17 June 2025 STEP Roundtable

This sets out questions that were posed, and provides summaries of the preliminary oral responses given, at the 2025 STEP CRA Roundtable, which was held in Toronto on June 17, 2025. We have mostly chosen our own titles. The Roundtable was hosted by: Michael Cadesky (Cadesky Tax); and Angela Ross (PwC).

CRA Panelists:

Katie Campbell, CPA, CA, Ottawa: Acting Manager, Trust Section II, Financial Industries and Trusts Division, Income Tax Rulings Directorate
Steve Fron, CPA, CA, TEP, Oshawa: Industry Sector Specialist, Trust Section Il, Financial Industries and Trusts Division, Income Tax Rulings Directorate

Q.1 – Control test for intergenerational transfer

Under the new rules for succession of a family business (subsections 84.1(2.31) and 84.1(2.32)), it is clear that there can only be one purchaser corporation.

1. Can the child group own the purchaser corporation through one or more holding companies owned by them?
2. Can shares of the purchaser corporation be held by a trust under which the only beneficiaries are members of the child group?
3. Can shares of the purchaser corporation be held by a trust if the trustees are all members of the child group and the parents are not beneficiaries?

Preliminary Response

Fron: First, some background: The taxpayer who disposes of a qualified small business corporation share or shares of the capital stock of a family farm or fishing corporation to a purchaser corporation may qualify for the intergenerational business transfer exemption under s. 84.1 if, among other things, at the time of disposition the purchaser corporation is controlled by one or more children of the taxpayer who is 18 years of age or older. For purposes of this answer, it refers to the concept of the “child,” which is defined in s. 84.1(2.3)(a).

This exception is only available if the taxpayer has not previously sought at any time after 2023 to rely on the exception in respect of the same business (the “prior sale restriction).”

I mention this because 2024 CTF Q. 10 (2024-0138231C6) deals with a concept in the present question, that speaks to the idea that there can be only one Purchaserco. That question dealt with the scope of the prior sale restriction. It dealt with a situation where there was a simultaneous disposition of shares of the subject corporation to two purchaser corporations, and the question was: would that disqualify either of the dispositions from meeting the requirements for the intergenerational business transfer.

CRA stated that the prior sale restriction did not preclude simultaneous dispositions of shares of the subject corporation to more than one purchaser corporation provided that those dispositions occurred as part of the same genuine intergenerational business transfer.

Part 1 – Child group indirectly owns purchaser corporation

“Can the child group own the purchaser corporation through on ore more holding companies owned by them?”

Fron: In a word, yes. Ss. 84.1(2.31)(b) and (2.32)(b) require that, at the time the shares of the subject corporation are disposed of by the taxpayer to the purchaser corporation, the purchaser corporation is controlled by one or more of the children of the taxpayer. They are not required to own shares directly in the purchaser corporation. Our written response quotes ss. 256(6.1)(a) and (b) – to summarize, s. 256(6.1)(a) confirms that a corporation may be controlled directly or through one of more corporations, and s. 256(6.1)(b) confirms that a corporation may be controlled by various groups of persons within a corporate structure.

Accordingly, the requirement that one or more children of the taxpayer control the purchaser corporation may be met where the controlling interest in the purchaser is held through one or more corporations.

Part 2 – Purchaser corporation held beneficially by child group

“Can shares of the purchaser corporation be held by a trust under which the only beneficiaries are members of the child group?”

Fron: The answer is inconclusive.

Where shares of a corporation are held by a trust, the trustees of the trust would normally exercise the voting rights attached to those shares. Accordingly, in this scenario, we generally look at the trustees to determine who controls the purchaser corporation. We do not have the information to answer that question. The fact that the only beneficiaries of the trust are the members of the child group is not in itself sufficient to meet the requirement that the purchaser corporation be controlled by one or more of the children of the taxpayer.

You might be thinking about a couple of paragraphs within the intergenerational business transfer rules. Ss. 84.1(2.3)(c) and (d) contain rules that are there for the transfer rules, and they basically may treat the beneficiary of a trust as owning property held by the trust such as, in this case, the purchaser corporation shares. However, these rules are not relevant to determining the control of a corporation. They would only apply in determining whether a beneficiary of a trust exceeds the ownership limits applicable to shares or equity interests described in SS. 84.1(2.31) and (2.32).

Part 3 – Child group are trustees

“Can shares of a purchaser corporation be held by a trust if the trustees are all members of the child group and the parents are not beneficiaries?”

Fron: At STEP 2022, Q.6 (2022-0928191C6), we addressed the question of who controls a corporation where the shares of the corporation are held by a trust with multiple trustees. CRA stated that, where a trust has multiple trustees, the determination as to which trustee or group of trustees controls the corporation can only be made after a review of all the pertinent facts, including the terms of the trust document. However, in the absence of evidence to the contrary, we would consider there to be a presumption that all the trustees would constitute a group that controls the corporation. In circumstances where a trust holds a controlling interest in the purchaser corporation at the time at which the taxpayer disposes of the shares of the subject corporation to the purchaser corporation, and there are multiple trustees of the trust, we would be guided by the comments in the 2022 response in determining who controls the purchaser corporation.

One other point in respect of the control of the purchaser corporation in the context of continued control: the one child or the multiple children of the taxpayer must control the purchaser corporation at the time of disposition of the shares of the subject corporation, but they must also maintain control of the purchaser corporation, subject to certain exceptions in two different scenarios. Scenario 1 is for an immediate intergenerational business transfer: they have to maintain control for 36 months following the disposition. Scenario 2 is for a gradual intergenerational business transfer: in such case, the period is 10 years.

