Unless otherwise stated, all statutory references in this document are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act), as amended to the date hereof.

Question 1: 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?[2] (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?

CRA Response

As part of the Safe Income Paper, the CRA did state that where a shareholder acquires preferred shares of a corporation as consideration for a transfer of a property on a tax-deferred basis to the corporation, the accrued gain on the property at the time of the transfer and that would subsequently be realized by the corporation would indeed be viewed as contributing to the gain on the preferred shares and would be included in the safe income of the preferred shares.[3] However, the CRA stated that this position is only applicable to, specifically, the transfer of property other than shares. Accordingly, the position set out in the Safe Income Paper does not extend to the situation described in the question where shares of a corporation (the exchanged shares) are exchanged for preferred shares of the corporation on a tax-deferred basis.

Instead, the allocation of safe income to the preferred shares in such circumstances should follow the CRA’s long-standing position on the allocation of safe income to preferred shares acquired on a tax-deferred share exchange. Specifically, the portion of safe income of the corporation to which the exchanged shares would have been entitled immediately before the exchange would flow through to the preferred shares.[4] In relation to any safe income realized after the exchange, the preferred shares so acquired as a result of the exchange would generally participate in the safe income of the corporation in accordance with the shares’ dividend entitlement, which entitlement would be affected by the conditions of such shares as well as the cumulative or non-cumulative nature of the preferred shares.[5]

Question 2: Subsection 55(2) and Intra-Corporate 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 intragroup dividends?

CRA Response

Our positions expressed in documents 2015-0613821C6 and 2016-0627571E5 are still valid. In document 2018-0765271C6, we referred to our past positions and reiterated that we were ready to provide additional comfort in the course of advance income tax rulings, subject to certain conditions:

“Guidelines providing a greater level of comfort could be developed in the context of a ruling request with all the relevant facts. As expressed previously at various venues, the CRA is open to consider rulings that involve the determination of purpose where taxpayers require some level of comfort regarding the application or non-application of subsection 55(2) to their proposed transactions. A favourable ruling could be provided where all manifestations of purpose and corroborating circumstances support the absence of one of the purposes described in paragraph 55(2.1)(b). The ruling would be conditional on the representation made by the taxpayer that the purposes for which the dividend was paid do not include one of the purposes described in paragraph 55(2.1)(b) and on the completeness of the description of all the manifestations of such purpose and corroborating circumstances. However, other than rulings on loss-consolidation, the CRA has not been deluged by requests for rulings on this topic.”

Taxpayers are encouraged to use such channel, where additional comfort is needed on the issue of regular dividends.

Question 3: Notifiable Transactions

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.”

What is the scope of the term “financing”? Is this limited to the advancing of debt or could equity subscriptions also be caught?
What, if any, role does taxpayer intent/purpose play in determining whether such a transaction is a notifiable transaction?
Is there an inherent materiality concept?
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)?

CRA Response (A)

The wording of each segment is premised on the notion that there is interest paid or payable on a debt or other obligation owing by the taxpayer to NR2.

With respect to the nature of the financing provided by NR1 (the ultimate funder) to NR2 (the intermediary), the following considerations are relevant.

The Thin capitalization segment is premised on the back-to-back loan rules in subsection 18(6.1) which provide the Canadian thin capitalization implications of a back-to-back loan arrangement that meets the conditions in subsection 18(6). Therefore, this segment includes an arrangement that involves interest-bearing debt financing from NR1 to NR2 and from NR2 to the taxpayer, provided that the other conditions of this segment are met. However, this does not mean that there cannot be an equity component to the arrangement. For instance, if NR1 provided financing in the form of debt to NR2 while also investing equity in NR2 and the latter loaned the funds to the Canadian taxpayer, such arrangement could meet the conditions of the Thin capitalization segment of NT 2023-05.

The Part XIII tax segment is premised on the back-to-back loan rules in subsection 212(3.2) which provide the withholding tax implications in respect of interest that is paid as part of a back-to-back arrangement that meets the conditions in subsection 212(3.1). Therefore, this segment includes an arrangement that involves interest-bearing debt financing from NR1 to NR2 and from NR2 to the taxpayer. However, this does not preclude the existence of other forms of financing in addition to the aforementioned debt financing. This can be inferred from the words of the Part XIII tax segment, read in the context of subsection 212(3.1) (including the character substitution rules in subsections 212(3.6) and (3.81)).

The conditions of NT 2023-05 are not considered to be met where NR2 does not receive any interest-bearing debt financing. As an example, if NR2 receives equity financing through the issuance of its shares and uses all or a portion of such proceeds to make an interest-bearing loan to the taxpayer, the arrangement would not fall within the Part XIII tax segment in the context of subsection 212(3.1) provided it is clear that such shares (1) are not specified shares (as defined in subsection 212(3.8)) and (2) do not meet the conditions of the character substitution rules (in subsection 212(3.6)).

Further to describing the conditions required to be met under the Thin capitalization segment and the Part XIII tax segment in the context of interest-bearing debt, NT 2023-05 also states, “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.” Accordingly, back-to-back arrangements that include rents, royalties or other or other payments of a similar nature (premised on subsection 212(3.9)) including the substitution of the character thereof are arrangements that may fall within the Part XIII tax segment of NT 2023-05.

CRA Response (B)

Further to the definition of “notifiable transaction” in subsection 237.4(1) and the description of the Designated Transactions in NT 2023-05, the transactions are not conditioned on intent or purpose. As noted in the CRA roundtable response at the 2024 IFA conference, the description of the Designated Transactions in NT 2023-05 does not differentiate between a situation where the back-to-back loan rules do not apply based on the requirements noted therein and a situation where the back-to-back loan rules were ignored. Accordingly, the Designated Transactions as described, identify arrangements that have not been subjected to the rules in subsections 18(6.1) and/or 212(3.2) (or the rules in subsection 212(3.91) in the context of rents, royalties or other payments of a similar nature), regardless of why those provisions were not applied by the Taxpayer.

CRA Response (C)

No, there is no de minimis exception in section 237.4. Further to subsection 237.4(6) and as noted in the CRA MDR Guidance, a person who obtains or expects to obtain a tax benefit from a notifiable transaction and a person who enters into such transactions for the benefit of such a person will not have a reporting obligation if that person has exercised the degree of care, diligence and skill to determine whether a transaction is a notifiable transaction that a reasonably prudent person would have exercised in comparable circumstances. In addition, with respect to advisors, promoters and certain non-arm’s length persons, subsection 237.4(7) provides that a reporting obligation will not arise unless the person knows or should reasonably be expected to know that the transaction was a notifiable transaction. In regards to the penalty provisions in subsection 237.4(12), the application of penalties will be subject to Headquarters’ oversight and approval requiring mandatory referrals as outlined in the CRA MDR Guidance.

