News of Note
Income Tax Severed Letters 16 April 2025
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
1084204 B.C. – BC Court of Appeal finds that an acquisition of a BC residential property by a foreign entity merely as agent for a resident was subject to 20% LTT
The respondent (“108”) was a BC company whose shareholder was a foreign national (Mr. Oeri), so that 108 was a “foreign entity” for purposes of the Property Transfer Tax Act (BC) (the “PTTA).
The chambers judge had found that an acquisition of a BC residential property by 108 was not subject to the additional transfer tax (“ATT”) of 20% imposed under the PTTA for acquisitions of such a property by a foreign entity because inter alia 108 acquired the property as agent for the common law spouse of Mr. Oeri (Ms. Sui), who was a Canadian permanent resident.
In reversing this finding and concluding that the purchase was subject to the ATT, Horsman JA referred to prior BC cases that “establish that, subject to statutory exemptions, property transfer tax is payable by the person to whom the legal estate is transferred (the 'transferee'), regardless of whether another person has beneficial ownership” and concluded:
Regardless of whether 108’s relationship with Ms. Sui could be characterized as an agency or a trust, or both, 108’s liability to pay the ATT arose on the registration of the transfer of the legal estate to 108.
Neal Armstrong. Summary of British Columbia v. 1084204 B.C. Ltd., 2025 BCCA 110 under PTTA, s. 1 – taxable transaction – (a)(i).
A retroactive amendment to s. 212.1(6)(b) is intended to accommodate a pipeline transaction by a GRE with a non-resident beneficiary
In a pipeline transaction where an estate with a non-resident beneficiary transfers its shares of Opco to a Newco in consideration for a note of Newco, Newco will be deemed under the current version of the s. 212.1(6)(b) conduit rule to pay to the non-resident beneficiary a dividend (subject to Part XIII tax) based on the note amount, that is generally proportionate to the relative FMV of that beneficiary's interest in the estate. If the Opco shares instead are transferred by the estate to Newco for high-PUC Newco shares, that PUC will be suppressed by the same amount.
An August 12, 2024 draft amendment to s. 212.1(6)(b) would (retroactively to the February 26, 2018) exclude, from the application of the above look-through rule, dispositions of shares by a graduated rate estate (GRE) which had acquired those shares upon the death of a Canadian resident individual.
Observations include:
- This amendment applies, in the case of resident trusts, to trusts that are GREs at the time of the share disposition, so that the amendment will not provide relief if the transfer occurs after the 36-month period for being a GRE has expired (or GRE status is otherwise compromised), or the subject shares are held in an alter ego, spousal, or joint partner trust.
- The amendment will provide no relief if the deceased was a non-resident on death, even if the estate is resident in Canada because of Canadian-resident executors.
- The amendment only applies to shares "acquired... on and as a consequence of" the individual's death. Accordingly, if the shares acquired by the GRE on death are then exchanged before the pipeline transaction, for example, on a share-for-share exchange to isolate value in new preferred shares, the amendment may not apply.
The amendment also extends the deadline for a refund application under s. 227(6) to 180 days from the date on which the amendment receives royal assent.
Neal Armstrong. Summary of Kyle Lamothe and Alexander Demner, “Retroactive Relief from section 212.1 ‘Look-Through’ Rules Proposed for Post Mortem Pipelines,” Tax for the Owner-Manager, April 25, 2025, Vol 25, No. 2, p. 4 under s. 212.1(6)(b).
Sura – Court of Quebec finds that the conversion of apartment buildings to condo units did not trigger a change of use – and that CAE rather than IT-218R would apply re change of use
In 1981, 10 individuals acquired as co-owners two adjoining rental buildings containing a total of 82 apartments. In 2006, in order to make their interests more marketable, they converted their undivided interests into 82 separate condominium units while continuing to rent them out. Between 2010 and 2013 (the taxation years under appeal), they disposed of 12 of the condo units, and reported capital gains.
Revenue Quebec applied the position in IT-218R on change of use and treated such gains as consisting of a capital gain, computed on the basis of a notional disposition of the properties for their FMV the time of their change of use from capital property to inventory (in 2005, when the decision to convert was taken) and, as to the balance (representing post-2005 appreciation), as business income from the disposition of inventory.
In confirming the taxpayers' position that all of their gains were capital gains, Bourgeois, JCQ, indicated inter alia that the Latulippe decision, where the Quebec Court of Appeal found that simply transforming from undivided to divided ownership in order to sell at a better price did not have the effect of converting capital property into inventory, “was quite similar”.