Q.2 - S. 84.1(2.31)/(2.32) parent as contingent beneficiary or trustee

It is not permitted for a parent to own any shares in the purchaser corporation or control the purchaser corporation (de jure or de facto control under the 3-year transition rule or de jure control under the 10-year transition rule).

Can shares (which do not amount to control) of the purchaser corporation be held by a trust where:

• the parent is a contingent beneficiary in the event of death of a child or all members of the child group, or
• the parent and the parent’s spouse or common-law partner are sole trustees or a majority of the trustees.

Preliminary Response

Fron: Agreed, there is no express prohibition against the ownership of shares by the taxpayer (the parent). However, the type and proportion are limited by ss. 84.1(2.31)(d) and (e) for an immediate transfer and in ss. 84.1(2.32)(d) to (f) for a gradual transfer.

In general, following the disposition of the shares of the subject corporation by a taxpayer to the purchaser corporation, the taxpayer, alone or together with a spouse or common-law partner, cannot own, directly or indirectly, 50% or more of the shares of any class of the purchaser corporation or the subject corporation other than certain non-voting preferred shares. There is a further limitation that, within 36 months of the disposition and at all times thereafter, the taxpayer, alone or together with a spouse or common-law partner, cannot own, directly or indirectly, any shares of the purchaser corporation or the subject corporation other than those certain non-voting preferred shares.

The term “own directly or indirectly" is defined, for the purposes of the intergenerational business transfer rules, in s. 84.1(2.3)(c). Generally, s. 84.1(2.3)(c)(ii) applies to determine the person’s indirect ownership and interest in a property by looking through intermediary entities. With respect to a discretionary interest in a trust, s. 84.1(2.3)(d) applies to preclude the use of discretionary interests in a trust to avoid the conditions that are prescribed for the intergenerational business transfer rules. For example, s. 84.1(2.3)(d) precludes a beneficiary of a trust from taking the position that, due to the discretionary nature of the trust, the beneficiary does not own any property of the trust.

Now turning to the question, in applying the look-through rule in s. 84.1(2.3)(c)(ii), CRA would not consider a person to have an interest in a trust where that person's interest depends solely on the occurrence of an uncertain event such as child predeceasing a parent. Accordingly, we would not during the lifetime of the child, or the lives of the relevant members of the child group, treat the parent as owning any shares of the purchaser corporation held by the trust.

With respect to the implications of the parent or the parent’s spouse or common-law partner being the sole trustee or a majority of the trustees of a trust that holds a non-controlling interest in the purchaser corporation, CRA would not consider the parent or the parent’s spouse or common-law partner in their capacity as a trustee to own shares of the purchaser corporation for purposes of the share ownership limitations in ss. 84.1(2.31)(d) and (e) and in ss. 84.1(2.32)(d) to (f). In that situation, CRA would apply the look-through rule and, if applicable, the deeming rule in respect of discretionary interests to determine who owns, directly or indirectly, any property held by the trust.

Q.3 - Bare trusts that ceased in 2024

A particular bare trust filed a T3RET, T3 Income Tax and Information Return (“T3 return”), including Schedule 15, in respect of its 2023 tax year prior to the announcement by the CRA that all bare trusts would not be required to file for the 2023 tax year. The bare trust ceased to exist in 2024. In October 2024, the CRA announced, for the 2024 tax year, a continuation of the exemption from the trust reporting requirements that was issued for bare trusts for the 2023 tax year. As a result, the bare trust will never file a final T3 return. How can the bare trust cancel its trust account number or otherwise advise the CRA that it no longer exists?

Preliminary Response

Campbell: To ensure that the trust account number for the bare trust is no longer considered active or open, the trustee may choose to do one of two things: (i) the trustee can send a letter to the trust tax centre indicating that the bare trust has ceased to exist, and this letter should also include the trust account number, the bare trust name and the date on which the bare trust ceased to exist; or (ii) the trustee can file a final T3 return for the 2024 tax year with the date on which the bare trust ceased to exist.

Q.4 - Preferred beneficiary election where also QDT trust

An individual (the “Individual”) is resident in Canada, eligible for the disability tax credit at all relevant times, and is a beneficiary of a Qualified Disability Trust (“QDT”), as defined in subsection 122(3). The Individual is also a beneficiary of another trust (the “Trust”), which does not qualify as a QDT.

Can the CRA confirm whether the preferred beneficiary election in subsection 104(14) would be available to the Individual and the Trust?

Preliminary Response

Campbell: The question indicates that the Individual is a beneficiary of a qualified disability trust (“QDT”) and another trust (the “regular trust”). The Individual would meet the definition of “preferred beneficiary” with respect to the regular trust if the individual satisfies all of the relevant conditions in that definition, one of which is the fact that the beneficiary is eligible to claim the disability tax credit.

The preferred beneficiary election would be available to the regular trust and the individual in respect of a particular year provided that all of the relevant conditions in s. 104(14) were also satisfied and the regular trust was not a trust described in any of paragraphs (a) to (h) of the definition of “trust” in s. 108(1). The fact that the Individual was also a beneficiary of the QDT would not prevent the regular trust and the Individual from making a preferred beneficiary election.

