News of Note
CRA rules on the use of s. 107.4(1) to effect the spin-off by a REIT of a portion of its operations to a new REIT
Email this ContentCRA ruled on a transactions for the spin-off by an existing REIT of a portion of its operations (the “Segment”) to a newly formed REIT.
In addition to numerous transactions to properly package the Segment, the Plan-of-Arrangement transactions included the REIT settling the New REIT, subscribing a modest amount (in the form of a REIT note issued by it to New REIT) in consideration for New REIT units equal in number to the number of outstanding REIT units, distributing a modest amount of cash to a depositary for its unitholders, and selling its units of the New REIT to the unitholders for such cash. At that point, New REIT might just marginally exceed the numerical thresholds in Regs. 4801 and 4803.
The REIT was then to transfer the Segment to New REIT in a gratuitous transfer that apparently was intended to qualify as a “sideways” transfer in accordance with s. 107.4(2), with CRA ruling that the transfer would be a “qualifying disposition” under the definition in s. 107.4(1), so that the rollover rules in s. 107.4(3) could apply.
The proposed transactions also contemplated that the “Investor” (a tax-exempt resident, perhaps a pension corporation) would transfer a significant portfolio of properties to New REIT in consideration for New REIT units, including non-voting Series B units that were convertible into the “regular” Series A listed units.
CRA also ruled that the transactions would not by themselves adversely affect the qualification of the REIT as a mutual fund trust. This, inter alia, was adverting to the proposed giving by the REIT of an indemnity to the subsidiaries of New REIT to make them whole if any residual guarantees of Segment entities in respect of properties retained in the REIT entities were called upon.
Neal Armstrong. Summary of 2021 Ruling 2021-0894161R3 under s. 107.4(1).
CRA publishes substantial changes to the VDP
CRA has substantially amended its ITA Circular and GST/HST Memorandum on the voluntary disclosure program (VDP). It has ditched the concept of the “Limited Program,” e.g., not waiving any interest if there is some indication of intentional conduct or, perhaps, if the taxpayer is large and sophisticated.
CRA now recognizes two categories of voluntary disclosure, with corresponding scaling of the degree of relief. If the VDP application was “unprompted”, then the application will be eligible for the "general relief," i.e., receiving 75% relief of the applicable interest and 100% relief of the applicable penalties. Where there is a “prompted” application, the applicant will receive 25% relief of the applicable interest and up to 100% relief of the applicable penalties. (As before, where there is a “wash transaction” for GST/HST purposes, there is 100% interest relief.)
An unprompted application includes one made following an education letter or notice that offers general guidance and filing information related to a particular topic such as unreported income or ineligible expenses. A prompted application would include an application made following verbal or written communication about an identified compliance issue related to the return or other disclosure, or one made after CRA had already received information from third-party sources regarding the potential involvement of the taxpayer or a related taxpayer in tax non-compliance.
The applicant should include documents for foreign-sourced income or assets for the most recent 10 years, for Canadian-sourced income or assets for the most recent six years, and for the most recent four years regarding information about GST/HST.
CRA indicates that these changes to the VDP will come into effect on October 1, 2025, and that applications received prior to that date will be considered for VDP relief under the old guidelines. Presumably, somebody will make an application for judicial review if CRA rigidly refuses to apply the more generous relief regarding applications that were made prior to October 2025.
Neal Armstrong. Summary of IC00-1R7 dated 10 September 2025 under ITA s. 220(3.1) and summary of GST/HST Memorandum 16-5-1 dated 10 September 2025 under ETA s. 281.1(1).
Income Tax Severed Letters 10 September 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Sennaike – Tax Court of Canada finds that personal business development was a personal element that weighed against an Amway distributorship being a business
The taxpayer devoted approximately 15 to 20 hours per week in 2019 and 2020 selling Amway products, generating a total of $8,706 in revenues from sales to 40 customers over the two years, while claiming expenses of over $32,000 for those years.
In finding that the taxpayer’s Amway activities did not constitute a source of income, so that his losses were not deductible, Cook J. first found that there was a significant, if not predominant, personal element in the taxpayer’s Amway activities. In particular, his level of activity (e.g., attending numerous workshops and other Amway functions) was disproportionate to his modest sales and likely reflected a strong interest in business networking, developing business partners, and participating in educational programs.
That was not the end of it, as Stewart had indicated that “where a taxpayer’s venture has elements that suggest it could be considered a hobby or other personal pursuit, it will be considered a source of income if it is undertaken in a sufficiently commercial manner”. However, Cook J found that the taxpayer’s activities were not undertaken in a sufficiently commercial manner to be considered a source of income.
Neal Armstrong. Summary of Sennaike v. The King, 2025 TCC 122 under s. 3(a) – business.
Angus – Tax Court finds that the taxpayer’s move was made for personal reasons, so that his moving expenses were non-deductible
Spiro, J. admitted into evidence an email sent by the taxpayer which effectively indicated that his primary reason for moving his residence from Vancouver to Salt Spring Island was personal (i.e., upset of his partner regarding arson attempts next to their Vancouver home), rather than to be closer to work on Vancouver Island. Accordingly, his relocation expenses of over $130,000 did not qualify as being for an eligible relocation.
Neal Armstrong. Summaries of Angus v. The King, 2025 TCC 121 under s. 248(1) – eligible relocation – (a)(i), and General Concepts – Evidence.
