News of Note
CRA publishes detailed views as to when a partnership will be recognized
Email this ContentCRA has published a GST/HST Memorandum on what constitutes a partnership which is more detailed than the Income Tax Folio on this subject. Points of interest include:
- A partnership cannot come into existence prior to the time that its partners commence to carry on business in common with a view to sharing profits of the business, so that, for example, a limited partnership which has been registered as such is not a partnership if it has not commenced to carry on business [accord D Marks cf. Bank of Beirut SAL v Prince Adel El-Hashemite].
- Consistent with Backman, a business must actually be carried on for more than a brief moment in time before being disposed of in order for an alleged partnership to in fact be formed.
- For purposes of the requirement that there be a sharing of profits, the ordinary commercial meaning of profit can include an increase in the value of assets (which suggests that profits for this purpose can include mark-to-market profits, such as under a carry).
- Where a person receives a salary or other remuneration that is not based on its interest in the partnership, then that person is not considered to be acting in partnership with the other parties engaged in the subject activity [per contra, Zahid Solicitors].
- Events that may result in a partnership ceasing to exist include:
- the conversion of a general partnership to a limited partnership such that the general partnership ceases to exist [cf. 2016-0660321R3 and 1992 Corporate Management Tax Conference Report (CTF), Q.11]
- a change in the members of a partnership, such as when a person ceases to be a member or a new person is admitted as a member [even though most partnership agreements expressly provide the opposite?]
- an event occurs that makes the partnership business illegal [cf. Continental Bank]
- Somewhat contrary to the above position, that reference should be made to whether a business in fact is carried on, it is stated that until dissolution of a partnership is evidenced by duly-filed declaration, the dissolution is not effective with respect to third parties (presumably including CRA).
- Where a foreign jurisdiction permits a person to be admitted to a limited partnership as a general partner or as a limited partner without obligation to make a contribution, this is inconsistent with provincial partnership law, so that in such circumstances a determination must be made, under the two-step approach to entity classification, as to whether the entity is closer to a partnership than other some other form of organization recognized under Canadian law.
- There is a detailed description of the differences between a co-ownership arrangement and a partnership
Neal Armstrong. Summary of GST/HST Memorandum 14-9-1 “Partnerships - Determining the Existence of a Partnership” March 2025 under s. 96.
CRA confirms that a return of premiums at maturity of a term life insurance policy can be mostly income
In response to a query as to why the taxpayer was issued at T5 slip for the receipt on the maturity of a term life insurance policy of a return of premiums (ROP) benefit (i.e., an amount equal to the total previously paid premiums under the policy), CRA provided a general explanation of how a policy gain under s. 148(1) is computed, and then referred the correspondent to White for further illumination.
In White, Mogan J confirmed that substantially all of the $24,909 ROP benefit received by the taxpayer on the maturity of his term life insurance policy was taxable to him given that the ACB of his policy had been reduced to $1,021 by the net cost of pure insurance (NCPI) for his policy.
In explaining this result, Morgan J stated:
A very large portion of all premiums paid by the Appellant was for life insurance. He had full value for that very large portion of premiums because his life was insured for 22 years. Therefore, it is not reasonable to think of the insurer as paying back (upon the expiry of the term) any of the premiums for which it had already provided full value. What the insurer paid as a benefit upon the expiry of the term was not, in a business sense or in an income tax sense, any part of the premiums for life insurance. … It was part of the insurer’s earnings.
Neal Armstrong. Summary of 21 January 2025 External T.I. 2024-1041441E5 under s. 148(9) – proceeds of disposition.
Csak – FCA confirms a s. 160 challenge on the basis that a TCC judgment of the transferor was incorrect, and confirms that a waiver time limit falling on a Sunday was extended
The taxpayer challenged assessments of her under s. 160(2) respecting unpaid tax of her late husband for his 1988 and 1989 taxation year by arguing that the CRA assessments of him for those years were statute-barred given that CRA had not received a waiver on a timely basis (which had been found by Owen J to be the case for his 1988 taxation year and, in the case of his 1989 taxation year, turned on the proposition that the receipt by CRA of a waiver on a Monday was one day following the expiry of the normal reassessment period on the Sunday).