Q.5 - RDSP financial hardship withdrawals

A registered disability savings plan (“RDSP”) is categorized as a primarily Government assisted plan (“PGAP”) if government contributions exceed plan holder contributions. Where an RDSP is a PGAP, annual withdrawals are limited to 10% of the value in the RDSP at the beginning of the year. In 2024, the CRA advised that it may permit certain withdrawal requests above the limit in circumstances of financial hardship where it is just and equitable to do so. One of the requirements set out by the CRA was that the plan holder must also be the plan beneficiary.

1. Could the CRA expand on the circumstances in which it would be just and equitable to permit a withdrawal that exceeds the 10% threshold?
2. Would the CRA provide a form to be used to capture the required information for making such a request?
3. Why does the CRA require that the plan holder also be the plan beneficiary, as this requirement would not be met in cases where an adult beneficiary is incapable of managing property or where the beneficiary of the RDSP is a minor and unable to be the plan holder? In both cases there could still be financial hardship.

Preliminary Response

Fron: CRA considers a waiver request in conformity with the rule of law, the principles of fairness, and due process. We consider each individual circumstance in order to achieve fair treatment and outcomes, especially when rigid application of the law would lead to undue hardship, inequity or unintended consequences.

I will just mention three of the guidelines that the CRA uses when considering whether it is just and equitable to approve an RDSP waiver.

The first guideline considers whether the RDSP beneficiary would suffer significant hardship, loss or disadvantage from a refused waiver. For example, could the beneficiary meet the basic necessities of life, or would their health suffer without access to the trust funds?

The second guideline is whether the granting of the waiver would negatively impact the financial viability of the trust? In other words, would there be any impact on family members or caregivers who rely on the trust’s integrity for planning and support?

Third, would the granting of the waiver be consistent with the legislative intent? For example, is the beneficiary using money for their own benefit, or are they using it to help someone else such as a relative who is experiencing financial difficulty? The RDSP program is not intended to help anyone other than the beneficiary.

These guidelines are intended to help make sure that the underlying intent of the waived requirement is met while still safeguarding the trust’s resources and ensuring the disabled person’s long-term financial well-being.

Regarding the 2^nd question, CRA is working on creating a form for the RDSP waiver requests for issuers to fill out and is anticipating having this form posted to its website in 2026.

As for the 3^rd question, as the sole purpose of an RDSP is to benefit the RDSP beneficiary, CRA must make sure that the beneficiary’s funds are only being used for the beneficiary’s benefit and not for others. This is more difficult when the holder and beneficiary are different individuals.

Currently, most waiver requests that the CRA has received, where the holder and beneficiary are not the same individual, are clearly requests to help plan holders who are having financial hardship issues themselves, and not the RDSP beneficiary.

Where the holder and the beneficiary are not the same individual, and the RDSP issuer is of the view that the beneficiary is experiencing financial hardship, and the issuer considers that requesting a waiver is in the beneficiary's best interest, they are welcome to send a waiver request to the CRA. The issuer should provide an explanation for why they consider that the request warrants an exception to the posted guidelines.

Q.6 - S. 116 certificate for multi-year estate distributions

During the administration of an estate or trust, the executor/trustee makes several capital distributions to a non-resident beneficiary spanning multiple years. In some cases, it may be possible to estimate the total value of these distributions in advance, but not the timing of such distributions. The non-resident beneficiary’s capital interest in this estate or trust constitutes taxable Canadian property (“TCP”) as that term is defined in subsection 248(1). Can the beneficiary file one Form T2062 under subsection 116(1) with the CRA before the above-mentioned distributions based on the estimated value of the total capital distributions that will be distributed to the non-resident beneficiary over multiple years? If the CRA issues a certificate of compliance (Form T2064) pursuant to such request, will the estate/trust be absolved from liability under subsection 116(5) for distributions over the multiple years provided the value of the total capital distributions do not exceed the certificate limit?

Preliminary Response

Fron: Yes, a single T2062 can be filed in advance of a single or multiple distributions.

Once CRA has verified the information provided in such a notice and when the CRA receives either an amount to cover the tax or appropriate security for such tax on any gain realized by the non-resident beneficiary or a vendor upon the disposition of their part of the capital interest in the trust, CRA will issue a certificate of compliance (or a T2064) under s. 116(2), establishing a certificate limit. Any and all distributions of capital of the trust up to the certificate limit would be covered under a single certificate of compliance as the T2064 does not indicate a disposition date.

After that initial T2062, if the facts and amounts in effect of the actual distribution differ from those reported to CRA for the proposed disposition, another completed T2062 form with the relevant changes and any additional payment or acceptable security to cover the increase in tax payable should be filed. Upon review, the CRA will then issue a certificate of compliance or a form T2068.

Q.7 - Transfer to and vesting in a spousal trust

A taxpayer dies with a will that contains the following provision in connection with the residue of the estate:

To hold and keep the residue of my estate (the “Residue”) invested and to pay the net income derived therefrom to or for the benefit of my spouse, provided that my Trustees may at any time or times pay to or for the benefit of my said spouse such amount or amounts out of the capital of the Residue of my estate as my Trustees in their absolute discretion deem advisable, it being understood that during my spouse's lifetime my spouse is entitled to receive all of the income of the Residue and that no person except my spouse may receive or otherwise obtain the use of any of the income or capital of the Residue, my intention being that the Residue constitute a spousal trust as described in paragraph 70(6)(b) of the Income Tax Act (Canada).

