Effective Date


The tax consequences of transactions often turn upon when they occurred. Documents to legally implement a transaction often are not executed (or been drafted) on the date on which they are desired to take effect. Furthermore, even if a document is executed on or before the date in the document on which it is stipulated to be effective, there may be a subsequent amendment to the document - and the parties may wish the transaction to be considered to occur for tax purposes on the original effective date on the basis described in the amended document.

Except for transactions where the Statute of Frauds has been pleaded and found to be applicable (Bouchard), or where a specific statute requires implementation through a specific document (e.g., amending share capital through filing articles of amendment, or amalgamating through filing articles of amalgamation), many transactions can be implemented orally, i.e., without written documentation (although for obvious reasons, this often will be undesirable). It follows that when a transaction is evidenced in writing, the agreement or other document may record an earlier effective date on which the transaction was actually implemented. For example, taxpayers have successfully established that they transferred assets to a corporation on a date prior to the execution of any documents evidencing that transfer (Barnabe, Falconer, Cf. Rose). Similarly, property has been found to be held on and after a date on trust or a resulting trust notwithstanding the lack of a contemporaneous trust deed or other document (Nelson, Bouchard). An agreement has been found to be effective at a date prior to the date on which it was evidenced in writing even where the written agreement did not refer to the prior date (McAnulty).

It is common for parties to enter into an agreement for a transaction that will only be implemented on a subsequent date when various conditions have been satisfied (Imperial General). In such a case the transaction typically occurs on the subsequent date, and not on the date of the agreement. Accordingly, the existence of an oral agreement on a particular date does not necessarily establish that the transaction described by that agreement occurred on that date (Scandia Plate, Barnabe, Kettle River Cf. Perini Estate). Similarly, a trust deed cannot have retrospective effect if at the earlier time the settlor lacked the requisite intention (Kingsdale Securities), and it would appear that a purported share redemption will not be effective on a stipulated date that is prior to the date on which a condition precedent to the share redemption occurrs (Nussey).

Where parties agree that income will be distributed or allocated on the basis of an earlier effective date, and it is found that their transaction did not occur for income tax purposes on that earlier date, then as a matter of commercial law that agreement nonetheless should be respected. For example, if an asset purchase agreement specifies an effective date of January 1 but it is found that the asset purchase did not actually occur until March 1, the characterization of the transaction under the Act should respect the fact that the income earned between January 1 and March 1 is the property of the purchaser rather than of the vendor. However, the March 1 effective date might mean that the transfer of that property from the vendor to the purchaser on closing is characterized as an adjustment to proceeds of disposition, rather than as a transfer of income that has been earned by the purchaser. See Waddington v. O'Callaghan and 91 CR - Q.41.

There are exceptions to the rule that persons should not be considered to have effected a particular transaction in a specific way on a date if at that time they lacked the requisite intention to do so. First, a retroactive (nunc pro tunc) order of a provincial Supreme Court will be respected as having retroactive effect for purposes of the Act (Dale, Larsson, Howard, Sussex). Second, the corporate doctrine of pre-incorporation contracts potentially means that an agreement that was made before a corporation came into existence may be treated as giving rise to a transaction of the corporation (see Shaw). Third, where a contract provides that where any provision thereof is found to be invalid, the contract shall be rectified so as to give effect to the business intent of the parties, a subsequent rectification of the contract pursuant to this clause by the parities themselves very well may be respected as having retroactive effect for tax purposes (Sommerer).

Agreements for non-arm's length transfers of property by taxpayers to a corporation for share consideration typically contain a price adjustment clause under which the redemption amount of preferred shares received by the taxpayers, or the quantity of common shares issued to them, will be adjusted if the initially stipulated redemption amount or number of common shares issued to them proves to be different than the fair market value (net of assumed liabilities or debt issued to them) of the property they transferred to the corporation. Price adjustment clauses also may be utilized in other types of transactions. The efficacy of price adjustment clauses rests, in part, on the notion that the operation of a price adjustment clause is not a subsequent attempt to change the terms of a transaction that has already occurred but, rather, gives effect to the intention of the parties at the previous time of implementation to transact on fair market value terms. See Guilder News, Leung and the various statements of the Agency set out below (including IT-169 and 90 CR - Q. 58).



price adjustment clause eliminated any possible value discrepancy between the FMV of the transferred property and the consideration therefor

Before finding that s. 160 did not apply to a s. 55(3)(a) spin-off transaction in which each component transaction entailed a value-for-value exchange including the issuance and redemption of preferred shares with a price adjustment clause, Noël CJ noted, in passing, at para. 50:

…160(1)(e)(i) … provides that the consideration is inadequate when the fair market value of the property transferred exceeds the fair market value of the consideration given at the time of the transfer (see Birchcliff Energy Ltd. v. Canada, 2019 FCA 151 at para. 47). As explained by the Tax Court judge, the price adjustment clause eliminated any possible difference between the two in the present case ... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) s. 160 did not apply to s. 55(3)(a) where each step involved a value-for-value exchange (including the cross-share redemptions) 565
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) “series of transactions” requires at least one tax-driven transaction 284
Tax Topics - Income Tax Act - Section 84 - Subsection 84(9) a shareholder whose shares have been redeemed has provided valuable consideration therefor by surrendering its shares 136
Tax Topics - General Concepts - Fair Market Value - Other note supported only by pref, then note, of a sister had full FMV 132

St-Pierre v. Canada, 2018 FCA 144

retroactive judgment of a Superior Court effectively treated as only having prospective effect for ITA purposes

A private corporation that sold eligible capital property in 2008 declared a capital dividend in the year in an amount which included the untaxed portion of this sale receipt. This was a mistake, as the addition to the capital dividend account for this amount does not occur until the beginning of the following year. When CRA discovered this mistake a number of years later, it indicated that it would not assess the corporation for Part III tax provided that the mistake was rectified through an order of the Quebec Superior Court.

Only a small portion of the dividend made payable in 2008 was actually paid in 2008, so that the CDA addition from the sale was not needed to cover that dividend payment. Accordingly, all that was necessary to fix the problem was to get the court order to declare the payable date for most of the dividend to be on or after January 1, 2009.

What the corporation instead sought and obtained was a court order dated January 6, 2014 that retroactively annulled the dividend and ordered the individual shareholder to repay the dividend, which he then did in 2015 and with a fresh capital dividend then being declared and paid. When CRA found out that annulment rather than rectification had been requested, and while this annulment order was still being awaited (and the period for making a s. 15(2) assessment was about to run out), it assessed the individual under s. 15(2) on the basis that, as the dividends would be annulled, the payments to the individual instead represented advances (i.e., amounts which he was required to repay, as retaining them would have given rise to unjust enrichment).

Boivin JA found that the s. 15(2) assessment was without foundation, essentially on the basis of his not treating the judgement of the Superior Court as having retroactive effect for ITA purposes. He stated (at para. 36, TaxInterpretations translation):

[I]f restitution was not possible before the date of the declaratory judgment of the Superior Court, it necessarily follows that there was no debt (in this context, an unjustified enrichment), before that date. The appellant could not at the same time be indebted to the Corporation and be legally incapable of repaying that debt to it.

Thus, the CRA assessment could not take an annulling judgment, which had not yet been given, into account. Furthermore, the “enrichment” of the individual taxpayer resulting from the Superior Court judgment was merely “theoretical” given his obligation to make restitution to the corporation, which he did.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2) retroactive judgment annulling a dividend did not retroactively give rise to a shareholder debt for the annulled amount 624

Anderson v Benson Trithardt Noren LLP, 2016 SKCA 120, aff'd 2017 SCC CanLii 8568

transaction documents not declared effective to date transaction agreed to in principle

When CRA gave notice in 2013 of a proposed audit, the taxpayer’s accounting firm realized that it had failed to instruct the taxpayer’s lawyers to prepare the documents to implement a s. 85 transfer of assets to the taxpayer’s corporation, which the taxpayer had agreed to in a June 6, 2011 meeting with them. On this discovery, the requisite documents were promptly prepared and executed. In confirming a decision of the judge below to refuse to declare that the 2013 documents had retroactive effect to June 6, 2011, Lane JA stated:

The Chambers judge...saw the application for a declaration for what it was – an attempt to obtain equitable relief not available from the Tax Court, which is a superior court of record but not a court of inherent jurisdiction, and to thereby attempt to determine the outcome of an assessment appeal by essentially binding the hands of that Court. …

[He] recognized the specialized nature of the Tax Court and its jurisdiction to decide the ultimate issue concerning the tax implications of the rollover. He correctly declined to effectively pronounce on that issue.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Rectification & Rescission drop-down documents could not be declared retroactive to the previously-agreed effective date, as this would undercut the Tax Court 286

Nussey v. Canada, 2001 DTC 5240, 2001 FCA 99

agreed retroactive redemption date was ineffective

The two sons of the taxpayer had transferred to him shares of a family corporation. The shareholders' agreement provided that, on the death of a shareholder, his shares were deemed to have been redeemed by the company on the day preceding that of death.

The Court affirmed the finding of the Tax Court Judge that the deemed redemption provisions in the agreement did not effect a retroactive disposition of the shares the day before the taxpayer's death.

Stone's Jewellery Ltd. v. Arora, [2000] GSTC 168 (Alta. Ct. Q.B.)

A transaction in which a company paid for a real estate property but the shareholders (who were not registered for GST purposes and, therefore, were not entitled to input tax credits) took title and, later, transferred the property to a newly incorporated company in reliance on the s. 85(1) rollover, was rectified so that both transfers were void ab initio. The second transaction was done under the mistaken belief that it could be done on a rollover basis whereas the Minister had assessed on the basis that the land was transferred as inventory. Respecting the first transfer, the Court found that the parties shared a mistaken belief based on their professional advice that no adverse tax consequences would result from the transfer.

Sussex Square Apartments Ltd. v. The Queen, 99 DTC 443, [1999] 2 CTC 2143 (TCC), aff'd 2000 DTC 6548, [2000] 4 CTC 203, Docket: A-40-99 (FCA)

Dale principle did not apply to "contractually agreed ... revisionism"

After the taxpayer had, for some time, been disposing of apartments suites which it held under a headlease by way of assignment rather than a sublease, it realized that a sublease would give rise to a more favourable income tax result (by accessing the reserve under s. 20(1)(m)). Accordingly, it entered into modification agreements with the bulk of the assignees under which one day of the term covered by the lease was reserved to the taxpayer, thereby effectively converting the assignment into a sublease. When the provincial Land Titles Office declined to register the modification agreements, the taxpayer obtained an order of the Supreme Court of British Columbia declaring that the assignments were so modified. The taxpayer then registered the court-approved modifications and a further 49 modification agreements were registered after the court order without the necessity of an application to the court.

Bowman T.C.J. found that the Dale decision applied to make the court-approved modification agreements effective ab initio but concluded at p. 451 (with respect to the remaining 49 modification agreements) that "it would be pushing the Dale principle too far if I applied it to contractually agreed fiscal revisionism without the benefit of a court order".

Barnabe Estate v. The Queen, 99 DTC 5387, [1999] 4 CTC 5 (FCA)

transaction effective at time of informal oral agreement

The Court, in reversing a finding of the trial judge, found that the deceased taxpayer had entered into an oral agreement with his corporation (which was the lessee of the assets of a farming business) to transfer to it the ownership of all those assets on the day that he met with his accountant, communicated that intention, and signed a blank election form. The failure to fix, at that time, the fair market value of the assets, and to prepare a schedule specifically listing them, represented a delay in dealing with purely "housekeeping measures"; and given that under Manitoba corporate law, a corporation had the capacity and the powers of a natural person, it was not germane that the purchasing corporation had not ratified the oral contract on that date (nor was it relevant that there was a significant delay before the consideration was paid).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) 44

The Queen v. Larsson, 97 DTC 5425 (FCA)

An order of the British Columbia Supreme Court made in 1993 that mortgage payments made from November 1989 onward by the taxpayer on a house that had been sold prior to 1993 were deemed to be periodic maintenance payments pursuant to s. 60.1(2) of the Act was intended by the Court to have been made nunc pro tunc, with the result that the payments were deemed to be allowances under s. 60.1(2) for the years in question.

Dale v. Canada, 97 DTC 5252, [1997] 2 CTC 286 (FCA)

retroactive superior court order has retroactive effect for tax purposes

Before finding that an order of the Nova Scotia Supreme Court (obtained without the federal Crown being a party to the proceedings) retroactively adding preferred shares to the authorized capital of a corporation and confirming that they had been issued to the taxpayers also had retroactive effect for taxation purposes, Robertson J.A. stated (at pp. 5255-6):

As a matter of law both the Tax Court and this Court are required to give effect to orders issued by the superior courts of the provinces. ...

