the corporation may incur in the coming years, but rather to determine whether its withdrawal could have a destabilizing effect on the business’s operations or whether its holding is necessary to satisfy a condition that must be met before engaging in commercial activities.
… [A] permanent accumulation of cash in excess of a company's reasonable needs for working capital will generally not be considered to be an asset used principally in an ABCO.
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.14 under s. 110.6(1) – QSBCS – (c)(i).
CRA indicates that there is only one penalty month if an election due on February 28 was filed on or before March 31 of the following month
A corporation, whose deadline for filing an s. 85(1) election was the last day of February (February 28), did not file the election until March 28 (or 31) of the next month. RCT 85-243, after referring to the Interpretation Act, stated that “[in] calculat[ing] from a particular date a month is that period of time from that date to the day before the same date in the next month on the calendar”. On this basis, the number of “each month or part of a month” from February 28 to the March 28 (or 31) filing date for purposes of computing the s. 85(8) penalty would be two, i.e., the period to March 27 would constitute one complete month, and the period consisting of March 28 (or March 28 to March 31) would be a part of a month.
CRA indicated that the above approach did not represent its current practice, and the penalty would be based on there only being one penalty month. After referring to ss. 85(6) and 85(8), it stated:
[T]he analysis of the provisions listed above favours an interpretation whereby the calculation of the number of "each month or a part of a month" in the period must exclude the date on which the election must be made, but include the date on which the election is made.
Thus, where an election must be made no later than the last day of a particular calendar month, the month in question ends on the last day of the subsequent calendar month.
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.13 under s. 85(8).
CRA finds that a conditional contractual obligation to issue shares in consideration for a cash advance might be subject to s. 49.1 on the share issuance
A SAFE (“Simple Agreement for Future Equity”) is a financing agreement in which an investor provides funds to a company in exchange for the right to receive shares upon the occurrence of a future event, generally a future financing or a winding-up event, at a preferential price.
CRA indicated that, assuming the SAFE was not a share, or a bond, debenture or note, the future issuance event would not come within s. 51(1). However, s. 49.1 was also relevant to the question as to whether the conversion of a SAFE into shares, and it was conceivable that there would be no disposition on such conversion.
Neal Armstrong. Summaries of 9 October 2025 APFF Roundtable, Q.12 under s. 51(1) and s. 49.1.
CRA confirms that a valid s. 83(2) election and the accompanying resolution must specify a dollar amount
Immediately after its sale of a subsidiary for a sale price based that would not be finalized until audited financial statements were issued, the seller adopted a resolution providing for the payment of a capital dividend corresponding to the portion of the non-taxable gain realized on the sale, but whose amount would not be known with certainty until three months later.
(a) Would CRA consider the election filed on the day of that resolution to be invalid because it did not stipulate a dollar amount?
(b) Would be valid If it instead was filed late, with the applicable penalties, but without a new resolution specifying the amount?
CRA responded:
The CRA's position, as stated in Technical Interpretation 2020-0852211C6, remains that, generally, the amount of the dividend designated under the election provided for in subsection 83(2) must be stated on Form T2054 and in the resolution authorizing that election in order for it to be considered valid, regardless of whether the election is filed within the prescribed time limits, or late and accompanied by the payment of the penalty established under subsection 83(4).
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.11 under s. 83(2).
CRA confirms that the departure tax deferral under s. 220(4.5)(a)(i) is available for AMT payable because of s. 128.1(4)(b)
CRA confirmed that, where an individual was deemed by s. 128.1(4)(b) to dispose of property on exiting Canada, it was possible that the amount of minimum tax calculated pursuant to s. 127.5(a) would exceed the (regular) tax otherwise payable by the individual under Division E, exclusive of s. 120. CRA went on to find that the election under s. 220(4.5) would allow the individual to defer the payment of an amount equal to the excess of such AMT over the tax that would otherwise have been payable by the individual for the year of emigration but for the application of s. 128.1(4)(b).
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.10 under s. 220(4.5)(a)(i).
CRA concludes that a land settlement claim received by an Indian band council or a trust formed by it would be exempted to non-Indian members when distributed to them
The federal government entered into an agreement with a band council representing a First Nation regarding the settlement of specific land claims pursuant to which the council will receive compensation for the First Nation. The members of the First Nation include individuals who were not Indians within the meaning of s. 2(1) of the Indian Act and who reside either on a reserve or off a reserve.
CRA found that compensation paid directly to the council would not be subject to tax, based on the conclusion in 2016-0645031I7 that all bands created under the Indian Act constitute exempt municipalities under s. 149(1)(c).
If the council distributed the compensation directly to band members, CRA would not consider that distribution to come from a source of income or proceeds of disposition of property by the members and, therefore, would not be included in computing their income under s. 3(a).
If the council formed a trust to distribute the compensation, the CRA would consider the compensation transferred to the trust to constitute capital to the trust, which could be distributed tax-free to the members. However, the application of s. 75(2) would need to be considered, if the trust earned any income from the compensation, as the council was both the settlor and the beneficiary of the trust.
Neal Armstrong. Summaries of 19 August 2025 External T.I. 2025-1066571E5 F under s. 149(1)(c), s. 3(a) and s. 104(13).
CRA confirms that the QSBCS exception to s. 55(5)(e)(i) applied to the repurchase of QSBCS held by a sibling’s Holdco simultaneously with the repurchase of the other sibling’s Holdco’s non-QSBCS
Two sisters (A and B) each held, through their respective wholly-owned Holdcos (Holdco A and Holdco B) 50% of the shares of Opco, which were qualified small business corporation shares (QSBCS), and 50% of the shares of Investmentco, which were not.
Opco repurchased its shares held by Holdco B, and Investmentco simultaneously repurchased its shares held by Holdco A.
At issue was the rule in s. 55(5)(e)(i) deeming siblings to be unrelated for s. 55 purposes and the exception to that rule (also stated in s. 55(5)(e)(i)) for where a dividend is paid on a QSBCS. CRA confirmed that the repurchase by Opco would not be subject to s. 55(2) by virtue of such exception (even though such repurchase occurred as part of the same series of transactions as the repurchase by Investmentco), and that the repurchase by Investmentco would be subject to s. 55(2) since such exception was inapplicable.
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.9 under s. 55(5)(e)(i).
CRA indicates that most (e.g., calendar-year) corporations should continue to use the old (pre-Update) CRA positions in computing safe income for 2023 and prior taxation years
In its 2023 Safe Income Paper, CRA indicated that its changes in position would apply prospectively to calculations of safe income for taxation years beginning after November 28, 2023.
CRA now confirmed that this meant that “a corporation's safe income must be calculated for each taxation year in accordance with the CRA positions applicable to that year.” For example, if a calendar-year corporation began a series of transactions in September 2025 that would include the payment of a dividend to which s. 55(2) would apply, it would determine its safe income as of September 2025 by calculating its safe income for each of its taxation years up to and including its 2023 taxation year using its old positions, and for its 2024 and 2025 taxation years using its new positions.
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.8 under s. 55(2.1)(c).
Neal H. Armstrong editor and contributor