News of Note
DAC – Federal Court of Appeal refuses to allow a third party to intervene in the DAC (avoidance of CCPC status) case
Email this ContentThe moving party (“QPG”) sought an order pursuant to Rule 109 of the Federal Courts Rules to permit it to intervene in the Crown’s appeal of the DAC decision, which found that there was no GAAR abuse in DAC continuing to the British Virgin Islands so as to cease to be a Canadian-controlled private corporation (CCPC).
In the DAC appeal, the parties had not put in issue the Minister’s designation of DAC as a CCPC in its notice of reassessment (nor was this relevant to or even mentioned by the Tax Court) whereas QPG wished to intervene on the issue of whether such a designation overrode the legislative criteria imposed by the Act for determining CCPC status.
Before dismissing the motion to intervene, Stratas JA stated that “[t]he issue raised by QPQ … seeks to reinvent the theory of the case” and that “[t]his is a classic case of a proposed intervention that, if allowed, will commandeer the parties’ case.”
Neal Armstrong. Summary of Canada v. DAC Investment Holdings Inc., 2025 FCA 37 under Federal Courts Rules, Rule 109.
CRA indicates that expenditure limits of associated CCPCs should be converted into a functional currency based on the spot exchange rate at year end
The annual “expenditure limit” of CCPCs (which is gradually reduced as the total of their taxable capital employed in Canada (“TCEC”) increases above $10 million) must be allocated between them. When the associated CCPCs of the taxpayer report their Canadian tax results in Canadian dollars, and the taxpayer reports its Canadian tax results in its elected functional currency, how will the TCEC of the associated corporations be converted into the functional currency?
Although CRA indicated that one possible interpretation would require the associated CCPCs to so convert each component of their TCEC computation (which “would be administratively burdensome”), it concluded:
The day the TCEC of the associated corporation is considered to “arise” for the purposes of determining the conversion rate according to paragraph 261(5)(c) is the last day of the taxation year of the associated corporation for which it is computed because that is the day when the amount of the TCEC is determined pursuant to section 181.2 (hence when an amount relevant to computing the Taxpayer’s Canadian tax results is created).
CRA further stated:
If prior to the date of this letter the Taxpayer was consistently using a different method for converting the TCEC of its associated corporation in its elected functional currency and claimed additional ITC which would not have been available if the Taxpayer used the conversion method put forward in this letter, the CRA will not challenge the computation for those periods.
Neal Armstrong. Summary of 25 November 2024 External T.I. 2023-0974111E5 under s. 261(5)(c).
CRA finds that s. 143.2(15) authorized it to open-up a statute-barred year to deny the carryback of a loss which it will deny under s. 143.2
An individual's 2019 taxation year will be reassessed under s. 143.2 to deny a loss, which he had carried back to his 2016 year, on the basis that it resulted from abusive tax planning representing a tax shelter investment.
S. 143.2(15) provides that, notwithstanding ss. 152(4) to (5), “such assessments … may be made as are necessary to give effect to this section.” In finding that, by virtue of s. 143.2(15), the individual’s 2016 taxation year could be reassessed beyond the normal reassessment period to deny the carried-back loss, the Directorate stated that “such carryback is closely linked to an adjustment in connection with a tax shelter investment and is necessary and required for the purposes of section 143.2.”
Neal Armstrong. Summary of 18 June 2024 Internal T.I. 2024-1006551I7 F under s. 143.2(15).
Income Tax Severed Letters 19 February 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Matte – Tax Court of Canada finds that the settlement of forgivable advances to an employee for less than the outstanding amounts produced s. 6(15) income
The taxpayer, who was employed at a wealth management firm, had received over $1 million in interest-free loans (evidenced by promissory notes) from predecessors of his employer which, by their terms, were forgivable in the employer’s discretion as to 10% each year, and were required to be repaid as to the balance on termination of his employment. When he resigned, his employer sued him for the balance owing, and a settlement agreement was later reached pursuant to which the loans were discharged on payment of an agreed portion of their remaining balances (with part of such payments made by way of set-off against damages found to be owing by his employer to him.)
Ouimet J found that the difference between the amount so agreed to be paid and the balances owing constituted a taxable benefit to the taxpayer pursuant to ss. 6(15) and 6(1)(a) at the time of the release pursuant to the settlement agreement.