CRA Response (D)

In the context of the Part XIII tax segment of NT 2023-05, Foreign Parent would be NR1 as Foreign Parent is considered to be the ultimate funder of the debt financing and Foreign Opco would be NR2 as the intermediary. Provided that the following conditions are met, the arrangement would constitute a “notifiable transaction”:

(1) if interest had been paid by the taxpayer directly to NR1, it would be subject to Part XIII tax; and

(2) 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,

The first condition would be met as, if the interest had been paid by the taxpayer directly to NR1 it would be subject to Part XIII tax. If the taxpayer determines that the arrangement does not meet the conditions in subsection 212(3.1) and therefore remits and reports withholding tax in respect of interest paid to NR2 at a rate of 10%, the second condition would also be met. Accordingly, the arrangement would constitute a “notifiable transaction” and would be subject to the reporting requirements in subsection 237.4(4).

Subsection 237.4(4) provides that an information return in prescribed form and containing prescribed information in respect of a notifiable transaction must be filed with the Minister by

(a) every person for whom a tax benefit results, or for whom a tax benefit is expected to result based on the person's tax treatment of the notifiable transaction, from

(i) the notifiable transaction,

(ii) any other notifiable transaction that is part of a series of transactions that includes the notifiable transaction, or

(iii) a series of transactions that includes the notifiable transaction;

(b) every person who has entered into, for the benefit of a person described in paragraph (a), the notifiable transaction;

(d) every person who is not dealing at arm's length with an advisor or promoter described in paragraph (c) and who is or was entitled, either immediately or in the future and either absolutely or contingently, to a fee in respect of the notifiable transaction.

With respect to the words “every person for whom a tax benefit results” in paragraph (a) of subsection 237.4(4), Foreign Parent would be considered to have received a “tax benefit” based on the meaning of that term in subsection 245(1) read in the context of the Part XIII tax segment of NT 2023-05. Foreign Parent would be required to file an information return pursuant to paragraph (a) of subsection 237.4(4) and Foreign Opco and Canco would also be required to file pursuant to paragraph (b).

Question 4: EIFEL and the Excluded Entity Exception

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?

CRA Response

Under the EIFEL rules as provided by sections 18.2 and 18.21, a taxpayer may qualify as an excluded entity for a particular taxation year if it satisfies the conditions in any of the three alternative tests provided in paragraphs (a) to (c) of the definition of that expression in subsection 18.2(1). As the question is phrased, paragraphs (a) and (b) are not relevant. The question focuses on one of the conditions under paragraph (c). As such, our comments will be limited to the requirements of subparagraph (c)(i).

This specific provision provides that a taxpayer resident in Canada would be an excluded entity for a particular taxation year only if, amongst other conditions:

“(i) all or substantially all of the businesses, if any, and all or substantially all of the undertakings and activities of

(A) the taxpayer are, throughout the particular year, carried on in Canada, and

(B) each eligible group entity in respect of the taxpayer are, throughout the eligible group entity's taxation year that ends in the particular year, carried on in Canada, (…)”.

Businesses, undertakings and activities have to be considered altogether distinctly for each of the relevant taxpayer and any eligible group entity, as this expression is defined under subsection 18.2(1). Although the DOF explanatory notes quote in the question describe the outcome from an aggregate perspective, the wording of the Act clearly indicates that such outcome is achieved through each entity forming the group individually meeting the threshold. The “all or substantially all” standard must be met in respect of undertakings and activities carried on in Canada by the taxpayer and each relevant entity in respect of the taxpayer, resulting in the aggregate of their respective undertakings and activities meeting it.

Subsection 248(1) states that a business:

“includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment”.

If all or substantially all of B Co’s business is not carried on in Canada, B Co would not be an excluded entity and neither would its parent, A Co.

The phrase “all or substantially all” is used in many provisions in the Act in respect of different elements (e.g.: assets used, property, liabilities or obligations, considerations received, revenue, income or loss, expenses or expenditures, businesses, activities, accounts, amounts, risks of loss and opportunities for gain or profit, outputs from businesses, proceeds from the issue of an obligation or the settlement of a debt, fair market values, time periods, duties, uses, members, benefits, and terms and conditions of shares). It is the longstanding position of the CRA that it generally refers to at least 90%. However, the CRA recognizes that this expression might not be interpreted as referring to that percentage in certain cases.

The element in respect of which the “all or substantially all” standard applies can be of such a nature that it leaves no doubt on the relevant criterion subject to the standard. This would generally be the case with elements such as liabilities or fair market values, which would generally imply that the standard be applied to relevant amounts. However, when it comes to elements such as the location of undertakings or activities, the relevant criteria might be highly fact specific as well as time-related.

Income Tax Folio S5-F2-C1, Foreign Tax Credit, paragraphs 1.53 to 1.56, concerning the determination of the location of a business, may provide useful guidance in evaluating particular situations. This determination depends upon all the relevant facts. However, it is generally the place where the operations in substance, or the profit generating activities, take place and it is possible that it occurs in more than one jurisdiction.

In a situation involving a distribution subsidiary, the place where sales efforts occur, the place where purchase and sale decisions are made, the location of the stock, the places of shipment, transit and receipt, the place of payment, and the intent of the taxpayer to do business in the particular jurisdiction, would be relevant factors to be considered. Where the subsidiary is subject to taxation by various states in the U.S., the foreign tax credits it claims on its Canadian return might reflect the location of its undertakings or activities.

B Co seems to have a significant presence in the U.S., and substantially all of its revenue is derived from sales in the U.S. However, with the limited information provided above, it is not possible to conclusively determine whether B Co would meet or fail the “all or substantially all” requirement set for in subparagraph (c)(i) of the excluded entity definition in subsection 18.2(1).

Should B Co not meet the “all or substantially all” standard of carrying on its business in Canada, the answer to the substantive question asked is that neither A Co nor B Co would qualify as an excluded entity under paragraph (c) of that definition.

Question 5: EIFEL and the ATI Calculation where Taxpayer has Non-Capital Losses

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).

CRA Response

A taxpayer’s ATI, defined in subsection 18.2(1), is relevant principally in determining the maximum amount a taxpayer is permitted to deduct in respect of interest and financing expenses, under the limitation in subsection 18.2(2), in computing its income for a taxation year.

ATI for a taxation year is determined by the formula: A + B – C, where A is determined by the formula D-E.

In general terms, variable D of variable A of the definition of ATI is the taxpayer’s taxable income earned in Canada for the year in the case of a non-resident, determined without regard to subsection 18.2(2), paragraphs 12(1)(1.2) and 111(1)(a.1), or in any other case the taxpayer’s taxable income for the year, determined without regard to subsection 18.2(2), paragraphs 12(1)(1.2) and 111(1)(a.1) and clause 95(2)(f.11)(ii)(D).