Wilson v. The Queen, 1983] 2 SCR 594 ... establishes the general rule that an order of a superior court cannot be atacked collaterally unless it is lawfully set aside. ...

It seems only logical that a [superior] court would decline the invitation to grant a retroactive order which has the clear legal effect of rewriting fiscal history. Assuing that such an order were granted, then it would be proper to ask whether the Minister is entitled to ignore it for taxation purposes.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Rectification & Rescission retroactive effect of nunc pro tunc rectification order 177
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Dividend 78
Tax Topics - Income Tax Act - Section 83 - Subsection 83(2) 78
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) retroactive validation by Superior Court of preference share issuance was effective for s. 85 purposes 171
Tax Topics - Statutory Interpretation - Provincial Law 140

Greenway v. Canada, 96 DTC 6529 (FCA)

Various conditions contained in an agreement for the acquisition of a MURB development by co-investors including the contractor's undertaking to obtain zoning and planning permissions, arrange financing, obtain a MURB certificate and convey title, did not represent conditions precedent the non-fulfilment of which would result in nullity of the agreement. Accordingly, various soft costs incurred by the investors after the effective date of the agreement were currently deductible by them.

Kettle River Sawmills Ltd. v. The Queen, 92 DTC 6525, [1992] 2 CTC 276 (FCTD)

Timber rights were not acquired on the intended adjustment date of March 26, 1974 but instead were acquired no earlier than the time that the purchaser commenced using the rights and had the other incidents of title.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property status does not turn on whether CCA actually claimed 69

R. v. Hutton, [1990] 2 CTC 258 (Alta. C.A.)

The taxpayer fraudulently caused his employer to pay invoices for work on renovation to his home in 1983 and 1984. After the renovations were completed in 1984, he informed the company vice-president and controller that he had done so, following which it was agreed that the misappropriated funds would be treated as a loan to him. Because this subsequent agreement was in place when he filed his 1984 tax return, there was no failure to report a benefit from employment with respect to the 1984 misappropriation, albeit, not the 1983 misappropriation.

Shaw v. The Queen, 89 DTC 5194, [1989] 1 CTC 386 (FCTD), aff'd 93 DTC 5213 (FCA)

The efficacy of a pre-incorporation contract was recognized.

Bouchard v. The Queen, 83 DTC 5193, [1983] CTC 173 (FCTD)

parol trust over land has effect for tax purposes from its formation - at least, if subsequently confirmed in writing

Before holding that the Statute of Frauds did not preclude a finding that the taxpayer held land in trust for his son and daughter-in-law, Cattanach J. indicated (p. 5200-5201) that a parol trust operates from the time of its creation even if writings evidencing the existence of the trust do not come into existence until a subsequent date. In particular, he referred with approval to the statement in Rochefoucauld v Boustead (1897) 1 Ch 207 that “it is not necessary that the trust should have been declared by such a writing in the first instance; it is sufficient if the trust can be proved by some writing signed by the defendant, and the date of the writing is immaterial” and to comments therein to the effect that a parol trust over land can be valid notwithstanding that the trustee may (or may not) be able to defeat the trust by invoking the Statute of Frauds.

Scandia Plate Ltd. v. The Queen, 83 DTC 5009, [1982] CTC 431 (FCTD)

Control of a corporation was not acquired until the date for closing the agreement of purchase and sale, when the purchaser acquired ownership of the shares, rather than on the earlier effective date of the agreement when there allegedly was a verbal executory contract in place for the acquisition of the shares. Cattanach J. applied the principle that where a preliminary contract (whether verbal or otherwise) is intended (as was the case here) to be superseded by, and is in fact superseded by, a contract of a superior character (here, the written agreement), then the later contract prevails.

Perini Estate v. The Queen, 82 DTC 6080, [1982] CTC 74 (FCA)

It was held that "interest" calculated from the closing date of a share purchase on outstanding instalments of a purchase price was taxable as interest rather than being capital receipts notwithstanding that the amount of each instalment of purchase price depended on the amount of after-tax net profits of the borrower earned subsequent to the closing date, with the result that the amount of interest could not be calculated until those earnings were ascertained. Le Dain, J. stated:

"it is my opinion that it was open to the parties to the agreement of sale in this case to treat the occurrence of the contingency as having such effect, insofar as interest was concerned. Cf. Trollope & Colls, Ltd. et al. v.Atomic Power Constructions Ltd., [1962] 3 All E.R. 1035, in which it was held that parties to a contract could give their contract retrospective effect. There is no rule of law that prevented them from treating an additional sum payable on account of the purchase price ... as owing, for the purposes of interest, from the closing date ...."

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Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) parties were entitled to treat conditional interest, when paid, as having retrospective absolute effect 319

Kingsdale Securities Co. Ltd. v. The Queen, 74 DTC 6674, [1975] CTC 10 (FCA)

Since the settlors lacked the requisite intention prior to the execution of settled trusts, the execution of the trust deeds did not have retrospective effect to the time of alleged settlement, notwithstanding a clause in the deed purporting to make the trust effective on a date prior to its execution.

Howard v. The Queen, 74 DTC 6607, [1974] CTC 857 (FCTD)

The BC Supreme Court on February 16, 1970 ordered the taxpayer to pay $200 per month to his wife commencing February 1, 1970. On October 22, 1973 the B.C. Supreme Court confirmed a recommendation of the Registrar, dated April 22, 1971, that the support be increased to $270 per month commencing April 1, 1970. Since the second judgment, on a true construction, was a judgment nunc pro tunc the taxpayer was entitled to make a deduction under what now is s. 60(c) at a rate of $270 per month commencing on April 1, 1970.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(c) 85

Nelson v. The Queen, 74 DTC 6266, [1974] CTC 360 (FCA)

Although it was the intention of the four related shareholders of a corporation that father hold 100 voting participating shares and each of his three sons hold 100 non-voting participating shares following the incorporation of a partnership in which the four individuals were equal partners, at the time of the payment by the corporation of a $1,000 dividend to each of the four shareholders the three sons (due, in part, to an oversight of the company's solicitor) held one voting participating share of the corporation. It was held (at p. 6268) that "each of the four shareholders was entitled to the $1,000.00 actually paid to him by the company either because the 96 shares issued to the appellant as part of the consideration for the partnership property were held by the appellant on a resulting trust for the members of the partnership in equal shares, or because the agreement between them called for them to have equal equity shareholdings in the company and to share equally in any divisions of the profits of the company". S.56(2) accordingly did not apply to include approximately 97% of the dividend in the income of father.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 171

Guilder News Co. (1963) Ltd. v. MNR, 73 DTC 5048, [1973] CTC 1 (FCA)

The sale in 1964 of shares by a corporation to its sole shareholder at an undervalue gave rise to a benefit to the shareholder notwithstanding that the shares had been purchased at the same undervalue by the corporation from the shareholder two years earlier. "If it had not been for the 1964 resale, the individual would have continued in the relatively impoverished state that resulted from the 1962 sale. As a result of the 1964 resale he was restored to his relatively affluent state at the expense of the company and ... the company thereby conferred a benefit on him." Under the jurisprudence, it was irrelevant that "when an individual benefits a company whose stock is all owned by him or when such a company benefits the individual, the individual's overall net assets may well have neither increased nor diminished ... ."

A price adjustment clause did not negate (although it arguably reduced) the amount of the benefit, given that there was no bona fide attempt to estimate a fair market value sale price. "If, in fact, a company simply sold property to its sole shareholder on expressed terms that the price payable was an amount equal to fair market value and provided a fair manner to determine such value, I would agree ... that there could not, as a matter of law, be a benefit arising out of the sale."

Rose v. MNR, 73 DTC 5083, [1973] CTC 74 (FCA)

serivces contract did not have backdated effect

It was held that a management services contract between a corporation ("Central Park Estates Limited") and a partnership with an effective date of November 1, 1965 was not executed, and approved by the directors of Central Park Estates Limited, until at least May 31, 1966, with the result that one of the corporate partners could not be said to be carrying on an active business during the interim seven-month period. "It may well be that, after Central Park Estates Limited subsequently executed the back-dated services contract and after the corporate partners accepted payment as though they had performed the services under that contract, the situation was the same, as among the parties, as though everything had been regularly done on November 1, 1965 ... However, in my view, no such back-dating of transactions can affect the fact that, during the period from November 1, 1965 to June, 1966, there was no services contract ..."

Minister of National Revenue v. Lechter, 66 DTC 5300, [1966] CTC 434, [1966] S.C.R. 655

In the taxpayer's 1955 taxation year, he accepted the Department of Transport's formal offer of settlement for compensation in respect of its expropriation of his land inventory, and in his 1956 taxation year, the Treasury Board ratified the agreement and authorized the payment to the taxpayer. Abbott J. found that "in accordance with the ordinary rules of mandate, [the ratification of the Treasury Board] had retroactive effect to [the date of the agreement]", with the effect that the gain of the taxpayer was realized in his 1955 taxation year rather than 1956 taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 92

Falconer v. Minister of National Revenue, 62 DTC 1247, [1962] CTC 426, [1962] S.C.R. 664

subsequently executed agreement evidenced an agreement that already existed

The members of a syndicate that had acquired an oil farm-out agreement incorporated a private company ("Ponder") on June 15, 1951, and Ponder immediately took possession of the syndicate's assets. However, an agreement evidencing the transfer and the consideration therefor (the obligation of Ponder to issue shares to the syndicate members) was not executed until September 25, 1951, by which date the assets had significantly increased in value. Before finding that "the agreements of September 25 did no more than to evidence, in writing, agreements which already existed" (p. 1250), with the result that the taxpayer should not be regarded as having realized a taxable profit by virtue of receiving shares on September 25, 1951 with a value higher than the assets transferred by him to Ponder on June 15, 1951, Martland J. applied (at p. 1250) the principle in Howard v. Patent Ivory Manufacturing Co. (1888), 38 Ch. D. 156 at 163:

"'Where possession has been given upon the faith of an agreement, it is I think the duty of the Court, as far as it is possible to do so, to ascertain the terms of the agreement and to give effect to it.'"

See Also

Wise v. The Queen, 2019 TCC 196

subsequent year’s transactions following a s. 15(1) assessment had no retrospective effect

An individual leased a building under a 5-year lease with a 5-year renewal option to a corporation (VMS) wholly-owned by her and her son. VMS then paid for substantial renovations to the building.

Smith J referenced the principle in Kennedy that “Where a tenant improves the leased premises, the extent to which, if at all, the improvement confers a benefit on the landlord will depend on the extent to which the improvement increases the value of the reversionary interest,” and then found that, here, no taxable benefit should be recognized until the termination or maturity of the lease, in which event the residual value of the reversionary interest of the taxpayer would have to be valued.

After the completion of the renovations, VMS sold its leasehold improvements to another company that was wholly-owned by the taxpayer, and the taxpayer transferred a 2/3 interest in the building to the same company. In this regard, Smith J stated (at para. 67):

As to the agreements …that were allegedly prepared and intended to mitigate the effect of the reassessments which are the subject of the present appeal, the Court agrees with the Respondent they are best described as an “ex post facto arrangement” which cannot be given any retrospective effect.

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Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) no immediate taxable benefit to a landlord-shareholder from improvements made to the leased building by the tenant-corporation 363

Black v. The Queen, 2019 TCC 135

loan was effective even though never documented and ultimately repudiated

The taxpayer (“Black”) controlled both Hollinger Inc. (“Inc.”) and Hollinger International Inc. (“International”). In 2004, the Delaware Court of Chancery ordered Black and Inc. jointly to pay to International damages equalling the amount of a “non-compete” payment of U.S$16.6 million that International had paid to Inc., plus interest thereon. Black used money borrowed from a third party (“Quest”) at 12.68% interest to pay all of such damages, but argued that he had advanced such funds on behalf of Inc. in satisfaction of an interest-bearing loan that he had orally agreed to make in the same amount to Inc. Although the Audit Committee of Inc. had approved the receipt of a loan from Black, the relationship between the independent directors of Inc. and Black deteriorated, and the alleged loan by him to Inc. was never formally documented – and following subsequent litigation, all of Black’s alleged rights in that regard were extinguished in a settlement in which he agreed to pay damages to Inc.

Rossiter CJ accepted Black’s position that the borrowed money had been used by Black to make a loan to Inc., so that Black was entitled to an interest deduction on his borrowed funds, stating: (at paras. 114, 128-129):

A reasonable observer would conclude that Black and Inc. intended for there to be a loan agreement, and the key players thought there was a binding loan agreement.

