News of Note
Here are 2 examples of the operation of the s. 85.1(4) exclusions
Email this ContentTwo illuminating examples are provided on the operation of the proposed expansion (contained in the August 15, 2025 draft legislation) of the exclusion in s. 85.1(4) for rollover treatment under s. 85.1(3).
Example 1
A non-resident corporation (“Foreign Parent”) wholly owns Canco, which in turn wholly owns two controlled foreign affiliates, FA1 and FA2.
Canco disposes of the shares of FA1, which have an accrued gain, to FA2 in exchange for shares of FA2. Subsequently, Canco disposes of all or a portion of its shares of FA2 to Foreign Parent in a transaction that is fully taxable for ITA purposes.
If it is determined that the initial and subsequent dispositions are part of the same series of transactions, the subsequent disposition of the FA2 shares by Canco to Foreign Parent should be considered a “relevant disposition” under proposed s. 85.1(4)(a)(i)(C) on the basis that the shares of FA2 would, at the time of disposition by Canco, derive a portion of their fair market value (FMV) from the shares of FA1.
Furthermore, Foreign Parent would be an acquirer described in proposed s. 85.1(4)(a)(ii)(B) because, during the testing period commencing with the disposition of the FA1 shares and ending immediately after the series of transactions, Foreign Parent is a non-resident person not dealing at arm's length with Canco and that is not a controlled foreign affiliate (CFA) of Canco described in s.17 (a “s. 17 CFA”).
Accordingly, the s. 85.1(3) rollover would be inapplicable to Canco’s disposition of its FA1 shares.
Example 2
Canco owns all the shares of FA1 (a CFA) and 50% of the only class of shares of a non-controlled foreign affiliate, FA2. The remaining 50% is owned by a non-resident of Canada who deals at arm's length with Canco.
Canco disposes of the shares of FA1, on which it has an accrued gain, to FA2 solely in exchange for additional shares of the same class of FA2.
Draft s. 85.1(4) denies the s. 85.1(3) rollover:
- First, because the disposition of the shares of FA1 would be considered a “relevant” disposition under proposed s. 85.1(4)(a)(i)(A) (whose definition includes a disposition of the rolled FA shares themselves).
- Second, that relevant disposition is made to an acquirer described in proposed s. 85.1(4)(a)(ii)(B) because: (i) FA2 is a non-resident person with whom Canco does not deal at arm's length at the time immediately after the disposition of the shares of FA1 to FA2; and (ii) FA2 is not a s.17 CFA of Canco at the time of the disposition of the FA1 shares (and instead, only became a s. 17 CFA of Canco immediately after that disposition).
Neal Armstrong. Summary of Bryan Leslie, “Proposed Amendments to Subsection 85.1(4),” International Tax Highlights, Vol. 4, No. 4, November 2025, p. 5 under s. 85.1(4).
Cineplex – Tax Court of Canada finds a payment to an affiliate to assume lease obligations, so as to permit a share sale of the payer, was currently deductible
A Canadian company with a loss-generating movie-theatre business (“Ventures”) was required to discontinue two of its theaters as a condition to the sale of its shares to Cineplex Inc. To accomplish this, Ventures agreed with its New Jersey affiliate (“AMCNJ”) to sell the assets relating to the two theatres to AMCNJ for a purchase price of $0.7 million, satisfied by the assumption of liabilities in that amount, and to make a payment (the “Payment”) to AMCNJ of $26.6 million in consideration for AMCNJ assuming the balance of its future obligations in respect of the two discontinued theatres, mostly the assumption of the remaining lease obligations.
In finding that the Payment was a currently deductible expense of Ventures, MacPhee J characterized the Payment as “a specific ‘commutation payment’ made to eliminate or reduce a future ongoing expense of a current nature for Ventures,” and quoted with approval the statement in Langille that:
As a general rule, there is no reason that business shutdown or termination expenses incurred post-closure of operations cease to be deductible business expenses in ordinary, commercial, and business-like circumstances.
Respecting the submission of the Crown that the Payment represented negative proceeds of disposition resulting from the sale of the two theaters, MacPhee J stated his view that “Parliament likely did not intend ‘proceeds of disposition’ to be negative in value.” Furthermore, the fact that the Payment had been made as a result of a share sale did not have the effect of converting it into a capital expenditure.
Neal Armstrong. Summary of Cineplex Inc. v. The King, 2026 TCC 15 under s. 18(1)(b) – capital expenditure v. expense - start-up and close-down expenditures.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in December and November of 1999. Their descriptors and links appear below.
