Income Tax Severed Letters - 2026-02-25

Conference

2 December 2025 CTF Roundtable Q. 1, 2025-1080781C6 - Avoidance of subsection 80(3) on settlement of debt.

Unedited CRA Tags
80, 80(3), 61.3, AND 245(2).

Principal Issues: Could the GAAR apply to the settlement of a debt where the debtor corporation's non-capital losses have already been claimed in a loss consolidation arrangement?

Position: Yes. GAAR could apply so favourable ruling cannot be provided in such situation.

Reasons: Two losses would be claimed with respect to the same investment, contrary to the scheme of the Act, and in particular, section 80.

2 December 2025 CTF Roundtable Q. 2, 2025-1080681C6 - Loan Restructuring and Application of the General Anti-Avoidance Rule

Unedited CRA Tags
245(2), 20(1)(c)

Principal Issues: Whether the CRA position expressed in document 2013-0477601E5 regarding interest deductibility on restructured borrowings is still valid in light of the amendments to section 245 as part of Bill C-59.

Position: Yes, the CRA position is still valid.

Reasons: see below.

2 December 2025 CTF Roundtable Q. 3, 2025-1080671C6 - T1134 Reporting

Unedited CRA Tags
233.4 of the Act

Principal Issues: 1. In a case where two Canadian resident companies, Canco and Holdco held a direct ownership in a U.S. Company, USco for part of their 2025 taxation year, who needs to file a T1134 for that year; is it Canco or Holdco or both? 2. What is the equity percentage that needs to be reported under Part I, Section 3.C ii) of form T1134 summary if USco held a 50% of the interest in a LLC on June 30, 2024, a 100% interest on December 31, 2024, and a 0% interest on May 1, 2025?

Position: 1. Both. 2. The equity percentage that must be reported is the one for June 30. For tax year 2024, Canco will need to report that USco had a 50% equity percentage in LLC and in tax year 2025, both Canco and Holdco will need to report that USco had a 0% equity percentage in LLC regardless of their choice of filing jointly or separately.

Reasons: 1. Canco and Holdco must each file a T1134 in relation to their direct share ownership in USco during their 2025 taxation year. However, Canco and Holdco also have the option of jointly filing the T1134 form provided that they meet the requirements described in the instructions for filing for a group of reporting entities that are related to each other. More specifically, in order to file as a group, Canco and Holdco must be related to each other, share the same tax year-end and both use either the Canadian dollar or the same functional currency. It should be noted that the transfer of the shares of USco from Canco to Holdco during the year, in the example provided, would need to be reported under Part I Section 3.B, of the T1134 summary for tax year 2025. 2. The equity percentage that must be reported is the one at the end of the tax year of the reporting entity or entities which is June 30th. It should be noted that the liquidation of USco would need to be reported under Part II, Section 3.B of the T1134 supplement for USco.

2 December 2025 CTF Roundtable Q. 4, 2025-1080661C6 - T1134 – Partnerships and the meaning of “Related Group”

Unedited CRA Tags
233.4 of the Act

Principal Issues: Based on the definition provided in subsection 251(4) of the Income Tax Act (the "Act"), a ''related group'' is a group of persons but a partnership is not always a person for the purpose of the Act. However, it is included in Part I, Section 3.C iv), Partnership, of form T1134. Can the Canada Revenue Agency ("CRA") clarify its position as to when a partnership should be included in a group of reporting entities that are related to each other?

Position: A ''group of reporting entities that are related to each other'' can include a partnership in certain cases.

Reasons: If a partnership is considered a reporting entity, the administrative position relating to reporting entities that are members of a related group would be extended to partnerships if at least one of the partners is related to every other reporting entity forming the related group.

2 December 2025 CTF Roundtable Q. 5, 2025-1080691C6 - Intergenerational Business Transfer – control requirement in subparagraphs 84.1(2.31)(f)(i) and (2.32)(g)(i)

Principal Issues: Implications of divorce or termination of a common-law partnership on the control requirement in subparagraphs 84.1(2.31)(f)(i) and 84.1(2.32)(g)(i).

Position: See below.

Reasons: See below.

2 December 2025 CTF Roundtable Q. 6, 2025-1080701C6 - Intergenerational Business Transfer – Relevant Group Entity

Unedited CRA Tags
84.1(1), 84.1(2)(e), 84.1(2.31)(c)(iii), 84.1(2.32)(c)(iii), 84.1(2.31)(a), 84.1(2.32)(a), 110.6(1) "qualified small business corporation share", 248(1) "small business corporation"

Principal Issues: Whether the CRA's conclusion in 2024-1036641E5 that Realco would not be a "relevant group entity" in respect of Opco would change if Opco had a Loan Receivable from Realco.

Position: Possibly. Realco would be a "relevant group entity" in respect of Opco if Realco carries on an active business at the disposition time and all or a portion of the Loan Receivable is needed by Opco in order to meet any of the conditions that are required to be met in order for Opco's shares to be QSBCS, as defined in 110.6(1).

Reasons: See below.

2 December 2025 CTF Roundtable Q. 7, 2025-1080791C6 - Treaty-Protected Business

Unedited CRA Tags
248(1) "treaty-protected business", 115(1), 111(9), Canada-US Treaty, OECD Model Treaty, Vienna Convention on the Law of Treaties

Principal Issues: An update on the issue described in 1999-0008185.

Position: See below.

Reasons: See below.

