2 December 2025 CTF Roundtable

This sets out the questions that were posed, and provides summaries of the preliminary oral responses given, at the 2025 Canadian Tax Foundation CRA Roundtable, which was held in Calgary on 2 December 2025. The descriptive titles below are our own. The Roundtable was hosted by: Terri McDowell (EY) and Drew Morier (McCarthy).

CRA Panelists:

Stéphane Prud'Homme, Director, Reorganizations Division

Sophie Larochelle: Director, Specialty Tax Division

Q.1 - Avoidance of s. 80(3) on debt settlement

Consider the following situation:

1. A corporation resident in Canada (Parentco) owns all of the issued and outstanding shares of another corporation resident in Canada (Subco). Parentco and Subco have the same taxation year-end.

2. In Parentco’s 20X3 taxation year, Parentco made a $1,000 interest free loan to Subco to fund Subco’s business operations (“the Subco Loan”).

3. Subco used the proceeds from the Subco Loan in its business and incurred a $1,000 non-capital loss (“the NCL”) in its 20X3 taxation year.

4. In 20X4, it was determined that the business of Subco would need to be wound down.

5. Subco claimed the NCL in its 20X4 taxation year by implementing a loss consolidation arrangement (“the LCA”) with Parentco.

6. In 20X5, Parentco forgave the Subco Loan (“the Settlement”) and, immediately after the Settlement, Subco was wound-up into Parentco under subsection 88(1).

7. Immediately before the Settlement, Subco held property with nominal cost amount and fair market value (FMV) and its only liability was the Subco Loan. Subco did not have any other tax attributes.

As a result of the Settlement, Parentco claimed a capital loss of $1,000 (“the Capital Loss”) in relation to the Subco Loan and Subco claimed a deduction for insolvency under subsection 61.3(1) that fully offset the amount that was included in its income pursuant to subsection 80(13).

Does the Canada Revenue Agency (CRA) have any concerns with this situation?

Preliminary response

Prud’Homme: The short answer is yes. We have concerns, and I elabourate below.

We recently received a ruling request with respect to similar proposed transactions, and we were unable to issue a favourable ruling based on the following:

First of all, the debt settlement forms part of the same series of transactions as the loss consolidation arrangement. When you view these elements separately, they are not problematic. The loss consolidation arrangement and the debt settlement will not, in isolation, result in abusive tax avoidance. It is their combined effect that makes the result achieved here contrary to the scheme of the Act and, in particular, to the scheme of s. 80.

As a result of this series, Subco was able to benefit not only from a gain on the forgiveness of the Subco loan, but also from expenses and deductions related to the Subco loan, which generated the non-capital losses. In our view, such a result is contrary to the scheme of section 80, as established in Pièces automobiles Lecavalier Inc. v. The Queen, 2013 TCC 310.

This position is also consistent with the views expressed in Example 23 of IC 88-2, Supplement 1. To summarize:

Prior to the settlement of its debt, a debtor corporation transfers all of its assets to a wholly owned subsidiary, ensuring that the amounts elected on the drop-down of the assets under s. 85 results in the recognition of income. The debtor uses its losses to offset such income generated. The debt is then forgiven, and the debtor finally amalgamates with the subsidiary. In that case, s. 80 would technically apply to reduce the adjusted cost base (ACB) of the Subco shares. However, since the shares of the subsidiary are cancelled on amalgamation, the reduction would have no real effect.

In our view, this is similar to the current situation. The loss consolidation arrangement enables Subco to use the non-capital losses before they would otherwise be eliminated pursuant to s. 80.

Moreover, two losses are being claimed with respect to the same investment within the related corporate group. Parentco recognizes a capital loss, while Subco is also claims the non-capital losses “downstairs” as part of the loss consolidation arrangement.

Had the loss consolidation arrangement not been entered into, s. 80 would have applied as intended, with the result that the non-capital losses would have been eliminated pursuant to s. 80(3).

On the other hand, the parties could have entered into transactions to preserve the non-capital losses and settle the Subco loan without Parentco realizing the capital loss. For example, the Subco loan could have been settled on an amalgamation of Subco and Parentco or as a consequence of the winding up of Subco into Parentco. In each of these situations, the result would be that only one loss is available to the group — the non-capital losses. This result would be consistent with the result described in ATR-66 and would also comply with the scheme of the Act.

Note that Document 2011-0426051R3 no longer reflects CRA's position on the application of s. 80 and the general anti-avoidance rule (GAAR) in such circumstances.

Q.2 - New GAAR and restructuring to generate interest deductibility

In CRA Document No. 2013-0477601E5 (“the 2013 Document”),[1] the CRA was asked whether, under certain circumstances, interest would be deductible where borrowed money is used to purchase publicly-traded common shares. Specifically, the CRA was asked whether interest on a loan would be deductible for income tax purposes where an individual uses proceeds from the sale of publicly-traded common shares to pay down a mortgage on a personal residence, and then takes out a loan to repurchase identical shares in the same publicly-traded corporation. The CRA’s position was “[g]enerally yes provided that there is a direct link between the borrowed funds and an eligible use.”

