3 December 2024 CTF Roundtable

This sets out the questions that were posed, and provides summaries of the preliminary oral responses given, at the 2024 Canadian Tax Foundation CRA Roundtable, which was held in Vancouver on 3 December 2024. Various of the titles shown are our own. The Roundtable was hosted by: Anu Nijhawan (Bennett Jones) and Michael Smith (Deloitte).

CRA Panelists:

Stéphane Prud'Homme, Director, Reorganizations Division

Daryl Boychuk: Manager, Income Tax Rulings Directorate

Q.1 - Deferred safe Income and preferred shares

The Canada Revenue Agency (CRA) has considered the allocation of safe income to preferred shares where a shareholder acquires preferred shares in a corporation as consideration for the transfer of a property (other than shares) on a tax-deferred basis to the corporation. As per the CRA Update on Subsection 55(2) and Safe Income, Where are we Now?[1] (the “Safe Income Paper”) that was presented at the 2023 CTF CRA Roundtable, we understand that it is now the CRA's view that, when the accrued gain is realized by the corporation, the gain would be seen as contributing to the gain on the preferred shares and would be included in the safe income of the preferred shares.

What is CRA's view on the allocation of safe income to preferred shares where the preferred shares are acquired in exchange for common shares? Do the accrued gains on the underlying property held by the corporation and any of its subsidiaries at the time of the share exchange get allocated to the safe income of the preferred shares once realized? For example, assume that Holdco owns 100% of the common shares of Midco which in turn owns 100% of the common shares of Subco. The shares of each company have FMV of $1,000 and ACB of $1. Subco owns a capital property with FMV of $1,000 and ACB of $1. Holdco exchanges its common shares in Midco for preferred shares of Midco with FMV of $1,000 on a tax-deferred basis. When the gain on the property held by Subco is eventually realized, would that gain be seen as contributing to the gain on the preferred shares of Midco and would it be included in the safe income of the preferred shares of Midco?

Preliminary Response

Prud'homme: As part of the Safe Income Paper, the CRA stated that, where a shareholder acquires preferred shares as consideration for the transfer of property on a tax deferred basis, the accrued gain on the property at the time of the transfer that is subsequently realized by the corporation would be viewed as contributing to the gain on the preferred shares, and accordingly would be included in the safe income of the preferred shares.

However, CRA clearly stated that this position was only applicable to the transfer of property other than shares. Accordingly, the position of the Safe Income Paper will not extend to the situation where shares of the corporation are exchanged for preferred shares of the corporation on a tax deferred basis. Instead, in that case, the allocation of the safe income to the preferred shares should follow CRA’s longstanding position to the effect that a portion of the safe income to which the exchanged shares would have been entitled immediately before the exchange simply flows through to the preferred shares.

With respect to the safe income that will be realized after the exchange, the preferred shares will generally participate in the safe income of the corporation in accordance with the shares’ dividend entitlement only.

Official Response

3 December 2024 CTF Roundtable Q. 1, 2024-1038181C6 - Safe Income and Preferred Shares

Q.2 - S. 55(2) and regular dividends

Many dividend-paying public corporations rely on dividends received from their subsidiaries to fund their public dividends. In CRA documents 2015-0613821C6 (November 17, 2015) and 2016-0627571E5 (June 23, 2016), the CRA confirmed that, where a dividend is paid pursuant to a well-established dividend policy and the amount of the dividend does not exceed a reasonable dividend return on equity on a listed share issued by a comparable corporation in the same or similar industry, the purpose test in paragraph 55(2.1)(b) is not met. For this purpose, the term “reasonable dividend income return on a […] listed share” refers to dividends paid regularly by widely-held corporations to their shareholders on publicly listed shares. A corporation that has a policy of paying on its listed shares quarterly dividends that are set at a fraction of yearly earnings would fit that description. The CRA noted that, in the proposed question where dividends are paid up a corporate chain to fund a parent corporation’s dividend, the purpose can only be determined by a review of all the particular facts and that the purpose of a dividend has to be analyzed at each level of payment through a corporate chain.

Can the CRA provide any update on the application of subsection 55(2) to ordinary course intra-group dividends?

Preliminary Response

Prud'homme: Our positions expressed in 2015-0613821C6 and 2016-0627571E5 are still valid. In 2018 APFF Q.5 (2018-0761561C6), we reiterated that we were ready to provide additional comfort in the course of an income tax ruling, subject to certain conditions: Specifically, the CRA is open to consider a ruling request that involves the determination of the purpose where all manifestations of purpose in those circumstances support the absence of the purposes that are described in s. 55(2.1)(b).

Of course, the ruling would be conditional on a representation by the taxpayer that the purposes for which the dividend was paid do not include one of the purposes in s. 55(2.1)(b). The ruling would also be conditional on the completeness of the description of all the supporting facts and circumstances.

The taxpayer should use the rulings channel where initial comfort is needed on the issue of regular dividends. In other words, we are still open for business on this matter.

Nijhawan: In the rulings that you have seen, what sort of issues are you dealing with?

Prud'homme: We basically see two types of files concerning regular dividends – either there is safe income or there is not.

If there is not the safe income, the purpose test must be addressed, and we have indicated that we are open for business. I remember years ago where we would basically not rule on purpose tests. That is a thing of the past. We are now open for business on that issue, assuming that we have the circumstances supporting that.

Where there is safe income, taxpayers need to manage the safe income determination time notion (of a series with respect to the safe income exception in 55(2.1)(c).)

We have not been flooded with either type of request.