… Black and Inc. had [orally] agreed that the essential terms or repayment would match the Quest Loan so as to ensure Black was not out-of-pocket after stepping up to help Inc.

… Black and Inc. reached an agreement on the essential terms of the loan and left the details to be worked out at a later date. The fact that a formal document outlining those essential terms was to be prepared later on and signed … does not alter the validity of the earlier contract.

Rossiter CJ also found that there was an exchange of legal consideration, stating (at para. 132):

Black’s direct advancement of funds to International on Inc.’s behalf is not a bar to a loan existing between Black and Inc. …[An] advance on another party’s behalf can support a binding loan.

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Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) an ancillary income-earning purpose for making a loan whose terms were never finalized was sufficient to satisfy s. 20(1)(c)(i) 659
Tax Topics - General Concepts - Payment & Receipt advance on another party’s behalf established a loan 141

Trower v. The Queen, 2019 TCC 77 (Informal Procedure)

a dividend by a sole director could not be backdated to when there was another director

While Ms. Trover was separated from Mr. Trover, their jointly-owned company (Cove) paid amounts into their joint bank account. That same year, she ceased to be a shareholder and director of Cove, and in the subsequent year Mr. Trover, who was now Cove’s sole director and shareholder, purported to sign a resolution that retroactively treated a portion of the amounts paid into their joint bank account as having been a dividend payment by Cove to her. She had not agreed to this treatment.

In finding that Ms. Trover had not received this amount as a dividend (and in reversing the assessment including that amount in her income), Monaghan J stated (at paras 37-38, 46):

I accept that practice in the “real world” does not always conform with best practice. … [and] that directors and/or shareholders may make a decision and act upon it, even though they may not record that decision in writing until a later date. But that cannot be said to have happened here. All of the evidence is that the only two relevant people, Mr. and Ms. Trower, never agreed that the transfers would be dividends. The decision was a unilateral one by Mr. Trower. He did not have that power before he became the sole shareholder and director.

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Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a) purported retroactive dividend would not have been agreed to by both directors at the time 319

Bourgault v. The Queen, 2019 TCC 6

parties justifiably rectified their agreement so that it had retroactive effect

The written agreement for the purchase by the taxpayer of shares of a real estate corporation (“Quatre Saisons”) stated that the purchase price was to be satisfied by the payment to the vendor (“Placeval”) of 50%, then 30%, of the sales proceeds of real property of Quatre Saisons, with such proceeds to be paid to Placeval as commissions. Those percentage amounts in fact were paid by Quatre Saisons directly to Placeval and CRA assessed the taxpayer for shareholder benefits under s. 15(1). Two months after this assessment, the Quebec Superior Court issued an order for the rectification of the agreement to change the stated purchase price to $1. Before assessing, CRA was aware of the application for this judgment, but did not see fit to intervene, so that the Crown was not a party to the application.

Before granting the taxpayer’s appeal from the assessment, Favreau J first indicated that the Crown was not bound by the Court order “as neither the Attorney General of Canada nor the Minister was involved in the application” (para. 59), and also found that the judgment was not “res judicata.” He nonetheless found that “The parties justifiably obtained the judgment of the Superior Court to rectify the situation” (para. 62) in light of evidence that from the outset they had been consistently treating (e.g., in their financial statements and in invoicing procedures for services performed) the payments made by Quatre Saisons to Placeval as commissions rather than sales proceeds.

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Tax Topics - General Concepts - Rectification & Rescission a rectification judgment was “justifiably obtained” and, therefore, followed for tax purposes 404

De Vries v The Queen, 2018 TCC 166

oral agreement to postpone changed terms of loan

The two individual shareholders of a corporation (“IPG”) were assessed under s. 160 regarding a dividend they had received from IPG. The validity of this assessment turned on whether an assessment of IPG under s. 224(4) for failure to comply with a demand under s. 224(1) effectively requiring it to pay to CRA a demand loan owing by IPG to a third party (“Houweling”) was valid.

Paris J accepted testimony that Houweling had orally agreed, prior to the receipt by IPG of the s. 224 demand, to postpone his right to receive repayment of the loan until the conclusion of a significant suit brought by IPG against a third party. He further found that “there has been an evolution in the doctrine of consideration in the context of contract modifications,” so that now “when parties to a contract agree to vary its terms, the variation should be enforceable without fresh consideration, absent duress, unconscionability, or other public policy concerns” (para. 57).

As the oral agreement of Houweling to postpone payment was contractually binding, the s. 224(4) assessment of IPG was invalid.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 224 - Subsection 224(1) a corporate creditor’s oral agreement to postpone collection of his loan defeated a RTP encompassing that loan 394
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) if requirement to pay assessment had been valid, it would have flowed through with a dividend 302

Melançon v. The Queen, 2018 TCC 73

rebooking of “expense” as shareholder advance was retroactive tax planning

The taxpayer was the sole shareholder of a home construction company. After the CRA auditor noticed that amounts booked as “subcontractor expenses” had been paid to the taxpayer, such amounts were rebooked as shareholder advances. Before finding that these amounts had given rise to a taxable benefit under s. 15(1), Smith J quoted with approval the statement in Bibby v. The Queen, 2009 TCC 588 that:

None of [the cited cases], however, support the appellant’s proposition that adjustments to the expenses of a previous fiscal period, and concomitant changes to the income of the employee for a previous year, may be made on a retroactive basis … . It is, of course, permissible to enter into a second transaction of the kind dealt with by the Board in Brazelot, so long as it is accounted for in the fiscal period when it takes place. What is not permissible is retroactive implementation of tax planning by purporting to undo, or change, transactions that took place in an earlier period.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) failure of a house construction company to charge a mark-up on its costs incurred for shareholder work generated at taxable benefit/rebooking of “expense” as shareholder advance was retroactive tax planning 348

Mammone v. The Queen, 2018 TCC 24, rev'd 2019 FCA 45

subsequent deregistration of RPP retroactively validated reassessment

The CRA revocation of a registered pension plan (the “New Plan”) was invalid due to inadvertent failure to comply with the 30-day notice requirement in s. 147.1(12). Graham J found that the contemporaneous reassessment of the taxpayer under s. 56(1)(a)(i) for having purportedly transferred the commuted value of his (OMERS) pension plan to the New Plan was valid since the CRA’s subsequent issuance (well beyond the normal reassessment period) of a further retroactive deregistration of the New Plan effectively also retroactively validated such reassessment.

In this regard, he stated (at paras 14, 16, 17, and 19):

The facts necessary to support the reassessment did exist when the reassessment was issued because subsection 147.1(12) caused them to exist retroactively.

… I do not see any practical difference between a law being given retroactive effect and a fact deemed by law to exist retroactively being given retroactive effect.

…Parliament enacted legislation which gave the Minister the power to retroactively change facts. There is no suggestion that Parliament was unaware what it was doing.

…[The taxpayer] tried to distinguish rectification cases from his situation on the basis that rectification occurs as a result of a court order whereas the revocation of the New Plan’s registration occurred as a result of an exercise of the Minister’s power. With respect, I do not see any real difference between the two situations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) RPP revocation beyond the normal reassessment period retroactively validated an unsupportable reassessment under s. 56(1)(a)(i) 414
Tax Topics - Income Tax Act - Section 152 - Subsection 152(9) subsequent retroactive deregistration of RPP also retroactively validated an assessment factually made on basis of plan’s invalidity 216
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) subsequent retroactive deregistration of RPP would not establish carelessness in previous return filing 197
Tax Topics - Income Tax Act - Section 147.1 - Subsection 147.1(12) subsequent deregistration of RPP beyond normal reassessment period nonetheless retroactively validated reassessment 95
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) valid assessment for transfer to an RPP that was retroactively deregistered 85

Cook v. The Queen, 2017 TCC 188 (Informal Procedure)

tax effect given to a retroactive court order

Whether the taxpayer was able to take a deduction for a dependent child depended on whether in the year in question she was considered to have a support obligation to her ex-spouse. They had agreed that she no longer was obligated to pay support, but this was not reflected in a court order until a subsequent year, although the court order was stated to have effect to the date of their support-cessation agreement. After noting conflicting authority on the point, Russell J stated (at para. 17) that he preferred the authority that the retroactive nature of the subsequent court order should be respected.

However, the taxpayer’ claim still failed on the ground that “no statutory language used in or in connection with subsection 118(1) indicates that the deductions may be prorated for a taxation year” (para. 26) – and here, the support obligation had been agreed to be terminated only partway through the year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118 - Subsection 118(5) court order retroactively terminating support obligation to the taxpayers’ agreement thereon respected – but s. 118(1) claim denied as entailing proration 446

Gillen v. The Queen, 2017 TCC 163, aff'd 2019 FCA 62

relation-back theory applied: closing retroactively confirmed previous beneficial ownership transfer

A limited partnership was found to have immediately transferred the beneficial ownership of applications to the Saskatchewan government for potash exploitation rights (the “Purchased Applications and Purchased Permits”) to a corporation (“Devonian”) immediately upon entering into a sale agreement of the Purchased Applications and Purchased Permits with Devonian. In rejecting the taxpayer’s submission that until the subsequent completion of the transfer of the permits to Devonian (on their subsequent grant by the government), the partnership nonetheless was using the Purchased Applications and Purchased Permits in a business carried on by it, as required under s. 110.6(14)(f)(ii), D’Arcy J stated (at para. 122-3):

The Appellant appears to be ignoring the so-called “relation-back” theory. In Clem v. Hants-Kings Business Development Centre Ltd, 2004 NSSC 114 … the Court found (at paragraph 17) that the relation-back theory applied and that the vendor held the land in trust for the purchaser from the date of the agreement: “In other words, while the trust relationship between vendor and purchaser may be dubious before closing, once the agreement is completed the trust relationship is solidified retroactively. …’”.

In the present appeal, the transactions under the Subscription Agreement were closed. Therefore, the trust relationship, in the context of an executory contract, was solidified on the closing date, retroactive to the date the agreement was entered into, i.e. December 7, 2007.

In the FCA, Webb JA stated (at para. 50) that it was unnecessary to address the coments of D'Arcy J on the relation-back theory.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(ii) property was not used in a business for s. 110.6(14)(f)(ii) purposes when it was beneficially acquired and dropped-down on the same day 364
Tax Topics - General Concepts - Ownership test of beneficial ownership 112

Deragon v. The Queen, 2015 TCC 294

proceeds reduced by subsequent settlement pursuant to price adjustment clause

Vendors agreed to sell shares for a sale price of $16 million, of which $2 million was payable in subsequent years only if an EBITDA condition respecting the sold companies was satisfied. The sales agreements contained a simple price adjustment clause based on the final audited shareholders’ equity of the sold companies. When a substantial deficiency in shareholders’ equity subsequently emerged, a negotiated Settlement Agreement concluded more than a year after the sale reduced the sale price by $0.5 million (to $15.5 million), increased the portion of the sale price payable under the reverse earn-out to $3 million – and provided that the vendors would reimburse a further portion of the sale price out of amounts received by them under the earn-out.

Favreau J respected the retroactive downward adjustment, pursuant to the Settlement Agreement, of the proceeds of disposition by $0.5 million but, by the same token, considered that the reverse earnout amounts of $3 million could not be excluded from the proceeds of disposition notwithstanding their contingent nature. However, he did not permit a downward adjustment to the proceeds of disposition for the contingent obligation to refund the sale price to the purchasers.

See summary under s. 54 – proceeds of disposition – para. (a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition - Paragraph (a) sales proceeds reduced by subsequent price adjustment clause but included conditional sales proceeds 480
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) reverse earnout amounts included in proceeds 245

Charania v. The Queen, 2015 DTC 1103 [at 614], 2015 TCC 80 (Informal Procedure)

consideration for transfer to shareholder adjusted without price adjustment clause

An individual shareholder of a corporation ("B&N") thought that he was the beneficial owner of his home, but everyone else, including his accountants (and ultimately the Tax Court) considered that it was beneficially owned by B&N. Immediately before his sale of the home at a gain, it was transferred to him by B&N, with the excess of its book value over the outstanding mortgage amount being treated as a shareholder advance to him.

In reversing a shareholder benefit assessment of the taxpayer equal to the excess of the property's fair market value over its book value (and stating an "understanding" that the shareholder loan amount would be increased by this difference), VA Miller J stated (at paras. 40-41):

The Appellant was not aware of the error in this case nor did he sanction the error. He believed that the Declaration of Trust was followed and that he already owned the Property.

