News of Note
Uppal Estate – Tax Court of Canada strikes pleadings of assumptions of facts in the alternative, and states that it cannot impose a penalty that was not assessed
Email this ContentGraham J ordered that the Crown’s pleading, that the deceased taxpayer’s purchase of shares of a company occurred “singly or jointly with” a corporation owned by him, should be struck (with leave to file amended pleadings), as acquisition of beneficial ownership by the taxpayer’s company or by him personally were mutually inconsistent, and substantially affected the case that his estate would have to make.
The Minister also assessed the taxpayer for gross negligence penalties but then, in the Amended Reply argued, in the alternative, that the taxpayer should be liable for penalties under ss. 162(7) and (10) for failing to file T1134 (or T1135) information returns. Before ordering that such alternative argument should be struck, Graham found that the Court did not have “the power to order the Minister to assess a previously unassessed penalty” as “[p]enalties are imposed by the Minister, not by the Court”.
Neal Armstrong. Summaries of Uppal Estate v. The King, 2025 TCC 34 under General Concepts – Onus and s. 171(1).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in December of 2000. Their descriptors and links appear below.
These are additions to our set of 3,129 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).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2000-12-22 | 21 September 2000 Internal T.I. 2000-0046180 F - Remboursement de dépenses | Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(iv) | settlement agreement compensation for mortgage (including principal) payments that B had paid on a mortgage that A assumed as of an earlier partition date, was s. 12(1)(x)(iv) income to B |
| 25 October 2000 Internal T.I. 2000-0044547 F - REGIME DE PRESTATIONS AUX EMPLOYES | Income Tax Act - Section 248 - Subsection 248(1) - Employee Benefit Plan | job security fund was an EBP | |
| 2000-12-08 | 4 December 2000 External T.I. 2000-0001715 F - Qualified small business corporation share | Income Tax Act - Section 48.1 - Subsection 48.1(1) | s. 48.1 election could be made respecting the accrued capital gain on shares that ceased to be QSBCS on a narrowing of the CCPC definition re a connected corp. |
| Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation - Paragraph (c) | para. (c) relevant where Holdco’s asset was shares of Opco but Opco shares also were held by Pubco | ||
| 30 November 2000 External T.I. 2000-0026615 F - GAAR | Income Tax Act - Section 83 - Subsection 83(2) | streaming of CDA to particular shareholders is not abusive if s. 83(2.1) is complied with | |
| Income Tax Act - Section 83 - Subsection 83(2.1) | CDA streaming generally does not violate s. 83(2.1) or GAAR where the objective is to pay capital dividends to taxpayers who were already shareholders | ||
| Income Tax Act - Section 245 - Subsection 245(4) | CDA streaming between existing shareholders is generally acceptable | ||
| 5 December 2000 External T.I. 2000-0047515 F - Impôts financiers intérêts terrain vacant | Income Tax Act - Section 10 - Subsection 10(1) | interest and property taxes may be added to the cost of real estate inventory on general principles | |
| 5 December 2000 External T.I. 2000-0055815 F - Grief réglé après décès | Income Tax Act - Section 5 - Subsection 5(1) | retroactive salary adjustment that was not determined by tribunal until after employee’s death not taxable to him or estate (although heirs were taxable on interest component) | |
| Income Tax Act - Section 70 - Subsection 70(2) | retroactive salary adjustment that was not determined by tribunal until after employee’s death was not a right or thing at death |
Morgan – Tax Court of Canada accepts that an application was mailed one month before its stamping as received by the CRA mailroom
Whether the taxpayer had timely filed his application for the Ontario component of the new housing rebate pursuant to ETA s. 256.21(1) for his newly-renovated home turned on when the substantial renovation had been “substantially completed” (which started the running pursuant to s. 46(6) of the New Harmonized Value Added Tax System Regulations of the two year period for filing the application) and on when the application was filed (which, pursuant to s. 334(1) was deemed to be the mailing date).
Yuan J accepted the Crown’s position that the substantial completion date was the date when the local town conducted its final inspection of the property.