In light of the amendments to the GAAR in section 245 that received Royal Assent on June 20, 2024,[2] and in particular, the new economic substance test in subsections 245(4.1) and 245(4.2), has the CRA's position expressed in the 2013 Document regarding interest deductibility on restructured borrowings changed?

Preliminary response

Prud’Homme: 2013-0477601E5 continues to reflect CRA’s position.

The usual caveat applies – the application of the GAAR requires a thorough analysis of all the facts and circumstances related to a particular situation. A detailed analysis of all the facts will be needed to reach a definitive determination regarding the application of the GAAR in a particular situation.

Q.3 - T1134 reporting re drop-down and liquidation

Consider the following scenario:

1. Canco, a corporation resident of Canada, owns all of the issued and outstanding shares of USCo, a corporation resident of the United States, which in turn owns all of the units of USLLC, a company that is resident of the United States for purposes of the Act, and that is transparent for U.S. tax purposes.

2. On March 31, 2025, Canco incorporated Holdco, a corporation resident in Canada. Canco is its sole shareholder.

3. On April 30, 2025, Canco rolled all of its shares of USCo into Holdco pursuant to section 85.

4. On May 1, 2025, USCo is liquidated into Holdco.

5. Both Canco and Holdco have a taxation year-end of June 30, while USCo and USLLC have a December 31 taxation year-end.

Questions

A. Who must file the T1134 information return for the 2025 taxation year: Canco, Holdco, or both?

B. What equity percentage and direct equity percentage of USCo in USLLC should be reported in Part I, Section 3.C ii) of the T1134 information return if USCo held 50% of US LLC on June 30, 2024, 100% on December 31, 2024, and 0% on May 1, 2025?

Preliminary response

Q.3A

Larochelle: S. 233.4 requires a reporting entity to file a T1134 in respect of each corporation that was a foreign affiliate during its taxation year. Under s. 233.4(1)(a), the “reporting entity” is defined as the taxpayer resident in Canada for which a non-resident corporation was a foreign affiliate at any time in the year. For this purpose, the determination of whether a non-resident corporation is a foreign affiliate is made in accordance with the definition of "equity percentage" found in s. 95(4), but as amended by s. 233.4(2)(a), in order to disregard equity percentages in corporations resident in Canada.

This means that only corporations with direct equity, usually the lowest-tier Canadian corporation in the related group, will be required to file a T1134 for a given foreign affiliate. However, if another Canadian corporation also has a direct equity percentage in that same foreign affiliate at any point during the year, that corporation will also be required to file a T1134 return for that same foreign affiliate.

Applying this to the scenario presented, Canco directly held all the shares of USCo from July 1, 2024, until April 2025, while Holdco directly held those shares from May 1, 2025, until the end of its taxation year (June 30, 2025). As a result, both Canco and Holdco had sufficient direct equity percentages in USCo and indirectly in US LLC at some point, such that USCo and US LLC were foreign affiliates of both corporations during the 2025 taxation year. Therefore, both Canco and Holdco are “reporting entities” and must file T1134 returns for the taxation year ending in 2025.

That said, if Canco and Holdco meet the conditions set out in the instructions for the T1134 under the title "Group of Reporting Entities That Are Related to Each Other", they may designate either one of them as their representative, and then the chosen corporation may then file a single T1134 providing the information for both entities. This administrative relief is available to reporting entities that are members of a related group of reporting entities, who file their tax returns in Canadian dollars (or in the same functional currency), and have the same fiscal year-end.

"Related group" in this context refers to the definition under s. 251(4) of the Act, which references a group of persons, each member of which is related to every other member of the group.

Lastly, the transfer of USCo shares from Canco to Holdco during the year must be reported. This will need to be disclosed in Section 3.B of Part 1 on the T1134 Summary for the 2025 taxation year.

Q.3B

Larochelle: Part 1, Section 3.C of the T1134 is where the taxpayer reports the organizational structure of the group of corporations and partnerships that owns the foreign affiliate. The filer most also provide an organizational chart of the group structure, including the same information.

The Q&A section of the CRA webpage on T1134 states that the structure that must be reported is the one as it exists at the end of the reporting taxpayer's year-end. Additional information can be also be attached if there are entities that are no longer part of the structure at year-end but still need to be declared.

In the scenario presented, for Canco’s taxation year ending June 30, 2024, when completing item 3.C(ii) (the reporting entity’s foreign affiliate equity percentage and direct equity percentage in another foreign affiliate), it should indicate that USCo had both an equity percentage and a direct equity percentage of 50% in USLLC.

For the second taxation year, ending on June 30, 2025, both Canco and Holdco would report a USCo equity percentage and a direct equity percentage of 0% in US LLC. This remains the case whether or not Canco and Holdco file separate T1134s, or a joint return under the administrative relief previously mentioned.