It is clear that B&N did not intend to confer a benefit on the Appellant. It transferred the Property to him and included an amount with respect to the Property as a loan receivable from him. The problem was that the amount included was incorrect. This problem arose as a result of an error made by [the accountants] not from any intent of B&N or the Appellant to commit a fraud.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) no shareholder benefit from erroneous property valuation 314

Murphy Estate v. The Queen, 2015 TCC 8

disclaimer has retroactive effect

An estate unsuccessfully argued that the effect of the settlement of some estate litigation pursuant to a consent order, which provided for the transfer of the interest in the deceased's RRSPs, by the children who otherwise would have received the RRSP assets, to the deceased's surviving spouse, was to retroactively access the rollover for RRSP transfers to a surviving spouse. In connection with noting that the children had not disclaimed their interests in the RRSPs, V. Miller J stated (at para. 33) that the effect of a disclaimer (being "a refusal to accept an interest which has been bequeathed to a disclaiming party") is "to void the gift as if the disclaiming party never received it."

See detailed summary under s. 146(8.8).

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(8.8) consent order for settlement of estate litigation did not have retroactive effect 201

Al-Hossain v. The Queen, 2014 TCC 379

bare trust declaration was too late

To secure mortgage financing for his home purchase, the appellant's friend ("Khandaker") agreed to co-sign the mortgage documents and to be placed on title as a co-owner. Less than three weeks after closing, they signed a statutory declaration stating that the appellant was the 100% beneficial owner and that Khandaker held a 0.01% interest in trust for the appellant. In rejecting a submission that the appellant was the sole beneficial owner (so that the new housing HST rebate was available to him), Lyons J stated (at para. 27):

The creation of a trust must be properly documented containing the requisite elements of a trust, dated, signed and in existence prior to or contemporaneous with the matter that is the subject of the trust arrangement.

See summary under ETA s. 254(2).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 254 - Subsection 254(2) co-owner was not occupant and bare trust declaration was too late 282
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) bare trust declaration was too late 138

James v. The Queen, 2013 DTC 1135 [at 705], 2013 TCC 164

retroactive nature of B.C. court order applied for ITA purposes

The British Columbia Court of Appeal ordered a retroactive increase in the monthly amount of the support payments the taxpayer paid to his spouse, and was thus made to pay a lump sum equal to the monthly increases. Pursuant to the finding in Dale that retroactive court orders are binding on the Minister for tax purposes, C Miller J found that the lump sum represented payments "on a periodic basis," and were therefore support payments.

The present case was distinguishable from Peterson, in which there was insufficient proof that the lump sum in question represented periodic payments.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56.1 - Subsection 56.1(4) - Support Amount retroactive court orders 113

Twomey v. The Queen, 2012 DTC 1255 [at 3739], 2012 TCC 310

subsequent share issuance to give effect to shareholders' intent "gave effect to the true facts"

In 2005, the taxpayer sold 78 of his 100 common shares of an Ontario corporation ("115") to the other shareholder ("D.K."), and claimed the capital gains exemption. Both shareholders had believed from the time of the organization of 115 in 1995 that they each held 100 common shares of 115, and this belief was reflected in 115's financial statements and accounting ledgers. However, in connection with the sale in 2005, they discovered that (due to some communication difficulties relating to a change in the taxpayer's counsel) the corporate minute books recorded only one share as having been issued to each of them. A shareholders' resolution was passed "acknowledging the initial intent of the parties and issuing share certificates totaling 99 common shares of 115 to each of the Appellant and D.K. to correct the error without further consideration to be paid for them" (para. 9). CRA denied substantially all of the taxpayer's capital gains exemption claim on the basis that 77 of the 78 shares sold by him had been issued within 24 months of the time of their disposition, contrary to the requirement of para. (b) of the qualified small business corporation share definition.

Pizzitelli J. found that in fact all 200 common shares (including those sold by the taxpayer) had been issued in 1995. He stated (at paras. 19, 24):

We frankly have inconsistent corporate records at best, but the reality is that the correcting resolution quite clearly speaks to the other documents, clearly superseding them for the simple reason of correcting an error. ...

...The correcting resolution resulted in the records being amended to give effect to the true facts.

Accordingly, the taxpayer satisfied the 24-month requirement and was eligible for the capital gains exemption.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share records rectified to reflect 24-mo. hold for shares 282

Sommerer v. The Queen, 2011 DTC 1162 [at 845], 2011 TCC 212, aff'd 2012 FCA 207

retroactive amendment respected

In 1996, the taxpayer (a Canadian-resident individual) purported to sell shares of a Canadian company ("Vienna"), while retaining the rights to dividends and the voting rights, to an Austrian private foundation (privatstiftung) which had been contemporaneously formed and funded in Austria by his father, and with family members including the taxpayer named as beneficiaries. The selling price was equal to 1/2 the fair market value of the shares (i.e., 1/2 of $1.33 per share, or $0.665 per share). When the parties subsequently were advised that it was not legally possible to transfer shares excluding certain of the rights attaching to those shares, they amended the agreement (perhaps in 1998, but purportedly on a retroactive basis) so as to provide that the Vienna shares (including all of the rights attached to the shares) had been sold in 1996 at a price of $1.33 per share, and with the voting rights and the dividend rights on the shares then immediately being assigned by the foundation to the taxpayer for $0.665 per share.

C. Miller J found that these amendments were legally effective on a retroactive basis in light inter alia of a clause in the original sale agreement which provided that any parts of the agreement that were found to be unenforceable would be replaced so as to give effect to the business intent. Respecting a submission that the sale agreement instead was void for mistake, he stated (at para. 54);

With respect to the Vienna shares, there was no mistake that Mr. Sommerer owned the Vienna shares, and that he could transfer them; he simply could not carve out certain rights. But the parties could easily rectify the situation, which they did.

Gestion Forêt-Dale Inc. v. The Queen, 2009 DTC 1378, 2009 TCC 255

purported retroactive issuance and redemption of shares was ineffective

After the accountants, over a year later, realized that a reorganization plan resulted in Part IV tax because two corporations were not connected at the time of the redemption of shares giving rise to a deemed dividend, they had resolutions prepared by a notary dated as of the date of the previous reorganization effective date purporting to issue special voting shares to the corporation receiving the deemed dividend, followed immediately thereafter by the shares' redemption. Favreau, J. interpreted these measures as retroactive tax planning, not the correction of a mistake in the implementation of the plan, and noted, in any event, that under the articles of the corporation issuing the voting shares, such shares were not redeemable, nor did it appear that such shares were validly issued as it appeared that the corporation did not receive the subscription price therefor.

Gagnon v. The Queen, 2008 DTC 3111, 2006 TCC 194

person declared a shareholder retroactively

The taxpayer originally signed an agreement for the sale of his half interest in a business (which was found to be held in a corporation) to his brother. Upon receiving the fifth and final cash instalment payment of the purchase price from the corporation, his brother purported in September 1997 to have the corporation retroactively issue two shares to the taxpayer in May 1995 and got the taxpayer to sign a second agreement providing for the purchase of those two shares by the corporation from the taxpayer in consideration for the four payments that the corporation had in fact made to him.

In finding that the taxpayer had received deemed dividends, Lamarre J. stated (at para. 22) that "a person can be declared a shareholder retroactively" and found that the second agreement was the one that prevailed as it "embodies the legal reality of the parties' contractual intent."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) 137

Avotus Corporation v. The Queen, 2007 DTC 215, 2006 TCC 505

retroactive agency agreement

The taxpayer’s foreign affiliate had acted as the taxpayer’s agent for the purpose of carrying on business (and deducting the losses). Among other things, the taxpayer relied upon a retroactive agency agreement that was executed in early 1996 but “made effective as of the 20th day of July, 1994” (para. 13). The Court noted that the Minister had neither pleaded nor argued that the agreement was a sham; consequently, the Minister was deemed to have accepted the validity of the agreement (paras. 52-53). On the strength of the written agency agreement, the Court ruled in favour of the taxpayer.

The decision implicitly approves the validity of late-executed agreements, but the Court did not expressly comment further on that issue.

Lloyd v. The Queen, 2002 DTC 1493 (TCC)

taxpayer can attack own transaction as legally ineffective

Although the taxpayer signed an agreement with a holding company for the sale of shares in a company ("READ") to the holding company, Bowman T.C.J. found that the transaction was not completed, so that there was no disposition for purposes of s. 84.1. Among other things, none of the stipulated consideration was ever paid by the holding company and the directors of READ did not approve the transfer as required by the articles.

Bowman A.C.J. stated (at p. 1496):

"If the Minister can attack a transaction in this court or the Federal Court of Appeal on the basis it is legally ineffective or incomplete, so too can the taxpayer. There is no need to wait for a provincial court to set an incomplete or legally invalid transaction aside."

Fallis v. The Queen, 2002 DTC 1242 (TCC)

mere intention to transfer an interest in real estate was insufficient

Following an assessment of the taxpayer under s. 160 she alleged that there had been a transfer of a one-half interest in a property to her from her husband in the summer of 1991 when there was a discussion between them that she should receive the equity in the property rather than, as alleged by the Crown, three years later when, on a sale of the property, the husband signed a direction authorizing the purchaser to pay the closing proceeds to her. McArthur T.C.J. stated (at p. 1244):

"It takes more than an intention or uncertain conversation to transfer an interest in real estate. The law of contract requires a clear statement of transfer, acceptance and delivery."

McAnulty v. The Queen, 2001 DTC 942 (TCC)

stock option agreement effective time of oral agreement (not yet ratified by board)

The time at which the taxpayer's employer agreed to issue shares to her was the time at which the president called her to his desk and told her that he was going to issue to her 45,000 stock options at a $1.50, rather than at the later date when a written stock option agreement was signed by the president and a related directors' resolution was passed. The president had ostensible authority to commit the company to issue shares to her (notwithstanding that the Board of Directors in fact had not delegated this authority to him as required by the stock option plan), and failure to comply, on the earlier date, with a stipulation in the stock option plan that the options be granted to her pursuant to a written and approved stock option agreement related to failure to comply with administrative rules rather than invalidating the grant.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) unauthorized grant of rights 200

Glassford v. The Queen, 2000 DTC 2531 (TCC)

land transaction not effective until reduced to writing

O'Connor T.C.J. applied s. 8(3) of the Land Act (BC), which provided that "a disposition of Crown land is not binding on the government until the certificate of purchase ... is executed by the government under this Act" to find that the period of ownership of land by the taxpayer did not satisfy the 24-month holding period requirement in the definition of qualified farm property.

Horkoff v. The Queen, 97 DTC 621, [1996] 3 CTC 2737 (TCC)

"as of" dividends not effective until quantified and declared

Dividends that were purportedly paid to the taxpayers "as of" December 30, 1990 were dividend income to the taxpayers in their 1991 taxation years given that the dividends were not declared until February 13, 1991, the amount of the dividends was not known until that date, and the dividends would not have been declared or paid if a sale of shares of the corporation had not closed on that date.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a) back-dated dividend 67

Leung v. MNR, 92 DTC 1090, [1992] 1 CTC 2110 (TCC)

price adjustment clause effective

In rejecting a submission of the Crown that the taxpayers were not assisted by a price adjustment clause, Kempo J. noted that they had addressed the fair market value of the shares in question, had noted the historical sales and earnings of the corporation, had considered the effect of a recent material event and had felt at the time that the value fixed by them (which later was established to be excessive) was reasonable.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares 177

Voukelatos v. MNR, 92 DTC 1076, [1992] 1 CTC 2154 (TCC)

Following the exercise by the taxpayer of a "shot-gun" clause in the shareholders' agreement, it was understood by him and the other shareholder that the corporation would redeem the other shareholder's shares. However, the documents which were drawn up and signed called for the purchase of the other shareholder's shares by the taxpayer. When this was discovered by the taxpayer two years later, an amended agreement effective as of the earlier date was executed by all three parties providing for the transfer of the other shareholder's shares to the corporation for the same price.

Rip J. rejected an argument by the agent for the taxpayer that the defence of non est factum applied given that there was negligence on the part of the taxpayer in not reading the original agreement. The agent apparently did not argue that the subsequent amending agreement was a rectification of the first written agreement.

Seaman v. MNR, 90 DTC 1909, [1990] 2 CTC 2469 (TCC)

replacement of demand by term notes a fundamental change

The taxpayer sold shares in 1983 to a trust for his children for proceeds of $388,000 paid by way of demand promissory note. After reassessment of the sale in 1988, he accepted the Minister's valuation of the shares at $921,500 and replaced the consideration by promissory notes payable over 10 years in that amount. The Minister appears to have ultimately accepted that the sale was subject to a price adjustment clause as reflected in the instruction leter of the accountants to counsel.

