News of Note
Total Energy – Federal Court of Appeal confirms that the use of losses of an insolvent public company by a SIFT trust was an abuse of s. 111(5)
Email this ContentIn September 2007, a company (“Nexia”), which traded in loss companies, acquired all of non-voting common shares of an insolvent public corporation (“Biomerge”) (representing 80% of its equity) and 45% of its voting common shares. In May 2009, a plan of arrangement was implemented under which the units of an income fund (“Total”), which was becoming subject to tax under the “SIFT” rules, were exchanged for new common shares of Biomerge, the existing voting common shares of Biomerge were largely cashed-out, and Total was wound-up into Biomerge (now, “New Total”) pursuant to s. 88.1(2). The former Total unitholders held 99.8% of the New Total equity.
In confirming the decision below that these transactions were an abuse of s. 111(5), Stratas JA indicated that:
- It was immaterial that Deans Knight did not deal with trust conversions, as the “object, spirit, and purpose of s. 111(5) does not change depending on the facts of the particular case nor on the status of the acquiror.”
- It was also immaterial that s. 256(7)(c)(i) (dealing specifically with a transaction of this type) was added only subsequently (“Deans Knight … did not look at other provisions enacted after s. 111(5) in order to determine the object, spirit, and purpose of s. 111(5).”
- The Tax Court had appropriately found “that this particular series of transactions frustrates the object, spirit, and purpose of s. 111(5), which is [quoting Deans Knight] ‘to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders’."
Neal Armstrong. Summary of Total Energy Services Inc. v. Canada, 2025 FCA 77 under s. 245(4).
We have translated 8 more CRA interpretations
We have translated two CRA interpretations released last week and a further 6 CRA interpretations released in November and October of 2000. Their descriptors and links appear below.
These are additions to our set of 3,159 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 24 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA considers that the specified corporate income carve-out may be avoided by earning active business income through rather than from a private corporation
A real estate broker carried on his practice through a wholly-owned corporation (A Co), which received all of its commissions, net of service charges, from a real estate brokerage firm (Realty Co). Realty Co was 25% owned by a holding company of the individual, and was otherwise owned by unrelated persons. Was such commission income of A Co excluded pursuant to s. 125(1)(a)(i)(B) from its active business income by virtue of being described in (a)(i)(A) of the “specified corporate income” (SCI) definition?
Given that (a)(i)(A) of the SCI definition was satisfied (the shareholder of A Co held an indirect interest in Realty Co.), this question turned on the application of (a)(i)(B) of that definition, which tested whether “all or substantially all” of the active business income of A Co for the year was from the provision of services or property to persons (other than the private corporation, i.e., Realty Co) with which it dealt at arm’s length. CRA indicated that this turned on the factual question of whether “A Co is receiving all or substantially all of its commission income from the provision of real estate services to clients with which it deals at arm’s length, and not Realty Co,” i.e., was A Co providing its services to Realty Co or to arm’s length clients?
This response perhaps implies that the SCI carve-out could be avoided with the appropriate structuring.
Neal Armstrong. Summary of 23 January 2025 External T.I. 2024-1030091E5 under s. 125(7) – SCI – (a)(i)(B).
CRA notes that a supplementary disability plan for the company’s majority shareholder and another executive might not qualify as a s. 6(1)(a)(i) group plan
A corporation, which already provided a group health and disability plan to all its employees, created a supplementary disability insurance plan for two of its executive employees, one of whom was the majority shareholder.
CRA indicated that if there was “a higher level of benefits for the employee who is the majority shareholder compared to the level of benefits for the other employee in the group, such a policy would probably not be considered a component of a group insurance plan, but rather an individual disability insurance policy.” Accordingly, even if the executives received their benefit from the employer payment of the premiums qua employee rather than shareholder, the exemption pursuant to s. 6(1)(a)(i) from the taxability of that benefit under s. 6(1)(a) would not be available to the executives.
Neal Armstrong. Summaries of 19 February 2025 External T.I. 2018-0744821E5 F under s. 6(1)(a)(i) and s. 15(1).
GST/HST Severed Letters December 2024-February 2025
This morning's release of nine severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their December 2024, January 2025, and February 2025 releases) is now available for your viewing.
