News of Note
CRA rules on applying its formula for prorating foreign tax between a FAPI and non-FAPI business for FAT purposes
Email this ContentA CFA of the Canadian taxpayer (“FA Opco” or “FA”) carried on a business giving rise to FAPI (the “FAPI Business”), as well as an active business. FA Opco had incurred non-capital losses in carrying on its active business for purposes of the Foreign Country tax laws and also had unused discretionary deductions in respect of that active business.
It was projected that in respect of a particular taxation year, FA Opco would generate net income from both the FAPI business and the active business and partially eliminate corporate income tax imposed by the Foreign Country through the use of its loss carryforwards and the discretionary deductions.
CRA ruled as to methodology for determining the amount of foreign accrual tax (“FAT”) applicable to the FAPI from the FAPI Business. This methodology was summarized as follows in 28 May 2025 IFA Roundtable Q. 5, 2025-1063771C6:
CRA … generally considers it reasonable to determine FAT applicable to the amount of FAPI of FA for a taxation year of FA by multiplying the total foreign tax paid by FA to the foreign country for a taxation year of FA by the fraction that the amount of the net income from … [the] FAPI Business … represents of the total net income of FA for the taxation year of FA, both as computed under foreign tax law. …
[Once] FA’s activities that generate FAPI [are] reasonably identified … the second logical step requires the determination of the following amounts:
A - the amount of gross income from the FAPI Business for the taxation year computed under foreign tax law.
B - the total amount of deductions allowed under foreign tax law and claimed by FA in the taxation year that may reasonably be regarded as directly applicable only to the FAPI Business.
C - the amount of gross income from all sources for the taxation year computed under foreign tax law that is subject to foreign tax.
D - the total amount of deductions allowed under foreign tax law and claimed by FA in the taxation year which are not directly allocable to either the FAPI Business or to other income-generating activities, multiplied by the ratio of A over C (or allocated between the two streams of income on other reasonable grounds).
Once those values are determined, the formula to compute the net income of FA from the FAPI Business becomes: A – B – D. The resulting amount divided by the total net income of FA for the taxation year determines the fraction which, applied to the amount of total foreign tax paid by FA, determines the amount of foreign tax “that may reasonably be regarded as applicable” to FAPI in that taxation year (i.e. the FAT).
Neal Armstrong. Summary of 2025 Ruling 2024-1039511R3 under s. 95(1) – FAT.
CRA confirms that a regular registrant is denied ITCs on HST that is charged to it under the simplified regime, and that s. 211.17(1) does not preclude a net refund under the SAM formula
A selected listed financial institution (SLFI) that was registered under the regular GST/HST registration provisions purchased intangible personal property (the “IPP”) from a non-resident supplier, which was registered under the simplified regime for non-residents.
CRA indicated that because the SLFI did not provide proof of its regular GST/HST registration to the non-resident, it was considered to be a specified Canadian recipient, so that the non-resident was required to charge GST/HST on that specified supply (at the Ontario rate of 13%, given that the usual place of business, as defined in s. 211.17(1), of the SLFI was in Ontario.)
Because such HST was charged under the simplified regime, the SLFI was precluded, under s. 211.17(1), from claiming any ITC for such HST.
Regarding the application of the specified attribution method (SAM) formula to the SLFI, CRA indicated that it would be applied in the usual manner in this simplified regime context, i.e., the federal GST charged to the SLFI would be slotted into A of the formula, converted to a blended HST rate based on the investor percentages and with the actual Ontario HST paid to the non-resident then subtracted from that result to arrive at the resulting effect on the net tax of the SLFI insofar as this IPP purchase was concerned.
Although s. 211.17(1) provided that the SLFI recipient was generally not allowed to claim an ITC, rebate, refund, or remission in respect of the GST/HST that was required to be collected by the non-resident under the simplified regime, s. 211.17(1) would have no application to restrict the SLFI from claiming a net tax refund for the reporting period if that was the result of the application of the SAM formula, including with respect to this acquisition of the IPP.
Neal Armstrong. Summaries of 3 April 2025 GST/HST Interpretation 248372 under ETA s. 211.14(1) and s. 225.2(2).
We have translated 5 more CRA interpretations
We have translated a further 5 CRA interpretations released in March of 1999. Their descriptors and links appear below.
These are additions to our set of 3,618 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Income Tax Severed Letters 22 July 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Northcut – Tax Court finds discrimination contrary to Art XXV:1 of the Canada-US Convention where a US citizen/Cdn. resident faced higher Cdn. taxation than if not a US citizen
The taxpayer, who was a Canadian resident and both a Canadian and US citizen, worked for a US-based organization in Montreal until his retirement in December 2002, at which point he began to receive a pension from the employer’s pension fund.