Biringer JA confirmed (based on Gaucher) that the taxpayer was not precluded from disputing the validity of the assessments of her under s. 160(2) on the grounds that the waivers proffered by CRA were invalid, even though this issue might have been raised, but was not, in the Makuz (2006 TCC 263) group appeals in which the CRA assessments of her husband’s 1988 and 1989 taxation years had been confirmed. Similarly, there was no abuse of process in collaterally attacking the judgments in Markuz (with her waiver arguments) given that the taxpayer had not been a party to that litigation (otherwise than, latterly, as an executor of her husband’s estate) and that Owen J had determined that it was “untenable” to expect her to have raised the waiver-timing issue in those appeals.
In the case of her husband’s 1989 taxation year, this then left the issue as to whether s. 26 of the Interpretation Act had extended the time for the receipt by CRA of the waiver to the Monday. In finding that this had occurred (and in reversing Owen J on this point), Biringer JA stated:
Section 26 is a remedial provision. It provides relief when the time limit for doing a thing expires on a holiday, allowing the thing to be done on the next day that is not a holiday. …
I am satisfied that the filing of a waiver is the “doing of a thing” for the purposes of section 26 … .
… I do not view the time limited for filing a waiver as conceptually different for this purpose from the deadlines for filing a notice of objection or notice of appeal … .
Neal Armstrong. Summaries of Canada v. Csak, 2025 FCA 60 under s. 160(2), s. 152(4)(a)(ii) and General Concepts – Abuse of Process.
Income Tax Severed Letters 19 March 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
RCA payment made to taxpayer’s ex-spouse was treated as “remuneration” to such recipient for source deduction purposes even though it was income only to the taxpayer
A distribution coming out of retirement compensation arrangement (RCA) that was generated in respect of the taxpayer’s employment but paid pursuant to a court order or separation agreement to the taxpayer’s former spouse constituted income to the taxpayer pursuant to s. 56(1)(x) even though received instead by the former spouse (in whose hands it was excluded from income pursuant to s. 56(1)(z)(ii).)
However CRA indicated that for source deduction purposes it was the payee of this “remuneration” (the former spouse), who was thus the “employee” for source deduction purposes, so that the amount of the source deductions under Reg. 101 was to be computed on this basis, and the amounts withheld were to be remitted for the account of the former spouse.
CRA recognize that this produced a “misalignment,” i.e., tax likely would be payable by the taxpayer (who have no amount to report on account of the income tax withheld for the year on the RCA Payment) and, conversely, the former spouse likely would be able to claim a refund when filing his or her return.
Under Reg. 200(1), a T4A-RCA Form was required to be issued to the former spouse in respect of the RCA Payment (i.e., effectively, to the wrong individual).
Neal Armstrong. Summaries of 8 January 2025 Internal T.I. 2024-1032871I7 under Reg. 100(1) – remuneration – (b.1) and s. 56(1)(x).
CRA rules on a single-wing butterfly of a DC held by two families’ Holdcos, with DC then amalgamated with one of the Holdcos
CRA ruled on a relatively straightforward single-wing butterfly spin-off of a proportionate part of its assets (on a net FMV basis) of a portfolio investment company (DC) held (mostly indirectly) by two sisters (A and B) and B’s children. A mostly held shares of DC through Holdco A, and B and her children indirectly held DC through a second holding corporation (TC). Before the butterfly reorganization, the CDA of DC, and then the ERDTOH and NERDTOH of DC, were proportionately split between Holdco A and TC through staged increases in the stated capital of the shares in DC held by the two holding companies, with the requisite s. 83(2) and 89(14) elections being made.
DC then distributed a proportionate share of its net assets to a new subsidiary of TC (Newco) in consideration for preferred shares of Newco, which were redeemed for a note, which was assumed by TC on a Newco winding-up. DC then repurchased the DC shares held by TC for notes, and the two sets of notes were set-off.
After some clean-up, DC and Holdco A then vertically amalgamated.