In declining to give retroactive effect to this replacement, as of a previous date, of the original demand promissory notes, Taylor J accepted (at p. 1911) the Minister's position that "the 1988 actions had completely altered a fundamental clause of the 1983 agreement , and an 'on demand' note (1983) could not be transformed into a series of promissory notes payable over ten years."

Amirault v. MNR, 90 DTC 1330, [1990] 1 CTC 2432 (TCC)

retroactive amendment to option price accepted

An amendment to the terms of a stock option plan that retroactively increased the exercise price of the options in order to satisfy the requirements of s. 110(1)(d) of the Act was held not to result in a rescission.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) Increase to exercise price did not create new option 159

May Estate v. MNR, 89 DTC 534, [1989] 2 CTC 2305 (TCC)

A court order became effective from the date it was pronounced rather than not taking effect until the date of issuance.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 64

Pellizzari v. MNR, 87 DTC 56, [1987] 1 CTC 2106 (TCC)

After finding that the taxpayer's employer had conferred a benefit on her in 1979 and 1980, Couture C.J. found that at the time of the decision (1986) it was not legally feasible to allow a retroactive deduction of those fees against loans that were outstanding in the books of the corporation. He stated (at. p. 59) "its fiscal years have been closed, and they reflected at the time its financial position as it legally existed then".

Robert Bédard Auto Ltée. v. MNR, 85 DTC 643, [1985] 2 CTC 2354 (TCC)

Before going on to find that the taxpayer had disposed of property on the effective date for a lease-purchase agreement in which land and building was leased by the taxpayer to the lessee for five years with an obligation to purchase within that period of time for a specified price, Tremblay T.C.J. found that the date of sale of the land and building was the subsequent date when the lease was terminated by purchase and stated (at p. 648):

"Consequently, where the parties have agreed for a future time, it cannot be decided under civil law that the transaction took place at a time other than the one determined and executed by them. A bi-lateral promise does not have the effect of making the promisor-purchaser an owner; it merely allows him to become one when the contract of sale is executed or when the judgment in lieu of contract is rendered."

Spence v IRC (1941), 24 TC 311 (Ct of Sess (1st Div'n))

rescission of contract had retroactive effect

The taxpayer sold shares to a third party in 1933 under a contract which he subsequently alleged to have been induced by fraud. In 1939 he obtained a judgment reducing (i.e., setting aside)the contract with effect from the date that it was made, together with orders that the shares be retransferred to him and the dividends which the purchaser had received be paid to him. After the judgment, the Revenue repaid the surtax assessed on the dividends in the hands of the fraudulent purchaser and assessed the taxpayer instead. In finding that the taxpayer was taxable on the dividends when they had been paid by the company, Lord President Normand stated (at p. 317):

In this case the party sued for rescission and in the end of the day he obtained a decree of reduction. The effect of that reduction was to restore things to their position at the date of the transaction reduced, with the result that as at that date and afterwards the successful pursuer in the action fell to be treated as having been the person in titulo of the shares which he had sold to the defender and therefore to have been in right of the dividends. No doubt it is true that in the interval the dividends had to be paid and were paid to the defender because his name stood in the register as the proprietor of the shares and no doubt also they were for the time being treated by the Inland Revenue as his income and while matters stood entire no other person had any right to the shares or to the dividends except the defender, Mr Crawford. But from the moment the reduction took place Mr Spence fell to be treated as having been throughout the proprietor of the shares and equally the person properly entitled to receive the dividends.

Waddington v. O'Callaghan (1931), 16 TC 187 (KBD)

A father instructed his solicitors that it was his intention to take in his son as a partner effective on the date of the instruction and requested them to prepare a deed of partnership. In finding that no partnership was intended to arise before the deed had been executed, Rowlatt J. stated (p. 197):

"When people enter into a deed of partnership and say that they are to be partners as from some date which is prior to the date of the deed, that does not have the effect that they were partners from the beginning of the deed [sic]. It cannot alter the past in that way. What it means is that they begin to be partners at the date of the deed, but then they are to take the accounts back to the date that they mentioned as from which the deed provides that they shall be partners."

Administrative Policy

7 September 2022 Internal T.I. 2022-0931081I7 - Retroactive support payments

court order rendered a lump sum payment as being in satisfaction of a retroactively-created periodic support obligation

A 2018 court order required retroactive child and spousal support payments to be made by an individual to a former spouse on a monthly basis for the period from 2013 until the date of the order but treated various payments previously made by the individual to the former spouse as being in satisfaction of this periodic obligation and also contemplated that such obligation would be satisfied in part by way of set-off against an obligation of the former spouse to pay an equalization amount to the individual respecting a division of matrimonial property.

Regarding whether the retroactive periodic support amounts would be deductible, CRA indicated that although the order, pursuant to the court’s legislative authority to do so, made the amounts payable retroactively on a periodic basis during the stipulated period (2013 to 2018), "payments made before the date of a court order or written agreement cannot be considered to be paid under the order or agreement.”

Regarding the deductibility of amounts paid after the time of the order, the Directorate stated:

[W]here the lump-sum amount is paid pursuant to a court order that establishes a clear obligation to pay retroactive periodic maintenance for a specified period prior to the date of the court order … the lump-sum payment will not, in and of itself, change the nature of the underlying legal obligation of periodic maintenance payments and, if all other requirements are met, the lump-sum amount paid will be deductible to the payer according to the formula in paragraph 60(b) … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60.1 - Subsection 60.1(3) application of s. 60.1(3) to payments already made in the current and preceding year 388
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(b) CRA respects the effect of a court order providing that a lump sum payment was in satisfaction of a retroactive periodic support obligation 276

14 January 2022 Internal T.I. 2021-0913891I7 - CERS - Sublease

a sublease may in fact constitute a lease assignment

Although the definition of “qualifying rent expense” for CERS (rent subsidy) purposes generally includes a requirement that the rent be paid “under a written agreement entered into before October 9, 2020,” the definition also clarifies that an assignment of a pre- October 9, 2020 after that date is not problematic. CRA dealt with the situation where a sublease was signed prior to October 9, 2020, but the consent of the landlord was not obtained until later. CRA (citing Sussex Square) noted that the sublease would instead be an assignment of the leasehold interest of the sublessor if the purported sublease was for all of the sublessor’s remaining term as head tenant– so that it would not matter if the assignment was regarded as occurring after October 9, 2020.

On the other hand, if it indeed was a sublease then, given that “the only parties to the sublease are the sublessor and the subtenant” it would be plausible that the sublease took effect before the deadline, unless further considerations were engaged, for example, the sublease contained a condition stipulating that the agreement would not take effect until the signature of the landlord was procured.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Rent Expense sublease is generally between sublessor and subtenant, so that landlord consent generally is not required (unless expressly stipulated) for the sublease to take effect 253

20 January 2022 Internal T.I. 2021-0877511I7 - CERS- Written Agreement

agreement to lease entered into before cut-off date complied if it contained the essential binding terms

The definition of “qualifying rent expense” for Canada emergency rent subsidy (“CERS”) purposes includes a requirement that the rent be paid “under a written agreement entered into before October 9, 2020” (subject to some accommodation of subsequent renewals or lease assignments). CRA indicated that the requirement for a pre- October 9, 2020 written agreement was met where a letter agreement to lease was entered into before that date, even though the “formal” lease was not executed until subsequently, provided that the letter agreement satisfied requirements that it “show a clear intention to create a binding and enforceable contractual relation, outline all the essential terms and conditions of the agreement, and demonstrate an acceptance in writing by both parties of the terms and conditions.”

That left the requirement that the rents be paid “under” the letter agreement rather than only under the later lease. CRA stated that this was “possible … assuming that the Lease includes the same enforceable and binding rights and obligations, and terms and conditions, as the [letter agreement].”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Rent Expense a lease could constitute a continuation of an agreement to lease 264

GST/HST Notice 312 Proposed GST/HST Treatment of Supplies of Human Ova and In vitro Embryos May 2019

CRA allows immediate application of the new non-supply rules for human ova or embryos but won’t process rebate claims until passed

A proposed GST/HST amendment would zero-rate the supply of an ovum – which would have the effect of rendering the importation of an ovum as a non‑taxable importation. A further amendment will add the importation of in vitro embryos to the list of non-taxable importations.

Respecting the application of the ovum amendment, for example, CRA indicates:

[S]uppliers can stop charging GST/HST on supplies of human ova in accordance with the proposed amendment as of March 20, 2019. … [C]onsistent with its standard practice, the CRA is administering this measure on the basis of the proposed amendment [and similarly re

… However, the CRA cannot pay a rebate for an amount paid in error as or on account of tax until the proposed amendment becomes law.

A supplier who has charged or collected GST/HST on human ova supplied after March 19, 2019, must include that amount in the calculation of their net tax on their GST/HST return … .

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Schedules - Schedule VI - Part I - Section 6 445
Tax Topics - Excise Tax Act - Schedules - Schedule VII - Section 13 356
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part II - Section 1 - Institutional Health Care Service assimilation of provision of ovum or embryo to single supply at fertility clinic of institutional health care service 76

27 March 2018 Internal T.I. 2017-0691941I7 F - Investissement frauduleux – Fraudulent Investment

court order ab initio declaring loan void would eliminate interest income

Individuals had “invested” in what turned out to be a Ponzi scheme under which for many years they reported annual income inclusions for interest which they were treated as having reinvested in the scheme. They sought to have their returns for those years adjusted in order to obtain a refund of the taxes they paid on such interest income.

The Directorate indicated that the interest had been required to be recognized in the years in which the individuals received or were entitled to receive it. It noted in passing that:

In the case of fraudulent Ponzi schemes, taxpayers may ask a court to cancel the loan agreement between the parties ab initio.

Because of the ab initio cancellation of the contract, it would be possible to conclude that the taxpayer concerned never received and was never entitled to receive interest income from the said contract. It would then be possible for the Minister to reassess for each taxation year affected by the cancellation of the contract provided that the time limits under paragraph 152(3.1)(b) or subsection 152(4.2) are satisfied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.2) s. 152(4.2) reversal of Ponzi interest inclusion must be applied for by 10th anniversary of the taxation year 252
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(i) Ponzi scheme investors can generally write off their reinvested interest income in the year the perpetrators are charged 283

5 October 2018 APFF Roundtable Q. 15, 2018-0768861C6 F - Share exchange and statute of limitation

retroactive ACB adjustment under PAC to statute-barred transaction may be taken into account in a current relevant transaction

CRA accepted that where a price-adjustment clause retroactively adjusts a tax attribute, such as adjusted cost base, that arose from a rollover transaction that occurred in what is now a statute-barred year, that adjustment may occur “for a taxation year that is otherwise not statute-barred if it has an impact on the tax consequences for that year.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) a price adjustment clause can operate re statute-barred transactions to affect a tax attribute that is used in the current year 252

16 June 2016 External T.I. 2015-0623031E5 F - Application of paragraph 7(1)(b)

contingent amount included under s. 7(1)(b) cannot later be reversed

On a sale of a corporation, the outstanding employee stock options are surrendered for a price reflecting the sale price for the shares. However, as the sale price depends on the outcome of litigation, part of the agreed amount for the option surrenders is retained until the action is settled.

CRA indicated that if the price expressed to be payable for the surrendered options included the contingent amount, it would be included in the employees’ income arising under s. 7(1)(b), and that if it was not subsequently received, they would not be able to amend their returns for the year of surrender to then exclude the amount from their income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b) contingent amount included under s. 7(1)(b), cannot subsequently be excluded 237

9 October 2015 APFF Roundtable Q. 10, 2015-0595671C6 F - Question 10 - Table Ronde APFF 2015

price adjustment clause not required to reduce income for an excessive management fee

When CRA disallows part of the deduction by a corporation of the management fee charged to it by another (presumably affiliated) corporation ("Managementco"), it generally will accept a downward adjustment to the revenues of Managementco if Managementco reimburses the other corporation for the denied amount, Managementco’s relevant taxation year is not statute-barred and it sends a written request to CRA in which it "demonstrate that it has reimbursed, or committed to reimburse, a sum equivalent to that whose deductibility was denied." However, CRA will not do this "if there is abuse or a deliberate overstatement of the fees."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose generally should be reimbursement for expenses incurred for affiliate 226

2013 Ruling 2013-0488291R3 - Reorganization of Corporations - Rollover

no ruling on price adjustment clause

Pubco (a Canadian public company) wishes to spin-off non-strategic assets to its shareholders without incurring the expense of a plan of arrangement or holding a shareholders' meeting. In the preliminary transactions to pre-package Newco for distribution, Pubco will subscribe nominal cash for common shares, and the drop down the non-strategic assets for interest-bearing notes and for preferred shares whose redemption amount is nominal but would increase on application of a price adjustment clause. The amount of the taxable dividend to the shareholders is minimized by their being distributed only the Newco common shares.