Official Response

3 December 2024 CTF Roundtable Q. 2, 2024-1038191C6 - Subsection 55(2) and Intra-Corporate Dividends

Q.3 - S. 237.4(4) reporting of B2B financings

Further to the introduction paragraphs, effective November 1, 2023, the following transactions (NT 2023-05) were designated for the purposes of section 237.4 as “notifiable transactions” (emphasis added):

In certain circumstances, the thin capitalization rules in subsections 18(4) to (8) and paragraph 12(1)(l.1) of the Income Tax Act deny a deduction, or provide for the inclusion of a deemed amount of income, in respect of an amount of interest that is paid or payable by a taxpayer or partnership on debts owing to certain non-residents specified in those rules, (generally, non-residents that hold a significant interest in the taxpayer, or that do not deal at arm’s length with a person that holds such an interest – in these notes referred to as a “relevant non-resident”). Supporting rules help to ensure the thin capitalization rules cannot be circumvented through the use of certain back-to-back lending arrangements involving intermediaries.

Parallel rules in subsections 212(3.1) to (3.3) help to ensure that withholding tax under Part XIII is not circumvented through the use of back-to-back lending arrangements, or back-to-back arrangements in respect of rents, royalties and similar types of payments. There are also character substitution rules in the Part XIII context.

Thin capitalization

Non-resident 1 (NR1) is a relevant non-resident in respect of a taxpayer. NR1 enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer. The taxpayer files, or anticipates filing, its income tax returns on the basis that the debt or other obligation owing by it, and the interest paid thereon, is not subject to the thin capitalization rules.

Part XIII tax

A non-resident person (NR1) enters into an arrangement to indirectly provide financing to a taxpayer through another non-resident person (NR2). If interest had been paid by the taxpayer directly to NR1, it would be subject to Part XIII tax. The taxpayer’s income tax reporting reflects, or is expected to reflect, the assumption that the interest it pays in respect of the arrangement is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1. Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.

The above Designated Transactions are broken up into two segments: the “Thin capitalization” segment and the “Part XIII tax” segment. Both segments make reference to an “arrangement to indirectly provide financing.”

A. What is the scope of the term “financing”? Is this limited to the advancing of debt or could equity subscriptions also be caught?

B. What, if any, role does taxpayer intent/purpose play in determining whether such a transaction is a notifiable transaction?

C. Is there an inherent materiality concept?

D. Public shareholders (including non-residents) wholly own Foreign Parent (a non-resident corporation) which in turn owns all of the shares of Foreign Opco (a non-resident corporation). Foreign Opco owns all of the shares of Canco (a Canadian resident corporation).

The public shareholders subscribe for shares of Foreign Parent. Foreign Parent uses the share subscription proceeds received to (i) make an interest bearing loan to Foreign Opco and (ii) subscribe for shares of Foreign Opco. Foreign Opco uses all of the loan and equity proceeds received to make an interest-bearing loan to Canco. Interest paid by Canco to Foreign Opco is subject to a 10% withholding tax rate. If the interest had been paid by Canco to Foreign Parent a 15% withholding tax rate would apply. The arrangement does not meet the conditions of the character substitution rules in subsection 212(3.6) and there are no “specified shares” as defined in subsection 212(3.8).

In the above scenario, what parties would be considered NR1 and NR2, respectively, and what are their reporting obligations under subsection 237.4(4)?

Preliminary Response

Part A

Boychuk: The reference to an “arrangement to provide financing” is not restricted to debt. It can include an equity component.

That said, the meaning of “financing” or “arrangement to provide financing” is largely informed by the scope of the back-to-back loan rules in ss. 212(3.1) and (3.2). We have provided several examples.

From these examples, it can be seen that, in general, provided the shares are not specified shares, or shares involved in some kind of duplicative character or recharacterization rules, straight equity financing would not be that relevant for the purposes of these rules.

Part B

The notifiable transaction rules are not restricted to identifying tax avoidance transactions, and can be used as an information-gathering tool.

It is possible that, in this case, information gathering is largely what the purpose of this particular reporting obligation.

Intent and purpose do not provide a basis for limiting or excusing the reporting obligation.

The objective is largely to allow CRA to collect information to build a picture of the nature and scope of transactions, and what arrangements are in place. That information can then be used for various purposes, including to better target audit resources, or to provide information that could be useful to Finance.

In other words, there are reasons why it is not desirable for taxpayers to filter these transactions based on purpose or intent, because that would likely compromise the picture that CRA is trying to piece together.

Part C

There is nothing built into the notifiable transaction requirement with respect to materiality.

That said, there is some flexibility built into the reporting obligations in ss. 237.4(6) and (7), which could excuse the reporting obligation where a person who expects to obtain a tax benefit or who enters into a transaction for the benefit of another person exercises a degree of care, diligence and skill, to determine whether the transaction is a notifiable transaction, that a reasonably prudent person would have exercised in the circumstances.

Regarding advisors and promoters, s. 237.4(7) provides that the reporting obligation will not arise unless the person knows, or should reasonably be expected to know, that the transaction is a notifiable transaction.

There are implications from a penalty perspective where there is non-compliance. With respect to penalty provisions for a failure to file an information return, there is a process in place to ensure that all penalties are subject to Headquarters oversight.

Smith: The lack of a materiality component could be a problem. To take an extreme example, could a failure to report a $100 transaction result in a $100,000 fine?

Boychuk: In that extreme example, I would anticipate CRA exercising discretion.