Regarding the purported application by Revenue Quebec of the CRA position in IT-218R (which now was not relevant given his finding of no change of use), Bourgeois JCQ noted that this approach had been overruled in the CAE case, which found that gain would be realized in the taxation year of change of use pursuant to ITA ss. 13(7) and 45(1).
Neal Armstrong. Summary of Sura v. Agence du revenu du Québec, 2025 QCCQ 1127 under s. 45(1).
We have translated 8 more CRA severed letters
We have translated a CRA interpretation and ruling released last week and a further 6 CRA interpretations released in October and September of 2000. Their descriptors and links appear below.
These are additions to our set of 3,167 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).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2025-04-09 | 2024 Ruling 2023-0998291R3 F - Multi-wings split-up net asset butterfly 55(3)(b) | Income Tax Act - Section 55 - Subsection 55(1) - Distribution | split-up butterfly between a divorced couple where excess debt is allocated to land rather than building to produce capital gains treatment |
| Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(b) | excess debt allocated on s. 85(1) transfer of land and building to the land so as to produce capital gains rather than recapture | ||
| 17 January 2025 Internal T.I. 2024-1029791I7 F - SSUC - Rémunération de la haute direction / CEWS - | Income Tax Act - Section 125.7 - Subsection 125.7(1) - Executive Remuneration | no adjustments are made to an eligible entity's Statement of Executive Compensation for NEOs filed pursuant to NI 51-102 for CEWS repayment purposes | |
| Income Tax Act - Section 125.7 - Subsection 125.7(14) | repayment based on NI 51-102 statements, without adjustments | ||
| 2000-10-13 | 18 September 2000 External T.I. 2000-0026805 F - PAIEMENTS DANS LE CADRE D'UN CONGEDIEMENT | Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | payment in lieu of reasonable notice was s. 5 employment income |
| Income Tax Regulations - Regulation 102 - Subsection 102(1) | reimbursed legal costs of dismissed employee paid by the employer are not subject to withholding if such costs were deductible under s. 8(1)(b) | ||
| 3 October 2000 Internal T.I. 2000-0039997 F - VENDEAU-CONFERENCE ET CONGRES | Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(f) - Subparagraph 8(1)(f)(v) | costs of presentations to improve skills of salespeople who generated commissions to the taxpayer were not capital expenditures, cf. cost of attending conference | |
| 20 September 2000 External T.I. 2000-0043435 F - Associé quittant société de personnes | Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) | adjustments to avoid double taxation on a completed withdrawal from a partnership are considered first by the TSO, generally as part of an audit | |
| 2000-09-29 | 14 September 2000 External T.I. 2000-0037085 F - ALLOCATION DE RETRAITE | Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | a lump sum amount paid in satisfaction of salary insurance benefits could not be transmuted into a retiring allowance |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | a lump sum paid in satisfaction of an insurer's obligations under a wage loss replacement plan were taxable irrespective of whether paid as a lump sum and via the employer | ||
| Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) | lump sum wage loss payments paid by an insurance company to the employer for on-payment were subject to source deductions | ||
| 14 September 2000 External T.I. 2000-0023515 F - TAXE DE VENTE AVANTAGE IMPOSABLE | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | payment by employer of sales tax on insurance premiums under an employee-funded sickness or accident insurance plan did not taint the plan | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | payment by employer of sales tax on insurance premiums under an employee-funded sickness or accident insurance plan is a taxable benefit | ||
| 2000-09-15 | 11 September 2000 External T.I. 2000-0045115 F - FERR TRANSFERT | Income Tax Act - Section 60 - Paragraph 60(l) | an individual's spouse may make a transfer from a spousal RRIF a non-spousal RRIF of the spouse (which then becomes a spousal RRIF) |
| Income Tax Act - Section 146.3 - Subsection 146.3(5.1) | spousal RRIF status has relevance only for purposes of s. 146.3(5.1) |
CRA rules on a split-up butterfly between a divorced couple where excess debt is allocated to land rather than building to produce capital gains treatment
In order to accomplish a multi-wing split-up net asset butterfly of a private corporation (DC) owned by a divorced couple, they will transfer their common shares of DC to two new transferee corporations (TC1 and TC2), then DC will distribute each of the two rental properties, along with cash assets, to the respective TC in consideration for the assumption of liabilities (including shareholder advances and mortgage debt) and the issuance of TC preferred shares. Such preferred shares will then be redeemed for notes, and such notes will then be extinguished by operation of law on the winding-up of DC into TC1 and TC2 (but following the establishing of the first year ends of TC1 and TC2, to avoid Part IV tax circularity).