In rejecting a submission that, based on Merchant, the “loan” advances to the taxpayer had, in fact, been advances on his salary (which had been received in taxation years that were now statute-barred), Ouimet J noted that, unlike here, in Merchant “an entire year’s work [took] the form of cheques entered into the accounting records as loans” and “the employee in Merchant did not have to repay the amount from any source available to him.”
Neal Armstrong. Summaries of Matte v. The King, 2025 TCC 16 under s. 6(15), s. 12(11) – investment contract and s. 248(26).
Structures GB – Quebec Court of Appeal finds that corporate reorganization documents could not be rectified to correct for an unforeseen Pt. IV tax issue
The shareholders of a Canadian-controlled private corporation (“Structures”) implemented a reorganization that was intended to crystallize the capital gains deduction (CGD). However, the transactions for first "purifying" Structures of investment assets entailed the issuance of some preferred shares, which caused the shareholding in Structures of three of the holding companies to be diluted from 10% to below 10%, so that Structures was no longer connected to them and so that they were subject to significant Part IV tax on dividends received from Structures.
In reversing a Quebec Superior Court rectification order which made extensive changes to the reorganization steps so as to eliminate the Part IV tax, the Court of Appeal applied the principle that:
If the agreement is consistent with what the parties agreed to but simply produces unforeseen tax consequences, due to an error by the tax planners in the design of the tax planning, rectification cannot be granted.
In particular, there was nothing about the implementation of the reorganization (whose object was to maximize CGD deductions) which indicated that the parties were thinking about Part IV tax.
Neal Armstrong. Summary of Agence du revenu du Québec v. Structures GB Ltée, 2025 QCCA 134 under General Concepts – Rectification.
CRA confirms that a life insurance policy issued by a foreign insurer that does not report to OSFI can no longer qualify as an s. 138.1(1) segregated fund
The preamble to s. 138.1(1), which defined a “segregated fund” as a specified group of properties in respect of which an insurer’s life insurance policy reserves varied depending on the specified group’s fair market value, was amended, effective for taxation years beginning after 2022, to add a further requirement that the specified group of properties be specifically reported (as interpreted in s. 138(12.3)) to the relevant authority (whose definition extends only to OSFI or, in some circumstance, a provincial insurance authority) as a segregated fund.
CRA confirmed that a life insurance policy, issued by a foreign insurer that does not operate in Canada and has no reporting obligation to a relevant authority respecting such a policy, would not qualify as a segregated fund under s. 138.1(1) after giving effect to this amendment. Furthermore, the Act did not provide any grandfathering in this regard.
Neal Armstrong. Summary of 8 November 2024 External T.I. 2024-1006321E5 under s. 138.1(1).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in January of 2001. Their descriptors and links appear below.
These are additions to our set of 3,110 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 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 |
|---|---|---|---|
| 2025-02-12 | 11 December 2024 External T.I. 2024-1039101E5 F - Vertical amalgamation & former paragraph 84.1(2)(e) | Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(e) | s. 87(2)(j.6) continuity rule does not remediate the adverse consequences under the old intergenerational transfer rules of vertically amalgamating the subject corp |
| Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(j.6) | s. 87(2)(j.6) does not apply for purposes of the “old” s. 84.1(2)(e) intergenerational transfer rules | ||
| 2001-02-02 | 23 October 2000 Internal T.I. 2000-0027477 F - ALLOCATION DE RETRAITE | Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | exclusion for replacement employment at an alleged affiliated employer was not applied |
| 2001-01-19 | 5 January 2001 External T.I. 2000-0010905 F - Valuation - Freeze shares | General Concepts - Fair Market Value - Shares | requirement to seek consent detracts to retraction detracts from FMV of freeze preferred shares |
| Income Tax Act - Section 86 - Subsection 86(1) | right to retract freeze preferred shares must not be fettered | ||
| 4 January 2001 External T.I. 2000-0047605 F - FRAIS DE DIVERTISSEMENT | Income Tax Act - Section 67.1 - Subsection 67.1(1) | attending shows in order to identity artist recruits might be entertainment | |
| Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(a) | s. 67.1(2)(a) exception unavailable for tickets to shows attended to recruit artists | ||