Part D

In our view, in this case Foreign Parent is the ultimate funder and Foreign Opco is the intermediary, so that Foreign Opco is the immediate funder. In terms of reporting, Foreign Parent would be required to report pursuant to s. 237.4(4)(a) because it would be considered to be a person to whom a tax benefit results. Likewise, Canco and Foreign Opco would be required to report under s. 237.4(4)(b) because they entered into the transaction for the benefit of Foreign Parent.

Smith: What if Foreign Parent only equity finances Foreign Opco?

Boychuk: In that case, the conditions in NT 2023-05 would not be met, because NR2 is not receiving any interest-bearing debt financing. If NR2 is receiving equity financing through the issuance of shares, and uses all or a portion of the proceeds to make an interest-bearing loan to Canco, the arrangement would not come within the Part XIII tax aspect of the rules (respecting s. 212(3.1).)

This is provided that it is clear that the shares are not specified shares as defined in s. 212(3.8), and do not meet the conditions of the character substitution rules.

Official Response

3 December 2024 CTF Roundtable Q. 3, 2024-1038151C6 - Notifiable Transactions

Q.4 - EIFEL excluded entity - (c)

Under paragraph (c) of the definition of “excluded entity” in section 18.2, a taxpayer resident in Canada may be excluded from the EIFEL regime where certain requirements are satisfied, including that “all or substantially all of the businesses … and undertakings and activities of the taxpayer are … carried on in Canada.”

The Department of Finance (DOF) explanatory notes to the provision indicate that this requirement to the exemption “is intended to ensure that all or substantially all of the aggregate economic activity of the taxpayer and each group member is carried on in Canada, regardless of whether that activity is carried on through one or more businesses and regardless of whether that activity rises to the level of carrying on a business.”

Can the CRA consider the following example, where A Co and B Co have taxable capital employed in Canada in excess of $50M and net interest and financing expenses in aggregate of $1M:

Assume that B Co generates substantially all of its revenue from sales to U.S. customers. B Co has Canadian employees, which travel to the U.S., and B Co stores its goods physically in the U.S. for sale to U.S. customers but does not otherwise have any physical presence in the U.S. While B Co is subject to U.S. State tax, it does not have a permanent establishment in the U.S. such that the Canada-U.S. Tax Treaty allocates taxing rights to Canada.

In this scenario – where Canada maintains full ability to tax – are the businesses, undertakings and activities of B Co carried on in Canada?

Preliminary Response

Boychuk: The problem here is that the question, of whether the income is all taxed in Canada or not, is not the relevant test in this case. The relevant test is not whether Canada has relinquished its right to tax, but rather a two-part factual test. One is, on an entity-by-entity basis, where does that entity carry on business? If it carries on business both inside and outside Canada, then the analysis proceeds to the second question – are all or substantially all of those business activities and undertakings within Canada?

It can be daunting to apply that particular test, both in terms of determining where the profit-making activities are being carried on, and in applying the “all or substantially all” test, which involves both qualitative and quantitative components. We often refer to a “90%” rule, but neither CRA nor the courts have ever considered 90% to be a strict threshold.

Official Response

3 December 2024 CTF Roundtable Q. 4, 2024-1038161C6 - EIFEL and the Excluded Entity Exception

Q.5 - Computing ATI where NCLs

In the CRA’s view, is the computation of “adjusted taxable income” (ATI), defined in subsection 18.2(1), iterative if a taxpayer wishes to claim a deduction for sufficient non-capital losses under paragraph 111(1)(a) such that taxable income is nil after accounting for a deduction limitation under subsection 18.2(2)?

The core of the question is whether taxable income used in the computation of paragraph (b) of variable D for computing variable A of the definition of ATI can be negative or can it only be nil or positive having regard to the definition of “taxable income” in subsection 248(1)? If it can be negative for the purposes of the computation of ATI, then this can lead to an iterative computation of the deduction claimed under paragraph 111(1)(a) and the limitation of interest and financing expenses under subsection 18.2(2).

Preliminary Response

Prud'homme: This question is essentially addressing “adjusted taxable income” (ATI), defined in s.18.2(1). That notion is relevant in determining the maximum amount which the taxpayer is permitted to deduct in respect of interest and financing expenses under the limitation in s. 18.2(2). ATI is determined by the formula

A + B – C,

and A is determined by the formula

D – E.

In general terms, variable D is the taxpayer’s taxable income for the year determined without regard to s. 18.2(2). As per s. 248(1), the taxpayer’s “taxable income” has the meaning assigned by s. 2(2), except that it cannot be less than nil. This means that the taxable income of a taxpayer for purposes of computing (D - E) can only be nil or positive. This result may not be consistent with policy in all circumstances, and it has been brought to the attention of the Department of Finance.

Smith: So it sounds like the possibility of a legislative amendment is coming. I would expect that it is reasonable for taxpayers to file based on the current legislation, just given the clarity of the provisions and the text and that on that basis that any legislative amendment would be coming would be prospective?

Prud'homme: From a high-level policy perspective, when you look at the example that you have in the Qs and As, it can be seen in the technical result that the ATI number does not reflect or capture all the losses that have been used. That is probably the policy issue that needs to be examined.

Official Response

3 December 2024 CTF Roundtable Q. 5, 2024-1038171C6 - EIFEL and ATI Calculation where Taxpayer has Non-Capital Losses

Q.6 - EIFEL pre-regime election and amalgamations etc.