1. Where a formal conveyance of the Residue from the estate of the deceased to a separate trust has not yet occurred, does the CRA consider that the assets forming the Residue have been “transferred to” a spousal trust for the purposes of subsection 70(6)?
2. Does the CRA agree that the above provision results in a separate trust for the purposes of the Act?
3. Does the CRA agree that provided the estate administration has been completed and the assets forming the Residue are determined within 3 years of the taxpayer’s death, that the assets of the taxpayer on death that become part of the Residue will be deemed disposed by the taxpayer for proceeds equal to their cost pursuant to subsection 70(6)?
4. What are the consequences if the administration of the estate takes more than 3 years from the time of the taxpayer’s death such that the Residue is not known until after 3 years from the taxpayer’s death?

Preliminary Response

Campbell: A lot of this comes down to a question of fact.

The first part of the question deals with whether the residue of an estate can be considered to be transferred or distributed even if a formal conveyance of the residue has not yet occurred.

S. 70(6) applies where capital property of a deceased taxpayer who is resident in Canada immediately before the taxpayer’s death is, as a consequence of the death, transferred or distributed to a spousal trust created by the taxpayer’s will. In addition, the property must generally become vested indefeasibly in the spousal trust within 36 months after the death of the taxpayer.

Where s. 248(8) applies in respect of a testamentary spousal trust, it provides that the property is considered to have been transferred or distributed to the trust as a consequence of the taxpayer’s death when the transfer or distribution was under or as a consequence of the terms of the will or other testamentary instrument of the taxpayer, or as a consequence of the law governing the intestacy of the taxpayer.

Regarding the meaning of “transfer or distribute,” the Federal Court of Appeal in The Queen v. Boger Estate concluded that a formal conveyance was not necessary to transfer or distribute the property in question. In this case, this means that the absence of a formal conveyance of the residue to the testamentary spousal trust would not by itself prevent the residue from being transferred or distributed for the purposes of s. 70(6). However, whether property has been transferred or distributed for the purposes of s. 70(6) is a question of fact and law that will depend on the particular facts and circumstances of each case, including the terms of the will and the particular provincial law which, in the common law provinces and territories, includes the common law and relevant provincial or territorial statutes.

Part 2 of the question asked whether the relevant provision in the will creates a separate trust. For s. 70(6) to apply to a trust, that trust must be created by the taxpayer’s will.

S. 248(9.1) provides that a trust is considered to be created by a taxpayer’s will if the trust is created under the terms of the taxpayer’s will or by an order of a court in relation to the taxpayer’s estate made under any law of a province that provides for the relief or support of dependents. That means in this case, in order to meet the requirements of s. 70(6), the testamentary spousal trust would need to be created pursuant to the terms of the taxpayer’s will or by a court order, and would need to be separate from the estate.

Whether a valid trust is created is a question of fact and law which is dependent on the applicable provincial law and the particular facts and circumstances of each case, including the terms of the will.

It is CRA’s view that an estate and each trust created by the will of a taxpayer are separate taxable entities for purposes of the Act, and each will have their own filing requirements.

Part 3 of the question asks whether the spousal rollover would apply if the estate administration is completed within three years.

In addition to specific conditions that must be satisfied for s. 70(6) to apply to a testamentary spousal trust, the capital property transferred or distributed to the testamentary spousal trust must generally vest indefeasibly in the spousal trust within 36 months of the death of the taxpayer.

The Act does not define the term “vested indefeasibly.” For the purposes of s. 70(6), “vested indefeasibly” refers to the unassailable right to ownership of a particular property that as a consequence of the death of the owner has been transferred to a spouse or common-law partner or testamentary spousal trust of the deceased.

A property can vest indefeasibly in a beneficiary even if the title has not yet been transferred by a legal conveyance or by registration if, for example, there is a specific, non-contingent, and uncontested bequest to a spouse or common law partner after the death of the taxpayer, and if it is clear that there are sufficient assets available in the estate to allow for the distribution of the specific bequest. In respect of the residue of an estate, generally, only once the residue is clarified, and the beneficiaries have an enforceable right to the property, can those assets vest in the beneficiaries.

Whether the residue in this case can be considered to vest indefeasibly in the testamentary spousal trust in order for s. 70(6) to apply is a question of fact and law and the particular facts and circumstances of each case, including the terms of the will.

Part 4 of the question asks what the consequences are where the administration of the estate takes longer than three years.

In addition to other specific conditions that must be satisfied for s. 70(6) to apply, the capital property transferred or distributed to the testamentary spousal trust must vest indefeasibly within 36 months, or within such longer period as the Minister considers reasonable in the circumstances, provided the written application for an extension is made within the 36 month period.

Therefore, if it cannot be shown in this case that the residue is vested indefeasibly in the testamentary spousal trust within 36 months of the taxpayer’s death, a written application can be made to the Minister by the taxpayer’s legal representative within that period to request an extension. 2023 STEP Q.14 (2023-0967371C6) provides guidance regarding this type of application. If this condition or any other condition in s. 70(6) is not met, s. 70(6) would not be applicable and s. 70(5) would apply.

An estate cannot be a graduated rate estate for more than 36 months after the death of the taxpayer. This means that, to the extent that the estate continues beyond 36 months, it would no longer be a graduated rate estate, and the estate would be deemed to have a year-end immediately before that time. Other income tax consequences may be applicable depending on the facts of the particular situation.