Hyatt – Supreme Court of India finds that a Hyatt UAE company providing hotel supervisory services had a PE in India
The taxpayer, a corporation resident in the United Arab Emirates, entered into a consultancy agreement (the “SOSA”) with an Indian company in respect of two hotels situated in Delhi and Mumbai pursuant to which it agreed over the term of 20 years to provide strategic planning services and know-how to ensure that the hotels were developed and operated as efficient and high-quality international full-service hotels.
In finding that the hotels constituted fixed permanent establishments (PEs) in India within the meaning of Art. 5(1) of the UAE-India DTAA, so that income received by the taxpayer under the SOSA was attributable to such PEs and taxable in India, R. Mahadevan J stated:
Formula One … expressly held that exclusive possession is not essential – temporary or shared use of space is sufficient, provided business is carried on through that space. …
[T]he functions performed by the appellant, through its staff operating from the hotel premises … clearly establishing their control over the day to-day operations of the hotel.
Art. 5(2)(i) of the DTAA provided:
2. The term "permanent establishment" includes especially: …
(i) the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period.
R. Mahadevan J went on to state:
[T]he appellant’s executives and employees made frequent and regular visits to India to oversee operations and implement the SOSA. … Under Article 5(2)(i) of the DTAA, the relevant consideration is the continuity of business presence in aggregate – not the length of stay of each individual employee.
In other words, the hotel was regarded as a “project.”
Neal Armstrong. Summary of Hyatt International Southwest Asia Ltd. v. Additional Director of Income-Tax, Civ. App. No. 9766 of 2025 under Treaties – Income Tax Conventions – Art. 5.
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in March of 2000. Their descriptors and links appear below.
These are additions to our set of 3,310 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).
De Kruyff – Tax Court of Canada confirms using Google Maps to determine whether a new commuting route produces a 40-kilometer reduction under the “eligible relocation” test
The taxpayer, in connection with changing the location of his employment in Toronto, moved his residence from Newmarket to Mississauga. Whether he could deduct almost $130,000 in relocation expenses turned on whether the reduction in commuting distance produced by his move exceeded 40 kilometers.
The taxpayer got from his new downtown office to his old home during rush hour (or the reverse, in the morning) following a circuitous route recommended by Google Maps (westward to Hwy. 427, north on Hwy. 400, then east on Hwy. 9) whereas the route proposed by the Crown was a more direct route (north on Hwy. 404, then west on Hwy. 9), but which per Google Maps was slower during rush hour.
In rejecting the Crown’s route and allowing the taxpayer's appeal, Bocock J stated (at para. 27) that “[t]he new norm of shortest normal route most people use deploys Google Maps to select such route.”
Neal Armstrong. Summary of De Kruyff v. The King, 2025 TCC 116 under s. 248(1) – eligible relocation – (d).
CRA finds that insurance premiums were required to be bifurcated from lease payments to be GST-exempted
A customer of a car dealer would apply to an insurer for insurance and be issued the policy directly. However, the full up-front premium would be paid to the insurer by the car dealer, who would add the premium amount to the cost of the leased vehicle for purposes of computing the monthly lease payments payable by the customer under the lease agreement.
CRA noted that the lease agreement was the only governing agreement between the dealer and the customer and that, generally, where the dealer and customer entered into a lease agreement, the entire monthly lease payment would be consideration for the dealer's single taxable supply of the vehicle by way of lease to the customer.
Under an alternative situation, where the insurance premiums were charged separately to the customer by an agent for the insurer, those premiums were exempted.
Neal Armstrong. Summary of 17 May 2022 GST/HST Ruling 209546 under s. 123(1) – supply.
CRA indicates that an employee indemnity, in a settlement agreement with the employer, regarding the employer’s failure to withhold, likely is not a reportable transaction
The settlement agreement between an employer and a terminated employee protected the employer against any claim in respect of failure to withhold income tax, CPP or EI. Was this a reportable transaction on the basis of being an avoidance transaction with a contractual protection hallmark?
Regarding that hallmark, CRA indicated that “[g]enerally, the person having contractual protection is the person that would be entitled to compensation in the event of a failure of the transaction to achieve a tax benefit” and that where an employer is protected by an indemnity clause like this “the contractual protection hallmark is unlikely to be triggered in most instances.” Presumably, this comment could reflect that the only tax “benefit” to the employer that is being protected by the indemnity is not bearing a 10% penalty under s. 227(8)(a) (assuming that the employee was resident.)
Regarding whether there was also an avoidance transaction, it noted that this is a “fact-driven determination” but went on to state:
Presumably, the main purpose of an employment settlement is to resolve a dispute between an employer and employee. In our view, the fact that damages are paid as a result of a settlement should not systematically lead to the conclusion that “one of the main purposes” of the settlement is to obtain a tax benefit. In situations where the parties negotiated in good faith and reached a principled settlement that provides for a proper characterization of the damages, it is unlikely that such settlement would qualify as an “avoidance transaction”.
However, it further indicated that a settlement could be reportable. For example, “the absence of legal or factual basis to the payment of non-taxable damages could lead to a determination that the settlement is an ‘avoidance transaction’.”
Neal Armstrong. Summaries of 7 June 2024 External T.I. 2024-1006831E5 under s. 237.3(1) - contractual protection - (a)(i)(A), - avoidance transaction.