News of Note
Income Tax Severed Letters 14 May 2025
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
MedSleep – Tax Court of Canada confirms the efficacy for GST/HST purposes of an agreement between a sleep clinic and physicians for 80/20 sharing of the physicians’ fees
MedSleep, which operated sleep clinics in five provinces, received referrals from family doctors of patients with suspected sleeping disorders, who then completed a questionnaire which was reviewed by a physician assigned to the patient by MedSleep (a “sleep physician”). The patient then stayed overnight at a MedSleep clinics for overnight polysomnographic examination, with the results reviewed by the assigned sleep physician, discussed with the patient, and with a report sent back to the referring family doctor.
For its services, MedSleep collected a fee (in BC and Ontario, directly from the provincial health plan). MedSleep also entered into fee-sharing agreements with the sleep physicians, under which it was entitled to a share (e.g., 20%) of the fees that they billed to their provincial health care plan.
In rejecting the Crown's position that such 20% share was taxable consideration for administrative, billing and marketing services supplied to the sleep physicians by MedSleep, Bodie J found that:
- The fee-sharing agreements were valid for tax purposes notwithstanding that, under provincial health care law, payments for physicians’ services could be made by the provincial health insurance plans to physicians only; and
- The fee-sharing agreements did not contemplate that MedSleep would provide the alleged admin and marketing services to the sleep physicians and they instead indicated that MedSleep was entitled to a portion of the professional fees generated from medical services provided to the patients.
Bodie J further found that MedSleep and the sleep physicians were making a single compound supply given that their health care services were “all interconnected and intertwined”.
In concluding that the supplies made by MedSleep to its patients were exempted under ETA s. V-II-2 (the consideration for which was both its directly charged fees and its 20% share of the sleep physicians' fees), Bodie J found that MedSleep, in tandem with the sleep physicians, supplied institutional health care services referred to in both paras. (a) and (c) of the definition of institutional health care services, being diagnostic services and the provision of sleep access to the clinic case rooms. The clinics were health care facilities because the sleep services constituted medical care being the diagnosis and evaluation for medical treatment of the patients, and the patients who received such treatment were patients of MedSleep.
The above findings also pointed to the sleep physicians not being “recipients” of services supplied by MedSleep.
Neal Armstrong. Summaries of Medsleep Inc. v. The King, 2025 TCC 70 under ETA s. V-II-2 and s. 123(1) - recipient.
Freedom Cannabis – Alberta Court of King’s Bench finds that it had the discretion under the CCAA to eliminate directors’ personal liability arising under a federal taxing statute
The only bid for the shares of assets of a company (“Freedom”), a cannabis-producer in CCAA proceedings, came from a secured creditor (JLL), which proposed that desired assets and contracts of Freedom would be retained and that there would be a vesting out of unwanted liabilities to a newly created company (ResidualCo.) The existing shares of Freedom would be cancelled and new shares issued to a JLL subsidiary.
The only contentious issue before Mah J related to the proposed release of liabilities of the directors of Freedom, which would have the effect of extinguishing their liability pursuant to s. 295(2) of the Excise Act (similar to ETA s. 323(2)) for unremitted excise taxes of Freedom of $4.7 million.
Mah J found that the Court had the jurisdiction pursuant to s. 11 of the CCAA to grant a release of such liabilities in the face of a CRA argument that it was within the exclusive jurisdiction of the Minister of National Revenue or the Tax Court to relieve director liability under the Excise Act. In particular, Mah J found that the wording of s. 11 should not be viewed as meaning that an order thereunder could not affect rights granted by other federal legislation.
In determining that the requested director releases were appropriate, he referred, inter alia, to the JLL position that it would not proceed with the transaction without continuity of management, which depended on the release, and that there was no basis for finding that Freedom and its directors had not in good faith sought to manage the excise liabilities.
Neal Armstrong. Summary of Freedom Cannabis Inc (Re), 2025 ABKB 272 under ETA, s. 323(2).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in August of 2000. Their descriptors and links appear below.
These are additions to our set of 3,195 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).
The FAPL election may be desirable where the RAIFE of a CFA generates a FAPL that is not useful
Where a CFA has both RAIFE (i.e., interest and financing expenses that are deductible in computing its FAPI) and a FAPL for a particular taxation year, since the inclusion of the RAIFE in the taxpayer's IFE may seem inappropriate because the Canadian taxpayer (Canco) may never be able to use that FAPL, the election under s. s. 95(2)(f.11)(ii)(E) (the “FAPL election”) can generally be made to allow Canco to exclude an amount from the RAIFE of the foreign affiliate and reduce the FAPL of the foreign affiliate by the same amount.
