News of Note
CRA finds that a financial institution’s investment in a non-resident partnership generally does not give rise to zero-rated supplies after the initial investment
Email this ContentA Canadian financial institution made a capital contribution to a “Non-Resident Partnership”) between a general partner and a limited partner, with a resulting credit to its capital account. Could it claim ITCs for its related inputs on the basis that its investment was a zero-rated financial service under ETA s. VI-IX-1?
CRA noted that applying the two-step approach in Folio S4-F16-C1, the Non-Resident Partnership might not be a partnership for Canadian tax purposes, given that the general partner did not have an interest in the “partnership,” and the limited partners and general partner had no obligation for its liabilities. If not a partnership, the consideration received for the investment (the “partnership” interest) might not be a financial instrument, in which case, that investment would be excluded from being the supply of a “financial service” by virtue of the exclusion in para. (n) of the definition thereof. [This possibility seems unlikely. If not a partnership, the consideration received presumably would qualify as a share.]
CRA indicated that the acquisition of the initial investment likely was a zero-rated supply, namely, a payment of money in consideration for the partnership interest, so that the related inputs could potentially qualify for input tax credits (ITCs).
Regarding the subsequent holding of the partnership interest, they would not represent the making of a supply. Furthermore, even if the receipt of monthly partnership distributions constituted the making of a supply (in which case, it would be an exempt supply under para. (f) of the financial services definition), it would not constitute the making of a supply for consideration (i.e., the financial institution would not receive consideration in return for receiving such distributions) so that no related ITC claims could be made. [CRA apparently did not regard the monthly distributions as deferred zero-rated consideration for the investment, even though the entitlement thereto was part of the bundle of rights (the partnership interest) received in consideration for the investment.]
Finally, the making of an additional capital contribution by all partners would not be a taxable supply made for consideration, as no consideration (i.e., partnership interest, further right or enhancement) would be received in return for doing so – so that, again, this could not generate ITCs. [This seems questionable. A partner has a deferred undivided interest in the partnership property and a capital contribution credited to its capital account would increase the quantum of that entitlement.]
Neal Armstrong. Summaries of 30 May 2024 GST/HST Interpretation 246958 under ETA s. VI-IX-1, s. 141.02(1) - non-attributable input, s. 123(1) – financial service - (n), and (f).
Susquehanna International - Irish Court of Appeal finds that a US LLC was not a resident of the US for purposes of the US-Ireland treaty
The taxpayers were Irish resident companies whose ultimate parent was a single member LLC (“SIH LLC”), which was fiscally transparent for U.S. tax purposes. SIH LLC was, in turn, owned by a Delaware LLP, the members of which were six Delaware S corporations, each of which was owned by a U.S. resident businessman. Those individuals included the income of the LLC in their income for U.S. tax purposes.
Whether the Irish companies were entitled to group relief (i.e., consolidation of losses) by virtue of a non-discrimination article in the Ireland-U.S. Treaty (the “DTA”) turned on whether SIH LLC was a "resident" of the U.S. Article 4 of the DTA defined "resident of a Contracting State" to mean "any person who under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature."
Allen JA stated that, as “the purpose of the treaty is to avoid double taxation … it stands to reason that it should only apply to persons who otherwise would be exposed to a liability to pay tax. SIH LLC had no such exposure.”
He further suggested that TD Securities (which found a US LLC to be a resident of the U.S. for purposes of the Canada-U.S. Treaty) appeared to be incorrectly decided, stating:
As to Boyle J.'s conclusion that TD LLC must be considered to be liable to tax by virtue of all of its income being fully and comprehensively taxed under the U.S. Code, albeit at the member level, I agree with the judge that this conflated the taxation of the LLC with the taxation of the income and ignored the legal separation between the entity and the members. The DTA applies to persons who are liable to tax, not to income that is liable to be taxed.
The taxpayers’ appeal was dismissed.
Neal Armstrong. Summary of Revenue Commissioners v Susquehanna International Group Ltd & ors [2025] IECA 123 under Treaties – Income Tax Conventions – Art. 4.