Regarding the application’s mailing date, Yuan J was underwhelmed by CRA’s application of an administrative presumption that mail was sent five business days before its receipt by the CRA mailroom, and indicated that he was not satisfied that the application was actually received by the CRA mailroom on the date of stamping on January 31, 2022. He preferred the evidence of the taxpayer’s accountant, who testified that she had mailed various client related items on December 31, 2021 and who provided a Canada post receipt dated December 31, 2021 for two items which showed that a piece of letter mail had been sent to the Sudbury TSO. Before allowing the taxpayers appeal, Yuan J stated:
I have difficulty imagining what better evidence the CRA could reasonably expect an applicant to produce as proof of filing where the application was submitted by regular mail … .
Neal Armstrong. Summary of Morgan v. The King, 2025 TCC 36 under s. 46(6)(a) of the New Harmonized Value Added Tax System Regulations, No. 2.
1351231 Ontario – Federal Court of Appeal confirms that conversion of the use of a condo from long-term rental to an Airbnb property caused its subsequent sale to be taxable
The Appellant used a condo unit for the first nine years after purchase for long-term residential rentals and then listed it on Airbnb and rented it out for succession of short-term rentals (under 60 days and sometimes for only one night) before its sale.
D’Arcy J found that this short-term rental operation caused the condo to cease to be residential complex (i.e., it became similar premises to a hotel, a motel, an inn, a boarding house and a lodging house; and substantially all of its rentals were for under 60 days) so that its subsequent sale was taxable.
Woods JA found no reviewable error in the above findings.
Neal Armstrong. Summary of 1351231 Ontario Inc. v. Canada, 2025 FCA 53 under ETA s. 123(1) – residential complex.
CRA summarizes how to delineate a transaction for transfer-pricing purposes
As part of his responses to questions posed at the 27 February 2024 CTF Transfer Pricing Roundtable, Frédéric Bourgeois set out a conceptual framework used in analyzing transfer-pricing issues. Here is a summary:
“Delineation” of a transaction
Consistent with the transfer-pricing guidelines (TPG), the delineation process requires outlining what has actually occurred between the parties, not simply a description of the legal agreement.
While the inter-company agreement can be a good starting point, what is needed is a detailed outline of what the parties actually did in terms of functions, assets consumed, and risk assumed; what they did for one-another, did separately, and how all this resulted in the creation of value in the business.
Commercial rationality of a transaction
Commercial rationality is another process that is linked to the transfer pricing analysis. It can really be understood as an economic test. It asks whether arm’s length parties acting in a self-interested, commercially rational manner, would have entered into the transactions with stated terms and conditions under the economic circumstances that they are each operating under. Each party would take into account the options realistically available for their business in their decision-making as to whether to enter into a transaction and what should be the terms and conditions of the transaction.
Therefore, commercial rationality requires consideration of the reasonable expectations of the best possible outcome for the entity. For the purpose of documenting commercial rationality of a transaction, taxpayers should provide an economic discussion to explain the nature of the transaction and should include consideration of the history of the arrangement and the activity of the broader market to justify the tested party’s decision.
Ultimately, the purpose of the inquiry is to determine whether the arrangement would have been agreed to by unrelated parties. As stated in the TPGs, the key question in the analysis is whether the related party arrangement exhibits the commercially rational terms and conditions that would be agreed between unrelated parties under comparable economic circumstances.
Who bears the risk?
Lastly, on the concept of who bears the risk, CRA would not, at first, differentiate between inbound (Canadian subsidiary) and outbound (Canadian parent) transactions. The transaction is analyzed in its totality. Generally, duly staffed and funded incorporated businesses are responsible for the risks that are inherent in their business and have the financial capacity to bear the risk. Any interaction with a related party carries compensation for the services that are provided, commensurate with the risk of providing the service as determined by a comparability analysis.
Generally, CRA sees risk as linked to the functions and assets. That is, the risk follows the functions and the assets, and the taxpayer’s efforts to decouple risk from functions and assets, as if risk were some form of commodity to be traded, is troublesome and not in CRA’s view how the TPGs should be interpreted and applied.
Neal Armstrong. Summaries of 27 February 2024 CTF Transfer Pricing Roundtable under s. 231.1(1), s. 247(2), s. 247(3) and s. 271(4).
Brookfield Renewable Power – Quebec Court of Appeal confirms the reduction of the deductible interest on loss consolidation loans from 14% to 8.75% based on parent’s borrowing costs
Loss consolidation transactions between a “Lossco” in the Brookfield group (“BRPI”) and “Profitcos” resulted, for instance, in BRPI holding $2.3 billion of loans in its Profitco subsidiary, and the Profitco holding $2.3 billion of preferred shares of its parent until this reciprocal arrangement was reversed five months’ later. The ARQ assessed to deny the deduction of the interest in excess of 6%.