The legislation enacting sections 18.2 and 18.21 (which are the main provisions of the Excessive Interest and Financing Expenses Limitation Regime or EIFEL rules) includes a pre-regime election[2] in the coming into force provision that allows a taxpayer to elect to calculate its excess capacity for each of the three taxation years (the pre-regime years) immediately preceding its first taxation year (the first regime year) in respect of which the EIFEL rules apply. Where there have been amalgamations or winding-ups in the pre-regime years, or the first regime year, please confirm that the deeming rules in paragraph 87(2.1)(a.1) or subsection 88(1.11) apply to take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of the predecessor corporations for the purposes of determining the “net excess capacity” of the amalgamated corporation or parent corporation (the particular taxpayer), as the case may be, and the “group net excess capacity” in respect of the particular taxpayer, as well as for the purposes of determining the same amounts for other taxpayers in respect of which the particular taxpayer is an eligible pre-regime group entity.

Consider the following scenarios:

Scenario A (Amalgamations)

Facts

a) YCo and ZCo are eligible pre-regime group entities on December 31, 2024, the taxation year-end of the first regime year for both taxpayers. YCo and ZCo jointly file a pre-regime election.

b) On July 1, 2024, there was a horizontal amalgamation of Z1Co and Z2Co to form ZCo.

c) On July 1, 2023, there was a horizontal amalgamation of Y1Co and Y2Co to form YCo.

d) On July 1, 2023, there was a horizontal amalgamation of Z1ACo and Z1BCo to form Z1Co.

e) On Jan 1, 2023, there was a horizontal amalgamation of Y1ACo and Y1BCo to form Y1Co.

f) Paragraph 87(2.1)(a.1) applied to all amalgamations.

g) All entities normally have December 31 taxation year-ends.

h) There have been no loss restriction events.

Please confirm the following:

1. . When determining the “net excess capacity” of YCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of YCo, Y1Co, Y2Co, Y1ACo, and Y1BCo for the taxation years noted in the chart below should be taken into account.
2. . When determining the “group net excess capacity” in respect of YCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of YCo, Y1Co, Y2Co, Y1ACo, Y1BCo, Z1Co, Z2Co, Z1ACo, and Z1BCo for the taxation years noted in the chart below should be taken into account.
3. . When determining the “net excess capacity” in respect of ZCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of Z1Co, Z2Co, Z1ACo, and Z1BCo for the taxation years noted in the chart below should be taken into account.

Scenario B (Winding-ups)

Facts

a) YCo and ZCo are eligible pre-regime group entities on December 31, 2024, the taxation year-end of the first regime year for both taxpayers. YCo and ZCo jointly file a pre-regime election.

b) On June 30, 2024, Z1Co wound up into ZCo.

c) On June 30, 2023, Y1Co wound up into YCo and dissolved.

d) On June 30, 2023, Z1ACo wound up into Z1Co and dissolved.

e) On December 31, 2022, Y1ACo wound up into Y1Co and dissolved.

f) Subsection 88(1.11) applied to all wind-ups.

g) All entities normally have December 31 taxation year-ends.

h) There have been no loss restriction events.

Please confirm the following:

1. When determining the “net excess capacity” of YCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of YCo, Y1Co, and Y1ACo for the taxation years noted in the chart below should be taken into account.

2. When determining the “group net excess capacity” in respect of YCo and ZCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of YCo, Y1Co, Y1ACo, ZCo, Z1Co, and Z1ACo for the taxation years noted in the chart below should be taken into account.

3. When determining the “net excess capacity” of ZCo for the pre-regime years, the pre-regime “excess capacity otherwise determined” and “excess interest” of all of ZCo, Z1Co, and Z1ACo for the taxation years noted in the chart below should be taken into account.

Preliminary Response

Prud'homme: The written answer will be more detailed than my answer today and will include a discussion on the background of these rules.

The short answer is that there would be a continuity of interest.

In the context of an amalgamation, s. 87(2.1)(a.1) was introduced as part of the EIFEL rules, which provides continuity treatment in respect of the various amounts that are relevant in computing the taxpayer’s cumulative unused excess capacity. S. 87(2.1)(d) also has a role to play, by ensuring that an amount in respect of interest and financing expenses is deductible in the post-amalgamation year where the new corporation has cumulative unused excess capacity resulting from s. 87(2.1)(a.1). Those two provisions work in tandem, and the amendments introducing both of these provisions apply in respect of amalgamations that occur in any taxation year.

S. 87(2.1)(a.1) does not contain a specific reference to terms used in the transitional rules, (which basically allow you to compute cumulative excess capacity in respect of specific rules that can be carried forward afterwards). The balances described in the transitional rules are modified descriptions of the balances described in s. 87(2.1)(a.1).

This is why, using a textual, contextual and purposive interpretation, we believe that s. 87(2.1)(a.1) should provide a similar continuity treatment for the balances of the predecessor corporations in the transitional period for a corporation that would be formed on an amalgamation. The same approach is used for a winding up during that period. We think that it would be reasonable to apply these rules, keeping in mind the continuity treatment.

Thus, mergers of entities during that transitional period would be considered to produce continuity treatment using a textual, contextual, and purposive interpretation.

Official Response

3 December 2024 CTF Roundtable Q. 6, 2024-1038251C6 - EIFEL - Pre-Regime Election and Amalgamations and Liquidations

Q.7 - Post-mortem pipeline bump

Assume that an individual (Individual A) owns all of the shares of the capital stock of Aco, a private corporation, which owns non-depreciable capital property with material gains that accrued after Individual A acquired control of Aco. Individual A dies and the beneficiaries of Individual A's estate (Estate) include a charity. The charity is not a specified shareholder of Aco prior to the death of Individual A, but it is entitled to 11% of the Estate.

Following the death of Individual A, the Estate intends to implement a standard post-mortem pipeline bump transaction. The post-mortem bump entails the incorporation of a Newco (parent) by the Estate and the transfer of the shares of Aco to Newco. Aco would then be wound up into, or amalgamated with, Newco.