The Directorate did not rule on the price adjustment clause "since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated."

Ruling letter described in greater detail under s. 52(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 215 - Subsection 215(6) Spinco taking responsibility for Part XIII remittance obligation of Parent 246
Tax Topics - Income Tax Act - Section 52 - Subsection 52(2) taxable dividend spin-off of thinly capitalized sub 299

29 October 2013 External T.I. 2013-0507881E5 - Price adjustment clause

A price adjustent clause in the share provisions for preferred shares issued by Opco to the taxpayer in Year 1 in consideration for the transfer of property to Opco provide that the redemption value of the shares issued will be changed if the FMV of the consideration for the shares is determined by CRA to be different than the determination at the time of the transaction (or an additional amount will be paid if the change is upward and the preferred shares issued are redeemed before the determination by CRA).

In year 5, Opco redeems all the preferred shares, in year 7, CRA determines that the FMV of the property and the redemption value of the preferred shares should have been higher, and "pursuant to the price adjustment clause" the taxpayer receives an additional payment from Opco in year 8.

When would the taxpayer have to include the additional payment as income? CRA stated:

[I]f the price adjustment… is valid…CRA's longstanding position is that the additional payment will be treated as a dividend that will be included in the taxpayer's income in the year of receipt under subsection 84(3) of the Act. …

However, as the additional payment is not determined at the time of the redemption of the shares… it should not be included in the income of the taxpayer in the year of the redemption as part of the amount paid under subsection 84(3)… .Rather, the CRA…[will] tax the additional payment pursuant to the general rules with respect to the dividends, that is, to tax such amount at the time it is received. …

[T]here would be no interest with respect to the income tax computed on that additional amount if the income tax is paid in a timely manner pursuant to the Act and if any instalment computed under the Act with respect to the income tax for the year of the receipt was remitted on time.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) price adjustment payment recognized as s. 84(3) dividend when received 330

25 September 2013 External T.I. 2013-0488571E5 F - Repayment of a dividend

taxpayer generally cannot change his legal position through a subsequent board or shareholder resolution

Where a taxpayer and his wife repay a portion of the dividends received by them in their 2006 taxation year, can the taxes on those dividends be reduced? CRA cited Sussex Square Apartments v. The Queen, [1999] 2 CTC 2143 (TCC), [2000] 4 CTC 203 (FCA), Dale v. The Queen, 97 DTC 5252 (CFA) and Waddington v. O'Callaghan (1931) 16 T.C. 187 for the proposition that (TaxInterpretations translation):

Generally, a legal position of or involving the taxpayer cannot be changed.

CRA then stated:

When a dividend is declared by the board of directors of a corporation, we are of the view that it cannot be reduced or nullified by the board and the shareholders have no power to request its nullification.

Consequently, in your particular situation, it does not seem possible ... to modify the tax consequences of the dividends ... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a) dividend declared cannot be nullified by subsequent board or shareholder resolution 139

10 June 2013 STEP Roundtable Q. 7, 2013-0480291C6 - 2013 STEP Roundtable Q.7 - Price adjustment clause

The requirement in IT-169 that CRA be notified of the existence of a price adjustment clause was not carried over into S4-F3-C1, and no longer represents CRA policy.

S4-F3-C1 - Price Adjustment Clauses

A price adjustment clause will be recognized where there was a bona fide intention to transfer at fair market value as determined by a fair and reasonable method, with the price adjustment amount (based on the fair market value as determined by CRA or a court) actually paid (or a legal liability therefor adjusted) (para. 1.5). Where the purchase price is adjusted by issuing or cancelling shares (as opposed to adjusting the shares' redemption amount or adjusting a note), this may result in "a number of legal and technical difficulties" (para. 1.6)

Where shares with a price adjustment clause are redeemed before the adjusting payment is made, the adjusting payment will be included under s. 84(3) in the income of the redeemed shareholders when received (para. 1.10). A price adjustment clause in a butterfly reorganization "might" not prevent s. 55(2) from applying (para. 1.12).

5 October 2012 APFF Roundtable, 2012-0453891C6 F - Price Adjustment Clause

operation of freeze price adjustment clause depends on share actually being adjusted and can apply for s. 75(2) purposes

The summary (which is more specific than the actual question) describes an estate freeze in which a taxpayer exchanges his common shares of a corporation for preferred shares of the same corporation, with the purchase price and the value of the preferred shares being subject to a price adjustment clause. (New) common shares of the corporation then are issued to a discretionary family trust.

CRA was asked whether the price adjustment clause will prevail if CRA seeks to apply s. 75(2), and whether this depends on whether the preferred shares are still held by the taxpayer at the time of such assessment. CRA stated (TaxInterpretations translation):

In the case of an estate freeze, if the price adjustment clause is valid and the taxpayer makes the necessary changes to the price of the common shares, the redemption value of the freeze preferred shares received and the amount that would have been received for the redeemed freeze preferred shares (by arranging for the corporation to make a refund or payment for the difference, as the case may be), the CRA will consider the tax consequences of the freeze taking into account that clause. Those tax implications will include consideration of the conditions for the application of subsection 75(2). Therefore, it is not necessary for the price adjustment clause to specifically mention that it will also apply for the purposes of subsection 75(2).

...If the CRA recognizes the price adjustment clause as valid in a particular situation, under the wording of such a clause, it may result in a retroactive adjustment to the redemption value of the freeze preferred shares. In the situation you submitted to us, the preferred freeze shares have not been redeemed. Consequently, even if an estate freeze occurred in a statute-barred year, the price adjustment clause that would result in a change in the redemption value of the freeze preferred shares would have an effect in respect of the years following the freeze during which those shares were redeemed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) price adjustment clause that is implemented potentially can prevent s. 75(2) application to estate freeze 319

14 June 2012 External T.I. 2012-0443711E5 F - RAP - Annulation de la vente de l'immeuble

subsequent court-ordered voiding of home purchase did not retroactively void satisfaction of the HBP conditions at home purchase time

In confirming that a judgment declaring a sale of a home to be void would not affect the operation of the HBP rules where the home in question was acquired under an HBP, CRA stated:

Eligibility for withdrawing funds from an RRSP under the HBP … is not affected by the occurrence of subsequent events. As a result, once all the conditions to participate in the HBP are met and a withdrawal has been made from an RRSP, it is not possible to cancel participation in the HBP.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146.01 - Subsection 146.01(1) - Eligible Amount subsequent court-ordered voiding of home purchase funded with HBP does not affect satisfaction of the HBP conditions 122

24 May 2012 External T.I. 2011-0429991E5 - Price Adjustment Clause

Mr. A engages in an estate freeze transaction in Year 1 in which all his common shares are exchanged in a s. 86 reorganization for preferred shares whose terms contain a price adjustment clause. Following his death in Year 16 years later, CRA determines that the redemption value of these preferred shares at the time of their issuance was less than the fair market value of the common shares.

If the price adjustment clause was "valid," i.e., it complied with IT-169 including that the valuation method used in Year 1 was "fair and reasonable," then the redemption amount of the preferred shares would be automatically increased retroactively to Year 1, thereby increasing the fair market value proceeds of the deemed disposition of those shares in Year 16 on the death of Mr. A. If the price adjustment clause was not valid, it "could be argued" that there was a misrepresentation that opened up Year 1 to reassessment under s. 86(2).

17 May 2012 Internal T.I. 2012-0437001I7 F - Price Adjustment Clause

per Gurberg, a PAC has retroactive effect

A price adjustment clause (PAC) is engaged to increase the fair market value of shares issued to the taxpayer on a s. 85(1) drop-down transaction. Given that there is no change to the elected amount or the description of the transferred property, is there any need to file an amended s. 85(1) election? The Directorate responded:

[T]he recognition of an adjustment under a valid PAC does not depend on the filing of an amended election (on the prescribed form T2057) by virtue of subsection 85(7.1) and the payment of a penalty under subsection 85(8).

In general, from a legal point of view, a valid PAC has retroactive effect to the day of the original transaction. We refer you in this regard to the decision of the Quebec Court of Appeal in Gurberg, 2006 QCCA 867. …

Furthermore, nothing in the wording of section 85 allows the CRA to require a taxpayer and a taxable Canadian corporation to file an election or an amended election.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e.2) no need to file amended s. 85(1) election where PAC engaged 56

8 February 2012 Internal T.I. 2011-0431581I7 F - Sous-alinéa 6(1)a)(vi) proposé

taxpayers can file based on proposed legislation and wait until announcement that it will not be implemented

Respecting the proposed adoption of s. 6(1)(a)(vi), CRA stated:

[W]e indicated in question 16 of the CRA Roundtable at the 2009 Annual Conference of the Canadian Tax Foundation, that according to its well-established practice, the CRA generally allows taxpayers to file their tax returns in accordance with proposed legislation. However, if a taxpayer files a tax return under existing legislation and later requests an adjustment to the tax return to reduce the tax payable based on proposed legislation to amend the Act, the CRA will not agree to issue a reassessment if the first assessment was legally correct. It is therefore recommended that taxpayers in that situation waive the normal reassessment period to protect their rights until the proposed legislation receives royal assent.

In the event that the government announces that it will not adopt a particular amendment, it is expected that a taxpayer who has filed an income tax return based on a proposed amendment will take immediate steps to adjust the taxpayer’s affairs and, if applicable, pay all taxes due. Where taxpayers have acted reasonably in the circumstances, have taken immediate action to settle their affairs and have paid the taxes due, the CRA will waive the penalties and/or interest, if applicable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.1) no penalties if taxpayer promptly refiles after announcement that favourable amendment will not proceed 99
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(vi) “studies” are at all levels and bursaries and tuition reimbursements potentially are included 136

7 October 2011 APFF Roundtable Q. 4, 2011-0412071C6 F - Modifying a Capital Dividend Election

originally declared dividend not altered by subsequent resolution

Where the directors declare a capital dividend and before the payment date for the dividend the corporation (which has individual shareholders) realizes a capital loss that causes the capital dividend account to be less than the amount of the capital dividend, the fact of there being an excessive capital dividend will not be solved by the corporation passing a further resolution, before the payment date, to split the dividend in two (given that the original dividend declaration continues to be valid).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 184 - Subsection 184(3) short-cut method for direct assessment of shareholders for excess amount 134

29 November 2011 Roundtable, 2011-0426361C6 F - Price adjustment clause and redemption of shares

deemed dividend through operation of price adjustment clause arises in the adjustment rather than redemption year

CRA indicated that where there is subsequent payment to the redeemed shareholder as the result of the operation of a price adjustment clause to increase the redemption amount of preferred shares, the s. 84(3) dividend (and any resulting s. 129(1) dividend refund) is considered to have occurred in the year the additional payment was made rather than in the earlier year of redemption.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) deemed dividend arising from preferred share price adjustment clause arises in the year of actual payment 150

6 December 2011 External T.I. 2010-0384701E5 F - Décès contribuable - Immobilisation admissible

CRA policy of price adjustment clauses inapplicable where deferred sale price subsequently adjusted

Mr. X bequeathed all his property to his children including goodwill that he had generated over the years from his business, which his estate then sold for $100,000 to a non-arm’s length purchaser payable over 5 years at a rate of 20% per annum, subject to price adjustment. From year 1 to year 5, the estate claimed a reserve under subparagraph 40(1)(a)(iii) and reported an annual capital gain of $20,000. S. 12(1)(g) was inapplicable. After describing the application of s. 70(5.1) to the original bequest, CRA stated:

[T]he estate of Mr. X is deemed, under paragraph 70(5.1)(b), to have acquired a capital property at a cost equal to the deemed proceeds of disposition to Mr. X, being a cost of nil. Thus, when the estate disposed of goodwill for proceeds of disposition of $100,000, it realized a capital gain of $100,000.

IT-169 … addresses situations where the CRA determines that the FMV is higher or lower than the price otherwise determined by the parties to an agreement. Consequently … this Bulletin does not apply in this situation.

[I]t is impossible … to comment as to its retroactive effect to the day of the initial transaction, since we do not have all the particulars … .