Since s. 95(2)(f.11)(ii)(E) requires that the CFA’s FAPL and RAIFE be specified, a minor computation error may result in such FAPL election being invalid.
S. 95(2)(f.11)(ii)(E) is not prescribed under Reg 600, so that CRA is not explicitly authorized to accept a late filing of the election, although Onex (under appeal) indicated that CRA may be authorized under s. 220(2.1) or (3) to accept a late filed election not listed in Reg 600.
A simple example of a situation where the FAPL election would likely be helpful (even though the foreign affiliate group is seemingly “active”) is that of Canco wholly-owning FA Holdco, which wholly-owns FA Opco, where FA Holdco generates a FAPL as a result of third-party debt. Assuming that Canco would benefit from having additional interest-deduction capacity and that FA Holdco is not expected to generate future FAPI, it would generally be advantageous for Canco to make the FAPL election so as to reduce this FAPL by the RAIFE which otherwise would increase the IFE (i.e., non-deductible interest) of Canco.
Neal Armstrong. Summary of Eivan Sulaiman, “EIFEL’s FAPL Election,” International Tax Highlights, Vol. 4, No, 2, May 2025, p. 10 under s. 95(2)(f.11)(ii)(E).
Créations Guimel – Federal Court applies the principle that the CRA “obligation of fairness in reaching a decision under the VDP program is minimal”
In October 2022, which was more than three years after receiving the taxpayer’s VDP application for its 2008 to 2017 taxation years (which reported income generated from the investment of the proceeds from a 2007 European sale transaction), CRA requested that the taxpayer’s authorized representative provide documentation regarding the 2007 sale, including an amended 2007 T2 return. Some of this information but not, for instance, the amended return, was then so provided.
CRA made various follow-up attempts and the last communication from the representative was in May 2023, when he indicated that the taxpayer was attempting to retrieve the requested documentation relating to the 2007 sale.
On August 1, 2023, CRA left a voicemail message (which the representative apparently missed) indicating that if the requested information was not provided, the VDP application would be closed as incomplete. After no further communication, this occurred in October 2023.
In denying the taxpayer’s request regarding judicial review of the October 2023 decision, Régimbald J indicated:
- The applicant itself effectively raised the importance of the 2007 transaction in its VDP application which related to the use of proceeds of that transaction. Accordingly, its argument that the VDP application should be limited to the taxation years 2008 to 2017, because those were the only taxation years for which CRA could grant relief under the VDP program given the 10-year limitation in s. 220(3.2)(b), was without merit.
- No evidence was adduced to demonstrate that the information on the 2007 taxation year was impossible to obtain, and no request was made by the applicant to the CRA to accept that such information could not be legitimately obtained.
- Given that “’the obligation of fairness in reaching a decision under the VDP program is minimal’,” the taxpayer had no legitimate expectation that CRA would provide yet a further (and “final”) extension in writing on August 1, 2023, before making a final rejection decision.
Neal Armstrong. Summary of Créations Guimel Inc. v. Minister of National Revenue, 2025 FC 814 under s. 220(3.2).
CRA confirms that the “qualifying home” test for first-time home buyer credit purposes precludes ownership of a principal place of residence outside Canada in the 4 preceding years
In most circumstances, s. (a)(ii) of the definition of “qualifying home” in s. 118.05 requires the individual who is acquiring a qualifying home to have not occupied a home in the period beginning four years before the year of the acquisition.
CRA indicated that it interprets s. (a)(ii) as requiring the individual not to have inhabited a home during that period as the individual's “principal place of residence,” as defined in ITTN No. 31. CRA further indicated that it made no difference whether the home was so inhabited during the four-year period inside or outside Canada.
Neal Armstrong. Summaries of 31 December 2024 External T.I. 2021-0885741E5 F under s. 118.05(1) - qualifying home - s. (a)(ii), s. (a)(iii).
CRA indicates that a multi-year reportable uncertain tax treatment (RUTT) must be reported in each year and that it is “reflected” in the financials if it impacts them
In addressing various questions respecting the reporting of a reportable uncertain tax treatment (RUTT) under the s. 237.5 rules, CRA indicated that:
- Where the RUTT impacts multiple taxation years, it must be disclosed in the RC3133 form for each such year.
- Uncertainty in respect of tax treatment is considered to be “reflected” in the taxpayer's relevant financial statements (the core test in the RUTT definition) where such tax treatment “impacts” those financial statements, for example, where the entity concludes that it is probable that the tax authority will not accept an uncertain tax treatment and thus it is probable that the entity will pay amounts relating to the uncertain tax treatment. The financial statements include the notes.
