News of Note
CRA confirms that the gain on the shares of CFA2 (sub of CFA1) on the continuance of CFA1 (a sub of Canco) to Canada could be taxed again when CFA1 actually disposes of the CFA2 shares
Email this ContentCFA1 (a Country A resident) wholly owned CFA2 (a Country B resident) and was wholly owned by Canco.
Pursuant to s. 128.1(1)(b), at the time immediately before the deemed taxation year of CFA1 arising on the continuance (the “immigration”) of CFA1 to Canada (the “Last FA Year”), CFA1 was deemed to dispose of the shares of CFA2 for proceeds equal to their FMV at that time of $100. The resulting $90 capital gain on the shares of CFA2, which were not excluded property, gave rise during the Last FA Year to FAPI of CFA1 that was included in Canco’s income.
If there subsequently was an actual disposition of the shares of CFA2 by CFA1, CFA1 would be liable to tax of 30% in Country B on the capital gain computed based on the (low) pre-immigration costs of the shares to it of CFA2, thereby likely resulting in the same gain being taxed a second time. In particular, as the ACB of the CFA2 shares of CFA1 would have been stepped-up under s. 128.1(1)(c), on such sale CFA1 would not be subject to tax in Canada on the capital gain accrued prior to the immigration, and would not generate a foreign tax credit under s. 126 for the Country B tax paid on that accrued gain unless it had qualifying income from Country B sources. Further, since CFA1 ceased to be a foreign affiliate of Canco upon the immigration, the Country B tax paid on the actual disposition of the CFA2 shares would not be FAT in respect of Canco.
In addition to the FAPI inclusion under s. 128.1(1)(b) to Canco, s. 128.1(1)(d)(ii) required the inclusion, in computing the FAPI of CFA1 for the Last FA Year, of the amount prescribed under Reg. 5907(13), which would include any undistributed taxable surplus of CFA1, as reduced by its net earnings in respect of the FAPI for the Last FA Year from the deemed disposition under s. 128.1(1)(b). In these circumstances, where the only relevant FAPI was from the gain to CFA1 on the CFA2 shares on the continuance, there would be no net amount to add under Reg. 5907(13).
Neal Armstrong. Summaries of 22 August 2025 External T.I. 2019-0826681E5 under Reg. 5907(13), ITA s. 91(4) and s. 128.1(1)(b).
CRA generally confirms the use of s. 119 to reduce exit tax on CCPC shares by the Pt. XIII tax on their subsequent redemption
On exiting Canada, an individual was deemed, pursuant to s. 128.1(4)(b), to have disposed of preferred shares of a CCPC, which were taxable Canadian property and had a nominal ACB and PUC, for their fair market value, and elected under s. 220(4.5) to defer the payment of the resulting tax years later, the CCPC will now redeem the preferred shares, giving rise to a deemed dividend that is subject to a treaty-reduced withholding rate of 15%. His resulting capital loss will be reduced pursuant to ss. 40(3.7) and 112(3)(b) to nil by the amount of such deemed dividend.
CRA confirmed that, in general, the withholding tax could be credited under s. 119 against the tax payable under s. 128.14(4)(b). In particular, the individual would be allowed under s. 119 to deduct, from his tax otherwise payable for his departure taxation year the lesser of:
- the amount of tax attributable to the taxable capital gain on the deemed disposition of the shares; and
- the treaty-reduced Part XIII tax paid by the individual on that amount of the deemed dividend that, pursuant to s. 40(3.7), had reduced the individual’s otherwise determined capital loss from the share disposition.
On satisfying the s. 152(6.3) conditions, he could amend his tax return for the departure year in order to take the s. 119 deduction.
Neal Armstrong. Summary of 11 March 2022 External T.I. 2019-0829251E5 under s. 119.
Elhav – Tax Court of Canada finds that the taxpayer’s son sleeping at the new condo for 2 ½ months satisfied the 1st-occupant test in ETA s. 254(2)(g), but not the intention for a primary place of residence under s. 254(2)(b)
The appellant and his wife agreed in January 2017 with a developer to purchase a still-to-be-constructed condominium unit. They took possession in June 2020 and began renting the unit out in September 2020.