Finally, the transaction as to the liquidation of USCo into Holdco would need to be reported under Section 3.B of Part 2 of the T1134 Supplement, filed in respect of USCo.

Follow-up

Morier: This answer illustrates that, once a Canadian corporation has a direct equity percentage in a foreign affiliate at any time in the year, even for a short time, that triggers the T1134 filing obligation, with the only real relief being the previously mentioned administrative relief.

Larochelle: Yes, that is the message.

The obligation follows the direct equity at any given time in the year.

Q.4 - T1134 reporting re related-group partnerships

The instructions to the T1134 information return indicate that to benefit from the administrative relief for “groups of reporting entities that are related to each other,” the filers must be members of a related group, as defined under subsection 251(4). The definition of “related group” under subsection 251(4) specifies that a related group is a “group of persons each member of which is related to every other member of the group.” Although a partnership is a reporting entity pursuant to paragraph 233.4(1)(c), it is not necessarily a person for the purposes of the Act.

Can the CRA indicate how to determine if a partnership should be part of a related group under the administrative relief for the “group of reporting entities that are related to each other,” if the partnership is not a person for purposes of the definition of “related group” under subsection 251(4)?

Preliminary response

Larochelle: CRA has an administrative position which allows reporting entities that are members of the same group of related reporting entities to file a single T1134 report for all foreign affiliates for which they would otherwise have to file a T1134. For a reporting entity to be part of such a group, it must meet three conditions:

1. It must belong to the same “related group,” as defined in s. 251(4).
2. It must have the same year-end.
3. It must report in Canadian currency or the same functional currency.

The issue raised here is how the reporting rules apply to partnerships, which are not persons.

If the partnership is a reporting entity, meaning that it has Canadian-resident partners who are not exempt from Part 1 tax and who hold at least a 10% interest in the partnership's income or loss for the period, then the administrative relief will extend to the partnership if at least one of its partners (or, if one of the partners is also a partnership, a partner of that partnership, etc.) is related to each of the other reporting entities forming a related group in respect of the same foreign affiliates.

CRA recognizes that this is not always a straightforward determination. Therefore, if there is any doubt about including the partnership, the designated reporting entity would benefit from including the partnership on the T1134 form for the group. This ensures that the partnership's reporting obligations are met, and recognized as being met by the CRA.

This position is informed by a broader principle – the CRA is generally in favour of administrative relief regarding T1134 requirements where this would not result in the CRA receiving less information. Relief that avoids the taxpayer needing to provide redundant copies of information also avoids CRA needing to sift through redundant information, to the parties’ mutual benefit.

That said, partnerships that are clearly out-of-scope should not be presented as related to the group.

Ultimately, the goal is to support compliance, without getting stuck on form over substance where the connection is self-evident.

Q.5 - Control requirement in s. 84.1(2.31)(f)(i) or (2.32)(g)(i) where child divorces

Paragraph 84.1(2)(e) applies, for the purposes of section 84.1, to deem a taxpayer who disposes of shares of the capital stock of one corporation to another corporation (purchaser corporation), to be dealing at arm’s length with the purchaser corporation at the time of the disposition if the conditions in either subsection 84.1(2.31) or (2.32) are met. Those conditions include the requirement that one or more children of the taxpayer control the purchaser corporation at the time of the disposition and that during a specified time period following the disposition, the child or child group controls the purchaser corporation.

In a situation where the purchaser corporation was originally owned 50/50 by a natural child of the taxpayer and their spouse, would the control requirement in subparagraphs 84.1(2.31)(f)(i) or 84.1(2.32)(g)(i) cease to be met where the natural child and their spouse divorce before the expiration of the specified time period, with the result that paragraph 84.1(2)(e) would not apply to deem the taxpayer to be dealing at arm’s length with the purchaser corporation?

Preliminary response

Prud’Homme: To provide context, pursuant to s. 252(1)(c), a child of a taxpayer includes the spouse of a child of the taxpayer. On the termination of marriage, the former spouse of a child of the taxpayer ceases to be a child of the taxpayer.

Each of ss. 84.1(2.31)(f)(i) and 2.32(g)(i) refers to the control of the purchaser corporation during a specified time period by “the child or group of children”. In our view, the “child or group of children” referred to in those provisions is the child or group of children that controls the purchaser corporation at the time of the disposition, within the meaning of 84.1(2.31)(b)(2)(i) and 2.32(b)(2)(i).

Accordingly, if there is a group of persons that controls the purchaser corporation at the time of the disposition, and that group also controls the purchaser corporation throughout the specified time period, the control requirements in ss. 84.1(2.31)(f)(1)(i) and 2.32(g)(i) will be met.

To be clear, this would be the case even if a member of a group of persons that controlled the purchasing corporation at the time of the disposition ceased to be a child of the taxpayer within the specified time period by reason of divorce.

