News of Note
2520356 Ontario - Tax Court of Canada finds that the substantial demolition of a home was not its substantial renovation, so that its sale was HST-exempt
Email this ContentThe taxpayer acquired a Toronto home in order to completely renovate it and resell it. However, it fired the contractor after the demolition was largely completed (so that the former home was an “exoskeletal husk of a building”) – and then sold it in that state.
Bocock J found that the substantial demolition of a home did not qualify as its “substantial renovation” – so that the taxpayer was not a “builder” and the sale of the (largely demolished) home was an exempt supply. Although he did not really discuss this latter point, it appears to rest on the proposition that the ““exoskeletal husk” qualified under the definition of “residential unit” as a “detached house … that … was last occupied … as a place of residence”.
ITCs were available for the years prior to that of the sale as the inputs were incurred in relation to the proposed substantial renovation.
Neal Armstrong. Summaries of 2520356 Ontario Corp. v. The King, 2026 TCC 161 under ETA s. 123(1) – builder – (a)(iii) and s. 169(1).
CRA finds that entering into an employment contract indemnifying an employee against reportable-transaction penalties was not a reportable transaction
Under an employment contract, the employer agreed to indemnify (through a “Payment”) for any penalty imposed under s. 237.3(8) or s. 237.4(12). In finding that the execution of the employment agreement (or the employee's tax planning work) would not meet the s. 237.3(1) definition of a reportable transaction, CRA first indicated that it was reasonable to conclude that signing the employment agreement would not, because of the indemnification clause, be an avoidance transaction, given that the “Payment would not reduce, avoid or defer the Penalty imposed under the Act as it would only reimburse or satisfy the employee’s economic cost under a private agreement,” and that “[a]lthough the Payment might provide the employee with an economic benefit, it would not appear … to result in a tax benefit to the employee.”
In further finding that the indemnification clause did not constitute “contractual protection,” CRA stated:
[T]he relevant question is whether the indemnification clause protects against a failure of a transaction or series to achieve a tax benefit from that transaction or series, or reimburses an amount incurred in the course of a dispute in respect of such a tax benefit. In the hypothetical scenario described, any economic benefit associated with the Payment would arise from indemnification against a Penalty, not from the failure of a transaction or series to achieve a tax benefit, and not from a dispute in respect of such benefit.
Neal Armstrong. Summaries of 1 May 2026 External T.I. 2026-1086241E5 under s. 237.3(1) – reportable transaction, – contractual protection.
Income Tax Severed Letters 9 September 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Foresters – FCA finds that a multinational life insurer could not make allocations relating to its exempt accident insurance business to reduce its life taxable income
The taxpayer was a Canadian resident fraternal benefit society and a life insurer providing accident and sickness insurance (“accident insurance”), and individual life insurance to its members. Ss. 149(1)(k) and (3) exempted it regarding its taxable income other than from carrying on its life insurance business, and s. 149(4) provided that its taxable income from carrying on a life insurance business was to be computed “on the assumption that it had no income or loss from any other source.”
Given that the taxpayer carried on its insurance businesses both in Canada and abroad, it included the assets and liabilities of its accident insurance business in determining its Canadian investment fund (“CIF”) (i.e., the notional fund used as part of the basis for determining how much of its investment income should be allocated to its two Canadian insurance businesses). As the liabilities of that business exceeded its assets, it purportedly reduced its CIF by that difference. Second, as its CIF (of $717 million exceeded the net Canadian reserve liabilities in respect of its life insurance business (of $517 million), it was required by Reg. 2402(2)(d) to designate additional investment property equal to that excess (of around $200 million) in respect of one of its businesses. It designated the excess as being in respect of its accident insurance business and reported the gross investment revenue from this excess investment property as non-taxable income from that business. A third adjustment is discussed below.