Regarding the appellant’s new housing rebate claim, Friedlander, J. found that a qualifying relation, namely their son (Michael), age 23, had satisfied the first-occupancy test in ETA s. 254(2)(g) given that he had, in fact, slept every night in the condo unit until he decided to return to the family home in Vaughan about 2 ½ months later, and had furnished the unit (albeit, sparsely) while staying there. He was more than “merely ‘camping’” there.
However, the rebate nonetheless was not available because s. 254(2)(b) was not satisfied, i.e., Friedlander, J. doubted that their intention at the time of the purchase agreement was that Michael would use the unit as his primary place of residence. For instance, there was the significant distance between the family home in Vaughan (where Michael was staying until 2020) and the unit’s location in east Toronto, their close family ties, and the absence of any reason to consider that he would work near the condo (and, in fact, he ended up working in the Vaughan area).
Neal Armstrong. Summaries of Elhav v. The King, 2025 TCC 132 under ETA s. 254(2)(b) and s. 254(2)(g).
Income Tax Severed Letters 8 October 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Fiducie Historia – Federal Court of Appeal finds that, notwithstanding their agreement somewhat to the contrary, trustees had not delegated their trustee function to others
A discretionary trust received dividend income, which it allocated and distributed to one of its beneficiaries ("Father"). In an attempt to avoid a change in control of the corporation held by the trust due to an associated redemption of shares of the corporation held by family members, the trustees entered into an agreement with two beneficiaries, who were sons of Father, under which the trustees undertook to exercise their powers according to the instructions given by the sons and to not make decisions without their prior consent – and to resign in the event of disagreement with the sons' instructions.
However, this caused CRA to conclude that the trustees had abdicated the exercise of their powers to the sons, so that the sons had become de facto trustees, contrary to Art. 1275 of the Civil Code. This, in turn, signified that the purported trust distributions were void, so that no amount was deductible under s. 104(6).
The Tax Court found that, notwithstanding this agreement, the trustees continued to exercise their powers as trustees and that the sons did not, in fact, act as trustees. Thus, there was no violation of Art. 1275.
Before dismissing the Crown’s appeal, Goyette JA first noted that the terms of the agreement with the sons were ambiguous, and then indicated that the Tax Court was called upon to take the actual facts into account, so that it was entitled to decide based on its finding that in fact their had been no abdication of the exercise of trustee powers. Furthermore, no palpable and overriding error in the Tax Court’s assessment of the facts could be identified.
Neal Armstrong. Summaries of The King v. Fiducie Historia, 2025 CAF 177 under s. 104(6) and s. 171(1).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in February and January of 2000. Their descriptors and links appear below.
These are additions to our set of 3,336 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 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Laurie – Tax Court of Canada finds that a taxpayer had failed to establish due diligence re a repeated failure to file T1135s
The taxpayer filed a voluntary disclosure regarding her failure for her 2012 to 2014 taxation years to file T1135 returns reporting her foreign investments, which the CRA accepted. In the course of preparing her 2021 taxation return, she realized that she had failed to file T1135 returns for her 2019 and 2020 taxation years. CRA refused a second voluntary disclosure, and she appealed the imposition on her of s. 162(7) penalties.
Graham J. found that the jurisprudence had established that a due diligence defence was available under s. 162(7). In rejecting a Crown submission that Parliament had turned its mind in s. 233.5 (respecting due diligence in seeking unavailable information) regarding the only relevant circumstances in which due diligence could be a defence, Graham J. stated (at para. 8):
I cannot see how, in providing a due diligence defence for information returns under sections 233.2 and 233.4 that were filed on time but were incomplete, Parliament could in any way be said to have indirectly precluded a due diligence defence to the late filing of all information returns covered by subsection 162(7).
However, he went on to find that in these (repeat mistake) circumstances, the taxpayer had failed to establish that she satisfied the Résidences Majeau due diligence tests.
A somewhat analogous issue arises, regarding the s. 245(5.1) GAAR penalty, as to whether the extremely narrow statutory defence under s. 245(5.2) implies that there is no Résidences Majeau due diligence defence (although the analogy is perhaps complicated by the availability of the alternative defence for voluntary disclosure under s. 237.3). The final version of the Explanatory Notes on s. 245(5.2) notably added a statement that:
It is not intended to replace any other defences that may be available under applicable law.
