Section 211.91

Subsection 211.91(1)


Tusk Exploration Ltd. v. Canada, 2018 FCA 121

Part XII.6 tax was payable on CEE purportedly renounced on a look-back basis to NAL shareholders

For its 2002 to 2006 years, the taxpayer (“Tusk Exploration” - a Canadian exploration company) renounced Canadian exploration expenses (“CEE”) under s. 66(12.6) using the Look back” rule under s. 66(12.66). However, approximately 97% of these renunciations were made to shareholders with whom Tusk did not deal at arm’s length, so that the look back rule was unavailable. Furthermore, there was a deficiency in the amount of CEE incurred by Tusk in the applicable subsequent years as compared to the CEE renounced for the look-back years. The shareholders with whom Tusk Exploration was not dealing at arm’s length were reassessed to deny the claims for CEE that had been renounced under s. 66(12.6) because of the application of s. 66(12.66) and were assessed interest on the resulting increase in tax liability - but were allowed to claim CEE for the year in which the CEE was actually incurred.

Tusk Exploration argued that it was not subject to Part XII.6 tax on the CEE expenses because the reference in Part XII.6 to CEE that it “purported” to renounce under the rule referred only to expenses which had been validly rather than invalidly renounced under the look-back rule: the reference to “purports to renounce” in s. 66(12.73) (which informed the meaning of the same phrase appearing in s. 211.91(1)) was only to allow the Minister to reduce the amounts that shareholders may claim for a previous year if there was a shortfall in the actual amount of CEE incurred, and did not apply to CEE renounced to a non-arm’s length person.

In rejecting this submission and confirming the Minister’s assessment of Tusk Exploration under Part XII.6, Webb JA stated (at paras 28-29):

… [T]he reference to “purports to renounce” in subsection 66(12.73) … is a reference to an amount that the corporation stated in the forms that it filed that it was renouncing and hence an amount that it claimed that it was renouncing. This would include amounts that were validly renounced and amounts that it could not renounce because any of the conditions of subsection 66(12.66) …were not satisfied. Furthermore, since subsection 66(12.73) … refers to both an amount that a corporation “purports to renounce” and to an amount that a corporation “can renounce”, amounts that a corporation “purports to renounce” cannot be restricted to only amounts that it “can renounce”. Because Parliament has chosen to use two different expressions, it must mean that Parliament did not intend for the two expressions to be synonymous.

… [P]aragraph 66(12.73)(d) … provides that any reduction in the amounts renounced does not affect the calculation of the amount payable under Part XII.6… . Therefore, Part XII.6 tax is not affected by any change in the amounts renounced as reflected in the statement filed with the Minister under subsection 66(12.73)… .

Furthermore, the additional requirement in (b)(v) of the s. 248(1) definition of “specified future tax consequence” that a purported renunciation be made to an arm’s length taxpayer implied that a renunciation could be purported to be made to a non-arm’s length shareholder (para. 39).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) potential for double taxation under the ITA of NAL transactions 307
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(a) double taxation can result from non-arm’s length transactions such as under s. 69(1) 301
Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.6) only a PBC can renounce 61

See Also

Tusk Exploration Ltd. v. The Queen, 2016 TCC 238

Part XII.6 tax applies to CEE which is invalidly (as well as validly) renounced on a look-back basis

The taxpayer, which was assessed under Part XII.6 for applying the look-back rule in s. 66(12.66) to Canadian exploration expenses (CEE) which were ineligible for treatment under the rule because they were renounced to a non-arm’s length shareholders, argued, referring to a statement in Joseph v Joseph, [1963] 3 All ER 486 at 490 that

The word “purports” … does not mean “professes”. It means “has the effect of”.

The taxpayer then argued that as the phrase “purported to renounce” in s. 211.91 meant “had the effect of renouncing,” A in the formula would only apply where the renunciation was effectively made in the year under s. 66(12.6) or 66(12.601) because of the application of s. 66(12.66).

In rejecting this submission (so that the taxpayer was liable for the Part XII.6 on all its look-back renunciations), V. Miller J stated (at paras. 42-43, 47):

…It is clear that “an amount purported to be renounced in respect of expenses incurred or to be incurred” must refer to an amount “claimed” to be renounced or “intended” to be renounced whether the claim is true or not. …

… If the legislators intended that section 211.91 only applied where the corporation effectively renounced an amount, they could have achieved this goal by simply omitting the word purport. …

Subsection 66(12.66) allows a corporation to renounce CEE that it has not yet incurred. In effect, it permits a corporation to back-date the expenses so that the shareholder can deduct amounts with respect to the CEE in the year prior to their being incurred. These are CEE that the corporation anticipates it will incur and “purports to renounce”. Clearly, this is a claim the corporation is making which may or may not be true.

Words and Phrases

Subsection 211.91(2.1)

Administrative Policy

24 February 2021 Internal T.I. 2020-0870401I7 - Application of Part XII.6 tax re Draft legislation

illustration of draft s. 211.91(2.1) reducing Part XII.6 tax from delayed CEE under the look-back rule

In January 2020, a principal-business corporation (“PBC”) renounces (with an effective date of December 31, 2019, under the look-back rule) $5M of Canadian exploration expense (CEE) on shares issued in December 2019 pursuant to a December 2019 flow-through share agreement. The PBC incurs $3M of CEE in August 2020, and the remaining $2M in July of 2021.

CRA discussed the application of draft s. 211.91(2.1), which relevantly provided that: the deadline for filing Part XII.6 tax returns was extended by one year; and Part XII.6 tax is to be applied (in the context of a 2019 agreement) as if the renounced CEE was incurred in January 2020, if the expenses were incurred in 2020 and, otherwise, 12 months earlier than when they were actually incurred.

In computing Part XII.6 tax of the PBC for February to June 2020, it is deemed to have incurred $3M of CEE before the end of those months, so that the tax would be computing (applying the prescribed rate of 2%) in accordance with the formula:

($5M - $3M) X (0.02/12 + 0/10) = $3, 333.33

so that the tax for each month during that period is $3,333.

The remaining $2M of CEE is deemed to have been incurred by the end of July 2020, so that the PBC would not have any Part XII.6 tax payable respecting its $5M renunciation after June 2020.

Given the one-year deferral, the Part XII.6 tax return (Form T101C) for 2020 would be required to be filed before March of 2022.

23 December 2020 External T.I. 2020-0874621E5 - Administration of Draft Legislation-FTS Extension

taxpayers can delay flow-through share reporting under the look-back rule in reliance on the CODID-related proposed amendments

Regarding the proposed amendments (principally ss. 66(12.6001), 66(12.731) and 211.91(2.1)) released on December 16, 2020 generally relating to a one-year extension of the timelines to spend capital raised through the issuance of flow-through shares make related filings (the “Proposed Amendments”) and whether taxpayers should file their returns based on the Proposed Amendments, e.g., where flow-through shares were issued under the look-back rule in 2019, filing the Form T101C (reporting any Part XII.6 taxes payable) before March 2022 rather than March 2021, CRA first noted its position (at the 2009 CTF Roundtable, Q.16):

It is the CRA’s longstanding practice to ask taxpayers to file on the basis of proposed legislation. … However, where proposed legislation results in an increase in benefits … the CRA’s past practice has generally been to wait until the measure has been enacted. …

Generally speaking, the CRA will not reassess if the initial assessment was correct in law. As a result, a taxpayer’s request to amend their tax records to reflect proposed legislation will be denied.

CRA then stated:

Based on the foregoing, taxpayers may file their tax returns, including any Form T101C, based on the Proposed Amendments.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.731) filings can be made relying on draft COVID extensions 188