News of Note
CRA indicates that the later-of-incurring-and-acquiring rule in s. 127.44(9)(e) applies on an expenditure-by-expenditure basis
Email this ContentCRA illustrated the application of s. 127.44(9)(e), which deems an expenditure for qualified CCUS expenditure purposes to be incurred in the later of the taxation year in which it was incurred and that in which the related property was acquired.
A taxable Canadian corporation (BCo), receives initial project evaluation from Natural Resources Canada (NRCan) for its CCUS project in 2025. In 2026, it incurs $1,000,000 for detailed engineering costs relating to Class 57 equipment to be acquired by it; in 2027, it requires further Class 57 equipment for $10,000,000; and in 2028, it incurs $5,000,000 in installing the Class 57 equipment in the course of constructing the carbon capture facilities.
CRA noted that although there was no property acquired in 2028 (but only in 2027), s. 127.44(9)(e) would deem the related property to have been acquired in 2028, thereby permitting the definition of qualified carbon capture expenditure to apply to the taxpayer in 2028 in respect of the $5,000,000 of installation costs.
Furthermore, s. 127.44(9)(e) was to be applied separately to each expenditure such that its application to the installation cost incurred in 2028 would not adversely impact its application to expenditures incurred in the previous taxation year. For example, as for the $1,000,000 of costs incurred in 2026, they would be deemed to be incurred in the later of the year in which they were incurred (2026), and the year in which the property to which they related was acquired (2027), i.e., in 2027.
Neal Armstrong. Summary of 21 July 2025 External T.I. 2025-1068511E5 under s. 127.44(9)(e).
CRA finds that NRCan preliminary approval of a CCUS project in Year 2 can backdate qualification of a project expenditure for Class 57(a) property acquired in Year 1
In 2026. a taxable Canadian corporation (Aco) takes ownership and delivery of, and pays for, equipment described in Class 57(a) at the premises of its proposed (carbon capture) CCUS project. However, the equipment will be stored at the premises until Natural Resources Canada (NRCan) issues an initial project evaluation, which will not occur until 2027.
After noting that, unlike other clean economy investment tax credits, there is no requirement that the property acquired be available for use before the CCUS tax credit can be claimed, CRA indicated that the expenses incurred in 2026 could be considered to have been incurred “in respect of” a qualified CCUS project of ACo once ACo's project became a qualified CCUS project upon receipt of the initial project evaluation from NRCan in 2027.
Accordingly, such expenditure would be qualified carbon capture expenditures for the 2026 taxation year, i.e., once initial project evaluation occurred in 2027, the 2026 expenditure would qualify and could be claimed for 2026 (and this was so even though the special backdating timing rule in s. 127.44(9)(h) was not available.)
Neal Armstrong. Summary of 21 July 2025 External T.I. 2024-1039761E5 under s. 127.44(4).
Stackhouse - Federal Court of Appeal confirms that the farming operation of a doctor to which she devoted significant time and capital was a subordinate source for s. 31(1) purposes
After being amended to overrule Craig, s. 31(1) generally provides that where the taxpayer’s chief source of income is a combination of farming and another source, the farming loss restriction rule in s. 31(1) applies unless that other (non-farming) source is a subordinate source.
From 2007 to 2015, the taxpayer earned aggregate net income of $4.1 million from her medical practice, and incurred losses exceeding $4 million from her farming business to which she devoted substantial time and capital. In confirming the denial of farming losses claimed by her for her 2014 and 2015 taxation years, the Tax Court had found that her farming business had always been subordinate to her medical practice as a source of income and that there was no evidence that this would change in the foreseeable future.
Monaghan JA rejected the taxpayer's submission that, to determine which of the two sources was subordinate, priority should be given to time, attention, energy, and capital invested, and not actual or potential profitability. More generally, she found that there was no reviewable error in the Tax Court’s application of the relevant factors in applying the subordinate source test “including the appellant’s ‘ordinary mode of living, farming history, and expectations’: Craig at para. 42” and in its conclusion that farming was subordinate to the taxpayer’s medical practice.
Neal Armstrong. Summary of Stackhouse v. Canada, 2025 FCA 175 under s. 31(1) and Statutory Interpretation – Prior Cases.