Under subparagraph 88(1)(c)(vi), a bump will be denied if property distributed to the parent on the winding-up (or “substituted property”) is acquired by a “specified shareholder” (other than a “specified person”) of the subsidiary “at any time during the course of the series and before control of the subsidiary was last acquired by the parent.”

In this fact scenario, the Estate will acquire control of Aco as a consequence of the death of Individual A. Paragraph 88(1)(d.3) will deem control to have been acquired by the Estate immediately after the death of Individual A from a person dealing at arm’s length. Further, pursuant to paragraph 88(1)(d.2), control of Aco by Newco will be deemed to occur at the time the Estate is deemed, by paragraph 88(1)(d.3), to have acquired control of Aco.

The question is whether the bump denial rules apply in these circumstances. In particular, would the CRA consider the charity to be a specified shareholder of Aco before control of the subsidiary was last acquired by Newco?

Preliminary Response

Boychuk: We would not consider the charity to be a specified shareholder of the subsidiary prior to the deemed acquisition of control of the subsidiary by the Estate.

We would apply ss. 88(1)(d.2), and (d.3) on the understanding that the deemed acquisition of control of Aco by the Estate occurs concurrently with the acquisition of shares of Aco by the Estate.

Official Response

3 December 2024 CTF Roundtable Q. 7, 2024-1038221C6 - Post-Mortem Pipeline Bump Planning

Q.8 - Computing s. 55(2)(b) gain

Could the CRA please comment on the following example:

• Canco A is a taxable Canadian corporation which owns shares of another taxable Canadian corporation, Canco B.
• The shares of Canco B owned by Canco A have an ACB and PUC of $100.
• Canco B redeems/purchases its shares held by Canco A for $1,000.
• Pursuant to subsection 84(3), Canco B is deemed to have paid and Canco A is deemed to have received a taxable dividend of $900.
• Subsection 55(2) applies such that, for purposes of the Act, the deemed dividend is considered not to be a dividend and to be proceeds of disposition of the share.

From a policy and logic perspective, the appropriate result in this situation appears to be that Canco A should realize a capital gain of $900. However, there is some circularity in the drafting of subparagraph (j)(i) of the definition of "proceeds of disposition" in section 54 and paragraph 55(2)(b). In particular:

• subparagraph (j)(i) of the definition of “proceeds of disposition” reduces the proceeds of disposition otherwise received ($1000) by the amount of any dividend deemed under subsection 84(3) “except to the extent the dividend is deemed by paragraph 55(2)(b) to be proceeds of disposition of the share”
• paragraph 55(2)(b) deems the dividend to be proceeds of disposition of the share that is redeemed “except to the extent that the dividend is otherwise included in those proceeds.”

Members of the tax community have expressed concern that the provisions could be applied to result in the same $900 resulting in two capital gains – one on the disposition without subparagraph (j)(i) of the definition of proceeds of disposition applying, and a second one under paragraph 55(2)(b).

In this scenario, can the CRA confirm there is only one capital gain of $900?

Preliminary Response

Boychuk: Yes.

We understand that there is a concern that these provisions may lead to some kind of circularity or feedback loop. We have looked at them carefully from different angles, and we do not end up with that result.

In any event, if such a possibility does exist, the CRA would take a purposive approach to statutory interpretation to avoid an absurd result.

In our view, there is only one capital gain or loss from the disposition of the shares in this case. We confirm that, in the example described, the capital gain is $900.

Official Response

3 December 2024 CTF Roundtable Q. 8, 2024-1038201C6 - Application of paragraph 55(2)(b)

Q.9 - Reg. 105 where Cdn. subcontractor

In CRA document 2022-0943241E5 (2022-0943241E5), the CRA changed the position expressed in document 2008-0297161E5 and provided a new position on the application of Regulation 105 to services billed by a non-resident for services rendered in Canada.

Could the CRA clarify its new position in the following hypothetical situation? A Canadian taxpayer (CanCo) engages a non-resident (NRCo) to provide services to be rendered in Canada. NRCo subcontracts part of the services rendered to CanCo in Canada to another corporation (SupplierCo).

Preliminary Response

Boychuk: We will start with a short explanation of our previous position, which provided some leeway on payments made by Canco to NRco to cover costs incurred by NRco under its contract with Supplierco. As a reimbursement of an expense, the payment would not be subject to Reg. 105.

The previous position (2008-0297161E5) was adopted following the Weyerhaeuser decision, 2007 TCC 65. In that case, the Tax Court held that Reg. 105 applied to an amount that is remuneration for services rendered that had the character of income in the hands of the recipient. In that case, the excluded amounts were paid as a reimbursement of certain expenses, which I think largely dealt with meal and travel expenses.

Our new position is that an amount paid in the circumstances described here by Canco to NRco, other than the reimbursement of certain out-of-pocket costs, would be considered to be paid for services rendered in Canada that do have the character of income in the hands of NRco. The fact that NRco enters into a further agreement with the Supplierco does not alter the character of the payment to NRco.

Therefore, Reg. 105 would apply to these payments.

Nijhawan: When will this new position apply?

Boychuk: It will apply to payments made after September 30, 2024. There will be no interest, penalties, or additional reassessments for payments made before October 2024.

Nijhawan: Will this position apply where the subcontractor is a Canadian resident, which we know will pay taxes on its subcontracting fees? In that situation, will Reg. 105 apply to the full amount received by the non-resident contractor?

Boychuk: Yes, in respect of the amounts that were contracted for the services to be rendered in Canada.