The Court of Quebec reviewed inter alia the Gervais Auto decision, and also referred to the evidence of the two ARQ experts indicating that BRPI had been borrowing from arm’s length lenders at around that time at rates ranging between 6.00% and 8.75%; and to a written concession of the ARQ counsel that an interest rate as high as 8.75% could be justified as reasonable. It then referred the appeal back to the ARQ for reassessment on the basis of allowing the interest deduction at an 8.75% rate.
In finding that no reversible error had been made, the Court of Appeal stated:
In short, in accepting the expert reports produced by the respondent, the judge did not limit himself to applying an arm’s length test to the detriment of that of reasonableness. Instead, he favoured an approach based on the correct criterion, taking into account the particular nature of the transactions carried out … in the context of the consolidation of losses … and retaining, as an objective element … the financing costs incurred by the parent company and BRPI at the relevant time. This approach, which does not depart from the teachings of Gervais Auto, is not tainted by any error of law.
Neal Armstrong. Summary of Brookfield Renewable Power Inc. (Corporation Énergie éolienne Brookfield inc.) v. Agence du revenu du Québec, 2025 QCCA 234 under s. 20(1)(c)(i).
CRA indicates that the processing of fuel could constitute “processing” for ITC and Class 29 purposes
Whether equipment acquired by the taxpayer qualified for the Atlantic investment tax credit (AITC) turned, in part, on whether its use in the production or processing of fuel could be considered to be the manufacturing or processing of goods for sale in the context of the description of a Class 29 property (and as required by the definition of “qualified property” in s. 127(9).) After referring to the meaning accorded to “processing” in Tenneco and Repsol, CRA stated that “in our view the production or processing of a fuel could be considered to be the manufacturing or processing of a good for sale for purposes of the AITC depending on the particular circumstances.”
Neal Armstrong. Summary of 23 April 2024 External T.I. 2024-1004511E5 under s. 127(9) – qualified property - (c)(i).
Income Tax Severed Letters 5 March 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
RTI – Court of Quebec confirms that it had no jurisdiction to deal with over-remittances of source deductions
Couture JCQ confirmed that the Court of Quebec had no jurisdiction to consider a Notice of Objection of the taxpayer based on the failure of the ARQ to refund source deductions which it alleged that it had over-remitted, given that the Quebec equivalent of ITA s. 171(1) only accorded the Court of Quebec jurisdiction to deal with assessments. Here, there was no assessment that had been objected to.
Neal Armstrong. Summary of RTI Turbo Inc. v. Agence du revenu du Québec, 2025 QCCQ 231 under s. 171(1).
A convertible debenture held by a non-resident could trigger the FAD rules
Suppose that a widely-held private corporation resident in Canada (the “CRIC”) will emigrate from Canada for non-tax reasons. However, a non-resident corporation (“Forco”) that is not a current shareholder had acquired, prior to the emigration, a convertible debenture which, when converted after the emigration, results in Forco having de jure control of the CRIC.
Under s. 212.3(1)(b), the s. 212.3 rules apply to an investment made by the CRIC in a subject corporation if as part of the series of transactions that includes the making of the investment, Forco acquired control of the CRIC and at the time of the “investment”, the Forco shares represented 25% or more of the votes or value of the CRIC – with s. 251(5)(b) rights being taken into account for these purposes. Accordingly, on the conversion of the debentures after the emigration, Forco could be the parent of the CRIC for purposes of the s. 212.3 rules in respect of any investment made during the period in which it held the debentures before the emigration, if the debenture conversion occurred as part of the same series of transactions as that investment.
However, the finding in Eyeball Networks - that the concept of a “series of transactions” applies only when one or more of the transactions within the series is primarily tax driven - could be helpful in this regard.
Neal Armstrong. Summary of Mark Jadd and Daniel Safi, “When a Non-Resident Might Qualify as a “Parent” Under the FAD Rules: A Potential for Retroactive Application?”, International Tax Highlights, Vol. 4, No. 1, February 2025, p. 4 under s. 212.3(1)(b).