Income Tax Severed Letters - 2026-02-11

Principal Issues: Given that a bare trust filed a T3 return, including Schedule 15, for its 2023 tax year prior to the CRA announcement that all bare trusts would not be required to file for the 2023 tax year, and the subsequent CRA announcement which provided for a continuation of the exemption from the trust reporting requirements for the 2024 tax year, where a bare trust ceased to exist in 2024, how can the bare trust cancel its trust account number or otherwise advise the CRA that it no longer exists?

Position: The trustee may voluntarily choose to either send a letter, containing specific information to the trust's Tax Centre, or file a final T3 return for the 2024 tax year with the date on which the bare trust ceased to exist.

Principal Issues: 1. Could the CRA expand on the circumstances in which it would be just and equitable to permit a withdrawal that exceeds the 10% threshold? 2. Would the CRA provide a form to be used to capture the required information for making such a request? 3. Why does the CRA require that the plan holder also be the plan beneficiary, as this requirement would not be met in cases where an adult beneficiary is incapable of managing property or where the beneficiary of the RDSP is a minor and unable to be the plan holder? In both cases there could still be financial hardship.

Position: 1. In general terms the CRA looks at whether the waiver request conforms to the rule of law, the principles of fairness, and due process. 2. The CRA will create a form for RDSP issuers to fill out when requesting a waiver of the 10% threshold for financial hardship. It is anticipated this form will be posted to our website in 2026. 3. As the sole purpose of an RDSP is to benefit the RDSP beneficiary, the CRA must make sure that the beneficiary's funds are only being used for the beneficiary's benefit, and not for the benefit of other people.

Principal Issues: 1) Where a formal conveyance of the residue of an estate to a separate trust has not yet occurred, can the assets forming the residue be considered to have been transferred to a spousal trust for the purposes of subsection 70(6); 2) Has a separate trust been created for the purposes of the Act; 3) Provided the estate administration is complete and the residue is determined within three years of the taxpayer's death, will the assets that the taxpayer had on death which became part of the residue be deemed to be disposed of pursuant to subsection 70(6); 4) What are the consequences if the administration of an estate takes more than three years such that the assets which form the residue cannot be identified until after three years from the date of death?

Position: 1) & 3) Question of fact and law; 2) An estate and each trust created by the will of a taxpayer are separate taxable entities for the purposes of the Act and each will have their own filing requirements; 4) If the conditions of subsection 70(6) are not met, subsection 70(5) will apply. To the extent than an estate continues beyond a period of 36 months it will no longer be a graduated rate estate. If it cannot be shown that the residue has vested indefeasibly in the spousal trust within 36 months of the taxpayer’s death, a written application for an extension can be made within that period to the Minister.

Reasons: See below.

Principal Issues: a) Can the CRA confirm that, in the situation described, that the flipped property rules will deem any recapture and gain to be treated as business income if Amalco sells the residential property within 365 days of the amalgamation? b) If, within 365 days of the amalgamation, Amalco sells the residential property to another corporation for share consideration and files a subsection 85(1) election, would the flipped property rules cause the election to be invalid because real property inventory cannot be “eligible property” pursuant to subsection 85(1.1) of the Income Tax Act?

Position: a) Yes, the flipped property rules may apply. b) Yes, in certain situations.

Reasons: a) For the purpose 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, in the situation described, if Amalco owns 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 applicable conditions are met. Any recapture and gains that would have otherwise been realized on the disposal of the property, if subsection 12(12) did not apply, will therefore be considered business income (i.e., profit from the disposition of inventory). (b) In the situation where Amalco transfers the property to another corporation for consideration that includes shares pursuant to section 85 of the Act, it is our view that the flipped property rules would not apply if the proceeds of disposition of the property do not exceed its capital cost such that no capital gain would otherwise be realized on the disposition of the property.

Principal Issues: (1) Whether a loss restriction event would occur as a result of the distribution of all the voting shares of a corporation held by a trust administered by three trustees ("Trustees") to a beneficiary who is an individual ("Distribution"); (2) Whether control of the corporation shall be deemed not to have been acquired pursuant to clause 256(7)(a)(i)(A) only if the individual was related to each of the Trustees immediately before the Distribution.

Position: (1) Yes; (2) Yes.

Reasons: (1) A loss restriction event would occur as a result of the Distribution since the individual would hold, after the Distribution, all the voting shares of the corporation that were previously owned by the Trustees; (2) The CRA views pertaining to the application of clause 256(7)(a)(i)(A) to the transfer of the voting shares of a corporation held by a person or a group of persons to a person or a group of persons should apply to the acquisition of control resulting from the Distribution.

Principal Issues: Reporting requirements where a trust distributes assets of the trust but holds back cash or other assets until a clearance certificate has been obtained.

Position: It is a question of fact and law whether a bare trust exists. Where a bare trust has been created, unless exempted by another provision, there would be a file obligation for a T3 return and a requirement to provide the beneficial ownership information.