Income Tax Severed Letters 1 October 2025
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Husky Energy – Federal Court of Appeal finds that a securities loan between residents of two Treaty countries did not change the beneficial ownership of the transferred shares
Before a Canadian public corporation (“Husky”) paid a dividend on its shares, two significant shareholders of Husky resident in Barbados (the “Barbcos”) transferred their shares under agreements styled as securities lending agreements to related companies resident in Luxembourg (the “Luxcos”). On payment to the Luxcos of a special dividend on those shares, Husky withheld at the Luxembourg Treaty-reduced rate of 5%. Pursuant to the terms of the lending agreements, the Luxcos paid dividend compensation payments to the Barbcos equal to the gross amount of such special dividends to the Barbcos, and later returned the borrowed shares to the Barbcos.
In finding that the Tax Court did not err in concluding that the 5% Luxembourg Treaty-reduced rate did not apply because the Luxcos were not the beneficial owners of the special dividends, Goyette J.A. noted that they essentially had not assumed any risk with respect to the receipt of those dividends, including by entering into “perfect hedges” with respect to FX risk with related parties, or experienced any significant net monetary consequences. The Tax Court’s finding was consistent with the 2003 OECD Commentaries, which indicated that a company is not normally the beneficial owner of dividends if, though the formal owner, it only has “very narrow powers … in relation to the income concerned”.
Furthermore, the finding that the Luxcos, as the borrowers of the Husky shares, were not the beneficial owners of the dividends did not shed an adverse light on the application of treaties to true securities lending arrangements since the agreements between the Barbcos and Luxcos were not in legal substance securities lending agreements. First, the parties never intended for the Luxcos to sell or lend the borrowed Husky shares, which represented 71.5% of all the outstanding Husky shares; and, second, they had agreed that the Luxcos would not post any collateral.
The Tax Court had found that s. 212(2) imposed tax at 25% (although CRA had only assessed at 15%) on the basis of the persons to whom the dividends had in fact been paid (the Luxcos). Since the dividends had not been paid to Barbados residents (the Barbcos), the Barbados treaty rate of 15% was unavailable. Furthermore, the Luxembourg Treaty rate was unavailable because the Luxcos were not the beneficial owners of the dividends,
Goyette JA indicated that this finding was troubling, as it would suggest that a financial institution custodian resident in one country holding for the beneficial owner resident in a second country, would not be eligible for the Treaty-reduced rate applicable to the country of residence of the beneficial owner. However, it was not necessary for her to address this issue, although she should not be taken to have endorsed the Tax Court's interpretation of s. 212(2).
Neal Armstrong. Summaries of The King v. Husky Energy Inc., 2025 FCA 176 under Treaties – Income Tax Conventions – Art. 10 and s. 212(2).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in February of 2000. Their descriptors and links appear below.
These are additions to our set of 3,330 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 25 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Héroux – Quebec Court of Appeal finds that ETA s. 296(2.1) requires the acceptance of late refund claims
The taxpayer, who was not a registrant, constructed various new rental units in 2014 and 2015. After the expiry of the two-year period under the Quebec equivalents of ETA s. 257(1) for claiming input tax refunds (ITRs), and under ETA s. 256.2(7)(a)(iii) for claiming the new rental housing rebate (NRHR), the taxpayer filed QST returns in which he self-assessed QST on the fair market value (FMV) of the facilities when they were first rented out and claimed NRHR and ITR rebates, resulting in a net refund claim.
The ARQ denied the refund claims on the basis that the two-year periods for making such claims had expired. Did s. 30.5 of the Tax Administration Act (Quebec) require the ARQ to take such refund claims into account when assessing, given that para. 2(a) of that provision stipulated that such requirement did not apply where "a claim was made and not refused in respect of the refund before the day on which the Minister made the assessment"?
In finding that the 2(a) exclusion only applied where a refund claim had previously been made within the two-year normal claim period, so that it did not apply to the taxpayer whose refund claims instead had been made late, Hamilton JCA stated:
The [2(a)] exception aims to prevent double refunds: if the person has a refund claim that is pending at the time of the notice of assessment, it must, in principle, proceed. However, in this case, the refund claims were late … [and] were doomed to fail from the outset due to the expiration of the deadline. … Those claims should not, however, prejudice his rights. In other words, exception (a) must be interpreted as being limited to claims that could be accepted and could lead to double refund, and thus only to those submitted within the two-year period prescribed by statute.