There are two contracts here – the contract with the non-resident service provider, and the non-resident service provider’s contract with the Canadian supplier. We would simply be looking at the legal arrangement between the non-resident and the Canadian payer.

Official Response

3 December 2024 CTF Roundtable Q. 9, 2024-1038271C6 - Regulation 105

Q.10 - Simultaneous s. 84.1(2.31)/ (2.32) sale

Subsections 84.1(2.3), (2.31) and (2.32) provide for “intergenerational transfer” rules permitting the transfer of a business to children or grandchildren without triggering section 84.1. One of the requirements, in paragraph 84.1(2.31)(a), is that a previous inter-generational exception to section 84.1 has not been sought out – i.e., that “the taxpayer has not previously, at any time after 2023, sought an exception to the application of subsection 84.1(1) under paragraph 84.1(2)(e) in respect of a disposition of shares …”

It may be the case that a parent, who has not previously sought out such an exception, simultaneously disposes of subject shares to two separate purchaser corporations, one of which is wholly-owned by one of their adult children and the other of which is wholly-owned by another one of their adult children.

In such a scenario, can the CRA confirm that the fact that the shares are simultaneously being sold to two separate purchaser corporations would not cause either sale to fail to meet the requirements of paragraph 84.1(2.31)(a)?

Preliminary Response

Prud'homme: Finance’s Technical Notes describe the purpose of the condition which is set forth in ss. 84.1(2.31)(a) and (2.32)(a) as follows:

This new provision is intended to ensure that the taxpayer’s interest business is effectively transferred only once from a taxpayer to their child. This condition precludes the use of s. 84.1(2)(e) by a taxpayer which receives successive distributions of corporate surplus in the form of capital gains in respect of the same business.

On that basis, and considering the wording of these provisions, provided multiple dispositions occur at the same time as part of the same genuine intergenerational transfer (and of course as long as there is no exception that has been claimed before the transfer) we would consider the condition would be satisfied for each disposition.

Official Response

3 December 2024 CTF Roundtable Q. 10, 2024-1038231C6 - Intergenerational Business Transfers

Q.11 - Lagged GMTA implementation of OECD guidance

We understand that CRA Rulings has formed a new Specialty Tax Division, ITRD of the Legislative Policy and Regulatory Affairs Branch, and that, amongst other items, this new division is responsible for interpreting the new Global Minimum Tax Act (the GMTA), implementing Pillar Two in Canada.

Subsection 3(1) of the GMTA requires Part 1, Part 2 and the relevant provisions of Part 5 of the GMTA to be, unless the context otherwise requires, interpreted consistently with the GloBE Model Rules, the GloBE Commentary and the administrative guidance in respect of the GloBE Model Rules (the Administrative Guidance). The Tax community has raised questions as to how the CRA will administer the application of the GMTA in circumstances where the enacted state of the GMTA does not reflect changes to the GloBE Model Rules, or to new GloBE Commentary or Administrative Guidance.

An example of this potential tension is the application of subsection 17(6) of the GMTA in situations where a particular constituent entity (a CE) is a reverse hybrid entity in relation to its direct owner, while at the same time being fiscally transparent in relation to an indirect owner that holds the particular CE through one or more intermediaries who are also fiscally transparent in relation to the indirect owner. In the version of the GMTA that was enacted on June 20, 2024, this scenario was addressed by allowing the income of the CE to be allocated to the indirect owner. However, the June 2024 Administrative Guidance took a different approach and addressed this scenario by allowing any tax paid by the indirect owner with respect to the income of the CE to be allocated to the CE. While both approaches are intended to address the same technical issue, they do not produce the same outcome in all cases. The proposed amendments to subsection 17(6) of the GMTA that were released in August 2024 (the Summer Release) no longer allow the income of the CE to be allocated to the indirect owner, and even though the Explanatory Notes indicate that the proposed amendments in the Summer Release are intended to give effect to the June 2024 Administrative Guidance, the proposed amendments do not include a mechanism that allows the tax paid by the indirect owner with respect to the income of the CE to be allocated to the CE. We understand that this is due to the short period of time between the release of the June 2024 Administrative Guidance and the Summer Release, which did not allow for all aspects of the June 2024 Administrative Guidance to be reflected in the Summer Release. We understand that there will be further amendments to the GMTA to align with the June 2024 Administrative Guidance, and such amendments will be effective from the inception of the GMTA.

In circumstances like this, will the CRA administer the application of the GMTA based on the enacted version of the GMTA, the proposed amendments to the GMTA, or the June 2024 Administrative Guidance (which is not yet reflected in the GMTA, neither enacted nor proposed)?

More generally, how will the CRA administer the application of the GMTA in circumstances where there have been changes to the GloBE Model Rules, GloBE Commentary or Administrative Guidance that have not yet been reflected in the GMTA, and to what extent can subsection 3(1) be relied upon in such cases?

Preliminary Response

Boychuk: To deal with the demands relating to the interpretation and administration of the Digital Services Tax Act, and Global Minimum Tax Act, the Income Tax Rulings Directorate has established the DST and Global Tax sections of the new Specialty Tax Division. The section will handle, among other things, all technical interpretations and guidance on the DST and GMTA, and should be an important point of contact in the CRA for tax practitioners.

Smith: Are members of this Division directly reachable by practitioners?

Boychuk: We prefer that you use our email portal to submit any questions or concerns, and they will be properly triaged, and properly forwarded to that section.

Smith: How will the GMTA be administered in circumstances where its enacted state does not reflect changes to the GloBE Model Rules, or to new GloBE Commentary or Administrative Guidance?