Q.6 - Realtyco as relevant group entity (s. 84.1(2.31)(c)(iii))

In CRA Document No. 2024-1036641E5, the CRA addressed whether an operating corporation (Opco) and a sister corporation (Realco) that owned a building leased to Opco were “relevant group entities,” as defined in subparagraphs 84.1(2.31)(c)(iii) and 84.1(2.32)(c)(iii). As described in that document, Opco was a CCPC, a small business corporation, operated a business selling telecommunications services, and was owned by spouses, Mr. A and Mrs. B, each of whom held 50 Class A voting shares in the capital stock of Opco. Realco was a CCPC, all the issued and outstanding shares of which were held by Mr. A.

Mr. A and Mrs. B wished to sell all of their shares of Opco to their adult child, Mr. C, who was also an employee of Opco and intended on taking over the business. Mr. C owned all of the issued and outstanding shares of Holdco, a CCPC through which Mr. C would acquire the Opco shares.

The CRA concluded, in part, that for purposes of subparagraphs 84.1(2.31)(c)(iii) and 84.1(2.32)(c)(iii), Realco was not a “relevant group entity” in respect of a disposition of the shares of Opco by Mr. A and Mrs. B to Holdco.

Would the CRA’s answer differ if Opco had a Loan Receivable from Realco at any point during the 24 month period described in the asset use test under the definition of “qualified small business corporation share” (QSBC share) in subsection 110.6(1), which is used in determining whether the Opco shares are QSBC shares?

Does the mere existence of the Loan Receivable make Realco a “relevant group entity,” or is the Loan Receivable simply relevant to determining whether the Opco shares are QSBC shares?

Preliminary response

Prud’Homme: First of all, for the purposes of s. 84.1, s. 84.1(2)(e) deems the taxpayers that disposes of shares (the “subject shares”) to another corporation (the “purchaser corporation”) to be dealing at arm's length with the purchaser corporation at the time of the disposition, if all of the conditions in ss. 84(2.31) and 84(2.32) are met.

One of these conditions is that the subject shares (the Opco shares in this case) must be QSBC shares at the time of the disposition. In addition, paragraph (c) of ss. 84.1(2.31) and (2.32) restricts the taxpayer, either alone or together with a spouse, from controlling the subject corporation, the purchaser corporation, and any “relevant group entity” after the disposition.

A “relevant group entity” refers to a person that carries on at the disposition time an active business that is relevant to the determination of whether the Opco shares are QSBC shares.

To determine whether Realco is a relevant group entity in respect of the disposition of the Opco shares, two tests must be applied:

1. Realco must carry on an active business at the time of the disposition.
2. Such active business must be relevant to the determination of whether the Opco shares are QSBC shares.

Turning to the first test, active business is defined in 248(1) as any business carried on by a taxpayer other than a specified investment business or a personal services business. According to the facts in the 2024 CRA document, Realco was carrying on a specified investment business and was not carrying on an active business at the time of the disposition.

Although s. 129(6)(b) may deem rental income earned by Realco from Opco to be income from an active business for the purposes of s. 129(6) and s. 125. This deeming rule would not result in Realco being considered to carry on an active business for the purposes of ss. 84.1(2.31) and (2.32). Consequently, since Realco does not carry on an active business, it would not be a relevant group entity, and the second test does not need to be considered.

Regarding the second test, if we assume for discussion purposes that Realco does carry on an active business, then it must then be determined whether Realco’s active business is relevant to the determination of whether the Opco shares are QSBC shares. This would be the case if all or a portion of the fair market value of the loan receivable is needed for the Opco shares to be considered QSBC shares.

In other words, if Opco can meet all of the conditions of the QSBC share definition by reference to the fair market value of its other assets—that is, treating the loan receivable as representing an inactive asset—then Realco would not be a relevant group entity.

Q.7 - Allocation of treaty-protected business profits

The definition of “treaty-protected business” in subsection 248(1) was the subject of CRA Document No. 1999-0008185. This definition reads as follows:

“treaty-protected business” of a taxpayer at any time means a business in respect of which any income of the taxpayer for a period that includes that time would, because of a tax treaty with another country, be exempt from tax under Part I

Where a US resident (US Co) carries on, through a permanent establishment in Canada, a single business that is comprised of (a) an activity which results in income that is treaty-exempt (“the Exempt Activity”); and (b) an activity which results in income that is not exempt from Canadian tax under an income tax treaty (“the Taxable Activity”), the business would fall within the “treaty-protected business” definition. As a “treaty-protected business,” to the extent that the Taxable Activity produces a loss, such loss would not be available, pursuant to paragraph 115(1)(c) and subsection 111(9), to reduce the profits from the Taxable Activity in another year.

The above scenario may arise where Article VIII(4) of the Canada-U.S. Income Tax Convention (“the Treaty”) applies to exempt from Canadian income tax, the profits of US Co’s Canadian branch operations derived from point-to-point cross-border motor vehicle delivery of passengers or property (i.e. the Exempt Activity), leaving intra-Canada profits subject to Canadian income tax pursuant to subparagraph 115(1)(a)(ii)(i.e. the Taxable Activity). CRA Document No. 1999-0008185 noted that the business of the non-resident would be a “treaty-protected business” notwithstanding that only a portion of the income from the business is treaty-exempt. As a result, to the extent that the Taxable Activity produces a loss, such loss would not be available, pursuant to paragraph 115(1)(c) and subsection 111(9), to reduce the profits from the Taxable Activity in another year.