CRA indicates that an Arizona limited partnership is a partnership rather than a corporation for ITA purposes
Two Arizona limited partnerships holding rental properties were to be treated as partnerships rather than corporations under the two-step approach of CRA to entity classification. Although they had separate legal personality, that by itself did not preclude them from being classified as partnerships. On the other hand, they had various attributes of common law partnerships including importantly, that the general partner had unlimited liability.
Neal Armstrong. Summary of 28 November 2024 Internal T.I. 2024-1014251I7 under s. 96.
CRA indicates that it might address the consequences of a sale of IP by a partnership for the benefit of a university and its researchers
A university transferred the intellectual property developed for it by its researchers in the course of their employment to a limited partnership of the university, but agreed that they would receive 50% of the resulting net income from the commercialization of the IP. When asked about the tax treatment of a lump sum received on a sale by the partnership of IP and shared with the researchers, CRA indicated that this was a question of fact that might be addressed in a request for a ruling, but not for a technical interpretation.
Neal Armstrong. Summary of 11 March 2025 External T.I. 2020-0845931E5 F under s. 9 – capital gain v. profit – patents.
Income Tax Severed Letters 2 April 2024
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
MEGLobal – Tax Court of Canada effectively finds that a taxpayer had no remedy for a refusal of CRA to accept a requested s. 247(10) downward adjustment
In objections of the taxpayer to reassessments of three of its taxation years to reflect upward transfer pricing adjustments under s. 247(2), it included requested downward adjustments pursuant to s. 247(10). The Minister then vacated the reassessments, but with the requested downward adjustments being refused. The taxpayer filed this appeal to the Tax Court from such further reassessments, and also timely filed in the Federal Court for judicial review of such refusal. However, before MacPhee J the taxpayer effectively indicated that its Federal Court action was futile, i.e. if, in response to an order of the Federal Court, the Minister determined that a downward adjustment was appropriate under s. 247(10), the Minister would not be able to reassess the taxpayer for the years under appeal to the Tax Court if that appeal was quashed.
MacPhee J followed Dow Chemical in finding (at para. 15) that the “Tax Court has no jurisdiction to interfere in any way with the Minister’s discretion in disallowing a downward adjustment”. He also indicated that he lacked jurisdiction (having regard to the scope of s. 171(1)(b)(iii)) to even provide an opinion that the requested downward adjustment accorded with a proper s. 247(2) analysis (and that such request amounted to “seeking to obtain and use a judgment of the Tax Court as a collateral attack on the absolute discretion of the Minister under 247(10).” The appeal of the taxpayer was quashed.
Neal Armstrong. Summary of MEGLobal Canada ULC v. The King, 2025 TCC 50 under s. 247(10).
CRA covers additional points in its FAQ on the trust-reporting rules
CRA has revised its FAQ on the new trust reporting rules. Changes include:
- CRA has added a detailed description of what constitutes a trust under the common law (e.g. referring to the “three certainties”) or under the Civil Code. CRA states that “a person who is required to manage and dispose of trust property and who can exercise independent discretionary power over the property is a trustee rather than an agent” and that the “trustee of a bare trust, in contrast, acts as an agent for the beneficiaries when dealing with trust property.”
- Unlike the accommodation by the rules for beneficiaries who are not known or ascertainable with reasonable effort, CRA notes that the Regulations “do not include a relieving provision where the person making the return does not know the identity of a particular reportable entity” (other than a beneficiary).
- It indicates that the s. 163(5) gross negligence penalty could be imposed for failure to file a return rather than only in relation to a false statement or omission in a return that had been filed.
- Regarding the inclusion in listed (i.e., disclosure-exempted) trusts for a trust that was in existence for less than three months at the end of the taxation year, CRA states that this requirement is satisfied by a trust that ceased to exist during the particular taxation year at a date which was less than three months after it was created, and by a trust that was created less than three months before the end of the taxation year.
Neal Armstrong. Summaries of additions to CRA Webpage, Enhanced reporting rules for trusts and bare trusts: Frequently asked questions, updated on 14 March 2025 under s. 104(1), Reg. 204.2(1), s. 163(5) and s. 150(1.2)(a).