Boychuk: In short, we are committed to administering the GMTA in accordance with Canadian law, particularly s. 2(1) of the GMTA. To apply it as intended, as new administrative guidance is released, the DST and Global Tax Section will consult with the Department of Finance to determine, on a case-by-case basis, how it should be handled – whether there is a potential legislative amendment or whether we would be applying the new guidance to inform the interpretation of the GMTA.

Smith: Does that mean there will be regular monitoring and notices sent out to the community, or does the community need to contact CRA?

Boychuk: There is no formal monitoring process in place, but I think there is an expectation that the group will be proactive. Of course, there will still be periods where there is some uncertainty, and the group will try to communicate transparently.

Smith: With those points established, can CRA speak to how it would administer the scenario described above?

Boychuk: The DST and Global Tax Section has consulted with the Department of Finance, and we understand that additional proposed amendments to the GMTA may be in order to accommodate the matching of covered taxes with the constituent entities’ income in the circumstances you described.

Therefore, the CRA will administer the provisions of the GMTA to achieve what the administrative guidance clarifies should be the outcome – that is, the constituent entity covered taxes paid by the upper-tier entity being pushed down to the constituent entity.

Official Response

3 December 2024 CTF Roundtable Q. 11, 2024-1038241C6 - Global Minimum Tax Act – Interpretation and Application of OECD Agreed Administrative Guidance

Q.12 - Flipped property and rollover transactions

The flipped property rules contained in subsections 12(12) to 12(14) (the Flipped Property Rules) provide a deeming rule (in subsection 12(12)) that results in a gain on the disposition of a housing unit that is flipped property being fully taxable as business income. The rule applies where, if absent this deeming provision and the principal residence exemption in paragraph 40(2)(b), a taxpayer would have had a gain from the disposition of a flipped property. Then, throughout the period that the taxpayer owned the flipped property, the taxpayer is deemed to carry on a business that is an adventure or concern in the nature of trade with respect to the flipped property and the flipped property is deemed to be inventory of the taxpayer's business and not to be capital property of the taxpayer.

The term “flipped property” is defined in subsection 12(13) and essentially refers to a housing unit (or the right to acquire a housing unit) located in Canada, owned by a taxpayer (or in the case of a right to acquire, held by the taxpayer) for less than 365 consecutive days prior to its disposition, other than a disposition that can reasonably be considered to occur due to, or in anticipation of, one or more of the events listed in subparagraphs 12(13)(b)(i) to 12(13)(b)(ix).

Consider the following situation:

• Corporation B owns all of the shares of Corporation A;
• Corporation A has owned a residential property (Property) for 5 years;
• The main activity of Corporation A is the rental of residential property;
• Corporation A has less than 5 full-time employees.

Can the CRA confirm the following:

A. In January 2023, Corporation A and Corporation B amalgamated. The new corporation resulting from the amalgamation of Corporation A and Corporation B (New Corporation) disposed of the Property in December 2023.

Since the Property increased in value since its acquisition, will the Flipped Property Rules apply to the disposition of the Property? Should the Flipped Property Rules apply, will the income arising from the disposition of the Property qualify for the small business deduction (SBD)?

B. If, instead of amalgamating, Corporation A was wound-up into Corporation B, would the answer to question A be the same?

C. If the Property was transferred under subsection 85(1) from Corporation A to Corporation B in January 2023, and then sold by Corporation B to a third party in December 2023, would the Flipped Property Rules apply to the disposition of the Property?

D. If the Property was instead transferred by Corporation A to Corporation B in January 2023 at fair market value, would the answer to question C be the same?

Preliminary Response

Boychuk: We included this item to provide a heads-up to taxpayers who may not be aware of the potential scope of the Flipped Property Rules.

Briefly, there is a 365-day holding period that must be met, or the gain on the disposition of the house is fully taxable.

There are certain exceptions, but the exceptions do not extend to certain common reorganizations, such as amalgamations, winding-ups, or s. 85(1) transfers. Practitioners have to be aware that, when they are engaged in these type of transactions, they may be resetting the 365-day rule.

Official Response

3 December 2024 CTF Roundtable Q. 12, 2024-1037751C6 - Property flipping rules and corporate property transfers

Q.13 - Convertible debenture withholding

In its response to question 12 at the CRA Round Table at the May 2009 IFA Seminar,[3] the CRA said that where there is a conversion of a traditional convertible debenture (as described in the response) by its original holder for common shares of the capital stock of the issuer, there would generally be no excess under subsection 214(7) (the CRA’s Administrative Position).

In its May 10, 2010 letter of submissions,[4] the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada stated that the conversion premium realized on conversion or sale of a convertible debenture would constitute an excess (the amount by which the price for which the obligation was assigned or otherwise transferred exceeds the price for which the obligation was issued) under subsection 214(7).

In its response to question 16 at the CRA Round Table at the 2021 CTF Annual Conference,[5] the CRA said that it had to review the CRA’s Administrative Position concerning the application of subsection 214(7) to the conversion of convertible debentures in light of new information available. What is the status of the review mentioned by the CRA at the 2021 CRA Round Table?

Preliminary Response

Prud'homme: The CRA’s position is now that, where there is a conversion of a standard convertible debenture issued by Canadian public entities, meaning taxable Canadian corporations, trusts resident in Canada and Canadian partnerships, in general there will be an excess under s. 214(7) equal to the amount by which the fair market value of the common shares received on the conversion exceeds the price for which the debenture was issued. This new position will be applicable on a prospective basis for convertible debentures that are issued after December 3, 2024.