The CRA acknowledged that the scenario outlined above may produce results that are inconsistent with the object and purpose of the legislation. Are there any developments that the CRA can share?

Preliminary response

Larochelle: We have since reopened the issue, and our position is now a bit more nuanced than in 1999-0008185.

Article VIII(4) of the Canada-U.S. Tax Treaty provides that, notwithstanding the provisions of Article VII (the business profits provision), profits from certain cross-border transportation activities are not subject to Canadian income tax and are therefore from exempt activities. However, the amount of profit exempt under Article VIII(4) is determined with reference to Article VII of the Treaty and its specific requirements. Consequently, the exempt profits corresponds only to a portion of the total business profit attributable to the business carried on by the U.S. resident through its Canadian permanent establishment which, in this scenario, includes both exempt and taxable activities.

To begin with, the total business profits attributed to the Canadian permanent establishment must reflect what the permanent establishment would have been expected to earn if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions, in dealing wholly at arm’s length with the US resident. Once that total profits have been determined, they must then be apportioned between the exempt activity and the taxable activity under Article VIII(4).

This apportionment must adhere to arm’s length principles. Specifically, the allocation of revenue and expenses between the two activities must reasonably and accurately reflect the functions and risks associated with those activities and must be computed in a consistent manner from year to year. For example, an allocation of revenue and expenses that skews profits disproportionately toward the exempt activity, thereby reducing profits attributed to the taxable activity, would generally not be reflective of employing arm’s length principles.

Further to the comments made 1999-0008185, provided that the taxpayer’s allocation of revenue and expenses in such scenarios is appropriate, as described above, losses arising from the taxable activity could generally be deducted against profits from that same activity in accordance with s. 115(1)(c) and s. 111(9). However, if the allocation of revenue and expenses between the exempt and taxable activities is unreasonable or inappropriate, it may result in an adjustment to the amount exempt under Article VIII(4). Additionally, it could lead to the denial of any loss deductions in respect of the taxable activity.

Follow-up

Morier: Is this a reversal of 1999-0008185?

Larochelle: Not completely, but it a significant evolution.

The main change here is that our current focus is much more on reasonable attribution and arm's length allocation between the exempt and taxable activity.

This approach allows the loss of the taxable side to do what losses are supposed to do, namely to shelter future taxable profits from that same activity if the allocation is done properly.

Of course, the trade-off here is that the battleground shifts to the allocation. However, the conceptual framework now aligns better with Article VII and the object and purpose of the legislation and the Treaty in general.

Q.8 - Whether beneficiary is affiliated where control by trust

Background

Section 251.1 contains a set of rules to determine whether persons are affiliated with each other for purposes of the Act (hereafter “the affiliated persons rules”). Notably, pursuant to subparagraph 251.1(1)(b)(i), a corporation will be affiliated with a person by whom the corporation is controlled, and pursuant to subparagraph 251.1(1)(b)(ii), a corporation will be affiliated with each member of an affiliated group of persons by which the corporation is controlled. For these purposes, and for purposes of the affiliated persons rules in general, the reference to “controlled” means controlled, directly or indirectly in any manner whatever and, as such, encompasses both control in fact (de facto control) and legal control (de jure control). An “affiliated group of persons” is defined in subsection 251.1(3) as meaning a group of persons each member of which is affiliated with every other member. The affiliated persons rules also contain specific rules applicable to trusts. In particular:

• subparagraph 251.1(1)(g)(i) provides that a person will be affiliated with a trust if the person is a “majority-interest beneficiary” of the trust, as that term is defined in subsection 251.1(3); and
• paragraph 251.1(4)(c) generally provides that, for purposes of the affiliated persons rules, a reference to a trust does not include a reference to the trustee or other persons who own or control the trust property.

We are seeking the CRA’s view on the application of the affiliated persons rules in the following fact situation.

Fact situation

1. Individual A is a majority-interest beneficiary of a discretionary trust (Trust). Accordingly, Individual A is affiliated with Trust, and Individual A and Trust form an affiliated group of persons.

2. BCo is a corporation incorporated in Canada that only has one class of shares (“BCo Voting Common Shares”).

3. Trust owns 100% of the BCo Voting Common Shares and therefore exercises de jure control over BCo.

4. Individual A does not, either alone or as part of a group, exercise de facto control over BCo within the meaning of subsections 256(5.1) and (5.11).

Questions

A. Even if Trust alone holds all of the BCo Voting Common Shares, do Individual A and Trust form an affiliated group of persons by which BCo is controlled, such that BCo is affiliated with Individual A pursuant to subparagraph 251.1(1)(b)(ii)?