| 10 January 2001 External T.I. 2000-0049585 F - DEDUCTIBILITE DES INTERETS | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | annual payment cap on interest until maturity did not preclude deductibility | |
| 5 January 2001 Internal T.I. 2000-0053767 F - IT-92R2 Paragraphe 1 | Income Tax Act - Section 9 - Timing | progress method per IT-92R2 could be used by supplier of kitchen equipment if installed by it pursuant to the building construction plans and title thereto thereupon vested in the building owner | |
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) | construction holdbacks not receivable until approved for release | ||
| 2001-01-05 | 19 December 2000 External T.I. 2000-0035685 F - RPA TRANSFER AU DECES | Income Tax Act - Section 147.3 - Subsection 147.3(7) | deceased member can have had more than one qualifying spouse or partner |
CRA finds that the s. 87(2)(j.6) continuity rule does not remediate the adverse consequences under the old intergenerational transfer rules of vertically amalgamating the subject corp
S. 84.1(2.3)(a)(i), as part of the former (private-member bill) intergenerational business transfer rules, provided that if, otherwise than by reason of death, the children’s purchaser corporation disposed of the subject corporation shares within 60 months of their purchase, the exception in s. 84.1(2)(e) from the application of s. 84.1 was nullified.
2022-0953991E5 indicated that, consequently, if the purchaser corporation amalgamated, within the 60-month period, with the subject corporation, then the resulting disposition pursuant to s. 87(11)(a) of the subject shares engaged the s. 84.1(2.3)(a)(i) exclusion.
CRA now confirmed that s. 87(2)(j.6), which provides for continuity on an amalgamation for the purposes of ss. 84.1(2.31) and (2.32), does not deem there to be no disposition on an s. 87(11) amalgamation for purposes of access to the former s. 84.1(2)(e) rule, so that the adverse amalgamation result continues to apply in the above situation.
Neal Armstrong. Summary of 11 December 2024 External T.I. 2024-1039101E5 F under s. 84.1(2)(e).
RBC – UK Supreme Court finds that an oil and gas royalty was too remote from a land interest in the oil field to be immovable property under the Canada-U.K. Treaty
A Canadian corporation (“Sulpetro”), which had rights to direct the exploitation of, and to receive the proceeds from, a licence its U.K. subsidiary (“Sulpeto UK”) held in an offshore U.K. oil and gas field, sold its rights (and shares of the subsidiary) to a U.K. purchaser (BP) for consideration that included a royalty that became payable, based on production from the field, when the market price of oil exceeded US$20 per barrel. The taxpayer (RBC) received an assignment of this royalty following default by Sulpetro on a loan from RBC.
The principal issue was whether HMRC was permitted by Art. 6 of the Canada-U.K. Treaty to impose tax on the royalty payments received by RBC and, in particular, whether they fell within the portion of the definition of “immovable property” in Art. 6(2) (the “fifth limb”) that referred to "rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources".
Lady Rose first stated her agreement with the conclusion of the Court of Appeal (per Falk LJ) that the right to work the field was held by Sulpeto UK and not by Sulpeto, stating in this regard:
There is a legal difference between someone having a right to work natural resources and someone having a right to require another person to work those natural resources. Sulpetro has the latter but not the former. …
Lady Rose went on to find that even If the rights of the royalty payer (now, BP) had amounted to a right to work the field, nonetheless RBC's right to royalty payments from BP did not amount to a right to "consideration for" such right to work. In particular:
- It was inherent in the reference in the fifth limb to payments being "consideration for" the right to work that the royalty recipient (RBC) be a person who could confer on the royalty payer the right to work the oil field, whereas RBC never had such right because it never had an interest in the land in which the natural resources were found.
- Furthermore, it was only payments made in return for the first grant of the rights by the landowner that fall within the definition of "consideration for" the right to work, so that payments made for the assignment or transfer of rights conferred on someone by the owner of the rights were not "consideration for" the right to work.
Accordingly, HMRC did not have the right to tax the royalty payments.
Neal Armstrong. Summaries of Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs [2025] UKSC 2 under Treaties – Income Tax Conventions – Art. 6, Art. 12, General Concepts – Separate Existence, and ETA s. 217 – imported taxable supply - (c).