In rejecting these two adjustments, Monaghan and Goyette JJA noted that the above-quoted requirement in s. 149(4) meant that “the Order could not include the amount of the assets that it used in its accident insurance business in the computation of its Canadian investment fund” as “[a]t no time in the year were those assets used or held in the course of carrying on the Order’s life insurance business,” and that similarly, “the Order could not reduce its Canadian investment fund by the amount of the liabilities related to these assets.” They then stated :
[T]he text of subsection 149(4) reveals that in computing the gross investment revenue under subsection 138(9) from its life insurance business, a fraternal benefit society cannot reduce its Canadian investment fund by the net liabilities (in this case, $3,299,000) connected to its accident insurance assets, nor can it designate an excess from its Canadian investment fund (here, $199,462,344) to its accident insurance business. Put simply, the text of subsection 149(4) does not permit a fraternal benefit society to blend its life and accident insurance businesses when computing its taxable income from its life insurance business. Instead, subsection 149(4) requires the society to exclude items from its other insurance businesses when computing its income and taxable income from its life insurance business carried on in Canada, including its gross investment revenue from that business. …
The third adjustment at issue related to the portion of the Order's total surpluses (the excess of assets over liabilities) that the Order did not allocate to any specific operation (the “World Surplus”). Element I of Reg. 2400(1)(a)(2)(b) of the CIF definition referred to:
… the total of all amounts, each of which is the amount of an item reported as an asset of the insurer as at the end of the year (other than an item that at no time in the year was used or held by the insurer in the course of carrying on an insurance business)"
The Order accepted that the World Surplus assets were so reported (on the basis of being included in its OSFI-required balance sheet as per Reg. 2400(3)), but maintained that they came within the parenthetical exclusion, so that they were excluded from its CIF.
The Court stated:
The text leads to the following interpretation: every asset reported on the insurer’s non-consolidated balance sheet is presumptively included by element I. Only if the evidence establishes that an asset was neither used nor held in the course of carrying on an insurance business at any time in the year is that presumption rebutted.
In commenting on the exclusion, the Court stated:
For example, the insurer might succeed in excluding assets by demonstrating they were at all times employed and risked in (i.e., used or held in the course of carrying on) another business … .
The Tax Court had instead got the test backwards, i.e., by asking “what assets were used or held in the course of carrying on the insurance business”. As the Tax Court had applied the wrong test, the matter was remitted to the Tax Court for a fresh determination.
Neal Armstrong. Summaries of Canada v. Independent Order of Foresters, 2026 FCA 146 under s. 149(4) and Reg. 2400(1) – CIF – (a)(ii)(B)-I.
Harvard Properties – Federal Court of Appeal finds in a s. 160 context that the FMV of a note and preferred shares equaled the cash amount that their transferee agreed to pay for them
The sale of a Calgary shopping mall by the taxpayer (“Harvard”) and the other co-owners to a third party (“Bentall”), which otherwise would have occurred as an asset sale, was effectively converted to a share sale through the participation in the transactions of a subsidiary (“NH Properties”) of another third party (“Abacus”).
Focusing on Harvard, it transferred its ½ co-ownership interest on a s. 85(1) rollover basis to its Newco in consideration inter alia for voting shares, and non-voting preferred shares, of Newco. In order for Newco to be controlled by NH Properties at the time the shopping mall was acquired by Bentall, Harvard first transferred its voting shares to NH Properties in exchange for an NH Properties promissory note. On the closing of the sale to Bentall, Newco directed that the applicable portion of the net proceeds be applied to pay off the promissory note owing by NH Properties to Harvard, and to pay the purchase price for the acquisition by NH Properties from Harvard of the Newco preferred shares.
The Crown position was that s. 160 applied to the exchange by Harvard of the NH Properties promissory note for cash and its sale of the Newco preferred shares to NH Properties for cash, because Harvard was not dealing at arm’s length with NH Properties and because such promissory note and preferred shares had a fair market value (FMV) of nil. This latter (FMV) position was based on the proposition that, at the precise time of their disposition, those securities had an FMV of nil because their only value was to a person protected by the various directions, escrow arrangements, and trust accounts for ensuring the payment of the note and the preferred share sale price. In rejecting this proposition, Goyette JA stated inter alia:
“[I]t is the value of the consideration as it stands in the hands of the transferee at the time of the transfer that governs”: Eyeball Networks at para. 67 (emphasis added). The directions, escrow arrangements, and trust accounts relied on by the Minister were intended to ensure that Harvard would be paid when it disposed of the preferred shares [and similarly re the note]. It is therefore difficult to see how those same arrangements could have reduced the value of the shares in Harvard’s hands.