Q.8 - S. 70(6) and survivor's untimely death

Spouse A and Spouse B are resident in Canada. Spouse A dies and the terms of Spouse A’s will provide that the assets of Spouse A (the “Property”) are left to Spouse B provided that Spouse B survives Spouse A by 30 days. Spouse B survives Spouse A by more than 30 days; however, Spouse B dies before the will is probated 8 months after the death of Spouse A. Consequently, there will not be an actual distribution or transfer of legal title of the Property to Spouse B until after the death of Spouse B.

In this circumstance, can subsection 70(6) apply to the deemed disposition of the Property by Spouse A immediately before their death?

Preliminary Response

Campbell: As discussed in the previous question, there are two conditions that must be met for subsection 70(6) to apply: the transferred or distributed condition must be met; and the property must vest indefeasibly in the spouse or common-law partner within 36 months after the death of the taxpayer.

S. 248(9.2), will deem the property to not have vested indefeasibly in an individual unless the property vested indefeasibly in the individual before the death of the individual.

In this case, in order for subsection 70(6) to apply, the property must be transferred or distributed to Spouse B, as a consequence of the death of Spouse A, and the property must vest indefeasibly in Spouse B before Spouse B's death.

Whether the property vested indefeasibly in Spouse B before the death of Spouse B, and whether the property was transferred or distributed to Spouse B for the purposes of subsection 70(6), are questions of fact and law.

However, the fact that Spouse B died before there was an actual distribution or transfer of legal title of the property, but after the 30-day requirement in the will, would not by itself prevent the conditions of subsection 70(6) from being met.

Q.9 - Flipped property where s. 85 election

A deceased individual (the “Deceased”) held 100% of the shares of a corporation (“RE Co”) which owns a long-term Canadian residential property as capital property. The estate undertakes a post-mortem pipeline and bump transaction whereby all the shares of RE Co are sold by the estate to a corporation (“Newco”) for a promissory note, and after some time RE Co is amalgamated with Newco to form Amalco.

At the 2024 CTF and APFF Roundtables, the CRA stated that an amalgamation restarts the holding period for purpose of the “flipped property” definition.

1. Can the CRA confirm that, in the above-described fact pattern, the flipped property rules deem any recapture income and gain to be treated as business income if Amalco sells the residential property within 365 days of the amalgamation?
2. If, within 365 days of the amalgamation, Amalco sells the residential property to another corporation for share consideration and files a subsection 85(1) election, would the flipped property rules cause the election to be invalid because real property inventory cannot be “eligible property” pursuant to subsection 85(1.1)?

Preliminary Response

Fron: The answer to the first part is yes, the flipped property rules would apply to Amalco in this scenario. The flipped property rules are contained in ss. 12(12) to (14). They deem certain property on which gain would be realized tp be inventory, the disposition of which results in business income. S. 12(12) provides that if, absent s.12(12) or the principal residence exemption, the taxpayer would have had a gain from the disposition of a flipped property then, throughout the period that the taxpayer owned the flipped property, the taxpayer is deemed to carry on a business that is an adventure or concern in the nature of trade with respect to that flipped property. The flipped property is deemed to be inventory of the taxpayer's business and not capital property of the taxpayer.

The written answer includes a discussion of the definition of “flipped property,” which is in s. 12(13), and the exceptions in ss.12(13)(b)(i) to (ix).

In this case, s. 87(2)(a) provides that the corporate entity formed as a result of an amalgamation shall be deemed to be a new corporation. That new corporation is not, for the purposes of the flipped property rules, considered to be the same corporation as and a continuation of any of the predecessor corporations. Amalco's holding period begins at the time of the amalgamation.

In this scenario, Amalco is disposing of the property after a period of less than 365 days. The flipped property rules would apply, provided that all the other conditions for the application of the rules are met. Amalco would be deemed to carry on a business that is an adventure or concern in the nature of trade with respect to that property. The property would be deemed to be inventory and not capital property of Amalco's business. Any recapture or gains that would have otherwise been realized on the disposition of the property, if s. 12(12) did not apply, will therefore be considered business income as the profit from the disposition of inventory.

For Part 2, in the situation where Amalco transfers the property to another corporation in exchange for consideration that includes shares and makes the s. 85(1) election, the answer comes in two parts because it depends on the agreed amount.

It is CRA’s view that the flipped property rules would not apply if, as a result of the election, the property is disposed of for an agreed amount that does not exceed its capital cost. In other words, the rules would not apply provided that the disposition of property would not, in the absence of those flipped property rules, give rise to a capital gain. However, if the property is disposed of for an agreed amount that is greater than the property's capital cost, such that a portion of the accrued capital gain on the property is realized on the disposition, then the deeming rule in s. 12(12) would apply with all of the consequences that follow from its application. This includes that the property is deemed to be inventory of Amalco's business. As a result, Amalco's s. 85(1) election will be invalid because the inventory that is real or immovable property is not “eligible property” pursuant to the definition of that term in s. 85(1.1).

CRA could, depending on the circumstances, consider applying the GAAR if one of the main purposes of a transaction is to obtain a tax benefit to which the taxpayer would otherwise not have been entitled.