B. Would the CRA’s answer to Question A change if, instead of Trust holding all of the BCo Voting Common Shares, Trust held 80% of the BCo Voting Common Shares and Individual A held 20% of the BCo Voting Common Shares?

C. Would the CRA’s answers to Question A and Question B change if Individual A had the ability to control Trust’s property as the trustee of Trust or as part of a group of trustees of Trust?

Preliminary response

Prud’Homme: CRA’s responses to these questions will only consider the application of de jure control in determining whether individual A is affiliated with BCo. We are not looking at all at de facto control, which, of course, could change the result in certain situations, including the scenario in question.

Secondly, case law has established that if a single person has de jure control over a corporation, resort to whether a group of persons holds de jure control is precluded.

Finally, the affiliated persons rules do not contain any provisions that would effectively override this principle. For example, consider s. 256(1.2)(b) in the context of the associated corporations rule. We do not have that in the context of the affiliated persons notion.

Q.8A

Prud’Homme: As previously noted, pursuant to s. 251.1(4)(c), a reference to a trust does not include a reference to the trustee or other persons who own or control trust property. Therefore, in this case, it is the trust alone that is considered to have de jure control of BCo, such that the trust and BCo are, of course, affiliated.

Since Bco is controlled by a single person, it cannot be said that BCo is controlled by any person or group of persons other than the trust. Consequently, BCo is not affiliated with Individual A under s. 251.1(1)(b)(ii).

Q.8B

Prud’Homme: Same answer – the trust would still own a sufficient number of BCo common shares to exercise alone de jure control over BCo. Accordingly, it cannot be said that BCo would be controlled by a group of persons formed by Individual A and Trust. For example, BCo would be controlled by a single person, being the trust.

Q.8C

Prud’Homme: Focusing on de jure control, the CRA's answers to Questions A and B will not change if Individual A was a trustee of Trust. Based again on s. 251.1(4)(c), Bco would still be controlled by Trust alone and would not be affiliated with Individual A.

Q.9 - S. 191(4) and specified amount

Subsection 191(4) provides for an exception to the application of Part VI.1 tax to dividends deemed to have been paid on a redemption, acquisition or cancellation of a share to which subsection 84(2) or 84(3) applies. In order for this exception to apply, the terms or conditions of the share, or the agreement in respect of the share, must specify an amount in respect of the

share, including an amount for which the share is to be redeemed, acquired or cancelled. In circumstances where a share is issued, the amount specified at the time of issuance must not exceed the FMV of the consideration for which such share was issued.

The CRA has indicated in the past that, in order to be valid, a specified amount must be expressed as an actual dollar amount (and not as a formula) and must not be subject to change, pursuant to a price adjustment clause (PAC), or otherwise.

Questions

A. Considering the above, can the CRA confirm if there would be a valid specified amount for purposes of subsection 191(4), where the terms or conditions of the share provide that the specified amount is the FMV of the consideration for which the share was issued?

B. Can the CRA provide clarification with respect to its position on the application of PACs in the context of subsection 191(4)?

Specifically, in CRA Document No. 2007-0250831E5, the CRA reasserted its position that, for the purposes of subsection 191(4), the specified amount cannot be subject to a PAC. However, in CRA Document No. 2016-0634551E5 (“the 2016 Interpretation”), the CRA stated that, in circumstances where the terms or conditions of taxable preferred shares contain a PAC with respect to the redemption amount of the shares, such PAC will not, in and of itself, negate the amount specified for the purposes of subsection 191(4). In addition, the CRA stated that if the PAC became operative after the redemption of the shares to increase the redemption amount to an amount in excess of the specified amount, the excess would not qualify as an excluded dividend by virtue of subsection 191(5). However, the operation of the PAC would not, in and of itself, result in the original deemed dividend being disqualified as an excluded dividend. On the other hand, if the PAC were to become operative to reduce the redemption amount to an amount that is less than the specified amount, the requirement in subsection 191(4) that the specified amount not exceed the FMV of the consideration for which such shares were issued, would not be met. As a result, the entire amount of the original deemed dividend would be disqualified as an excluded dividend for the purposes of subsection 191(4).

Preliminary response

Q.9A

Prud’Homme: This question keeps recurring, so that I will try to better explain CRA’s rationale.

Part VI.1 is concerned with after-tax financing. For example, tax financing can take the form of preferred shares that are redeemed for an amount that exceeds the fair market value of the consideration for which the shares were issued.

The purpose of s. 191(4) is to have the issuing corporation specify an amount which is equal to or does not exceed the fair market value of the consideration for which the share was issued. The share can then be redeemed, of course, to the extent of this amount without attracting Part VI.1 tax.

Now to provide more explanation: having the issuer corporation specify an amount was intended to reduce debate as to the fair market value of the consideration for which the share was issued. This objective would be defeated if the issuer corporation could specify the amount by way of a formula or simply indicate that the specified amount is equal to the fair market value of the consideration for which the share was issued. A specified amount that is adjusted pursuant to a price adjustment clause gives rise to the same problems.