[I]f it were appropriate to retroactively adjust the sale price, the CRA could apply subsection 152(4.2) in respect of taxation years already assessed … [but the] taxpayer must satisfy the five conditions for the CRA to agree to a reassessment giving rise to a refund.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(5.1) application of s. 70(5.1) to bequest of goodwill 210
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.2) CRA policy for adjusting a statute-barred year for a reduction in the 5th year of staged-proceeds sale 147

21 November 2011 External T.I. 2011-0422191E5 F - Price adjustment clause and redemption of shares

additional payment, pursuant to price adjustment clause, in year following shares; redemption is recognized then
This item is similar to 2011-0426361C6 F (translated).

if preferred shares with a redemption amount which is subject to a price adjustment clause are redeemed before there is an upward adjustment to the redemption amount pursuant to that clause, a payment of the resulting additional amount will be included in the shareholder's income in the year of receipt under s 84(3).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) price adjustment payment recognized as s. 84(3) dividend when received 54

7 October 2011 APFF Roundtable Q. 23, 2011-0412111C6 F - Validity of Price Adjustment Clause

price adjustment clause does not require filing amended election

CRA indicated that notwithstanding that para. 26 of IC 76-19R3 has not been modified to this effect, the validity of a price adjustment clause does not depend on the provision of an amended election (on form T2057) under s. 85(7.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(7.1) validity of price adjustment clause does not depend on filing an amended election 105

7 October 2011 Roundtable, 2011-0411851C6 F - Fiducie de protection d'actifs

trust deed clause deeming trust property to be distributed immediately prior to death would not be recognized as taking effect at that time

For asset protection purposes, Mr. X transferred his preferred shares of Opco to an asset protection trust of which he was the sole beneficiary. The indenture provides that immediately before death, the shares held by the trust will be distributed to Mr. X. Mr. X's will provides that the preferred shares thus distributed will be bequeathed to several testamentary trusts for the benefit of each of his children.

Would the distribution of preferred shares to Mr. X immediately before his death, followed by the bequest of such shares to testamentary trusts, be accepted by CRA? CRA (in its summary) stated:

No, the CRA does not recognize for taxation purposes that parties can contractually establish a presumption giving retroactive effect to a disposition of the property of a trust to a settlor-beneficiary.

… In fact, the transfer or distribution of property by the trustee of the trust to the settlor did not occur immediately prior to the death of the settlor-beneficiary. In addition, that contractual presumption would make it possible to escape the disposition of the property upon the death of the beneficiary. Furthermore … Nussey rejected the effect on the CRA of a contractual presumption that would recognize a redemption of shares by a corporation taking effect prior to their disposition on death of a shareholder … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Testamentary Trust - Paragraph (b) distribution of property from asset protection trust directly, rather than via estate, to testamentary trust would taint it 274

8 June 2010 STEP Roundtable Q. 2, 2010-0363071C6

For an amount to be "payable" to a beneficiary in a trust's taxation year, the beneficiary must have an enforceable right to payment by the end of that year. It is possible for the beneficiary to obtain a right to payment of an unknown amount if the amount is unknown because of administrative delays, but not if it depends on a subsequent contingency or event.

The beneficiary must also be advised before the end of the trust's taxation year of the trustees' decision to pay and the basis on which payment is to be apportioned. Where the amount is known, ordinarily a demand promissory note will be given to the beneficiary (or the beneficiary's legal guardian) as acknowledgement of the existence of the debt. The note should be delivered in the trust's taxation year or as soon as possible (i.e. in the event of the aforementioned administrative delays).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distribution note can be issued after year end based on administative delays in calculating income 237

8 October 2009 External T.I. 2009-0338861E5 - Backdating of a completed transaction

A request to vary the income tax consequences of transactions that have already taken place will only be considered if such a variance would amount to a rectification of an error and only if there is unequivocal evidence substantiating the fact that an error was made.

14 June 2007 Internal T.I. 2007-0229311I7 F - Capital Dividend Account

a declared dividend cannot be revoked

Subco declared a dividend payable to its parent (Parentco) which, in turn, declared a corresponding dividend to its individual shareholder (Mr. A), with a s. 83(2) election being made in both cases. After finding that such dividends were not paid since there were only accounting entries to accomplish the payments, the Directorate noted that there nonetheless was Part III tax payable because valid s. 83(2) elections had been made. The Directorate then stated:

A declared dividend cannot be revoked primarily because general principles of corporate dividend law provide that a corporation or its shareholders cannot validly reduce or revoke (cancel) a declared dividend, and the declaration of a dividend by a corporation is a matter of administration and within the power of the board of directors, unless there is a by-law adopted by the shareholders limiting that power. On the other hand, it appears that the recipient of an unpaid dividend may waive it.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (b) recording of dividend payable and dividend receivable between sub and parent was insufficient to constitute the payment of a capital dividend, so that there was no CDA addition 132
Tax Topics - General Concepts - Payment & Receipt making accounting entries does not constitute payment of a dividend 130
Tax Topics - Income Tax Act - Section 184 - Subsection 184(3) invalid payment of capital dividend (because no payment) was subject to Pt. III tax (given valid s. 83(2) election) for which no s. 184(3) election could be made as no payment 135

21 February 2007 Internal T.I. 2006-0218421I7 F - Pension alimentaire - date d'exécution

divorce judgment with stated retroactive effect caused the amounts to “be required to be made” on the earlier date

CRA indicated that where a 2006 divorce judgment required a reduction in child support obligations retroactive to a date in 2003, the date on which the varied amounts were “required to be made” for purposes of (b)(ii) of the definition of “commencement date” in s. 56.1(4) was the stipulated 2003 effective date.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56.1 - Subsection 56.1(4) - Commencement Day retroactive nature of a divorce judgment is to be respected 112

11 April 2005 External T.I. 2005-0112321E5 F - Price adjustment clause

CRA may also accept a price adjustment clause for improving the attributes of the shares received on an exchange so as to equal the exchange price

An estate freeze entailed the exchange by Mr. A of his common shares of Opco by way of purchase for cancellation for Class A preferred shares with a redemption value of $1 million, followed by a common share subscription by his two adult children for nominal consideration. The exchange agreement contained a price-adjustment clause providing that in the event of a CRA challenge to the FMV of the Class A preferred shares received by Mr. A as consideration, Mr. A and Opco would agree to exchange the those Class A preferred shares for an equal number of Class B preferred shares.

After noting that the price adjustment clause was not one described in IT-169 as it addressed adjusting the consideration received rather than the purchase price, and that the clause as described “would not be acceptable because … it did not provide for the necessary measures to settle any difference between the FMV of the consideration in relation to the transferred assets, should the preferred shares be redeemed before the CRA contests the FMV of the preferred shares,” CRA stated:

The CRA would generally agree to recognize a clause for adjustment to the consideration and not apply subsection 51(2), where the facts (including the contract) evinced that the parties actually intended to deal in the shares at their FMV and established the FMV of the preferred shares for the purposes of the arrangement, by a fair and reasonable method, and the relevant adjustments provided for in the adjustment clause were effected by the parties where the FMV of the preferred shares was less than the FMV of the common shares. …

Where there is a significant discrepancy between the FMV determined by the taxpayer for freeze preferred shares and the actual FMV, it usually demonstrates that the taxpayer had not made a genuine effort to determine the FMV of the shares [citing Guilder News and Wagner, 2001 DTC 5674 (FCA)].

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 51 - Subsection 51(2) CRA may accept a price adjustment clause adjusting of share consideration on s. 51 exchange if genuine attempt to establish FMV and issue of intervening share cancellation is addressed 312
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) where FMV of pre shares received on estate-freeze s. 51 exchange was less than that of the exchanged common shares, CRA would apply s. 51(2), not s. 15(1) 142

21 March 2005 Internal T.I. 2005-0119961I7 F - CCPC STATUS

effective date of transfer of shares (entailing acquisition of control) cannot precede determination of essential contract elements

USco disposed of 50% of the shares of Canco to another corporation ("Holdco" – that was a Canadian-owned Canadian corporation), "retroactive" to a particular date. In commenting on the effectiveness of the stated effective date, the Directorate stated:

[F]or tax purposes, the parties may only stipulate an effective date of a contract that is earlier than the date of signature if, at that earlier date, the parties had reached a final agreement on the essential elements of the contract. Thus, in our view, the effective date in the contract will not be enforceable against the CRA if, after the effective date, the parties continue to negotiate essential elements of the contract (e.g., the price or the subject matter of the contract), or if the parties have indicated an intention not to be bound until a final contract is signed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(2) - Paragraph 251.2(2)(a) moving from one shareholder to 2 equal shareholders generally entails an acquisition of control unless there is deadlock 217

22 March 2005 Internal T.I. 2005-0115451I7 F - Extinction d'une remise de dette

CRA assesses based on the state of affairs at year end

The creditor forgave a debt pursuant to an agreement with an improved fortunes clause, such that the forgiveness was subsequently cancelled. After finding that that the debtor corporation was not entitled to a deduction when the debt thus became due again or was repaid pursuant to this clause, the Directorate stated:

The Agency must, in computing the taxes payable for a taxation year, base itself on the facts as they exist at the end of the taxation year and new facts arising in a subsequent year cannot affect the computation of the taxes for an earlier year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount no deduction where forgiven debt is subsequently restored pursuant to improved fortunes clause 120
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(10) repayment deduction under s. 80.01(10) 129

6 July 2004 External T.I. 2004-0081631E5 F - Price Adjustment Clauses

no requirement to notify CRA of price-adjustment clause otherwise than by ticking box on any prescribed form

CRA indicated that it will accept a rollover form filed with a "yes" answer to the question concerning the existence of a price adjustment clause as sufficient notice of a price adjustment clause respecting a 85(1), 85(2) or 97(2) rollover transaction. However, in order to give effect to a price adjustment clause, the parties will be required to file an amended election under s. 85(7.1) and pay the penalty under s. 85(8). CRA went on to state:

[W]here no form is required (for example, with respect to a transfer of property pursuant to section 86 or 51), the CRA considers that the mere failure of the parties to notify the CRA of the transaction does not preclude the application of the provisions of … IT-169, provided that all other conditions set out in that Bulletin are satisfied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) ticking "yes" box on election form is sufficient notice of price adjustment clause 70
Tax Topics - Income Tax Act - Section 51 - Subsection 51(1) no requirement to notify CRA of price-adjustment clause regarding a s. 86 or 51 exchange 95

2 March 2004 Internal T.I. 2003-0045921I7 F - 118(5) - impact d'une clause rétroactive

CRA would not apply a retroactive judgment to the affected prior period because it was inconsistent with the actual understanding at the time

A separated couple on their divorce amended the provisions of their custody and support agreement to provide that, retroactive to a prior date, Monsieur was to pay support for only one of their two children (so that support paid to Madame in that prior period was labelled as being only in respect of the one child), rather than both as previously provided. This amended agreement was homologated by the Special Clerk of the Superior Court of Quebec so that it had the same effect as a court judgment. In finding that this amending agreement did not have retroactive effect, so that Monsieur could not amend his prior returns to claim the s. 118(1)(b) deduction for the other child (as was previously prohibited pursuant to s. 118(5) by virtue of him having paid support for that child), the Directorate stated:

… . In our view, the retroactive clause may have been specified for retroactive tax planning purposes. It is not clear from the documents that the retroactive clause is a mere clarification of the first agreement and that it is a clause that reflects the true original intention of the parties. The ancillary measures agreement still refers to support for both children and expenses for both children. The CRA must in the circumstances reject a retroactive effect that is inconsistent with the actual factual situation that existed in a prior taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118 - Subsection 118(5) homologated order with effect of judgment that retroactively eliminated Monsieur’s support obligation re one of his children did not retroactively eliminate the s. 118(5) prohibition 282

1 April 2003 External T.I. 2003-0004125 F - Freeze by Paying a Stock Dividend

price-adjustment clause to redemption value of preferred shares did not accord with IT-169
Also released under document number 2003-00041250.

A CCPC (Opco) paid a stock dividend of preferred shares with a fair market value of $800,000 and a paid-up capital of $80 to its sole shareholder, Mr. A, whose shares, being 100 common shares, until then were estimated to have an FMV of $800,100. Immediately thereafter, a trust for the minor children of Mr. A subscribed $1,000 for 1,000 Opco common shares. Following audit, CCRA determined that the common shares of Mr. A had had an FMV of $1,000,100.