Q.10 - Principal residence transfer to life interest trust

An individual, over age 65, transfers a “city” and a “recreational” property that could both otherwise qualify as their principal residence to a life interest trust (“LIT").[1] The properties have been owned for many years and there is the desire to maintain flexibility as to which property will be designated as the principal residence upon an ultimate sale by the LIT. By virtue of subparagraph 40(4)(b)(ii) and assuming subsection 73(1.01) applies, the property will be the principal residence of the LIT for any year that it was the principal residence of the transferor taxpayer. This differs from the language in subparagraph 40(4)(b)(i) which, in the case of a transfer to a testamentary spouse trust, refers to if the property had been designated as the principal residence of the transferor.

Does this mean that the individual must choose which of the city or recreational property they will designate as their principal residence for the years prior to the transfer at the time of transfer, as opposed to when the life interest beneficiary dies, or at the time of the ultimate sale by the LIT?

Preliminary Response

Fron: The question contains a footnote describing life interest trusts. “Life interest trust” (which is not a defined term) in this question refers to an alter ego trust, a joint spouse or common-law partner trust, or a spousal trust, generally as described in s. 73(1.01)(c).

Our written response describes some of the basic rules on the principal residence exemption. As most know, this exemption seeks to reduce or eliminate the amount of gain that someone otherwise would pay tax on. The key thing here is that the definition of “principal residence” provides conditions which must be met for the property, which is a housing unit, to qualify. That includes paragraph (c) of the definition in s. 54. Paragraph (c) requires that the taxpayer designates the property as their principal residence for the year.

As background, s. 40(4) it applies to the disposition by an individual of a property that was acquired from a taxpayer or a transferor pursuant to the rollover provisions of ss. 70(6) or 73(1). In particular, s. 40(4) deems certain conditions to have been met for the purpose of determining the individual’s or the transferee’s gain under s. 40(2)(b) on a subsequent disposition of the property. S. 40(4)(b) provides that the property shall be deemed to have been the transferee’s principal residence for any taxation year.

S. 40(4)(b)(i) deals with a property transferred under s. 70(6). It refers to any taxation year for which the property would have been the transferor’s principal residence if the transferor had designated it in the prescribed manner to have been their principal residence for that year. S. 40(4)(b)(ii), which deals with a property transferred under s. 73(1), refers to any taxation year for which the property was the transferor’s principal residence.

There is a difference here. Property transferred on death is deemed to be the principal residence of the transferee for each year in which it was eligible to be the deceased transferor’s principal residence, rather than for each year that it actually was the transferor’s principal residence in the case of an inter vivos transfer. The stricter language relating to the inter vivos transfer imposes a requirement for the designation condition and the principal residence definition to be satisfied by the transferor.

The principal residence designation condition requires that the designation must be made by the taxpayer in the prescribed form and manner. The form is the T2091(IND) form, and the prescribed manner is described in s. 2301 of the Regulations. It provides that the designation must be made in the taxpayer’s return for the tax year in which they have disposed of the property that is to be designated as their principal residence, or they have granted an option to acquire such property.

Although the transfer of the properties under s. 73(1) can take place on a tax-deferred basis, s. 2301 of the Regulations requires the transferor to make the decision as to which of their two properties to designate as their principal residence for the years preceding the transfer on the T2091 filed with the tax return for the year in which the transfer occurs. It follows that, in accordance with s. 40(4)(b)(ii), when the life interest trust disposes of the property, it will be deemed to have been the life interest trust’s principal residence for the taxation years for which it was the transferor’s principal residence.

Q.11 - Acquisition of control where trust distributes corporation

An inter vivos discretionary trust with three trustees (“Trustees”) holds the controlling shares of a Canadian corporation (“Corporation”). These shares are distributed (“Distribution”) to a beneficiary who is an individual (“Individual”). In order to prevent a loss restriction event to occur for the corporation, does clause 256(7)(a)(i)(A) require that the individual be related to each of the Trustees?

Preliminary Response

Campbell: Yes.

Where the majority of the voting shares of a corporation is held by a trust, it is the trustees of the trust who control the corporation. Where a trust has more than one trustee, deciding which trustees or group of trustees controls the corporation can only be made after a review of all the relevant facts, including the terms of the trust indenture.

In the absence of evidence to the contrary, the CRA presumes that all of the trustees would constitute a group that controls the corporation.

In this case, a loss restriction event would occur as a result of the distribution of the shares. However, control of the corporation will be deemed not to have been acquired if the individual beneficiary was related to each of the three trustees immediately before the distribution of the shares.

Q.12 - DSI allocation where s. 55(3)(a) not satisfied

According to the CRA paper “CRA Update on Subsection 55(2) and Safe Income - Where Are We Now?”[2] (the “Safe Income Paper”) presented at the 2023 CTF CRA Roundtable, when a corporation transfers assets as part of a reorganization (a “spin-out”) covered by paragraph 55(3)(a), safe income of the transferor corporation should be allocated to the transferee corporation pursuant to a proration based on the net cost amount of underlying assets transferred.

In Example 17 of the Safe Income Paper, the CRA provided an example where the entire direct safe income (“DSI”) of a transferor corporation (“Opco”) was to be allocated to a transferee corporation (“Newco”) as a result of a spin-out. Specifically, Opco, a subsidiary wholly-owned corporation of Holdco, had DSI of $1,000 and two assets (Asset 1 with an adjusted cost base (“ACB”) of nil and a fair market value (“FMV”) of $1,000, and Asset 2 with an ACB of $1,000 and a FMV of $1,000). The DSI of Opco was reflected in the ACB of Asset 2.