The Tax Court had concluded that Harvard and the Abacus Group of companies were not dealing at arm's length, based on its conclusion that the sales proceeds received by Harvard, representing its pro rata share of the total mall sale price of $89.8 million, represented a premium to the mall's FMV. In reversing this finding, Goyette J.A. found that the FMV of the mall was the $89.8 million for which it was sold to Bentall, stating that “[per] Nash … “ ‘[i]n determining the fair market value of property, little evidence could be more probative than the direct sale of the property in question.’ ”
In also reversing a Tax Court finding that the creation and sale of the Newco voting shares were “avoidance transactions” intended to cause Harvard to lose control of Newco so that it would be at arm's length with Newco and NH Properties, thereby avoiding the application of s. 160, Goyette JA indicated that Harvard was, in fact, dealing at arm's length with the Abacus group of companies. The creation and sale of the Newco voting shares also did not result in a misuse or abuse of s. 160 given that the Harvard and the Abacus group of companies dealt at arm’s length and Harvard had provided full consideration for the cash transfers to it from NH Properties.
Harvard’s appeal was allowed.
Neal Armstrong. Summaries of Harvard Properties Inc. Canada, 2026 FCA 142 under s. 160(1), s. 245(3) and General Concepts – FMV – land.
Bruyea Estate – US Federal-Circuit Court of Appeals finds that Art. XXIV of the Canada-US treaty did not create a right to an FTC independent of the Code provisions
In 2015, a U.S. citizen residing in Canada (Bruyea) sold Canadian real estate and paid both Canadian income tax and U.S. net investment income tax (NIIT) on his gain from the sale of Canadian real estate. The IRS denied his foreign tax credit (FTC) to eliminate his NIIT liability.
Bruyea acknowledged no entitlement to the FTC under the Code; and Judge Stark further agreed with the government that Art. XXIV of the Canada-U.S. Income Tax Convention did not independently provide Bruyea with an entitlement to claim an FTC for the Canadian tax.
In this regard he noted inter alia:
- “any credit created by Article XXIV … is, by its own terms, subject to the very Code provisions that foreclose the credit in the first place”
- the re-sourcing provisions in Art. XXIV (deeming certain U.S. source income to arise in Canada rather than the U.S, thereby overcoming Code s. 904(a) limitations) would have been unnecessary if the Convention's drafters had shared Bruyea's view that the Treaty generated an FTC independent of the Code
- Bruyea's interpretation would lead to an anomalous result - for example, a U.S. citizen residing in Toronto could claim an NIIT credit against the individual’s U.S. tax liability for income tax paid in Canada on income generated in Canada, while a similarly situated U.S. citizen living in Buffalo, New York, could not.
Neal Armstrong. Summary of Bruyea Estate v. US (U.S. Court of Appeals for the Federal Circuit, 31 August 2026) under Treaties – Income Tax Conventions – Art. 24. (See also Christensen v. US (U.S. Court of Appeals for the Federal Circuit, 31 August 2026).)
Income Tax Severed Letters 2 September 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA has published an expanded Notice on the Ontario enhanced new housing rebate
CRA has published an expanded Notice, dated August 2026 (replacing the June 2026 version), discussing the Ontario enhanced new housing rebate (ENHR) which, together with the Ontario new housing rebate, provides eligible individuals with combined relief of up to $80,000 of the 8% provincial part of the HST paid on the purchase or construction of a new or substantially renovated home valued up to $1,850,000, where the home is for use as the individual's or their relation's primary place of residence. This rebate is generally available for the purchase of a home from a builder where the agreement of purchase and sale was entered into on or after April 1, 2026, and on or before March 31, 2027. For owner-built homes, the rebate is generally available where construction begins on or after April 1, 2026, and on or before March 31, 2027.