Taxable income as defined in subsection 248(1) provides that a taxpayer’s taxable income has the meaning assigned by subsection 2(2), except that in no case may a taxpayer's taxable income be less than nil. Therefore, the taxable income for a taxpayer for purposes of computing paragraph (b) of variable D of variable A of the definition of ATI can only be nil or positive.

This result may not be consistent with policy and has been brought to the attention of the Department of Finance.

Question 6: EIFEL – the Pre-Regime Election and Amalgamations and Liquidations

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[6] 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 yearend 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:

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.
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.
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 winding-ups.

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

h) There have been no loss restriction events.

Please confirm the following:

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.
When determining the “group net excess capacity” in respect of YCo and ZCo for the preregime 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.
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.

CRA Response (A)

The coming into force provision for the legislation enacting the EIFEL rules contains transitional rules for the purpose of determining the cumulative unused excess capacity of a taxpayer that is a corporation or fixed interest commercial trust for a taxation year, determined based on the taxpayer’s excess capacity for the year plus its excess capacity for the three immediately preceding taxation years. These transitional rules, in effect, allow taxpayers to elect to determine their excess capacity for the pre-regime years in accordance with special rules and carry forward excess capacity so determined for a pre-regime year for three taxation years, by including it in computing their cumulative unused excess capacity. In order to benefit from these transitional rules, a taxpayer and all eligible group entities in respect of the taxpayer that are also corporations or fixed interest commercial trusts (referred to as eligible pre-regime group entities) must jointly elect to have these rules apply. Absent a valid election, the taxpayer’s excess capacity for all its pre-regime years is deemed to be nil.

The transition rules seek to replicate, in a relatively simple and administrable way, the extent to which the excess capacity of the taxpayer and eligible pre-regime group entities for pre-regime years would have been used to allow for the deduction of the excess interest and financing expenses of the taxpayer and eligible pre-regime group entities for pre-regime years. Pursuant to the transitional rules, a taxpayer’s excess capacity for each pre-regime year (which is, notionally, the unused portion of its excess capacity) can be broken down into three main steps.

The first step is to determine the “excess capacity otherwise determined” or “excess interest” of the taxpayer and each eligible pre-regime group entity for each pre-regime year. A taxpayer’s “excess capacity otherwise determined” for a pre-regime year is the amount that would be determined as its excess capacity for that year if that definition applied in respect of the pre-regime year. A taxpayer’s “excess interest” for a pre-regime year is the amount by which its interest and financing expenses for the year exceed the amount of interest and financing expenses that it would have been permitted to deduct for that year had subsection 18.2(2) applied in respect of that year. Specifically, the “excess interest” is defined as the amount that would be determined for the pre-regime year under paragraph (b) of the definition “absorbed capacity” is subsection 18.2(1).

The second step is to determine the “group net excess capacity” for the pre-regime years, which is the total of the excess capacity otherwise determined of the taxpayer and all eligible pre-regime group entities for all pre-regime years, net of the total of the excess interest of the taxpayer and eligible pre-regime group entities for all pre-regime years. Thus, the group net excess capacity represents the net excess capacity of the corporate group for the period spanning the pre-regime years. Consistent with the approach under the EIFEL rules more generally, the excess interest or excess capacity otherwise determined of any financial institution group entity or any tax-exempt person is excluded in the determination of group net excess capacity.

The third step is to allocate, in the joint election under the transitional rules, the group net excess capacity to the taxpayer and the eligible pre-regime group entities for specific pre-regime years. The portion of the group net excess capacity that is allocated to a taxpayer or eligible pre-regime group entity for a pre-regime year is deemed to be the excess capacity of the taxpayer or eligible pre-regime group entity, as the case may be, for that pre-regime year. The allocated amount for a given pre-regime year thus effectively replaces the amount that would otherwise have been determined as the taxpayer’s excess capacity (the taxpayer’s “excess capacity otherwise determined”) for the given pre-regime year under the definition “excess capacity” in subsection 18.2(1), if that definition applied in respect of pre-regime years. The taxpayer’s deemed excess capacity for a pre-regime year is, in effect, subject to both the usual three-year carry-forward by virtue of being included in the taxpayer’s cumulative unused excess capacity, and the ordinary rules under that definition that reduce excess capacity to reflect its utilization in the form of amounts of transferred capacity and absorbed capacity.

A taxpayer’s net excess capacity for its pre-regime years is the amount, if any, by which the total of all amounts each of which is its excess capacity otherwise determined for any pre-regime year exceeds the total of all amounts each of which is its excess interest for any pre-regime year. Thus, if a taxpayer’s total excess interest for its pre-regime years is greater than or equal to its total excess capacity otherwise determined for its pre-regime years, then it cannot be allocated any excess capacity for any pre-regime years, and thus its excess capacity for each of those years will be nil for the purpose of determining its cumulative unused excess capacity for any taxation year. In that case, any net group excess capacity for the pre-regime years can be allocated only to eligible pre-regime group entities in respect of the taxpayer that have net excess capacity for the pre-regime years.

Subsection 87(2.1) allows a corporation formed on an amalgamation of two or more other corporations (referred to as a new corporation and the predecessor corporations, respectively) to deduct the unclaimed losses of its predecessor corporations, subject to the restrictions on the use of losses imposed by section 111 and subsection 149(10).

Paragraph 87(2.1)(a.1), which was also introduced as a part of the EIFEL rules, provides a similar continuity treatment in respect of the various amounts that are relevant in computing a taxpayer’s cumulative unused excess capacity, which is defined in new subsection 18.2(1) and essentially reflects the three-year carry-forward of a taxpayer’s excess capacity (as also defined in that subsection). Specifically, the amounts referred to in paragraph 87(2.1)(a.1) are the new corporation’s “absorbed capacity”, “excess capacity” and “transferred capacity” in determining “cumulative unused excess capacity” and its “interest and financing expenses” and “interest and financing revenues” for the purposes of paragraph (g) in the description of B in adjusted taxable income. The explanatory notes indicate that this is intended to allow the cumulative unused excess capacity of the new corporation to be determined as though the new corporation were the same corporation as, and a continuation of, the predecessor corporations.

Paragraph 87(2.1)(d) was also amended to ensure that the general rule that subsection 87(2.1) has no effect on the income of the new corporation does not prevent an amount in respect of interest and financing expenses from being deductible in a post-amalgamation year where the new corporation has cumulative unused excess capacity resulting from subparagraph 87(2.1)(a.1).

The amendments introducing new paragraph 87(2.1)(a.1) and amended paragraph 87(2.1)(d) indicate that these provisions apply in respect of amalgamations that occur in any taxation year.