Ehresman – Tax Court of Canada finds that cash reserves were not active business assets because they were excessive in relation to reasonably-determined risks
Whether the sale by a couple of their shares of a private corporation (CCM) with producing Canadian oil wells and a Canadian financial services business constituted a sale of qualified small business corporation shares (QSBCS) turned on whether their CCM shares satisfied the test in the QSBCS definition of more than 50% of the fair market value (FMV), over the 24 months preceding the disposition, of their shares being attributable to assets used principally in CCM’s active business. Given that CCM had substantial cash holdings, this issue turned on whether at least $710,000 of this cash was so used in the business on the basis of being required by the oil and gas business as a reserve against prospective future well decommissioning costs.
Esri J rejected this proposition on the basis that the evidence indicated that the prospect of decommissioning costs being at this high a level was something quite remote and stated:
[I]t is a foregone conclusion that sooner or later decommissioning costs will become due, but that is not enough. The case law requires a rational connection between the reasonably determined risk and the amount of the reserves. It does not permit an appellant to set aside virtually unlimited amounts of property on the theory that there is a small and remote risk of an unlimited liability at an unspecified future date.
Neal Armstrong. Summary of Ehresman v. The King, 2025 TCC 78 under s. 110.6(1) – QSBCS.
CRA rules on qualification of building an access road as CEE
In order to facilitate access of exploration drilling equipment to a deposit, the taxpayer (a principal business corporation) will be constructing a one-way gravel road to the site. There is not currently a plan to maintain the road past the current exploration phase.
CRA ruled regarding the expenditures on this road qualifying under para. (f) of Canadian exploration expense.
Neal Armstrong. Summary of 2024 Ruling 2024-1017941R3 under s. 66.1(6) – CEE – (f).
Jewish National Fund - Federal Court of Appeal finds that the Federal Court lacked jurisdiction to review a decision of the Minister to publish notice of revocation of charitable registration
The Minister sent a notice of intention to revoke (“NITR”) to the appellant, a registered charity. After the Minister issued a notice of confirmation, the Minister agreed, in correspondence with the appellant, to stay the publication of the NITR until the period for appealing the notice of confirmation had expired.
About a month later, the appellant filed a notice of appeal in the Federal Court of Appeal but did not apply for an order extending the period after which the Minister could publish the NITR. Less than three weeks later, the Minister published the NITR in the Canada Gazette, thereby revoking the appellant's charitable registration. As noted by Monaghan JA, a charity cannot appeal a revocation (as contrasted to the right to appeal an NITR to the Federal Court of Appeal).
The appellant filed an application for judicial review and for injunctive relief in the Federal Court regarding the Minister's decision to publish the NITR, and also filed an application for judicial review of the Minister's decision to publish the NITR in the Federal Court of Appeal.
At issue in this proceeding was whether the Federal Court had been correct in determining that it lacked jurisdiction to review the publication decision. The appellant submitted that, as the ITA appeal provisions only captured the decision to issue or confirm the issuance of the NITR and the decision to publish the NITR (triggering revocation of charitable registration) was a separate decision that the appellant could not appeal, therefore only the Federal Court had jurisdiction (pursuant to s. 18(1) of the Federal Courts Act) to judicially review the publication decision.
In rejecting this submission, Monaghan JA noted that ss. 172(3) and 180(1) provided that a registered charity could appeal the Minister’s decision to issue an NITR, or to confirm it following objection, to the Federal Court of Appeal, and that s. 180(2) provided that the Federal Court had no jurisdiction to entertain “any proceeding in respect of a decision of the Minister” from which any such appeal may be instituted.
She then found that, given the close connection between the NITR and its subsequent publication, an application for judicial review of the Minister’s decision to publish the NITR was a proceeding “in respect of” the Minister’s decision to issue or confirm the NITR. Consequently, she agreed that the Federal Court lacked jurisdiction to review the decision to publish the NITR.
She noted that she was not commenting on the separate application for judicial review by the Federal Court of Appeal of the Minister’s decision to publish.
Neal Armstrong. Summary of Jewish National Fund of Canada Inc. v. Canada (National Revenue), 2025 FCA 110 under s. 180(2).
Income Tax Severed Letters 4 June 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that the mark-up in the charges for geophysical services by a connected corporation to an exploration company over its incurred costs would be excluded from CEE
BCO will be issuing flow-through shares to fund exploration work. A second company (ACO), which is wholly owned by the controlling shareholder of BCO, provides geophysical services to its customers, including BCO.