Neal Armstrong. Summary of Laurie v. The King, 2025 TCC 130 under s. 162(7).
CRA indicates that the later-of-incurring-and-acquiring rule in s. 127.44(9)(e) applies on an expenditure-by-expenditure basis
CRA illustrated the application of s. 127.44(9)(e), which deems an expenditure for qualified CCUS expenditure purposes to be incurred in the later of the taxation year in which it was incurred and that in which the related property was acquired.
A taxable Canadian corporation (BCo), receives initial project evaluation from Natural Resources Canada (NRCan) for its CCUS project in 2025. In 2026, it incurs $1,000,000 for detailed engineering costs relating to Class 57 equipment to be acquired by it; in 2027, it requires further Class 57 equipment for $10,000,000; and in 2028, it incurs $5,000,000 in installing the Class 57 equipment in the course of constructing the carbon capture facilities.
CRA noted that although there was no property acquired in 2028 (but only in 2027), s. 127.44(9)(e) would deem the related property to have been acquired in 2028, thereby permitting the definition of qualified carbon capture expenditure to apply to the taxpayer in 2028 in respect of the $5,000,000 of installation costs.
Furthermore, s. 127.44(9)(e) was to be applied separately to each expenditure such that its application to the installation cost incurred in 2028 would not adversely impact its application to expenditures incurred in the previous taxation year. For example, as for the $1,000,000 of costs incurred in 2026, they would be deemed to be incurred in the later of the year in which they were incurred (2026), and the year in which the property to which they related was acquired (2027), i.e., in 2027.
Neal Armstrong. Summary of 21 July 2025 External T.I. 2025-1068511E5 under s. 127.44(9)(e).
CRA finds that NRCan preliminary approval of a CCUS project in Year 2 can backdate qualification of a project expenditure for Class 57(a) property acquired in Year 1
In 2026. a taxable Canadian corporation (Aco) takes ownership and delivery of, and pays for, equipment described in Class 57(a) at the premises of its proposed (carbon capture) CCUS project. However, the equipment will be stored at the premises until Natural Resources Canada (NRCan) issues an initial project evaluation, which will not occur until 2027.
After noting that, unlike other clean economy investment tax credits, there is no requirement that the property acquired be available for use before the CCUS tax credit can be claimed, CRA indicated that the expenses incurred in 2026 could be considered to have been incurred “in respect of” a qualified CCUS project of ACo once ACo's project became a qualified CCUS project upon receipt of the initial project evaluation from NRCan in 2027.
Accordingly, such expenditure would be qualified carbon capture expenditures for the 2026 taxation year, i.e., once initial project evaluation occurred in 2027, the 2026 expenditure would qualify and could be claimed for 2026 (and this was so even though the special backdating timing rule in s. 127.44(9)(h) was not available.)
Neal Armstrong. Summary of 21 July 2025 External T.I. 2024-1039761E5 under s. 127.44(4).
Stackhouse - Federal Court of Appeal confirms that the farming operation of a doctor to which she devoted significant time and capital was a subordinate source for s. 31(1) purposes
After being amended to overrule Craig, s. 31(1) generally provides that where the taxpayer’s chief source of income is a combination of farming and another source, the farming loss restriction rule in s. 31(1) applies unless that other (non-farming) source is a subordinate source.
From 2007 to 2015, the taxpayer earned aggregate net income of $4.1 million from her medical practice, and incurred losses exceeding $4 million from her farming business to which she devoted substantial time and capital. In confirming the denial of farming losses claimed by her for her 2014 and 2015 taxation years, the Tax Court had found that her farming business had always been subordinate to her medical practice as a source of income and that there was no evidence that this would change in the foreseeable future.
Monaghan JA rejected the taxpayer's submission that, to determine which of the two sources was subordinate, priority should be given to time, attention, energy, and capital invested, and not actual or potential profitability. More generally, she found that there was no reviewable error in the Tax Court’s application of the relevant factors in applying the subordinate source test “including the appellant’s ‘ordinary mode of living, farming history, and expectations’: Craig at para. 42” and in its conclusion that farming was subordinate to the taxpayer’s medical practice.
Neal Armstrong. Summary of Stackhouse v. Canada, 2025 FCA 175 under s. 31(1) and Statutory Interpretation – Prior Cases.
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