Neal Armstrong. Summary of 2022 Ruling 2021-0911791R3 F under s. 55(1) – distribution.
We have translated 10 more CRA severed letters
We have translated 3 CRA interpretations released last week, a ruling issued several weeks ago, and a further 6 CRA interpretations released in December of 2000. Their descriptors and links appear below.
These are additions to our set of 3,139 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 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA indicates that individuals whose income is exempted under the Indian Act nonetheless are subject to the general T1135 and T1134 reporting obligations
CRA found that an “Indian” whose income earned during a taxation year is exempt pursuant to the Indian Act would be a “reporting entity” within the meaning of ss. 233.3 and 233.4 and, thus, be subject to the obligation to file T1135 and T1134 forms, and to penalties for failures to do so.
Generally, a “reporting entity” for such purposes excludes a taxpayer “whose total taxable income for the year is exempt from the tax under Part I”. CRA considers that this phrase refers to persons whose income is (absolutely) exempt pursuant to s. 149(1) and does not encompass a person (such as a status Indian) whose income from a particular source (here, income earned on a reserve) is excluded from the individual’s income.
Neal Armstrong. Summary of 30 December 2024 Internal T.I. 2024-1031721I7 F under s. 233.3(1) – specified Canadian entity – (a)(iii).
CRA confirms that an underground mineral formation used for carbon capture can qualify for refundable tax credit purposes
A refundable tax credit under s. 127.44(2) may be available for a carbon capture, utilization and storage project when 10% or more of the captured carbon is used for an “eligible use,” whose definition refers inter alia to the storage of captured carbon in a “dedicated geological storage.”
In confirming that a “geological formation” referred to in the definition of “dedicated geological storage” does not refer only to an underground reservoir, and can include an underground mineral formation used for carbon storage, for example, an underground serpentinite deposit, CRA first stated:
[A] “geological formation” will be an identifiable rock body with stable lithic characteristics that distinguish it from adjacent rock bodies and that occupies a particular position in the rock layers (the stratigraphic column). A formation may be mapped on the Earth’s surface or traceable underground. In general terms, a formation can be distinguished on the basis of the identification of a rock unit that has specific internal characteristics that make it different from neighbouring units.
CRA concluded:
[A] geological formation is not limited to underground reservoirs but could instead include rock bodies with the characteristics described above.
Neal Armstrong. Summary of 31 October 2024 External T.I. 2024-1038061E5 F under s. 127.44(1) - dedicated geological storage.
CRA finds that where sequential returns are simultaneously filed, each return can be penalized for income omitted from the preceding (but simultaneously filed) return
S. 163(1) generally imposes a penalty if there is failure to report income over $500 in a return and there was a comparable failure in any of the returns for the three preceding taxation years.
2005-0133411I7 F concerned an individual who filed his T1 income tax returns (each omitting over $500 of income) for the 2001, 2002, and 2003 taxation years at the same time in the 2004 calendar year. CRA found that (assuming there had been no failure to report income in any of the 1998, 1999 and 2000 returns) s. 163(1) did not apply to any of the 2001 to 2003 returns because they had been filed simultaneously, so that there was no “preceding” return with unreported income. If instead, it was assumed that he had been reassessed for failure to report over $500 of income for his 1998 taxation year, then only the amount of income omitted for his 2001 taxation year could be subject to the s. 163(1) penalty.
CRA has now reversed this position based on Whissell where (dealing with similar facts) “the Court concluded that the fact that the returns for the taxation years in question were filed simultaneously is not relevant for the purposes of subsection 163(1)” (i.e., there should be the same result as if the three subsequent returns had been filed sequentially). In the first scenario, the s. 163(1) penalty would be applicable to the 2002 and 2003 taxation years because in the “preceding” (albeit, filed simultaneously) 2001 taxation year there was omitted income. In the second scenario, his 2001 taxation year was now also subject to the penalty because of the omitted income for the third preceding year (1998); and his 2002 and 2003 taxation years were penalized for the same reasons as in the first scenario.
Neal Armstrong. Summary of 30 December 2024 Internal T.I. 2024-1032121I7 F under s. 163(1).