After finding that “as a result of the trust's subscription for common shares of the corporation for less than their FMV, Mr. A would have disposed of property for consideration equal to the decrease in the FMV of the common shares he held, pursuant to paragraph 69(1)(b),” CCRA further indicated that a price adjustment clause pursuant to the terms of the preferred shares pursuant to which their redemption value would be adjusted upwards pursuant to a board resolution to reflect the higher FMV was “not a type of price adjustment clause contemplated in … IT-169,” so that such clause would not stop such application of s. 69(1)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.4 - Subsection 74.4(2) non-application to stock dividend 108
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1.1) s. 15(1.1) inapplicable to stock dividend paid to wholly-owning shareholder 98
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) imputed disposition to which s. 69(1)(b) applied where common shares issued at undervaluation to children’s trust 131

15 November 2002 Internal T.I. 2002-0162427 F - Price Adjustment Clause & 85(7.1)

large FMV discrepancy suggested lack of bona fide valuation so that price adjustment clause need not be applied/ if applied, s. 85(1) election must be amended

Madame exchanged her Class A shares of the corporation for Class D shares having a redemption amount which CCRA subsequently determined was substantially less than the FMV of the Class A shares, and filed a s. 85(1) rollover election respecting this exchange. Monsieur (her husband) then subscribed for Class A shares. After finding that s. 85(1)(e.2) likely was applicable unless a price-adjustment clause was applied, the Directorate went on to indicate that it would be appropriate for the TSO not to respect the clause, stating:

[I]t could be argued that the significant discrepancy between the FMV set by the taxpayer and the amount of the Agency's valuation demonstrates that the taxpayer made no real effort to determine the FMV of the shares. The jurisprudence has shown that a price adjustment clause can be ignored in cases where there is no good faith effort to determine the FMV of a property (See: Guilder News … .). On this basis, it seems to us that you would be free to ignore the price adjustment clause and therefore maintain an assessment under 85(1)(e.2).

… [If] you decide to recognize the price adjustment clause … the taxpayer must file an amended election to give effect to the price adjustment clause.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e.2) significant FMV shortfall suggested that a benefit was desired to be conferred 146
Tax Topics - Income Tax Act - Section 85 - Subsection 85(7) amended s. 85(1) election must be filed if price-adjustment clause applied 100

19 December 2001 Internal T.I. 2001-0109417 - TAXABLE BENEFITS

corporate revival has retroactive effect

A revival of a corporation under the CBCA would appear to have retroactive effect and the revived corporation will generally have all the rights (including tax attributes) and obligations that it would have had if it had not been dissolved.

18 April 2001 Internal T.I. 2001-0069467 - RETRO. AGREEMENT-FILM TAX CREDIT

An amended distribution agreement would not be accepted as retroactively causing a film to no longer be an excluded production given that, prior to the entering into the amended agreement, a distributor had already acquired beneficial ownership of a portion of the production under the original agreement. "Generally, we do not accept retroactive amendments, for tax purposes. This position is consistent with the jurisprudence ... ."

10 March 1999 External T.I. 9829125 - PRICE ADJUSTMENT CLAUSE & 80(2)(G)

Although a price adjustment clause may be used for satisfying the requirements of s. 80(2)(g), "an acceptable price adjustment clause should not involve the cancelling of issued shares or the issuing of additional shares".

1996 Corporate Management Tax Conference Round Table, Q.9 (CTO "Plans of Arrangement")

Ordinarily, RC will respect the ordering of a series of transactions where the order is specified in a plan of arrangement.

1996 Calgary Round Table, Q. 17 (961680) (CTO Effective and Closing Date")

Discussion of when the date of disposition/date of acquisition for a transaction may be prior to the closing date.

94 CPTJ - Q.19

RC will accept situations where revenue between the effective date of a transaction and the closing date is reported differently for financial statement purposes than for taxation purposes, provided that the tax treatment accords with the position stated at 91 CPTJ, Q. 25.

92 CR - Q.30

RC generally will require that any elections under s. 85 that are affected by a price adjustment clause be amended.

17 August 1992, T.I. 921353 (April 1993 Access Letter, p. 135, ¶C20-1141)

Forgiveness of accrued interest has legal effect from the date of the amendment to the debt obligation or such later date as is provided in the amendment. It is not possible to retroactively waive the right to receive interest.

91 CR - Q.28

Any income earned prior to the adoption of a pre-incorporation contract by a corporation becomes its income for its first fiscal period and, where the income is from an active business, is eligible for the small business deduction.

91 C.R. - Q.41

The date of disposition of property (and, therefore, the date upon which income commences to be earned by the purchaser) is the date the beneficial ownership is intended to pass to the purchaser and the time the vendor has an absolute but not necessarily immediate right to be paid.

91 CPTJ - Q.25

There have been instances where RC has administratively accepted that income earned between the effective date of sale of an oil and gas property and the closing date was for the account of the purchaser rather than the vendor where both parties to the transaction agreed that the effective date should be utilized and no significant tax benefit arises from the use of this date.

16 September 1991 TI (Tax Window, No. 9, p. 9, ¶1451)

RC cautioned that in Dorcas v. MNR, 91 DTC 350 the Tax Court indicated that past events cannot be altered ab initio by steps taken ex post facto.

25 February 1991 TI (Tax Window, Prelim. No. 3, p. 29, ¶1123)

When a court judicially declares a person to have died on the day the person was last seen alive or the day on which it is likely that the person died, the date of the judgment should be regarded for tax purposes as the date of death.

10 December 1990 TI (Tax Window, Prelim. No. 2, p. 20, ¶1065)

An annulment of a bankruptcy does not invalidate the application of s. 128 for the period commencing on the date the taxpayer became bankrupt and ending on the date of the annulment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 128 - Subsection 128(1) 33

90 CR - Q.58

If the parties fail to notify RC of a price adjustment clause in their tax returns, this failure by itself will not preclude the acceptance of their clause provided the other conditions contained in IT-169 are met.

27 March 1990 TI (August 1990 Access Letter, ¶1364)

RC will not respect a price adjustment clause which contemplates that a final judgment of a court of competent jurisdiction would be binding as to the fair market value of the property in question.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 29

14 September 89 T.I. (February 1990 Access Letter, ¶1108)

In response to a submission that expenses incurred between the time of an agreement, and the time that the agreement is reduced to writing, are eligible under s. 66(15)(d.1), RC stated its view that agreements generally are not binding until they are written.

ATR-22R (14 April 89): RC indicates that its rulings do not pertain to a price adjustment clause described in the ATR.

ATR-36 (4 Nov. 88): With respect to a price adjustment clause in the share provisions for preference shares issued on an estate freeze, RC states that it is unable to provide a ruling as to the possible application of s. 15(1) if the price adjustment clause becomes effective:

"since the operation thereof is not a proposed transaction. In our opinion, however, if all the conditions mentioned in paragraph 1 of Interpretation Bulletin IT-169 are met, the provisions of subsection 15(1) of the Act would not be applied to tax a benefit to the shareholders in these circumstances."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.6) 38

87 CR - Q.70

Where the completion of an asset sale is subject to a true condition precedent (e.g., regulatory approval), then the vendor and purchaser cannot agree that income earned between an effective date and the date of completion will be income of the purchaser.

85 CR - Q.52

Efficacy of price adjustment clauses is recognized.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) 46

80 CR - Q.14

RC is prepared to issue favourable rulings respecting price adjustment clauses used in an estate freeze, provided that the clause involves adjusting the redemption amount of the frozen shares or the making of a cash payment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) 15

IT-396R "Interest Income"

"Where an enforceable agreement for the sale of property is executed but the negotiated price is not paid until a subsequent date, any interest that is receivable by the vendor for the period from the date of the agreement to the date of payment is interest income in the vendor's hands." On the other hand, if no enforceable agreement existed prior to the payment date, the amount paid instead simply represents "an upward adjustment to the sale price of the property".

IT-169 "Price Adjustment Clauses"

This bulletin has been cancelled and removed from the CRA website. It previously stated:


. ...If the parties have agreed that, if the Department's value is different from theirs, they will use the Department's value in their transaction, that is their choice and the Department will recognize that agreement in computing the income of all parties, provided that all of the following conditions are met:

(b) Each of the parties to the agreement notifies the Department by a letter attached to his return for the year in which the property was transferred

(i) that he is prepared to have the price in the agreement reviewed by the Department pursuant to the price adjustment clause,

(ii) that he will take the necessary steps to settle any resulting excess or shortfall in the price, and

(iii) that a copy of the agreement will be filed with the Department if and when demanded.

S4-F3-C1 does not contain an analogous provision.

IT-216 (Cancelled) "Corporation Holding Property as Agent for Shareholder" 20 May 1975

  1. A corporation may hold in trust, as agent for a shareholder, property that was acquired specifically to be held in this way. This situation, however, will only be accepted as a fact where there is an agreement or declaration of trust, entered into before or at the time the property was acquired, between the corporation and the shareholder, which clearly sets out the intention of the parties to the agreement and the degree of participation of the shareholder in the property so held in trust.


Kevyn Nightingale, John Sorensen, "Backdating of Dividends", Tax Topics (Wolters Kluwer), No. 2392, January 11, 2018, p. 1

Additional significance of having dividends paid in 2017 rather than 2018 (p. 1)

ln Canada, 2017 was the last year that dividends could be "sprinkled" freely to adult family members without concern for the Tax on Split Income.

The United States implemented broad-ranging tax reform, which included a "Transitional Tax" on most accumulated Earnings and Profits — essentially tax-based retained earnings — of many foreign corporations. [fn 2: US Internal Revenue Code ("IRC") § 965] …

Canadian personal taxes and non-resident withholding tax are partially creditable against this Transitional Tax. [fn 3: IRC § 901, 965(g)] Americans who wish to generate Canadian tax to offset the Transitional Tax will need dividends paid in 2017.

CRA distinction between evidencing and recharacterizing a transaction (p. 3)

[T]he CRA recognizes that a transaction may be "papered" after the fact, but backdating is improper where it is tantamount to a retroactive characterization or alteration of reality. The courts take the same view: "although not ideal, a share certificate may be prepared and signed after the investment and its acceptance, with no effect on the quality or value of the title represented by the share certificate" [fn 10: Beaulieu…2011 DTC 1160…] However, another court stated "I find unacceptable the notion that a company and its shareholder are entitled, for purposes affecting the rights of third parties, to rewrite history, that is to say, to treat imaginary events as having happened. A legislature has the power to enact deeming provisions. Others do not." [fn 11: … Wood …88 DTC 1180…]

Need to codify CRA practice on finalizing salary/dividend mix (p. 3)

We would recommend an express CRA policy permitting the crystallization of compensation and dividends in an owner-managed business to occur, for example, up to 60 days after fiscal year end (to match the due date for T5 slip filing). This administrative concession would codify the CRA's existing practice.

Efficacy of formulaic resolution

[I]s it feasible to draft resolutions before year-end without full knowledge of the financial situation? A formulaic approach may be legally effective. For instance: of the amounts disbursed, some proportion is a shareholder loan repayment, some proportion is salary or bonus, and the balance is a dividend (the amount of which is to be established following the calculation of shareholder loan balances and salary/bonus).

Douglas S. Ewens, Paul Lynch, "Comments on Rectification", 2005 Conference Report, c. 23

Includes comments on CRA's position.

Darcy De Moche, Greg Johnson, "Recent Developments and Transactions Affecting Income Funds and Royalty Trusts", 2005 Conference Report, p. 17:6

Discussion of effect of releasing documents from escrow.

Michel Bourque, "Requirement of Notice to the Canada Customs and Revenue Agency", Tax Litigation, Vol. IX, No. 4, 2001, p. 590.

Jules Lewy, "Making Amends", CA Magazine, January/February 2002, p. 41

Discussion of Juliar by the taxpayer's counsel.

Wilfred M. Estey, "Pre-Incorporation Contracts: The Fog is Finally Lifting", Canadian Business Law Journal, Vol 33, No. 1, February 2000, p. 3.

Wertschek, "The Tax Advisor and Commercial Law: Some Issues", 1993 Conference Report, C. 24, pp. 24:31-39

Discussion of escrow arrangements, and of transactions that cannot be conditional.

Joel A. Nitikman, "When Shares are Issued", Canadian Current Tax, May 1995, Vol. 5, No. 8, p. 79.

Joel A. Nitikman, "Rescission of Contracts for Mistake", Canadian Current Tax, April 1995, Vol. 5, No. 7, p. 63.

Pound, "Remedial Tax Planning: How to Fix It When It's Broke", 1993 Conference Report, c. 9, pp. 9:19 - 21.

Kuzyk, "Selected Aspects of the Interplay Between Tax and Corporate Law", 1990 Conference Report, c. 46, 2012 DTC 1255 [at 3739]