Consequently, CRA’s position remains that, in order to for a value to have been specified, the specified amount must be expressed as an actual dollar amount and not as a formula, and it must not be subject to change, pursuant to a price adjustment clause or otherwise.

Q.9B

When we were preparing the Roundtable, we realized where the issue probably was. CRA’s position with respect to price adjustment clauses in relation to the application of s. 191(4) remains as expressed in 2016-0634551E5.

There are two possibilities here. In circumstances where a price adjustment clause operates to adjust the redemption amount — not the specified amount, just the redemption amount — and the result of the adjustment is that the redemption amount is equal to or exceeds the specified amount, then the operation of the price adjustment clause would not result in the deemed dividend being disqualified as an excluded dividend. Of course, the excess portion of the dividend over the specified amount will not qualify as an excluded dividend by virtue of s. 191(5), but there is still protection for the balance.

The other potential scenario is where the price adjustment clause applies to reduce the redemption amount (again, without touching the specified amount) to an amount that is less than the specified amount. Here, there is a problem. The entire amount of the deemed dividend would be disqualified as an excluded dividend for the purposes of s. 191(4).

Q.10 - Gross negligence penalty re covered worker requirements

Section 127.46 sets out the labour requirements applicable to certain clean economy investment tax credits (each a “specified tax credit”). When the applicable conditions are met, an incentive claimant can avail itself of the “regular tax credit rate,” which is 10 percentage points higher than the “reduced tax credit rate.” More precisely, subsection 127.46(2) provides that the applicable rate for each specified tax credit of an incentive claimant is the “reduced tax credit rate,” unless the incentive claimant elects in prescribed form and manner to meet the “prevailing wage requirements” under subsection 127.46(3) and the “apprenticeship requirements” under subsection 127.46(5) (together referred to as “the Labour Requirements”) for each installation taxation year in respect of the specified tax credit.

As part of the prevailing wage requirements for an incentive claimant for an installation taxation year, subparagraph 127.46(3)(b)(i) provides that “covered workers” must be compensated either in accordance with the terms of an “eligible collective agreement” or at a level at least equivalent to the value of compensation (including benefits) provided to similar workers under such an agreement (“the Compensation Requirement”). Pursuant to subparagraph 127.46(3)(b)(ii), the incentive claimant must also attest in prescribed form and manner that it has met the Compensation Requirement for its own employees at the designated work site(s) of the incentive claimant, and that it has taken reasonable steps to ensure that covered workers employed by others at the designated work site(s) of the incentive claimant are so compensated.

An incentive claimant may outsource the preparation or installation of a specified property to a third party (“a Contractor”). For various reasons, the incentive claimant may not have sufficient information to support that the subparagraph 127.46(3)(b)(i) requirement has been met in respect of covered workers employed by such Contractor.

Where an incentive claimant has elected to meet the Labour Requirements in accordance with subsection 127.46(2), has attested to having met the Labour Requirements in accordance with subparagraph 127.46(3)(b)(i) and paragraph 127.46(5)(a) or (b), and has therefore claimed a specified tax credit at the regular tax credit rate, but is unable to substantiate having met the Compensation Requirement in respect of those covered workers employed by others, such as a Contractor, would the CRA seek to apply the gross negligence penalty under subsection 127.46(9)?

Preliminary response

Larochelle: The gross negligence penalty applies when a claimant has claimed a specific credit at the regular credit rate while failing to meet the labour requirement, either knowingly or in circumstances amounting to gross negligence. Obviously, this determination entails questions of fact.

The mere fact that a claimant is not able to demonstrate that covered workers employed by others were compensated in accordance with the Compensation Requirement would not, in itself, support a finding that the claimant knowingly or negligently failed to meet the labour requirement.

To access the regular tax credit rate, a claimant who uses a contractor must be able to show that it took reasonable steps to ensure compliance with the compensation requirement. If no reasonable steps have been taken, the claimant should limit their claim to the reduced tax credit rate and avoid making the election and the attestation. Doing otherwise may support the determination that the claimant, knowingly or in circumstances amounting to gross negligence, failed to meet the labour requirement.

This reading of s. 127.46(9) is consistent with the compliance-focused purpose behind the attestation mechanism, in that the attestation is a clear and explicit commitment that goes beyond implicit assertions.

If a claimant signs an attestation knowing it is not true, it may support a finding of non-compliance. This stands in contrast with situations covered by the addition to tax and the corrective measures, which also apply when the labour requirement is not met but there is no finding that the claimant acted knowingly or with gross negligence.

Q.11 - S. 98(5) business continuity

Subsection 98(5) requires that within 3 months of a Canadian partnership having ceased to exist, one of the members of the partnership (the proprietor) carries on the business that was the business of the partnership. In order for subsection 98(5) to apply, must the proprietor carry on the business throughout the 3-month period commencing upon the dissolution of the former partnership, or can the proprietor recommence carrying on the business within this period?