For the purposes of this response, it is assumed that each of YCo, Y1Co, Y2Co, Y1ACo, Y1BCo, ZCo, Z1Co, Z2Co, Z1ACo and Z1BCo are taxable Canadian corporations, are not financial institution group entities or persons exempt from tax under Part I of the Act and that YCo and ZCo have made the required joint election under the transition rule within the filing deadline.

Notwithstanding that paragraph 87(2.1)(a.1) does not contain a specific reference to the terms used in the transitional rules, the balances described in the transitional rules (“excess capacity otherwise determined” and “excess interest”) are modified descriptions of the balances described in paragraph 87(2.1)(a.1) (“excess capacity” and “absorbed capacity”). Applying a textual, contextual and purposive interpretation suggests paragraph 87(2.1)(a.1) should provide a similar continuity treatment for these balances of the predecessor corporations in the transitional period for a corporation formed on an amalgamation. Therefore, in determining an amalgamated corporation’s “net excess capacity” and “groups net excess capacity” for pre-regime years it would be reasonable to apply paragraph 87(2.1)(a.1) to provide continuity of treatment of the predecessor corporations’ “excess capacity otherwise determined” and “excess interest” following an amalgamation. Given the above, our response is as follows:

The “net excess capacity” of YCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of
1. a Y2Co, Y1ACo and Y1BCo for the taxation year ending December 31, 2022;
2. b Y1Co, and Y2Co, for the taxation year ending June 30, 2023; and
3. c YCo for the taxation year ending December 31, 2023.
The “group net excess capacity” in respect of YCo and ZCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of
1. a Z2Co for the taxation year ending December 31, 2021;
2. b Y2Co, Y1ACo, Y1BCo, Z2Co, Z1ACo and Z1BCo for the taxation year ending December 31, 2022;
3. c Y1Co, Y2Co, Z1ACo and Z1BCo for the taxation year ending June 30, 2023; and
4. d YCo, Z1Co and Z2Co for the taxation year ending December 31, 2023.
The “net excess capacity” in respect of ZCo for the pre-regime years will take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of
1. a Z2Co for the taxation year ending December 31, 2021;
2. b Z2Co, Z1ACo and Z1BCo for the taxation year ending December 31, 2022; and
3. c Z1Co and Z2Co for the taxation year ending December 31, 2023.

CRA Response (B)

Subsection 88(1.11) provides that if a subsidiary corporation has been wound up in circumstances described in subsection 88(1.1), new subsection 88(1.11) applies for the purposes of determining the parent’s cumulative unused excess capacity, which is defined in new subsection 18.2(1) and essentially reflects a three-year carry-forward of excess capacity (as also defined in that subsection). This subsection was introduced to provide continuity treatment to the parent in respect of the subsidiary’s cumulative unused excess capacity. This is achieved by attributing to the parent the principal amounts that are relevant in determining the subsidiary’s cumulative unused excess capacity. In particular, any absorbed capacity, excess capacity or transferred capacity (each as defined in subsection 18.2(1)) of the subsidiary for a taxation year is deemed to be absorbed capacity, excess capacity or transferred capacity, respectively, of the parent for its taxation year in which the subsidiary’s year ends. By attributing to the parent not only the subsidiary’s excess capacity, but also its absorbed capacity and transferred capacity, this rule, in effect, provides continuity in the parent only in respect of the subsidiary’s excess capacity that is not “used” by the subsidiary before the winding-up. Notably, if new subsection 111(5.01) applies on a loss restriction event to restrict the cumulative unused excess capacity of the subsidiary, that restriction will also apply to the parent because that subsection provides that the restriction applies in respect of all taxpayers for all taxation years ending after the loss restriction event. Subsection 88(1.11) applies in respect of windings-up that begin in any taxation year.

It is assumed for the purposes of this question that YCo, ZCo, Z1Co, Y1Co, Z1ACo and Y1ACo are Canadian corporations are not a financial institution group entities or persons exempt from tax under Part I of the Act and that YCo and ZCo have made the required joint election under the transition rule within the filing deadline.

Similar to the analysis in respect of paragraph 87(2.1)(a.1), applying a textual, contextual and purposive interpretation to the application of subsection 88(1.11), in determining a parent’s “net excess capacity” and “group net excess capacity” for pre-regime years following a winding-up of a subsidiary into parent it would be reasonable to apply the amendments in subsection 88(1.11) to take into account the subsidiary’s “excess capacity otherwise determined” and “excess interest”. Given the above, our response is as follows:

The “net excess capacity” of YCo for the pre-regime years will take into account the preregime “excess capacity otherwise determined” and “excess interest” of
1. a YCo, Y1Co and Y1ACo for the taxation year ending December 31, 2021;
2. b YCo, Y1Co and Y1ACo for the taxation year ending December 31, 2022;
3. c Y1Co for the taxation year ending June 30, 2023; and
4. d YCo for the taxation year ending December 31, 2023.
The “group net excess capacity” in respect of YCo and ZCo for the pre-regime years will take
1. intoaccount the pre-regime “excess capacity otherwise determined” and “excess interest” for
2. a YCo, Y1Co, Y1ACo, ZCo, Z1Co and Z1ACo for the taxation year ending December 31, 2021;
3. b YCo, Y1Co, Y1ACo, ZCo, Z1Co and Z1ACo for the taxation year ending December 31, 2022;
4. c Y1Co and Z1ACo for the taxation year ending June 30, 2023; and
5. d YCo, ZCo and Z1Co for the taxation year ending December 31, 2023.
The “net excess capacity” of ZCo for the pre-regime years will take into account the preregime “excess capacity otherwise determined” and “excess interest” for
1. a ZCo, Z1Co and Z1ACo for the taxation year ending December 31, 2021;
2. b ZCo, Z1Co and Z1ACo for the taxation year ending December 31, 2022;
3. c Z1ACo for the taxation year ending June 30, 2023; and
4. d ZCo and Z1Co for the taxation year ending December 31, 2023.

Question 7: Post-Mortem Pipeline Bump Planning

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 (the subsidiary) 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 Aco, the subsidiary, was last acquired by Newco?

CRA Response

We would not consider the charity to be a specified shareholder of the subsidiary (Aco) prior to the deemed acquisition of control of Aco by the Estate. We would apply paragraphs 88(1)(d.2) and (d.3) on the understanding that control of Aco was last acquired by the Estate concurrently with the acquisition of the shares of Aco by the Estate.

Question 8: Application of Paragraph 55(2)(b)

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?

CRA Response

The CRA is of the view that there is only one possible capital gain/loss from the disposition of a share to which paragraph 55(2)(b) applies. In addition, we confirm that, in the example described above, the capital gain on the disposition of the Canco B shares by Canco A is $900.