CRA is still of the view that the deemed payment of interest on standard convertible debentures under s. 214(7) does not generally constitute “participating debt interest” as defined in s. 212(3). Of course, the CRA cannot supply certainty concerning the application of Part XIII to all situations in which convertible debentures can be issued. There can be particular circumstances and the terms and conditions of the debentures may be different from one situation to another, but this is our general position, and, if you have any doubts or need additional certainty, we are open for business.

Nijhawan: When I look at it from non-arm’s length perspective, so where you have convertible debt existing through non-arm’s length players, this change of position that the conversion premium is also an excess now means that that excess is potentially subject to withholding under Part XIII. Stéphane, you had noted that that change of position is applicable to convertible debentures issued after December 3, 2024.

To confirm, if taxpayers have issued a convertible debenture to a non-arm’s length person prior to December 3^rd, but that conversion feature has not yet been exercised, would the old or new position apply?

Prud'homme: It would basically be grandfathered.

Official Response

3 December 2024 CTF Roundtable Q. 13, 2024-1038261C6 - Standard Convertible Debentures and Part XIII Tax

Q.14 - Scope of active business income

Corporation A is a Canadian controlled private corporation that carries on active business in Canada, and holds property in connection therewith.

Subparagraph 125(1)(a)(i) generally provides that, subject to various exceptions, a CCPC may deduct from the tax otherwise payable a percentage of the “income of the corporation for the year from an active business carried on in Canada”.

Paragraph (a) of the definition of “income of the corporation for the year from an active business” in subsection 125(7) states that that term includes the corporation’s income for the year from an active business carried on by it, including any income for the year pertaining to or incident to that business, other than income for the year from a source in Canada that is a property (within the meaning assigned by subsection 129(4)).

Subparagraph (b)(ii) of the term “income” of a corporation for a taxation year from a source that is a property in subsection 129(4) excludes income from a property that is “used or held principally for the purpose of gaining or producing income from an active business carried on by it” (the Principal Purpose Exception). The existence of the Principal Purpose Exception presupposes that such income does not pertain to and is not incident to the business.

Can the CRA confirm that income that falls within the Principal Purpose Exception will be “income of the corporation for the year from an active business”, notwithstanding that that term as defined in subsection 125(7) does not include the Principal Purpose Exception?

Preliminary Response

This answer was cut for time.

Official Response

3 December 2024 CTF Roundtable Q. 14, 2024-1037761C6 - Availability of the Small Business Deduction

Q.15 - Foix and hybrid sales

In 2023, the Federal Court of Appeal in Foix v. Canada, 2023 FCA 38 applied subsection 84(2) to treat certain amounts received on the sale of shares of a corporation to be a dividend received by the shareholders on the distribution or appropriation of funds or property on the winding up, discontinuance or reorganization of the business of the corporation. The deemed dividend in Foix arose in the context of a so-called hybrid sale (an arrangement involving the sale of corporate assets and shares of a target corporation).

Will the CRA apply the approach to the application of subsection 84(2) adopted in the Foix decision solely to hybrid sales that are identical to those in that case?

Preliminary Response

Boychuk: Given the complexity and number of variations in hybrid sales, in our view it is not possible to make any categorical statements limiting the scope of Foix to the facts of that case.

The reasons for the decision should be carefully considered before recommending a hybrid sale, with the one exception of transactions identical to those of the Geransky case. In particular, we note that the decision reinforces the broad scope of s. 84(2), and the role of that subsection as an anti-avoidance provision. It is a departure, in some respects, from the more restrictive view of s. 84(2) evident in some earlier cases.

Official Response

3 December 2024 CTF Roundtable Q. 15, 2024-1030561C6 - The Foix decision and hybrid sales

Q.16 - Indian Act exemption re LP employees

Consider the two variations of limited partnership arrangements, scenario 1 and scenario 2:

Scenario 1

A limited partnership (FNP) is created by a First Nation band (99.9% interest) and a general partner (a corporation indirectly owned by the First Nation band) (0.1% interest). The FNP is located on a reserve and holds 50.5% of the voting partnership interest in another limited partnership (LP) of which a non-First Nations corporation resident off-reserve (NFNC) holds 48.5% of the voting partnership interest. The general partner of LP is a corporation (GPC) that holds 1% of the voting partnership interest. The common shareholders of the GPC are the FNP (51%) and the NFNC (49%).

The GPC is resident off-reserve and is authorized with full power and authority to administer, manage, control, and operate LP’s business. The NFNC has an operating agreement with the GPC under which the NFNC makes day-to-day operating decisions of LP. However, any decisions about financing, management changes, management compensation, project proposal, and acceptance etc. must be reviewed and approved by the board of the GPC. More than 50% of LP’s business activities are carried on off-reserve. All LP’s offices are located off-reserve except for its registered office which is located on-reserve. Some of the LP’s employees live on-reserve and some live off-reserve. All LP’s employees consider LP’s registered on-reserve office as their reporting office even though less than 50% of their employment duties are performed on-reserve.

Scenario 2

Scenario 2 is essentially the same as scenario 1 except for the following: (1) all the offices of the LP are located off-reserve, and (2) all the employees consider the off-reserve office as their reporting office.

Can CRA comment regarding both scenarios whether the employment income earned off-reserve by LP’s employees, who are registered under the Indian Act and who live on a reserve, is exempt from tax under section 87 of the Indian Act?

Preliminary Response

This answer was cut for time.

Official Response

3 December 2024 CTF Roundtable Q. 16, 2024-1038281C6 - Indian Act Tax Exemption for Employment Income and Employees of a Limited Partnership