Opco undertook a spin-out covered by paragraph 55(3)(a) to transfer Asset 2 to Newco, a corporation wholly-owned by Holdco. As part of the spin-out, Holdco transferred shares of Opco with an ACB of nil and a FMV of $1,000 to Newco in consideration for shares of Newco with an ACB and paid-up capital (“PUC") of nil and a FMV of $1,000. Opco then transferred Asset 2 to Newco in consideration for shares of Newco with an ACB, PUC and FMV of $1,000. The shares held by Newco in Opco and by Opco in Newco were redeemed for notes and the notes were cross-cancelled. We understand that, as a result of the redemption of the shares of Opco held by Newco, Newco was deemed to have received a taxable dividend of $1,000 (the “Deemed Dividend”). Finally, the CRA concluded that the entire $1,000 DSI of Opco was transferred to the shares of Newco held by Holdco.

Under the same facts as described in Example 17, if this spin-out is not within the ambit of paragraph 55(3)(a) because the shares of Opco are subsequently sold to an unrelated person as part of a series of transactions that includes the Deemed Dividend, can the CRA confirm that the entire $1,000 DSI of Opco still shifts to the shares of Newco held by Holdco?

Furthermore, does the CRA agree that the Deemed Dividend would be fully sheltered by the $1,000 DSI of Opco such that subsection 55(2) would not apply (even if the shares of Opco so redeemed only accounted for 50% of the FMV of all of the issued shares of Opco)?

Preliminary Response

Campbell: Even if the spin-out of Asset 2 to Newco ultimately failed to meet the conditions for the exemption provided by s. 55(3)(a), it is our view that the entire $1,000 of direct safe income of Opco would shift to the shares of Newco held by Holdco.

The reason for this is that, since the $1,000 of direct safe income of Opco is reflected in the adjusted cost base of Asset 2, which was transferred to Newco, it is reasonable to conclude that, after the spin-out, the $1,000 of direct safe income of Opco contributes to the gain on the shares of Newco held by Holdco and does not contribute to any gain on the shares of Opco retained by Holdco.

This is the same answer as in Example 17, where s. 55(3)(a) exception applies.

As described in Example 17 of the Safe Income Paper, as part of the series of transactions to complete the spin-out, Holdco transfers shares of Opco to Newco. These shares of Opco held by Newco are subsequently redeemed.

The question asked whether the deemed dividend on the redemption of these shares would be sheltered by the $1,000 of direct safe income of Opco. Based on the same reasoning as previously described, it also follows that immediately prior to the redemption of the shares of Opco held by Newco, the $1,000 in direct safe income of Opco would reasonably be viewed as contributing to the accrued gain on the shares of Opco held by Newco, such that s. 55(2) should not apply to the deemed dividend resulting from the redemption of the shares of Opco held by Newco.

Q.13 - Whether s. 159 holdback creates bare trust

Where trustees of a trust distribute the assets of the trust, but hold back $1,000,000 of cash or other assets representing all or a portion of the assets distributed until a clearance certificate under subsection 159(2) has been obtained by the trustees, can the CRA confirm that the property subject to the holdback is to be reported as a bare trust arrangement separate and apart from the trust? Would the response change if the amounts held back were subject to a signed holdback agreement where the beneficiaries agreed that the amount of the holdbacks would be used to pay any ongoing costs and any additional taxes identified through the clearance certificate process?

Preliminary Response

Fron: (The written response will discuss s. 159(2), and the requirement for a clearance certificate and the implication of not having one, which is addressed in s. 159(3). See also IC82-6R13, which provides additional information on when a distribution is considered to have been made.)

The question asks for clarification on the T3 return filing requirements where a trustee continues to hold a property valued at $1,000,000 and whether the holding of the property constitutes a bare trust arrangement.

As outlined in Questions 1.1 and 1.2 of the Enhanced Reporting Rules for Trusts and Bare Trusts, which are the FAQs available on the canada.ca website, determining whether a particular arrangement is a trust is a question of fact and law based on an analysis of the specific circumstances in each situation under the applicable private law.

As such, it is the responsibility of the parties involved in an arrangement to determine the true nature of their legal relationships and whether they give rise to a trust and, if so, whether it is a bare trust. Where you have a trust, a bare trust that is an express trust is created unless any of ss. 150(1.2)(a) to (p) is applicable.

The bare trust would be required to file a T3 return pursuant to s. 150 and provide the beneficial ownership information outlined on Schedule 15 when required under s. 204.2(1) of the Regulations.

This applies to the scenario we are discussing with the $1,000,000 that is held back, and it applies to both variations of that scenario.

If you are filing late, such as where you had a bare trust for 2023 or 2024, CRA does not require the bare trust to file a T3 return, including Schedule 15, unless CRA makes a direct request for those filings.

Q.14 - Effect of late s. 116 filing

A Canadian resident individual dies, leaving in his estate a Canadian real estate property (“Property”) with a fair market value (“FMV”) of $1,000,000 and cash and marketable securities with a total FMV of $500,000.

The beneficiaries of the estate are three adult children of the individual, one of whom is resident in a country with which Canada has a tax treaty (the other two are residents of Canada). One of the Canadian resident beneficiaries is the executor of the estate, and the deceased individual’s will provides that the beneficiaries share equally in the residue of the estate. In the first tax year of the estate, the Property is sold[3] and $750,000 is distributed to the beneficiaries ($250,000 each).