After referring to the “presumption of coherence between provincial and federal statutes in GST/QST matters,” Hamilton JCA indicated that it appeared that ETA s. 296(2.1)(b) should be similarly interpreted. He did not discuss ETA s. 296(4)(b), which also could be relevant to a late claim for ITCs.
Neal Armstrong. Summaries of Agence du revenu du Québec v. Héroux, 2025 QCCA 1167 under ETA s. 296(2.1)(b), s. 225(1) - B and Statutory Interpretation – Similar Statutes.
Most of the MAG shareholders have opted to receive Pan American shares for their MAG shares which, because of proration, includes a substantial cash component
The MAG shareholders have approved an acquisition of MAG by Pan American pursuant to a BC plan of arrangement.
Each MAG shareholder was given the choice of electing to receive either the “Cash Consideration” of US $20.54 per MAG share, or the (Pan American) “Share Consideration” which, in order to avoid the application of s. 85.1, included a nominal cash component of US $0.0001 per MAG share. However, this was subject to a requirement that the aggregate consideration be fixed at US $500,000,000 in cash, with the balance in Pan American shares. In fact, only around 1.71% of the MAG shares elected to receive the Cash Consideration election, so that the balance of the shares, subject to the Share Consideration option will, in fact, receive around US $4.56 per share in cash.
“Eligible Holders” (generally, Canadian taxable investors) receiving the Share Consideration will be permitted to make a joint election under ITA s. 85(1) with Pan American, provided that they submit their duly signed and completed election form to Pan American within 60 days after the effective date of the Arrangement.
Neal Armstrong. Summary of Circular of MAG Silver Corp. (the "Company" or "MAG") respecting an Arrangement involving it and Pan American Silver Corp. (the "Purchaser" or "Pan American"), dated June 6, 2025 under Mergers & Acquisitions – Mergers – Shares for shares and nominal cash, or cash.
CRA finds that the electrolysis of sodium chloride solution producing hydrogen only as a by-product did not qualify as the “electrolysis of water” for clean hydrogen purposes
Whether a project, which used the chlor-alkali process or the chlorate process, constituted a qualified clean hydrogen project depended on whether, in accordance with the “eligible pathway” definition, such processes produced hydrogen from “electrolysis of water.”
CRA concluded that neither process so qualified given inter alia that these processes used electrolysis of sodium chloride solution to generate primarily sodium hydroxide or chlorate compounds, and the hydrogen produced was a relatively minor by-product.
Neal Armstrong. Summaries of 26 May 2025 External T.I. 2025-1056481E5 under s. 127.48(1) – eligible pathway and Statutory Interpretation – ordinary meaning.
Wygodny – Court of Quebec decision establishes that you should be careful whom you marry, especially if she lives in Quebec
The taxpayer was assessed by the ARQ for his 2014 to 2018 taxation years on the basis that he was resident in Quebec rather than Ontario.
He clearly was an Ontario resident until he met his future second wife in 1989 (whom he married in 1992). Thereafter, he started staying at various residences of his wife in Quebec when they were not wintering in Florida, and she never came to Ontario. Although he had maintained an Ontario driver's licence, vehicle registration and health care coverage, and his adult children (from his first marriage) remained in Ontario, the evidence established that his life had become centered in Quebec.
For example, an ARQ analysis of his expenditures showed that over 95% of his grocery and hardware-store purchases were made in Quebec. He failed to establish that he was paying rent to his children in Ontario to stay at their residences and, indeed, it appeared that he mostly stayed in hotels when he came to Ontario to attend to his real estate interests there.
Before dismissing the taxpayer’s appeal, Philippe J.C.Q. stated:
The Court concludes, after analyzing all the connecting factors, that Mr. Wygodny had brief stays in Ontario and clearly established his place of residence in Quebec over time.
Neal Armstrong. Summary of Wygodny v. Agence du revenu du Québec, 2025 QCCQ 4305 under s. 2(1).