In addition to a description of the general conditions for granting the ENHR rebate, the notice discusses the anti-avoidance rules, which may deem an agreement entered into after March 2026 to have been entered into before April 2026.
The Notice explains that the rebate for up to $50,000 of the GST component of the purchase price is provided through the Ontario new home affordability payment (ONHAP) system. Both the Ontario ENHR and the ONHAP can be paid or credited to the purchaser by the builder (similar to other GST/HST new housing rebates). Although the builder then claims the ENHR rebate on its GST/HST return for the reporting period in which the amount was paid or credited, the ONHAP is not included on the builder's GST/HST return because it is paid separately by the Province of Ontario (which administers it rather than CRA)
The CRA webpage entitled “Ontario enhanced new housing rebate (ENHR)” has also been modified effective July 30, 2026.
Neal Armstrong. Summary of GST/HST Notice No. 346 Ontario Enhanced New Housing Rebate August 2026 under New Harmonized Value-Added Tax System Regulations, No. 2, under s. 41(2.01).
We have translated 9 more CRA interpretations
We have translated a CRA interpretation released last week and a further 8 CRA interpretations released in February and January of 1999. Their descriptors and links appear below.
These are additions to our set of 3,650 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 27 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA expands its EIFEL webpage to provide more detailed guidance on the financing (non borrowing-lending) IFE and IFR rules
A(e) of the interest and financing expenses (IFE) definition in s. 18.2(1), in highly simplistic terms, may add to a taxpayer’s IFE an amount paid or payable by it in a year that would otherwise be deductible in computing its income, as a result of an arrangement entered into in relation to a financing of it, that may reasonably be considered to increase its cost of funding with respect to the financing. Conversely, B(a) of the IFE definition may reduce the IFE by an amount received or receivable that was included in the taxpayer's income for the year under an arrangement entered into in relation to a financing of the taxpayer, where the amount can reasonably be considered to reduce the cost of funding with respect to the financing.
In early June, the CRA significantly expanded an EIFEL webpage to discuss these rules, as well as the mirror image rules under A(e) and B(a) of the interest and financing revenues (IFR) definition.
CRA makes a determination as to whether the arrangements, in economic substance, result in a cost of financing or a reduction thereof to the taxpayer under the IFE rules and, conversely, regarding the IFR rules, whether they represent, in substance, a return on a financing provided by the taxpayer. In this regard, CRA provides some helpful examples.
For instance, in the case of Canco factoring its accounts receivable to a factoring company at a 10% discount to the receivables' face value without recourse, CRA indicates that the 10% discount would generally be included in Canco's IFE under A(e). However, from the factoring company's perspective, the transaction constitutes a purchase of trade receivables and does not represent a provision of capital by it to Canco in exchange for compensation for the time, risk, and deployment of capital involved, with an expectation of repayment at some future date. Accordingly, from the factoring company's perspective, the earned discount would not be included in its IFR.
The second example involves a Canco borrowing in U.S. dollars at a floating interest rate from a Canadian bank and hedging its risk with respect to the floating interest rate by entering into a derivative with an arm's length counterparty. CRA indicates that the hedging costs generally would be an addition to Canco’s IFE under A(e) or, if there was a receipt under the derivative, then this would reduce its IFE under B(a). However, the amounts received by the hedging counterparty would not be in respect of a return on a loan or other financing and would not constitute IFR to it.
Neal Armstrong. Summaries of Supplemental instructions and guidance for filing under the excessive interest and financing expenses limitation rules, CRA Webpage, 3 June 2026 including (in relation to the June 3, 2026 additions) s. 18.2(1) – IFE – A(a), A(e), B(a) and IFR – B(a).
Neal H. Armstrong editor and contributor