As a result of that distribution, the non-resident beneficiary is considered to have disposed of a portion of their capital interest in the estate which itself is taxable Canadian property (“TCP”) according to the meaning of that term in subsection 248(1) (immediately after the death, the FMV of the Property represents more than 50% of the value of the estate’s assets). In such a situation, the estate will be considered, for the purposes of subsection 116(5), a purchaser having acquired a TCP from the non-resident beneficiary.

The non-resident beneficiary does not file a notice using Form T2062 in respect of the disposition of a portion of their capital interest in the estate as required under subsection 116(3) and the estate does not file a notice provided for in subsection 116(5.02). The failure to file notices is subsequently identified.

If the non-resident beneficiary were to late file the notice required under subsection 116(3) and pay the applicable late filing penalty under subsection 162(7), can the CRA advise whether the estate would be liable for the tax under subsection 116(5) and/or the penalty under subsection 227(9)?

Preliminary Response

Campbell: The distribution and satisfaction of an interest in a trust that is taxable Canadian property requires the filing of a notice under s. 116. Under s. 116, non-resident vendors who dispose of certain taxable Canadian property have to notify the CRA of the disposition either under s. 116(1) before they dispose of the property or within 10 days of the disposition under s. 116(3). As described in the question, this was not done.

CRA has previously stated in published documents that, when there is a disposition of a capital interest in a trust because of a distribution from a trust, the purchaser for the purpose of s. 116 is considered to be the trust or estate. The question does not indicate whether the trust interest is treaty-protected property. Even if it is, since the estate and the beneficiary in the question are related, for the trust interest to qualify as treaty-exempt property, the estate, being the purchaser, must file a notice under s. 116(5.02) within the required time limit. As described in the question, this was not done either.

With respect to the purchaser, there are no late notifications allowed under s. 116(5.02). If the purchaser does not file the notice within the required 30 days, then the non-resident vendor is required to file notice under s. 116(3) because the excluded property exemption is not available. Administratively, CRA will process a late-filed notification under s. 116(3) as long as it is complete and received on or before the due date of the non-resident vendor's Part I income tax return for the taxation year during which the disposition occurred. When the CRA has verified the information provided in the notice, the CRA will issue a certificate of compliance to the non-resident vendor with a copy to the purchaser. The issuance of the certificate of compliance will relieve the purchaser of their obligation even though the notification was late.

In all cases, submission of a notification under ss. 116(1), (3) and 116(5.02) should be considered as early as possible in the disposition process to avoid the risk associated with s. 116(5). If the CRA has not issued a certificate of compliance under s. 116, the estate, as purchaser, is liable to pay and remit the amount described in s. 116(5) as tax on behalf of the non-resident vendor. The penalty under s. 227(9) would apply if the conditions are met. The purchaser is entitled to withhold that amount from the purchase price. If the purchaser does not remit the amount required under s. 116(5), a purchaser liability assessment for that amount may be raised against the purchaser under s. 227(10.1).

Purchaser liability assessments are not subject to any time restriction. An assessment may be issued at any time the CRA becomes aware that a non-resident vendor or purchaser has not adhered to the requirements of s. 116.

In summary, the non-resident beneficiary filing a late notification under s. 116(3) and paying the applicable late filing penalty under s. 227(9) would only relieve the estate's obligation to pay and remit the amount under s. 116(5) if the late notification results in the issuance of a certificate of compliance under s. 116(4).

Q.15 - S. 116 where s. 107(2) rollover

Where a trust or estate (hereinafter referred to as a trust) resident in Canada derives its value primarily from Canadian real estate (or other taxable Canadian property (“TCP”) as that term is defined in subsection 248(1)), a beneficiary’s capital interest in the trust is TCP. If Canadian real estate that forms part of the capital of a personal trust is distributed to a non-resident beneficiary of the trust, a rollover applies pursuant to subsection 107(2). We understand that as part of the certificate of compliance process under section 116, a valuation of the property is required. Can CRA explain why a valuation is required where a rollover results?

Preliminary Response

Campbell: Where s. 107(2) is applicable and, depending on the facts, the non-resident beneficiary’s proceeds of disposition of the interest are generally equal to the adjusted cost base of the property of the trust before the distribution.

There are certain adjustments in ss. 107(2)(b) and (c) that can impact what the proceeds of disposition of the beneficiary’s capital interest would be. Let us assume that none apply here.

Where the proceeds of disposition of the capital interest in the trust under s. 107(2)(c) are less than its fair market value, s. 116(5.1) will deem the consideration paid by the trust to be the fair market value of the Canadian real estate received for the purposes of s. 116.

On an administrative basis, in these circumstances, the CRA will accept the rollover amount under s. 107(2) as proceeds for the purpose of the issuance of the certificate of compliance under s. 116 for cases where there is clearly no risk to the Canadian tax base. That would include situations where the transferred property is property described in ss. 128.1(4)(b)(i) to (iii), which includes Canadian real estate.

In the circumstances described, the CRA will issue a certificate of compliance under s. 116 showing proceeds of disposition of the capital interest in the trust equal to the adjusted cost base of the distributed property to the trust. The fair market value of the distributed property provided to the CRA during the notification process will be listed in the notes on the certificate of compliance.

This recognizes that the deferral of the capital gain on the non-resident’s capital interest in the trust will ultimately be realized and included in income under Part I when the non-resident beneficiary disposes of the Canadian real estate.

The documentation supporting the information required under s. 116(1), s. 116(3) and s. 116(5.02) will depend on the nature of the disposition and the type of trust.