These are additions to our set of 3,465 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 26 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
American Express – Supreme Court of India confirms that a domestic Indian provision could limit the deduction permitted for offshore head office expenses of an Indian permanent establishment of an American bank
Art. 7(3) of the US-India Double Taxation Avoidance Agreement, provided:
In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment … whether incurred in the state in which the permanent establishment is situated or elsewhere, in accordance with the provisions and subject to the limitations of the taxation laws of that state.
Before concluding that s. 44C of the domestic statute limited the head office expenses of the American bank that could be deducted in computing the profits of its branch in India to 5% of the revenues of that branch, Pardiwala J confirmed that the italicized wording above permitted s. 44C to so apply to limit the head office expenditure deduction of the branch.
Neal Armstrong. Summary of Director of Income Tax v. M/S. American Express Bank Ltd. (2025 INSC 1431, Civil Appeal No. 4451 of 2016) under Treaties – Income Tax Conventions – Art. 7.
CRA publishes the 9 October 2025 APFF Financial Planning Roundtable
CRA has published the balance of the final version of the 9 October 2025 APFF Financial Planning Roundtable (Q.8 and Q.9 were published the previous week along with all of the 2025 “regular” Roundtable). There were essentially no changes from the provisional answers given in October (and a minor expansion to the wording of the question posed in Q.11).
For convenience, the table below links to these Roundtable items and the summaries which we prepared in October.
CRA now publishes its position that mutual fund trailer commissions (whether paid to the originating or a subsequent dealer) are subject to GST/HST
CRA has now published its response to a submission that GST/HST did not apply to dealer trailing commissions earned by a dealer (the “New Dealer”) who is not the dealer (the “Original Dealer”) who arranged the sale and issuance of the subject mutual fund trust units or shares (the “Units”).
In summarizing its previous position, it stated:
As noted in Excise and GST/HST News #111 issued in June 2022, CRA’s previous position had been that where a Dealer was not the same person that facilitated the initial sale of shares or units in the fund (i.e., a New Dealer) but received a trailing commission in respect of those shares or units, the trailing commission was consideration for a separate supply from the supply of arranging for the initial sale of shares or units. Unless the service provided by the New Dealer in these circumstances fell within the financial services definition, the trailing commissions would attract GST/HST. Where the Dealer received the trailing commission for the servicing of an investor's account, this was not a supply of a financial service as defined in the ETA.
It stated that it had now revised its position:
Effective July 1, 2026, mutual fund trailing commissions paid by [mutual fund] Managers to both Original Dealers and New Dealers will generally be subject to GST/HST.
It stated that this revised position arose from its review, which suggested that “Dealers do generally provide ongoing services to their clients in exchange for the trailing commissions they receive”, so that the “collective provision of investment account support, servicing and advice in this context generally constitutes an asset management service for GST/HST purposes”.
CRA further stated that its new position “simplifies tax administration”:
Managers will no longer be required to track the transfer of units to New Dealers (i.e. distinguish between payments to Original Dealers versus New Dealers) in order to apply GST/HST correctly to the trailing commissions paid. Note that arranging for the initial issuance of units remains an exempt supply, so any up-front trading fees earned by Dealers are not subject to GST/HST.
Neal Armstrong. Summary of 22 December 2025 GST/HST Interpretation 246664 under ETA s. 123(1) – asset management service.
Finance has expanded the scope of the proposed FABI rules
Although CCPCs that earn investment income indirectly through a controlled foreign affiliate (CFA) will no longer be eligible for a full deferral of Canadian corporate tax thereon through the reduction in the relevant tax factor from 4 to 1.9, the proposed foreign accrual business income (FABI) regime allows qualifying entities to elect to regain access to the tax deferral on certain types of foreign accrual property income (FAPI).
In its August 15, 2025 draft legislation, Finance has significantly broadened the definition of FABI in draft s. 93.4(1), from that contained in its August 2024 draft legislation, to include any FAPI that would not be included in a CCPC’s aggregate investment income (AII) if the subject CFA were a CCPC and the income was from a source in Canada (subject to certain anti-base erosion exclusions).
For instance, unlike the foreign affiliate rules, the specified investment business rules that are accessed under this deeming rule do not require the business to be conducted principally with arm's length persons, and the scope of income that is treated as specified investment income is narrower. For example, income from a specified investment business product does not include profits from the disposition of investment property. Furthermore, the AII rules have no analogue to the s. 95(2)(b) rules deeming services income to be FAPI in certain circumstances.