Preliminary response

Prud’Homme: The three-month period described in s. 98(5) addresses when the business must recommence, which is at any time during the three-month period. In other words, “within the three-month period” does not mean “throughout the three-month period.”

Whether the former partner carries on the former partnership business and continues to use, in the course of that business, the partnership property acquired, is of course a question of fact.

Q.12 - Interaction of s. 150(1.2) and Reg. 204.2(1)

Paragraph 150(1)(c) requires a trust to file a return of income in prescribed form and that contains prescribed information for each taxation year of the trust, unless one of the exceptions provided for in paragraph 150(1.1)(b) applies to the trust. However, where a trust is resident in Canada and an express trust, or, for civil law purposes, a trust other than a trust that is established by law or by judgement, subsection 150(1.2) denies the application of the exceptions in subsection 150(1.1), unless the trust meets one of the exceptions listed in subsection 150(1.2).

The exceptions provided for in subsection 150(1.2) also serve another purpose: where applicable, they also exempt a trust from the additional information reporting requirements imposed by subsection 204.2(1) of the Regulations.

It is unclear however if the preamble of subsection 150(1.2) limits the availability of the exceptions therein to trusts that are resident in Canada and express trusts or, for civil law purposes, trusts other than those established by law or by judgement. This creates uncertainty as to whether these exceptions can apply to exempt non-express trusts from the additional information reporting requirements pursuant to subsection 204.2(1) of the Regulations.

Could the CRA please clarify?

Preliminary response

This response was cut for time.

Q.13 - Expanding ATRs' scope where factual dependence

Given the growing complexity of various tax measures and the general need for upfront certainty, would the CRA consider broadening the scope of its advance income tax rulings (Rulings) in situations where taxpayers are able to provide sufficient supporting documentation and evidence to substantiate the relevant facts and intentions?

Preliminary response

Larochelle: Advance income tax rulings may be important as a tool to help manage the uncertainty arising from increasingly complex rules in some situations. As explained in Information Circular IC70-6R12 at para. 19.1, CRA generally does not issue rulings that depend on the existence of particular facts or intentions, especially when they must be inferred from the circumstances.

The Circular also recognizes that there are situations where the CRA has historically issued rulings on matters that are primarily factual, provided that the taxpayer provides complete details and credible documentation to support those facts. For example, this approach has already been used with respect to whether a transaction engages s. 55(2), as well as in the application of the general anti-avoidance rule.

The CRA will be looking for opportunities to apply that approach more broadly while still respecting the conditions of paragraph 19.1. Potential subject matter includes:

• The income tax consequences of transactions or arrangements involving crypto assets.
• Certain issues involving capital gains exemptions, including whether certain shares qualify as QSBC shares within the meaning of s. 110.6(1).
• Whether certain expenditures qualify as “Canadian exploration expenditures” within the meaning of s. 66.1(6).
• Whether distributions made by an Indian band to members constitute income from a source.
• Whether certain distributions made by tax-exempt non-profit organizations could result in the loss of their tax-exempt status.
• Whether an organization is organized to qualify as a non-profit organization as described in s. 149(1)(l).
• Whether paragraph 149(1.2) allows an entity earning certain income outside its geographical boundaries to retain its tax-exempt status under ss. 149(1)(d.5) and (d.6).

Rulings are binding on CRA only with respect to its interpretation of the law. The taxpayer’s factual representations are subject to verification on audit. CRA also retains discretion to decline an advance ruling request, even in subject areas enumerated above.

For situations where it is unclear whether the conditions of paragraph 19.1 are met or whether CRA would be in a position to issue a ruling, the pre-ruling consultation process may be a good option to consider. It allows taxpayers to get initial feedback on whether the issue might be suitable for a ruling.

Follow-up

Morier: Is that list exhaustive, or does CRA anticipate ruling in other areas?

Will CRA consider issuing advance rulings related to the Global Minimum Tax Act?

Larochelle: That list in not exhaustive, but merely illustrates cases where advance rulings are more likely to be appropriate – that is, the rulings request mainly raises an interpretive question, and the underlying facts can be supported by credible documentation.

The Directorate is not, at the moment, considering rulings on the GMTA. In addition to being a novel tax regime, it entails coordination with Canada’s tax partners. The main purpose of advance tax rulings is to provide technical guidance and to ensure consistent administration.

The Directorate may be in a position to rule on GMTA cases as the regime stabilizes. Stay tuned!

Q.14 - S. 83(2) election re a non-crystallized s. 84(3) deemed dividend

Does the CRA accept that a deemed dividend resulting from the application of subsection 84(3) may be the subject of an election under subsection 83(2), even though the exact amount of the dividend is subject to post-closing adjustments and the final amount of the deemed dividend is only known within a certain period of time following the point at which the dividend is deemed to be paid and received?

If so, does the CRA accept that the corporate resolution providing for the subsection 84(3) election may refer to a formula taking into account possible post-closing adjustments?

Preliminary response

Prud’Homme: This is another frequently asked question.

No, we need a number, not a formula – this is a longstanding position (see 2020-0852211C6).