Question 9: Regulation 105

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).

CRA Response

The purpose of paragraph 153(1)(g) is to collect a reserve of tax that is applied towards a future income tax liability.

In 2022-0943241E5, the CRA indicates that a person paying fees to a non-resident is required to withhold on the entire amount of the “fees, commissions or other amounts” paid for services rendered in Canada, including the portion equal to the amount paid by the non-resident to a subcontractor.

In determining the Regulation 105 withholding requirements, the contractual obligations between the parties must be respected. In the example above, SupplierCo has a contractual obligation to provide its services to NRCo and NRCo has a contractual obligation to provide services to Canco. The fee paid by CanCo with respect to services rendered in Canada is in satisfaction of its obligation to pay NRCo and Canco has no contractual obligation to SupplierCo.

The standard set by the judge in Weyerhaueser[7] was whether the payment had the quality of income. As mentioned in 2022-0943241E5, pursuant to paragraph 2(3)(b) and subject to the application of an Income Tax Convention with Canada, the non-resident is subject to tax in Canada on its taxable income earned in Canada as determined under section 115. On that basis, the amount that is “potentially subject to tax in Canada” which is subject to withholding pursuant to paragraph 153(1)(g) and Regulation 105 is the gross income or revenue of the non-resident recipient (NRCo).

In this context, income is to be given the meaning given in paragraph 20(1)(c) by the Supreme Court of Canada in the Ludmer decision,[8] i.e. gross income or revenue. That reading is consistent with the conclusion in 2022-0943241E5 and the nature of the payments on which Regulation 105 imposes withholding (“fees, commissions or other amounts paid”).

The CRA’s view is that the decision of the Court in Weyerhaeuser stands for the proposition that the reimbursement of travel and meal expenses is not subject to withholding pursuant to Regulation 105 in situations that are similar to the situations in that decision.

As pointed out in 2022-0943241E5, if SupplierCo is a non-resident, then payments from NRCo to SupplierCo may also be subject to Regulation 105 withholding.

The system put in place in the Act to manage circumstances where hardship might exist is in subsection 153(1.1). Two types of waivers exist to reduce the amount of Regulation 105 withholding tax a person must pay: a treaty-based waiver, or an income and expense waiver. For more info on these waivers see: How to complete Form R105, Regulation 105 Waiver Application - Canada.ca. The draft legislation released on August 8th, 2024 proposed the introduction of a broader class of waivers.

Question 10: Intergenerational Business Transfers

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)?

CRA Response

The Department of Finance’s Explanatory Notes describe the purpose of the condition set forth in paragraphs 84.1(2.31)(a) and 84.1(2.32)(a) (the “Condition”):

“New paragraph 84.1(2.31)(a) is intended to ensure that a taxpayer’s interest in a business is effectively transferred only once from a taxpayer to their child pursuant to the exception in paragraph 84.1(2)(e). This condition precludes the use of paragraph 84.1(2)(e) by a taxpayer to receive successive distributions of corporate surplus in the form of capital gains in respect of the same business.” [emphasis added]

Such purpose is reflected in the Condition in the following words:

“(a) the taxpayer has not previously, at any time after 2023, sought an exception to the application of subsection (1) under paragraph (2)(e) in respect of a disposition of shares that, at that time, derived their value from an active business that is relevant to the determination of whether the subject shares satisfy the condition set out in subparagraph (b)(iii);” [emphasis added]

Provided multiple dispositions occur simultaneously as part of the same genuine intergenerational transfer at the same disposition time, and that no exception has been sought before the transfer in respect of the same business, we would consider the Condition to be satisfied for each disposition.

Question 11: Global Minimum Tax Act – Interpretation and Application of OECD Agreed Administrative Guidance

We understand that CRA Rulings has formed a new Specialty Tax Division, in the Income Tax Rulings Directorate (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?

CRA Response

New Section within the Income Tax Rulings Directorate

The DST and Global Tax Section (the Section) within the Speciality Tax Division of ITRD is responsible for interpreting the Global Minimum Tax Act as well as the Digital Services Tax Act. The Section has been preparing to respond to requests from the taxpayer community for technical interpretations regarding these two new tax statutes. The Section has also been supporting the systems set up work being carried out within the CRA as required to support the administration of these new taxes.

The Section can be reached through the same mailing and email addresses as their colleagues in ITRD, that being:

Income Tax Rulings Directorate
Canada Revenue Agency
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
itrulingsdirectorate@cra-arc.gc.ca

Interpretation and Administration of Global Minimum Tax Act

As you note, subsection 3(1) of the GMTA is an interpretive rule that directs taxpayers and the CRA to interpret the GMTA consistently with the GloBE Model Rules, the GloBE Commentary and the administrative guidance in respect of the GloBE Model Rules approved by the Inclusive Framework and published by the OECD from time to time. This interpretive rule instructs that the GMTA is to be applied in accordance with those sources “unless the context otherwise requires.”

The CRA is committed to administering the GMTA in accordance with Canadian law as enacted by Parliament. This includes the application of subsection 3(1), which is described in the Department of Finance’s Explanatory notes as intending “to ensure that the Act is interpreted, applied and administered in a manner consistent with the outcomes provided under the Model Rules, Commentary and Administrative Guidance (referred to in this note, collectively, as the Pillar Two Rules), including any future revisions or additions to the Pillar Two Rules”. It is important that the GMTA be administered as such to ensure its Part 2 tax is a Qualified IIR, its proposed Part 2.1 tax is a Qualified UTPR, and its Part 3 tax is a Qualified Domestic Minimum Top-up Tax (QDMTT) that has QDMTT Safe Harbour status. Not achieving such qualification could result in Canadian businesses being subject to other jurisdictions’ Pillar Two Rules in addition to the GMTA.

In order to apply subsection 3(1) as intended, as new Administrative Guidance is approved by the Inclusive Framework and published by the OECD from time to time, the Section within ITRD will consult the Department of Finance on a case-by-case basis to determine how they intend to bring the Administrative Guidance into effect (e.g., through a proposed amendment to the GMTA or by the CRA applying the Administrative Guidance to interpret or clarify the existing GMTA provisions). Of note is that subsection 3(1) includes the instruction “unless the context otherwise requires” that, as noted in the Department of Finance’s Explanatory Notes, allows for there to be an intended substantive difference between the GMTA and a particular aspect of the Administrative Guidance, if such a difference were required to “produce outcomes that are understood to be better aligned with the policy intent of some aspect of the Pillar Two Rules.” The Explanatory Notes also explain that “In determining whether a substantive difference is intended, regard should be had to, among other things, whether the difference would produce outcomes that are consistent with the policy intent of the Pillar Two Rules, and whether the Inclusive Framework publication introducing the relevant aspect of the Pillar Two Rules occurred before or after the introduction of the relevant provisions to the Act. If the Inclusive Framework publication occurred after the relevant provisions were introduced to the Act, there is a strong inference that the difference is unintended (and may be rectified through future amendments to the Act).”