The DC debt likely exceeds the cost amounts of its assets. The sole consideration for the cash transfers will be debt assumptions, the buildings will be transferred on a full s. 85(1) rollover basis (i.e., debt assumed only up to their cost amounts, so that there is no recapture) and the balance of the assumed debt will be allocated to the transferred land so that the agreed amount therefor will produce (consistently with s. 85(1)(e.3)) the recognition of capital gains by DC (and resulting Part IV tax under s. 186(1)(b) to the TCs on the DC winding-up.)
Neal Armstrong. Summary of 2024 Ruling 2023-0998291R3 F under s. 55(1) – distribution.
CRA notes the practical difficulties faced by an immigrant to Canada holding a life insurance policy
CRA noted that a non-resident who immigrated to Canada while holding a policy, with a life insurance component, to secure a mortgage on a house would not be able to himself compute whether the policy was an exempt policy and what the policy gain would be when the policy matured in his hands as a Canadian resident, as the necessary information would be in the hands of the foreign issuer of the policy.
Since the policy did not constitute a "life insurance policy in Canada" as defined in s. 138(12), i.e., it was issued while the insured was not resident in Canada, ss. 128.1(1)(b) and (c) applied on the taxpayer's immigration to Canada so that the cost base to him of the policy was equal to its fair market value upon entering Canada. Accordingly, such fair market value cost would be taken into account for the purposes of computing any accrual under s. 12.2(1) (based on any excess of the accumulating fund over the ACB), if the policy was not an exempt policy.
Neal Armstrong. Summary of 27 January 2025 Internal T.I. 2024-1025011I7 under s. 12.2(1).
CRA concludes that no adjustments are made to an eligible entity's Statement of Executive Compensation for NEOs filed pursuant to NI 51-102 for CEWS repayment purposes
Ss. 125.7(14) and (14.1) could require exchange-listed eligible entities to repay all or part of the CEWS they had received based inter alia on the excess of their executive remuneration over the 2019 base level.
CRA concluded that the “executive remuneration” (as defined in para. (a) of the definition in s. 125.7(1)) of an eligible entity was the total amount of compensation that is reported in the eligible entity's Statement of Executive Compensation for Named Executive Officers filed pursuant to National Instrument 51-102 without adjustment - so that, contrary to the eligible entity’s submission to CRA, this amount could include compensation for more than five Named Executive Officers.
Neal Armstrong. Summary of 17 January 2025 Internal T.I. 2024-1029791I7 F under s. 125.7(1) – executive remuneration.
Galea – Privy Council finds that whether an activity qualifies as “carried on with a view to profit" turns on the taxpayer’s subjective intention
Whether the taxpayer could deduct his 92% share of the losses incurred by a Mauritius partnership (of which he was the dominant partner) from his other sources of income turned on whether the partnership was carrying on a “business,” whose definition in the Mauritian Income Tax Act 1995 relevantly referred to "any trade … or undertaking, or any other income earning activity, carried on with a view to profit." The partnership employed six people to manage its 200 acres of mountainous terrain and generate revenues from organizing annual hunts for deer on the lands (as well as from sales of live monkeys).
Before the Board, both parties agreed that, based on Grieve, [1984] 1 NZLR 101, Backman, and Ingenious Games (no mention was made of Stewart or Paletta), the question as to whether the activities of the partnership were carried on “with a view to profit” turned on the taxpayer’s subjective intention, and that the aim to make a profit need not be the sole or main aim and it could be ancillary.
Dame Philippa Whipple found that the Supreme Court of Mauritius had committed an error of law in deciding against the taxpayer on the basis that the expression "with a view to profit," although not referring to immediate profit, meant “an activity carried on with a reasonable expectation of making a profit in [the] near future.” Furthermore, she found that the panels below had not taken issue with the credibility of the taxpayer, who had testified that he had an intention of making a profit (although, in fact, the partnership had sustained significant and continued losses for the 10 years under review). Accordingly, the taxpayer's appeal was allowed.
Neal Armstrong. Summary of Galea v The Assessment Review Committee & Anor (Mauritius) [2025] UKPC 17 under s. 3(a) – business.
Income Tax Severed Letters 9 April 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.