Would any portion of the payments made by BCO to ACO for ACO's services be considered exploration and development overhead expense (CEDOE) so that such portion would be excluded from Canadian exploration expense (CEE) pursuant to ITA s. 66(12.6)(b) and Reg. 1206(4.2) and, thus, could not be renounced by BCO to its flow-through share investors?
CRA noted that under para. (d) of the CEDOE definition in Reg. 1206(1), amounts paid by BCO to a person with whom it was connected under Reg. 1206(5)(a) (i.e., ACO) for the performance of a service, which otherwise would be CEE, will be CEDOE to the extent that the amount charged exceeds the costs incurred by such connected person in providing the service.
Thus, the amount of CEE that BCO would be entitled to renounce in respect of the amounts paid by it to ACO for ACO's services would be limited to the actual cost incurred by ACO in providing such services. Regarding whether certain non-insurable risks and liabilities (e.g., losses if the survey aircraft crashed) could be considered to be “costs incurred” for these purpose, CRA noted that the “Courts have held that a taxpayer will not be considered to have incurred an expense unless and until the taxpayer has an absolute and unconditional legal obligation to pay an amount” and indicated that It seemed unlikely that such amounts could so qualify.
Neal Armstrong. Summary of 9 August 2023 External T.I. 2023-0979431E5 under Reg. 1206(1) – CEDOE – para. (d).
CRA indicates that the opening UCC for used depreciable property of an acquired LLC for the first year of computing its FAPI was the lesser of UCC and FMV
A US LLC, which was formed in 2017 by a regarded US corporation, acquired and used appreciable assets in carrying on its active business in the US from 2017 and all subsequent years. All the membership interests in the LLC were acquired at arm's length by an affiliate of a Canadian resident corporation on January 1, 2024.
The earnings of the LLC were required under s. (a)(iii) of the definition of “earnings” in Reg. 5907(1) to be computed on Canadian principles and, pursuant to Reg. 5907(2.03), with the claiming of maximum deductions. Would the undepreciated capital cost (UCC) of the LLC's depreciable property be determined on January 1, 2024 by being reduced by notional CCA deductions for the prior years?
CRA indicated that for the purposes of computing the income of US LLC under Part I of the Act, and for the purposes of determining its earnings under Reg. 5907(1), the opening balance of UCC for 2024 would be the lesser of capital cost and fair market value.
Neal Armstrong. Summary of 28 May 2025 IFA Roundtable, Q.6 under Reg. 5907(2.03).
CRA provides a formula for prorating foreign tax between a FAPI and non-FAPI business for FAT purposes
If a foreign affiliate (FA) carries on a business in a foreign county and pays tax to that country on income which the ITA segregates into income from a business other than an active business and active business income, how will the determination of what portion of the foreign tax paid “may reasonably be regarded as applicable to” foreign accrual property income (FAPI) of FA in accordance with the foreign accrual tax (FAT) definition be made?
CRA indicated that it would consider it reasonable to compute FAT by multiplying the total amount of foreign tax paid to the foreign jurisdiction by the foreign affiliate for its taxation year by a fraction:
- the numerator of which is the net income of the foreign affiliate for the taxation year computed under the foreign tax laws from the activities that generate FAPI for Canadian income tax purposes (the “FAPI business”); and
- the denominator of which is the total net income of the foreign affiliate computed under the foreign tax law.
Thus, for the purposes of computing the numerator it is necessary to first identify the activities that would form part of FAPI business, and then the gross income under the foreign tax rules from that FAPI business is to be computed, with that amount then being reduced by the total amount of deductions that are allowed under the foreign tax law and claimed by the foreign affiliate in the taxation year that may reasonably be regarded as directly applicable only to the FAPI business; this amount should also be reduced by the prorated amount of deductions (again allowed under the foreign tax law and claimed by the foreign affiliate) that would not reasonably be regarded as applicable to either the FAPI business or any other income-generating activities, such as overhead or head office expenses.
If there were any tax credits that reduced the foreign tax liability of FA, the above formula might have to be modified or a case-by-case approach might be required.
Neal Armstrong. Summary of 28 May 2025 IFA Roundtable, Q.5 under s. 95(1) – FAT.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in August and July of 2000. Their descriptors and links appear below.
These are additions to our set of 3,215 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).