Income Tax Mandatory Disclosure Rules Consultation: Sample Notifiable Transactions (Finance Release Webpage), 4 February 2022

The notifiable transactions designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance include:

Foreign continuance

• A corporation holding assets that are or will become investment assets continues from Canada to the corporate laws of a foreign jurisdiction, so that it ceases to be a “Canadian corporation” and a CCPC (so that it is not subject to additional tax under ss. 123.3 and 123.4) – but maintains its central management and control in Canada so that it is not subject to the emigration rules or the foreign accrual property income regime.

Avoiding “Canadian-controlled” status

• Alternatively it issues special voting shares, redeemable for a nominal amount, or options to acquire a majority of its voting shares, to a non-resident person or a public corporation so as to avoid CCPC status.

Allocation of loss leg of straddle to vending partner

• A taxpayer seeks to avoid the s. 18(19) straddle-transaction rules by acquiring a partnership interest in a partnership that had an accrued loss and gain on the two legs of an FX straddle, with the closing of such acquisition being immediately preceded by the closing out by the partnership of the gain leg so that such gain is allocated to the vending partner pursuant to s. 96(1.01) – and with the loss leg realized after the acquisition and such loss allocated to the taxpayer.

The notifiable transactions designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance include:

Extending 21-year period through s. 107(2) rollover or s. 104(19) designation

With a view to effectively extending the 21-year period under s. 104(4):

• A Canadian resident trust (“Old Trust”) transfers capital property or land inventory to Holdco (which is held by a new Canadian resident trust (“New Trust”) and is also a beneficiary of Old Trust) on a tax deferred basis under s. 107(2); or
• A trust having non-resident beneficiaries transfers property (other than as described in s. 128.1(4)(b)(i), (ii) or (iii)) to a corporation (Holdco) of which such beneficiaries are shareholders and which also is a trust beneficiary (it being noted that the Holdco shares of such beneficiaries “may reflect their former indirect interest in the property of the trust, possibly providing an opportunity to have such property transferred by Holdco to the non-resident beneficiaries at some future time without triggering the application of subsections 107(2.1) and 107(5)”; or
• Opco, is held by Old Trust, one of whose beneficiaries is Holdco (also Canadian-resident), which is a beneficiary of Old Trust and whose shares are held by New Trust. Opco redeems its shares held by Old Trust for a promissory note or cash, and Old Trust distributes and designates the resulting s. 84(3) dividend under s. 104(19) so that Holdco receives the s. 112(1) deduction and receives high-basis assets.

The notifiable transactions designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance include:

Temporary assignment into bankruptcy to avoid forgiven amount

• After a person or partnership is assigned into bankruptcy, a commercial obligation of such debtor is settled for an amount that is less than its principal amount - and at any point in time, the debtor files a proposal under Part III of the Bankruptcy and Insolvency Act and the bankruptcy is annulled either upon the approval of the proposal by a court or on the date stated in a court order.

Position that attribute trading rules do not apply on the basis of the purpose tests must be notified

• The notifiable transactions designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance include various listed transactions which are aimed at identifying situations where taxpayers rely on “one of the main reasons” or a “one of the reasons” tests in ss. 256.1(2), 256.1(4), and 256.1(6) not being satisfied so as to conclude that the “attribute trading” rules in s. 256.1(3) or 256.1(6) do not apply to transactions or events that would otherwise have satisfied all of the other conditions enumerated within those provisions.

The notifiable transactions designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance include:

Avoidance of thin capitalization rules

• A relevant non-resident in respect of a taxpayer (NR1) enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
• Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.

The notifiable transactions designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance include:

Avoidance of Part XIII tax

• A relevant non-resident in respect of a taxpayer (NR1) enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
• Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.

Draft s. 237.4 provides a requirement for taxpayers, advisors and others to report transactions to CRA that are designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance as transactions of a notifiable type. Although s. 237.4(3) is stated to be effective January 1, 2022, the substantial penalties applicable under draft s. 237.4(8) (subject to the due diligence defence under draft s. 237.4(12)) do not apply to transactions entered into before Royal Assent. The transaction types set out so far are:

• A corporation holding assets that are or will become investment assets continues from Canada to the corporate laws of a foreign jurisdiction, so that it ceases to be a “Canadian corporation” and a CCPC (and so that it is not subject to additional tax under ss. 123.3 and 123.4).
  • Alternatively, it issues special voting shares, redeemable for a nominal amount, or options to acquire a majority of its voting shares, to a non-resident person or a public corporation so as to avoid CCPC status.
• A taxpayer seeks to avoid the s. 18(19) straddle-transaction rules by acquiring a partnership interest in a partnership that had an accrued loss and gain on the two legs of an FX straddle, with the closing of such acquisition being immediately preceded by the closing out by the partnership of the gain leg so that such gain is allocated to the vending partner pursuant to s. 96(1.01) – and with the loss leg realized after the acquisition and allocated to the taxpayer.
• With a view to effectively extending the 21-year period under s. 104(4):
  • Canadian resident trust (“Old Trust”) transfers capital property or land inventory to Holdco (which is held by a new Canadian resident trust (“New Trust”) and is also a beneficiary of Old Trust) on a tax deferred basis under s. 107(2); or
  • A trust having non-resident beneficiaries transfers property (other than as described in s. 128.1(4)(b)(i), (ii) or (iii)) to a corporation (Holdco) of which such beneficiaries are shareholders and which also is a trust beneficiary, so that there is an indirect transfer out to the non-residents; or
  • Opco is held by Old Trust, one of whose beneficiaries is Holdco (also Canadian-resident), which is a beneficiary of Old Trust and whose shares are held by New Trust. Opco redeems its shares held by Old Trust for a promissory note or cash, and Old Trust distributes and designates the resulting s. 84(3) dividend under s. 104(19) so that Holdco receives the s. 112(1) deduction and receives high-basis assets.
• There is a temporary assignment of a debtor into bankruptcy to avoid a forgiven amount under the exception in (i) of the forgiven amount definition, with the bankruptcy then being annulled, for example, upon a court approval of a proposal.
• There are various listed transactions which are aimed at identifying situations where taxpayers rely on “one of the main reasons” or a “one of the reasons” tests in ss. 256.1(2), 256.1(4), and 256.1(6) not being satisfied so as to conclude that the “attribute trading” rules in s. 256.1(3) or 256.1(6) do not apply to transactions or events that would otherwise have satisfied all of the other conditions enumerated within those provisions.
• A relevant non-resident in respect of a taxpayer (NR1) enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
  • Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.