2 December 2025 CTF Roundtable Q. 8, 2025-1080721C6 - Whether a Beneficiary under a Trust is Affiliated with a Corporation Controlled by the Trust

Unedited CRA Tags
251.1, 251.1(4)(C)

Principal Issues: Whether a beneficiary under a trust is affiliated with a corporation controlled by the trust in three scenarios: (A) the trust holds all of the voting shares of the corporation (B) the trust holds 80% of the voting shares of the corporation and the beneficiary holds 20% of the voting shares (C) would the CRA's answers to (A) and (B) change if the beneficiary was also a trustee of the trust.

Position: (A) No. (B) No. (C) No.

Reasons: See below.

2 December 2025 CTF Roundtable Q. 9, 2025-1080731C6 - Subsection 191(4) and specified amount

Unedited CRA Tags
191(4) AND 191(5).

Principal Issues: In circumstances where a share is issued, whether FMV can be used as the specified amount.

Position: No.

Reasons: An amount (in dollar terms) must be specified.

2 December 2025 CTF Roundtable Q. 10, 2025-1080811C6 - Gross Negligence Penalty and Labour Requirements

Unedited CRA Tags
127.46(3), 127.46(9)

Principal Issues: Whether the gross negligence penalty under subsection 127.46(9) applies where an incentive claimant is unable to substantiate having met the compensation requirement under subparagraph 127.46(3)(b)(i) in respect of covered workers employed by others and having taken reasonable steps to ensure compliance for such workers.

Position: The determination of whether an incentive claimant has, knowingly or in circumstances amounting to gross negligence, failed to meet the LR is a question of fact that can only be determined after an examination of all the relevant facts and circumstances. In general, the fact that an incentive claimant is unable to substantiate having met the compensation requirement under subparagraph 127.46(3)(b)(i) in respect of covered workers employed by others should not, in and of itself, result in the Minister determining that the incentive claimant, knowingly or in circumstances amounting to gross negligence, failed to meet the LR. Where no reasonable steps have been taken, the incentive claimant should limit their claim to the reduced tax credit rate by refraining from making the election and attestation. Doing otherwise may support a determination by the Minister that the incentive claimant, knowingly or in circumstances amounting to gross negligence, failed to meet the Labour Requirements. In such cases, the gross negligence penalty under subsection 127.46(9) should generally apply.

Reasons: Textual, contextual, and purposive analysis of the relevant provisions.

2 December 2025 CTF Roundtable Q. 11, 2025-1080761C6 - Subsection 98(5)

Unedited CRA Tags
98(5); 122.92(1).

Principal Issues: In order for subsection 98(5) to apply, must the Partner carry on the business throughout the 3 month period commencing upon the dissolution of the former partnership, or can the Partner simply commence carrying on the business within this period?

Position: The 3 month period described in subsection 98(5) addresses when the business must recommence, which is at any time during the 3 month period. Whether the proprietor carries on the former partnership business and continues to use, in the course of that business, the partnership property acquired, is a question of fact that can only be determined based on all of the facts and circumstances.

Reasons: Text of the provision.

2 December 2025 CTF Roundtable Q. 12, 2025-1080801C6 - Interaction of Subsection 150(1.2) of the Income Tax Act and Subsection 204.2(1) of the Income Tax Regulations

Unedited CRA Tags
150(1)(c), 150(1.1), 150(1.2), subsection 204.2(1) of the Income Tax Regulations
Summary Under
Tax Topics - Income Tax Regulations - Regulation 204.2 - Subsection 204.2(1)
an excepted trust listed in s. 150(1.2) is not subject to Sched. 15 reporting even if it is not an express trust

Principal Issues: Can the exceptions provided for in subsection 150(1.2) of the Act apply to exempt non-express trusts from the reporting requirements of subsection 204.2(1) of the Income Tax Regulations?

Position: Yes.

Reasons: The exceptions to subsection 204.2(1) of the Income Tax Regulations may apply to any trust which has a filing obligation pursuant to paragraph 150(1)(c) of the Act regardless of whether that trust is resident in Canada and an express trust or, for civil law purposes, a trust other than a trust that is established by law or judgement.

2 December 2025 CTF Roundtable Q. 13, 2025-1080821C6 - Expanding the Scope of Advance Income Tax Rulings

Principal Issues: Given the complexity of some measures, would the CRA consider issuing rulings in these areas when taxpayers are able to provide sufficient documentation and evidence to support the relevant facts and intentions?

Position: Yes in some cases.

Reasons: The CRA is committed to providing greater certainty for taxpayers by considering advance income tax rulings in situations that may involve factual determinations, provided sufficient supporting evidence is submitted, including certain areas where rulings were traditionally declined.

2 December 2025 CTF Roundtable Q. 14, 2025-1080711C6 - Subsection 83(2) Election in the Context of a Subsection 84(3) Deemed Dividend

Unedited CRA Tags
83(2) & 89(1) ITA & 2101 ITR

Principal Issues: Would the CRA accept the filing of a resolution of the directors and Form T2054 where the amount of the capital dividend would be expressed in the form of a mathematical formula taking account possible post-closing adjustments?

Position: No. Reg. 2101 states that, among others, the prescribed form (T2054) and a certified copy of the resolution of the administrators authorizing the election shall be filed to the Minister. The CRA expects that such resolution will specify the amount of the dividend subject to the election under subsection 83(2) which should be the same as the one shown on Form T2054.

Reasons: According to the law.