With respect to the specific example you raise involving a constituent entity (herein referred to as the FT-CE) that is a reverse hybrid entity (i.e., fiscally opaque in relation to its direct owner) while being fiscally transparent in relation to an indirect owner and covered tax paid by the indirect owner with respect to the income of the FT-CE, you have indicated that you have corresponded with the Department of Finance and that you anticipate amendments to the GMTA will be forthcoming. These future amendments would be over and above the draft proposed legislation released in August 2024. We have consulted with the Department of Finance and it is also our understanding that they are of the view that additional proposed amendments to section 24 of the GMTA may be in order to accommodate the matching of covered taxes with the FT-CE’s income in the circumstances of the specific example you raise. As such, the CRA will administer the provisions of the GMTA to achieve what the June Administrative Guidance clarifies as the appropriate outcome - the income staying in the FT-CE and any covered taxes paid by the upper tier entity (i.e., the indirect owner in your specific example) on that income being pushed down to the FT-CE.

Question 12: Flipped Property Rules and Corporate Property Transfers

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?

CRA Response (A)

In the situation described, in order to determine whether the Property could be considered a flipped property, as is defined above, we will make the following assumptions:

The Property is a housing unit located in Canada;
The disposition of the Property does not occur due to, or in anticipation of, one of the events listed in subparagraphs 12(13)(b)(i) to 12(13)(b)(ix);
The New Corporation was formed on an amalgamation of Corporations A and B pursuant to section 87.

Accordingly, to establish whether the Flipped Property Rules apply in this situation, the issue to be considered is whether the Property was owned by the New Corporation for less than 365 consecutive days prior to its disposition by the New Corporation.

Paragraph 87(2)(a) provides that a corporate entity formed as a result of an amalgamation shall be deemed to be a new corporation. Also, according to paragraph 87(1)(a), an amalgamation of two or more corporations pursuant to section 87 is one where, among other things, all of the property of the predecessor corporations immediately before the merger becomes property of the new corporation by virtue of the merger, subject to certain exceptions. For the purposes of the Flipped Property Rules, the new corporation is not deemed to be the same corporation as, and a continuation of, the predecessor corporations.

Thus, if the New Corporation owned the Property for less than 365 consecutive days prior to its disposition, the Flipped Property Rules could apply to the disposition of the Property, provided all other conditions for the Flipped Property Rules to apply are otherwise met. Where subsection 12(12) applies, the New Corporation will be deemed to be carrying on a business that is an adventure or concern in the nature of trade with respect to the flipped property. As well, the flipped property will be deemed to be inventory of the New Corporation’s business and will be deemed not to be capital property of the New Corporation.

The income of a Canadian-controlled private corporation (CCPC) from an active business carried on in Canada for a taxation year generally qualifies for the SBD under subsection 125(1). The definition of “active business carried on by a corporation” in subsection 125(7) includes an adventure or concern in the nature of trade. Consequently, income arising from the disposition of a flipped property could be considered income from an active business and qualify for the SBD, subject to other conditions and requirements of the Act, namely the rules in section 125.

Please note however that the CRA could, depending on the circumstances, consider applying the General Anti-Avoidance Rule (GAAR) under subsection 245(2) if one of the main purposes of a transaction is to obtain a tax benefit, to which the taxpayer would not otherwise have been entitled to.

CRA Response (B)

In order to determine whether the Property could be considered a flipped property, as is defined above, for purposes of question (B), the assumptions made, in the response to question (A) remain relevant, with the only difference being that the Property was acquired on the winding-up of Corporation A into Corporation B pursuant to subsection 88(1). Furthermore, the comment on subsection 245(2) also applies.

In the case of a winding-up, if all conditions of subsection 88(1) are met, paragraph 88(1)(a) provides that each property of the subsidiary that was distributed to the parent corporation on the winding-up shall be deemed to have been disposed of by the subsidiary, subject to paragraphs 88(1)(a.1) and 88(1)(a.3).

In general, in the context of a winding-up and for the purpose of the Flipped Property Rules, the moment of the distribution of the property to the parent corporation would generally be the start of the 365-day ownership period requirement in paragraph 12(13)(b). That is, for the purposes of the Flipped Property Rules, the parent (Corporation B) is not considered to have owned the property for the period of time the property was owned by the subsidiary (Corporation A).

In the present case, upon the winding-up of Corporation A into Corporation B on January 31, the Property would be distributed to Corporation B. If Corporation B subsequently disposed of the Property on December 1 of the same year, Corporation B would have owned the Property for less than 365 days prior to its disposition. As a result, the Property could be considered a flipped property under subsection 12(13) and the flipped property deeming rule in subsection 12(12) could apply, provided all other conditions are met.

CRA Response (C)

In order to determine whether the Property could be considered a flipped property, as is defined above, for purposes of question (C), the assumptions made in the response to question (A) remain relevant, with the only difference being that the Property is transferred from Corporation A to Corporation B pursuant to section 85. Furthermore, the comment on subsection 245(2) also applies.

The rules in section 85 generally enable a taxpayer (transferor), to dispose of eligible property to a taxable Canadian corporation (transferee), for an agreed amount, which may be an amount that is other than the fair market value of the property. This agreed amount, which is subject to statutory limitations, generally becomes the proceeds of disposition of the property to the transferor and the cost of the property to the transferee. A capital property of a Canadian-resident taxpayer that is real property, such as a rental property, would generally meet the definition of eligible property in subsection 85(1.1) and can therefore qualify as property that can be transferred under section 85.

However, the Flipped Property Rules do not include a continuity of ownership rule that applies where property is acquired from a related or non-arm’s length person in circumstances where subsection 85(1) applies.

In the situation described, Corporation A transfers the Property to Corporation B in January pursuant to subsection 85(1). If Corporation B subsequently disposed of the Property on December 1 of the same year, that is within 365 days of acquiring it from Corporation A, the Property could be considered a flipped property under subsection 12(13). As such, the Flipped Property Rules could apply, provided all other required conditions are met.

CRA Response (D)

In order to determine whether the Property could be considered a flipped property, as is defined above, for purposes of question (D), the assumptions made in the response to question (A) remain relevant, with the only difference being that the Property is transferred from Corporation A to Corporation B at fair market value.

As mentioned above, and subject to other conditions, a property will be considered a flipped property under subsection 12(13) if it was 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. The Flipped Property Rules do not include a continuity of ownership rule that applies where property is acquired from a related or non-arm’s length person or as a result of a transfer of property at fair market value.

