News of Note

In most circumstances, s. (a)(ii) of the definition of “qualifying home” in s. 118.05 requires the individual who is acquiring a qualifying home to have not occupied a home in the period beginning four years before the year of the acquisition.

CRA indicated that it interprets s. (a)(ii) as requiring the individual not to have inhabited a home during that period as the individual's “principal place of residence,” as defined in ITTN No. 31. CRA further indicated that it made no difference whether the home was so inhabited during the four-year period inside or outside Canada.

Neal Armstrong. Summaries of 31 December 2024 External T.I. 2021-0885741E5 F under s. 118.05(1) - qualifying home - s. (a)(ii), s. (a)(iii).

The Joint Committee has provided a significant list of items where technical amendments would be desirable. Some of the items mentioned (not already mentioned in previous submissions) include:

• The definition of “tax-indifferent” for purposes of para. (c) of the EIFEL-related definition of "excluded entity" includes a trust resident in Canada if more than 50% of the fair market value of all interests as beneficiaries under the trust can be reasonably considered to be held directly or indirectly through one or more trusts or partnerships by any combination of tax exempts under s. 149 and non-resident persons. It can be challenging for a publicly traded mutual fund trust, such as a REIT, to determine whether it satisfies this definition of tax indifferent. Accordingly, the definition of tax indifferent should be amended to exclude mutual fund trusts which themselves would otherwise constitute excluded entities.
• Where a foreign affiliate makes an upstream loan to its Canadian corporate shareholder and the interest on such a loan is subject to Canadian withholding tax, the IFR definition in s. 18.2(1) ensures that the deduction to the taxpayer under s. 91(4) for such Canadian withholding tax does not reduce the amount added to the taxpayer's IFR with respect to the underlying interest income. The same appropriate result does not occur in the situation where, for example, Canco1 owns Canco2, which owns an FA which has made an upstream loan to Canco1, the interest on which is subject to withholding tax. If, for example, there was $100 of interest on which there was $25 of withholding tax and Canco2 was a pure holding company with no other sources of ATI, IFE, or IFR, the excess capacity generated by Canco2 would be $70, not $100. This anomaly arises because variable I of the excess capacity definition takes into account the absolute value of the taxpayer's negative ATI.
• An excluded lease under s. 18.2(1) would include, for instance, the lease of a building described in Reg. 1100(1.13)(a)(vi). The definition of excluded lease should be amended to clarify that it includes subjacent or immediately contiguous land that contributes to the use of the exempt property.
• Para. (c) of the definition of substantive debt in s. 183.3(1) references a test under which the preferred shares bear a dividend rate that is fixed, or computed generally as a percentage of the FMV of the consideration for which the shares were issued, rather than as a percentage of the redemption amount of the shares, even though it is commercially common for dividends to be computed on the latter basis. Furthermore, para. (d) does not generally permit the preferred shares to be issued at a discount to their general redemption amount.
• The share buyback tax can apply in a punitive manner where a qualifying issuance occurs within a short period of time before or after a redemption, acquisition, or cancellation of a share but in a different taxation year.
• The time at which a share is to be characterized as a QSBCS or family farm/fishing corp. share (a “qualifying share”) for purposes of the s. 55(5)(e)(i) exemption is unclear, for example, where in a purification transaction the shares were not qualifying shares at the beginning of the series of transactions.
• Furthermore, a qualifying share is a share of an individual, so that the definition does not accommodate situations where, for example, a farming corporation was held by an individual through a holding company.
• Where the shareholder of a taxable preferred share is a non-resident person, the policy behind Part VI.1 tax being imposed is no longer applicable since, subsequent to 2008, a non-resident investor who deals at arm's length with the Canadian corporation is not subject to Canadian tax on interest paid by the Canadian corporation.
• The flipped property rules should be amended to provide a broader safe harbour for various transactions, e.g., the 365-day test should be considered to be met for a beneficiary who acquires property by way of a tax-deferred distribution under s. 107(2) if it was held for 365 consecutive days by the trust or for where a graduated rate estate sells a property which would not have been a flipped property if sold by the deceased individual immediately prior to death.

Neal Armstrong. Summaries of Joint Committee, "Summary of Feedback on Various Technical Issues", 14 April 2025 Joint Committee Submission under s. 18.2(1) - IFR, s. 80(2)(b), s. 18.2(1) – excluded entity – (c), s. 18.2(1) – tax-indifferent, s. 18.2(1) – ATI – C – (a), s. 18.2(1) – excluded lease, s. 183.3(1) – substantive debt – (c), s. 183.3(2), s. 55(5)(e), s. 93.4(1) – FABI, s. 220(3.2), s. 191.1(1) – excluded dividend, and s. 12(13)(b).

BC Hydro, which had entered into an electricity purchase agreement (EPA) with an independent power producer for the supply of electricity at a particular project in BC, agreed with that supplier that the EPA would be amended to provide, inter alia, that in consideration for the payment by BC Hydro of the sum of $8.5 million by the date 30 days after the project became operational, BC Hydro would have the option to extend the term of the EPA by a further 16 years.

BC Hydro submitted that s. 182 applied to the $8.5 million sum as being an amount paid by it as a consequence of the modification of the EPA. In rejecting this submission, Bocock J found that the payment was consideration for the optional term extension and therefore was consideration for a "taxable supply per se." Since the payment was made for such taxable supply, it was not made as a consequence of any modification of the electricity supply agreement (the EPA) as required by s. 182.

Neal Armstrong. Summary of British Columbia Hydro and Power Authority v. The King, 2025 TCC 61 under ETA s. 182(1) and General Concepts – Evidence.

A cannabis producer (“Bio-Tech”) had entered CCAA proceedings. A requested reverse vesting order (RVO) contemplated that an arm’s length purchaser would acquire all the Bio-Tech shares and that a residual company (“ResidualCo”) would have transferred to it excluded assets and liabilities. The excluded liabilities included taxes owing or accrued due by Bio-Tech for the period prior to the CCAA filing date. However, the draft RVO also provided that such excluded taxes would include any taxes related to debt forgiveness arising from or in connection with the consummation of the transaction.

CRA argued successfully that s. 80(13) would operate to include forgiven debt amounts in the income of Bio-Tech on the future date when the transfer to ResidualCo occurred and the Court could not approve a provision in a transaction contract that required the Minister not to apply the ITA regarding the application of s. 80(13) to Bio-Tech. Marion J. ordered that the wording of the RVO was to be amended to include language that made it clear that it did not apply to any future inclusion of income to Bio-Tech pursuant to s. 80.

This conclusion is likely to limit the practical viability of an RVO where the application of the debt-forgiveness rules has a material impact on the subject corporation.

Neal Armstrong. Summary of Delta 9 Cannabis Inc (Re), 2025 ABKB 52 under s. 80(13) and summary of Chris Lang, “Debt Restructuring Using a Reverse Vesting Order: Tax Issues,” Canadian Tax Focus, Vol.15, No. 2, May 2025, p. 2 under s. 80(13).