- Regarding the requirement in the RC3133 to disclose whether each RUT is “temporary” (presumably meaning that it will reverse within some time frame), or “non-temporary,” this determination should be made according to the accounting principles used in the relevant financial statements of the reporting corporation.
Neal Armstrong. Summaries of 20 March 2025 External T.I. 2024-1042821E5 under s. 237.5(1) - RUTT, and s. 237.5(2).
The Joint Committee suggests technical amendments
The Joint Committee has provided a significant list of items where technical amendments would be desirable. Some of the items mentioned (not already mentioned in previous submissions) include:
- The definition of “tax-indifferent” for purposes of para. (c) of the EIFEL-related definition of "excluded entity" includes a trust resident in Canada if more than 50% of the fair market value of all interests as beneficiaries under the trust can be reasonably considered to be held directly or indirectly through one or more trusts or partnerships by any combination of tax exempts under s. 149 and non-resident persons. It can be challenging for a publicly traded mutual fund trust, such as a REIT, to determine whether it satisfies this definition of tax indifferent. Accordingly, the definition of tax indifferent should be amended to exclude mutual fund trusts which themselves would otherwise constitute excluded entities.
- Where a foreign affiliate makes an upstream loan to its Canadian corporate shareholder and the interest on such a loan is subject to Canadian withholding tax, the IFR definition in s. 18.2(1) ensures that the deduction to the taxpayer under s. 91(4) for such Canadian withholding tax does not reduce the amount added to the taxpayer's IFR with respect to the underlying interest income. The same appropriate result does not occur in the situation where, for example, Canco1 owns Canco2, which owns an FA which has made an upstream loan to Canco1, the interest on which is subject to withholding tax. If, for example, there was $100 of interest on which there was $25 of withholding tax and Canco2 was a pure holding company with no other sources of ATI, IFE, or IFR, the excess capacity generated by Canco2 would be $70, not $100. This anomaly arises because variable I of the excess capacity definition takes into account the absolute value of the taxpayer's negative ATI.
- An excluded lease under s. 18.2(1) would include, for instance, the lease of a building described in Reg. 1100(1.13)(a)(vi). The definition of excluded lease should be amended to clarify that it includes subjacent or immediately contiguous land that contributes to the use of the exempt property.
- Para. (c) of the definition of substantive debt in s. 183.3(1) references a test under which the preferred shares bear a dividend rate that is fixed, or computed generally as a percentage of the FMV of the consideration for which the shares were issued, rather than as a percentage of the redemption amount of the shares, even though it is commercially common for dividends to be computed on the latter basis. Furthermore, para. (d) does not generally permit the preferred shares to be issued at a discount to their general redemption amount.
- The share buyback tax can apply in a punitive manner where a qualifying issuance occurs within a short period of time before or after a redemption, acquisition, or cancellation of a share but in a different taxation year.
- The time at which a share is to be characterized as a QSBCS or family farm/fishing corp. share (a “qualifying share”) for purposes of the s. 55(5)(e)(i) exemption is unclear, for example, where in a purification transaction the shares were not qualifying shares at the beginning of the series of transactions.
- Furthermore, a qualifying share is a share of an individual, so that the definition does not accommodate situations where, for example, a farming corporation was held by an individual through a holding company.
- Where the shareholder of a taxable preferred share is a non-resident person, the policy behind Part VI.1 tax being imposed is no longer applicable since, subsequent to 2008, a non-resident investor who deals at arm's length with the Canadian corporation is not subject to Canadian tax on interest paid by the Canadian corporation.
- The flipped property rules should be amended to provide a broader safe harbour for various transactions, e.g., the 365-day test should be considered to be met for a beneficiary who acquires property by way of a tax-deferred distribution under s. 107(2) if it was held for 365 consecutive days by the trust or for where a graduated rate estate sells a property which would not have been a flipped property if sold by the deceased individual immediately prior to death.
Neal Armstrong. Summaries of Joint Committee, "Summary of Feedback on Various Technical Issues", 14 April 2025 Joint Committee Submission under s. 18.2(1) - IFR, s. 80(2)(b), s. 18.2(1) – excluded entity – (c), s. 18.2(1) – tax-indifferent, s. 18.2(1) – ATI – C – (a), s. 18.2(1) – excluded lease, s. 183.3(1) – substantive debt – (c), s. 183.3(2), s. 55(5)(e), s. 93.4(1) – FABI, s. 220(3.2), s. 191.1(1) – excluded dividend, and s. 12(13)(b).
Income Tax Severed Letters 7 May 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.