Question 13: Standard Convertible Debentures and Part XIII Tax

In its response to question 12 at the CRA Round Table at the May 2009 IFA Seminar,[9] 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,[10] 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,[11] 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?

CRA Response

In our view, the CRA’s Administrative Position is difficult to justify in light of the wording of paragraph 214(7)(d) and the provisions of indentures of standard convertible debentures issued by public entities.

Consequently, the CRA’s position (the CRA’s New Position) is now that where there is a conversion of a standard convertible debenture issued by Canadian public entities (taxable Canadian corporations, trusts resident in Canada, Canadian partnerships), there is in general an excess under subsection 214(7) equal to the amount (if any) by which the fair market value of the common shares received on the conversion (i.e. the price for which the standard convertible debenture was assigned or otherwise transferred at that time) exceeds the price for which the standard convertible debenture was issued.

The CRA’s New Position will be applicable on a prospective basis for standard convertible debentures issued after December 3, 2024.

Definition of “Participating Debt Interest”

The CRA’s view is still[12] that the deemed payment of interest on standard convertible debentures under subsection 214(7) that arises because of a transfer or assignment by a non-resident person to a person resident in Canada (including the issuer of the debentures) of standard convertible debentures issued by Canadian public entities (taxable Canadian corporations, trusts resident in Canada, Canadian partnerships), does not generally constitute “participating debt interest” (as defined in subsection 212(3)).

The CRA cannot provide certainty concerning the application of part XIII tax to all the situations in which convertible debentures can be issued.[13] They can be issued by corporations (public and private), trusts and partnerships. Their terms and conditions can be complex due to the wide variety of products available in the marketplace, and the particular circumstances and the terms and conditions of the debentures may differ from one situation to another.

As a result, it is not possible for the CRA to anticipate the result of the application of subsection 214(7) and the definition of “participating debt interest” in subsection 212(3) with respect to all possible situations involving convertible debts.

ITRD continues to encourage issuers and/or holders of convertible debts to request advance income tax rulings if they have concerns about the application of part XIII of the Act to convertible debts in the context of proposed transactions. Provided that a ruling request is received prior to the issuance of the convertible debts, ITRD will examine the request, and the rulings would generally apply prospectively to future regular periodic interest payments, conversions, or sales of convertible debts.

Question 14: Availability of Small Business Deduction

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?

CRA Response

Section 125 provides the rules for the calculation of the SBD available to a CCPC on its income from carrying on an active business in Canada. Using the SBD, a CCPC may reduce its tax otherwise payable on such income by an amount equal to the SBD rate multiplied by the least of three amounts. These amounts may be described in general terms as:

active business income (paragraph 125(1)(a));
taxable income (paragraph 125(1)(b)); and
the business limit (paragraph 125(1)(c)).

The amount described in paragraph 125(1)(a) is, generally speaking, equal to the sum of the portion of the CCPC’s income from an active business carried on in Canada for a taxation year excluding certain income and exceeding certain losses.

Subsection 125(7) defines “active business carried on by a corporation” as meaning any business other than a “specified investment business” or a “personal services business” and includes “an adventure in the nature of trade”.

The definition “income of the corporation for the year from an active business” in subsection 125(7) includes, by virtue of paragraph (a), 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)).

Paragraph (b) of the definition “income” or “loss” of a corporation for a taxation year from a source that is a property in subsection 129(4) does not include the income or loss from any property that is incident to or pertains to an active business carried on by it, or that is used or held principally for the purpose of gaining or producing income from an active business carried on by it.

Accordingly, Corporation A’s income for the year from an active business includes not only its income from its active business, but also any income from a source that is property that is incident to or pertains to that business or that is used or held principally for the purpose of gaining or producing income from that business.

Whether a property is used or held principally for the taxation year for the purpose of gaining or producing income from an active business is a question of fact. Factors to be considered in determining whether a property is used in an active business include the actual use to which the asset is put in the course of the business, the nature of the business involved and the practice in the particular industry.

As noted in paragraph 6 of IT-73R6, The Small Business Deduction, the issue of whether property was used or held by a corporation in the course of carrying on a business was considered by the Supreme Court of Canada in Ensite Limited v. Her Majesty the Queen [86 DTC 6521]. The court held that the holding or using of property must be linked to some definite obligation or liability of the business and that a business purpose test for the use of the property was not sufficient. The property had to be employed and risked in the business to fulfil a requirement which had to be met in order to do business. In this context, risk means more than a remote risk. If the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.

Therefore, where it is determined, based on the facts of a particular situation, that a property of Corporation A is used or held principally for the purpose of gaining or producing income from its active business, any income from that property would qualify as “income of the corporation for the year from an active business”, as defined in subsection 125(7).

Question 15: The Foix decision and hybrid sales

In 2023, the Federal Court of Appeal in Foix v. Canada, 2023 FCA 38 (Foix) 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?

CRA Response

The CRA addressed this question recently at the 2024 Association de planification fiscale et financière (APFF) Conference. In our response, we stated that we would not limit the decision in Foix (leave to appeal to the Supreme Court of Canada dismissed on February 29, 2024) to hybrid sales that are identical to those implemented in that case.

Generally stated, subsection 84(2) applies on the distribution or appropriation of funds or property of a Canadian-resident corporation in any manner whatever to or for the benefit of its shareholders, on the discontinuance, winding-up or reorganization of the business of the corporation. With respect to the expression “in any manner whatever” the Federal Court of Appeal stated in Foix, at paragraph 68, that these words are “far-reaching” and are “anchored in history as they have always been part of this provision, and they faithfully reflect its anti-avoidance purpose.” The Court further stated, at paragraph 69, that “in the presence of an orchestrated attempt to extract surpluses without tax or at a reduced rate, the intention of Parliament requires a reading of subsection 84(2) that balances the words that are used, as an overly literal reading would defeat its anti-avoidance mission…”.

In our view, the decision in Foix confirms that subsection 84(2) is to be applied in a manner that supports its anti-avoidance purpose. With this in mind, it is incumbent on the CRA to determine whether, in any particular case, the transactions underlying a particular hybrid sale involve the distribution or appropriation of property of a corporation in circumstances where the entirety of the conditions for the application of subsection 84(2) are met.

Question 16: Indian Act Tax Exemption for Employment Income and Employees of a Limited Partnership

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?

CRA Response

Employment income earned by an individual who is registered or entitled to be registered under the Indian Act (a First Nations employee), is exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a) only if the income is situated on a reserve. The courts have established that determining whether income is situated on a reserve, and thus exempt from income tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. The weight assigned to each connecting factor is determined by considering the purpose of the exemption, which is to ensure the protection of reserve lands and property on those lands from erosion by the government through taxation; it is not to confer a general economic benefit to First Nations individuals. The type of property in question and the nature of the taxation of the property must also be considered. This is referred to as the “connecting factors test”.