However, under the anti-base erosion provisions, FABI treatment will be denied where the payment is deductible in computing the payer's high-tax income. This includes deductions against AII, personal services business income, and FAPI other than FABI.
These FABI base erosion rules are similar to the base erosion provisions of s. 95(2)(b), but are narrower in scope. For example, where a CCPC pays its foreign affiliate (FA) for services, the payment will be deemed to be FAPI to the extent it is deductible in computing the CCPC's business income. However, as such amount would not be included in AII (if the FA instead were a CCPC), the payment could be eligible for FABI treatment, provided that it is deductible in computing the CCPC's income from an active business.
Neal Armstrong. Summary of Bryan Madorsky and Rachel Gold, “Department of Finance reintroduce anti-deferral rules for FAPI of CCPCs and substantive CCPCs,” International Tax (Wolters Kluwer), October 2025, No. 144, p. 1 under s. 93.4(1) - FABI.
Income Tax Severed Letters 21 January 2026
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The “suspended dividend” rule in proposed s. 129(1.3) can operate anomalously
Here is an example of the rule’s operation:
An individual (X) wholly-owns Holdco, (with a December 31 year end), which wholly-owns Investco (with a November 30 year-end). In its November 30, 2026 taxation year, Investco earns $100,000 of rental income, resulting in $30,667 being added to its non-eligible refundable dividend tax on hand (NERDTOH) balance. On November 30, 2026, it pays an $80,000 non-eligible taxable dividend to Holdco. On March 31, 2027, Holdco pays an $80,000 taxable dividend to X and utilizes its GRIP balance to designate $30,000 of that amount as an eligible dividend. Both Investco and Holdco have balance-due dates (BDDs) two months after their year-ends.
S. 129(1.3) denies Investco’s November 30, 2026, RDTOH refund because the payee, Holdco, is an affiliated private corporation with a BDD after Investco's BDD. However, the $80,000 taxable dividend paid by Holdco on March 31, 2027, will allow Investco to recover its “suspended” $30,667 NERDTOH in that subsequent year.
S. 129(1.32) does not distinguish between an eligible and non-eligible taxable dividend paid by the payee, so that this NERDTOH refund occurs even though Holdco's dividend is partly an eligible dividend – so that there is a more favourable result than if no “suspension” had occurred.
Untoward consequences include:
- A suspended dividend appears to be permanently forfeited if any taxpayer other than the payer relies on a dividend paid by the payee to obtain an RDTOH refund. For example, if Holdco received a $100 ERDTOH refund for its December 31, 2027, taxation year because it paid the $80,000 taxable dividend to X on March 31, 2027, this seemingly would permanently disqualify Investco's entire $80,000 “suspended” dividend from generating a future refund.
- If the dividend payer corporation experiences a loss restriction event after its dividend has been suspended, s. 129(1.32)(a)(i) prevents any subsequent de-suspension.
- In light of Vefghi, where the payer corporation and the beneficiary corporation have aligned but non-calendar year-ends, dividend suspension may still apply by virtue of the dividend being recognized in the beneficiary's subsequent taxation year.
Neal Armstrong. Summary of Kenneth Keung and Taylor Greening, “Suspended dividend and denied RDTOH refund under new subsection 129(1.3),” Tax for the Owner-Manager, Vol. 26, No. 1, January 2026, p. 2 under s. 129(1.3).
Ingredion – Tax Court of Canada finds that a proposed Crown pleading that an arm’s length interest rate would be nil was “untenable”
The Minister considered that the cross-border “hybrid instrument” structure at issue should be recharacterized as an equity investment in the taxpayer by its U.S. parent, and reassessed and pleaded accordingly based on ss. 247(2)(b) and (d).
The Minister now sought leave to amend such pleadings to state that, to the extent the parties dealing at arm's length would have entered into the transactions (which was denied), at all times the arm's length rate of interest for the money that the taxpayer borrowed from its U.S. parent as part of the series was 0%, so that the interest actually charged should be denied pursuant to ss. 247(2)(a) and (c).
In refusing such amendment, Sorensen J stated:
[I]n an environment in which annual inflation is greater than zero and Treasury Bills offer even negligible yields, the idea of handing $300M to an arm’s length party in a business-to-business transaction with nil interest is untenable. …. [B]aldly pleading an untenable fact does not meet the threshold for amending a pleading.
Neal Armstrong. Summary of Ingredion Canada Corporation v. The King, 2026 TCC 3 under s. 247(2)(c).