Connecting factors that have been considered and given weight by the courts in employment income situations include:

the location where the work is performed,
the residence of the employee,
the residence of the employer,
the nature of the services performed, and
the special circumstances in which they were performed.

Generally, where employment duties are performed on a reserve, the income from that employment is tax-exempt. Conversely, where employment duties are performed off-reserve, the income from that employment is not tax-exempt unless there are other factors connecting the income to a reserve. However, it should be noted that an employee’s on-reserve residence generally will not be given much weight, in and of itself, in connecting their employment income to a reserve.

In the two hypothetical scenarios presented, LP’s business activities are primarily carried on off-reserve, with some activities carried on on-reserve.

Whether LP is the employer and resident on a reserve is a question of fact. However, even if it is determined that LP is the employer and resident on a reserve, the courts[14] have concluded that such a connecting factor will have minimal weight if the residence of the employer has no tangible significance to the reserve. The courts[15] have also stated that connections that are artificial should not be given weight in determining if income is situated on a reserve for purposes of the exemption. Generally, the courts[16] have indicated that weight should be given to an employer’s residence on a reserve only where the scope of the employer's activities on the reserve, or the direct benefits flowing to the reserve, indicate a clear nexus between the employer and the reserve.

Based on our understanding of the two hypothetical scenarios presented, the following factors indicate that there is no clear nexus between LP and the reserve:

LP’s business activities are primarily carried on off-reserve.
The day-to-day business decisions of LP are made off-reserve by senior management of a corporation that is not owned by the First Nation and that is resident off-reserve.
The First Nations employees perform 50% or more of their employment duties off-reserve.
At least 48.5% of LP’s profits are flowing to a corporation that is not owned by the First Nation and that is resident off-reserve. Further, this corporation will receive a fee for managing the day-to-day operations of the LP and this fee will not benefit the reserve.
In Scenario 1, LP has its registered office on-reserve, but (as in Scenario 2) it will conduct its board meetings virtually. All the board of directors except one, will attend the meetings virtually from off-reserve locations.

Consistent with jurisprudence, it is our view that even if LP is determined to be the employer and is resident on a reserve, that factor will likely be given minimal weight in a connecting factors test as there does not appear to be any direct and significant benefits flowing to the reserve from LP’s business activities. Based on our understanding of the connecting factors presented in the two hypothetical scenarios and absent the identification of any other connecting factors, it is our view that the employment income earned off-reserve by the First Nations employees is not situated on a reserve, regardless of where the employees live and where the employer is resident. As a result, section 87 of the Indian Act will not apply to exempt from income tax the employment income earned off-reserve.

1 We gratefully acknowledge the following CRA personnel, who were instrumental in helping us prepare for this Round Table: Richard Archambault, Angelina Argento, Joseph Armanious, James Atkinson, Mélanie Beaulieu, Patrick Bilodeau, Pamela Burnley, Urszula Chalupa, Amanda Couvrette, Sandro D’Angelo, Lori Doucet, Christina Foggia, Laurence Gagné, Robert Gagnon, Rachel Jacques-Mignault, Jean Lafrenière, Simon Lemieux, Vicky Liu, Ananthy Mahendran, John Meek, Yves Moreno, Komal Patel, Chantal Pelletier, Matthew Ross, Yannick Roulier, Louise Roy, Sandra Snell, Charles Taylor, Christina Teow, Allison Thomas, Nerill Thomas-Wilkinson and Tobias Witteveen.

2 Ton-That, M. “CRA Update on Subsection 55(2) and Safe Income “Where Are We Now?”, 75th Annual Tax Conference, 2023.

3 Ibid, at page 31.

4 John R. Robertson, “Capital Gains Strips: A Revenue Canada Perspective on the Provisions of Section 55,” Report of Proceedings of the Thirty-Third Tax Conference, 1981 Conference Report (Toronto: Canadian Tax Foundation, 1982), 81-109, at page 85.

5 For instance, as stated in documents 9632725 and 9237660.

6 Clause 7(2)(c) of An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023.

7 Weyerhaeuser Company Limited v The Queen, 2007 TCC 65.

8 Ludco Enterprises Ltd. et al v The Queen, 2001 SCC 62, at paragraph 63.

9 CRA document no. 2009-0320231C6, May 1, 2009.

10 Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, “Re: Convertible Debentures,” submission to the Canada Revenue Agency, Income Tax Rulings Directorate, May 10, 2010.

11 Question 16 “Convertible Debentures and Part XIII Withholding Tax”, CRA document 2021-0911911C6, November 25, 2021.

12 Supra, note 11.

13 “Question 9: Part XIII Tax in Respect of Convertible Debentures”, CRA document 2013-0509061C6, November 26, 2013.

14 Shilling v. The Queen, 2001 FCA 178.

15 Bastien Estate v. Canada, 2011 SCC 38, and The Queen v. Ronald Robertson and Roger Saunders, 2012 FCA 94.

16 Ibid.

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3 December 2024 CTF Roundtable - Official Response

Question 1: Safe Income and Preferred Shares

CRA Response

Question 2: Subsection 55(2) and Intra-Corporate Dividends

CRA Response

Question 3: Notifiable Transactions

Thin capitalization

Part XIII tax

CRA Response (A)

CRA Response (B)

CRA Response (C)

CRA Response (D)

Question 4: EIFEL and the Excluded Entity Exception

CRA Response

Question 5: EIFEL and the ATI Calculation where Taxpayer has Non-Capital Losses

CRA Response

Question 6: EIFEL – the Pre-Regime Election and Amalgamations and Liquidations

Scenario A (Amalgamations)

Facts

Scenario B (Winding-ups)

Facts

CRA Response (A)

CRA Response (B)

Question 7: Post-Mortem Pipeline Bump Planning

CRA Response

Question 8: Application of Paragraph 55(2)(b)

CRA Response

Question 9: Regulation 105

CRA Response

Question 10: Intergenerational Business Transfers

CRA Response

Question 11: Global Minimum Tax Act – Interpretation and Application of OECD Agreed Administrative Guidance

CRA Response

New Section within the Income Tax Rulings Directorate

Interpretation and Administration of Global Minimum Tax Act

Question 12: Flipped Property Rules and Corporate Property Transfers

CRA Response (A)

CRA Response (B)

CRA Response (C)

CRA Response (D)

Question 13: Standard Convertible Debentures and Part XIII Tax

CRA Response

Question 14: Availability of Small Business Deduction

CRA Response

Question 15: The Foix decision and hybrid sales

CRA Response

Question 16: Indian Act Tax Exemption for Employment Income and Employees of a Limited Partnership

Scenario 1

Scenario 2

CRA Response