As a U.S. citizen, he could only deduct, from the amount of the monthly pension payments, an amount based on the contributions he had made out of his salary to the pension plan, and on that basis, CRA only permitted him to take those deductions pursuant to s. 110(1)(f)(i) and Art. XVIII:1 of the Canada-US Convention in computing his taxable income for Canadian purposes. Art. XVIII:1 provided that pensions arising in the US and paid to a resident of Canada may be taxed in Canada, but the amount of such pension that would be excluded from taxable income in U.S. if the recipient were a resident thereof shall be exempt from taxation in Canada.
If, however, the taxpayer had only been a Canadian resident, not a U.S. citizen (or the holder of a green card), he would also have been able to deduct under Art. XVIII:1 amounts in respect of the contributions made to the pension plan by his employer.
Lafleur, J. found that that this constituted discrimination contrary to Art. XXV:1 of that Convention, i.e., as a US citizen he was being subjected to more burdensome taxation by Canada than if he had only been a Canadian resident.
Neal Armstrong. Summary of Northcut v. The King, 2026 TCC 136 under Treaties – Income Tax Conventions – Art. 25.
Chobham Corp. – Tax Court of Canada finds that a s. 94(3) trust with a Quebec resident contributor was subject to double tax
The taxpayer, which was a trust that was factually resident in Panama but was deemed under ITA s. 94(3) to be resident in Canada because it had a resident contributor who resided in Quebec, was assessed for federal surtax under s. 120(1) and was denied the Quebec abatement under s. 120(2), on the basis that, as per Reg. 2601(1), it was not resident in Quebec (or any other particular province) on December 31 of the particular taxation years and thus did not have any "income earned in the year in a province" as defined in s. 120(4). However, because the resident contributor was a resident of Quebec, the trust was also subject to taxation on its income under the Taxation Act (Quebec), notwithstanding the absence of relief from the federal surtax or through the Quebec abatement.
In confirming the federal reassessments and in rejecting the trust’s submission that it was resident in a province (Quebec) for purposes of Reg. 2601(1) because it was deemed to be resident in Quebec for TA purposes, Clark J stated:
The use [in Reg. 2601(1)] of the word “resides” refers to established principles of residency under the Income Tax Act. While taxpayers may be deemed resident in Canada under various provisions such as paragraph 94(3)(a), those provisions do not apply for the purpose of Regulation 2601(1) because they do not refer to any particular province.
Regulation 2601(1) [only] applies if the individual is factually resident in a province on December 31 of a particular taxation year. …
Federal and provincial tax liabilities remain separate jurisdictional issues.
Neal Armstrong. Summary of Chobham Corporation Ltd. v. The King, 2026 TCC 127 under Regulation 2601(1).
LG Electronics – Federal Court allows taxpayer to make additional submissions to CRA in addition to the usual remedy for a successful judicial review of an interest-waiver decision
In November 2018, the Minister reassessed the Canadian taxpayer to give effect to a bilateral advanced pricing agreement (APA) between Canada and South Korea respecting sales of goods between the taxpayer’s South Korean parent and it.
In February 2017, the taxpayer applied for interest and penalty relief relating to the APA program, and in November 2019 requested such relief respecting alleged errors in processing advance payments made to CRA. The parties agreed that a CRA decision to grant only limited relief was based on inaccurate findings of fact.
D’Agostino J found no basis to depart from the usual remedy of remitting the matter back to CRA for reconsideration by a different decision-maker, other than to allow the taxpayer to provide further submissions to CRA within 30 days to address errors that it became aware of following receipt of the certified tribunal record.
She denied two further requested forms of relief having regard inter alia to "the distinct roles of the decision-maker and the reviewing court": (i) this did not constitute an exceptional situation where (as submitted by the taxpayer) CRA should be directed to provide its new decision-maker with a corrected set of facts as drafted by the taxpayer (and disputed, in part, by the Crown); and (ii) the taxpayer had not provided clear evidence and jurisprudence supporting its proposal that the new CRA decision be required to be made within 30 days.
Neal Armstrong. Summary of LG Electronics Canada Inc. v. Canada (Attorney General), 2026 FC 895 under s. 220(3.1).
Liu – Tax Court of Canada finds that the expanded s. 152(9) does not permit the Minister to advance a new argument based on transactions that were not the subject of the reassessments
The Minister's reassessments of the taxpayers were made on the assumption that their offshore corporations generated unreported employment and business income, and capital gains, to them. After the taxpayers had appealed, the Attorney General filed Replies asserting that income of controlled foreign affiliates of the taxpayers constituted foreign accrual property income (FAPI) to them.
Clark J noted that Walsh (2007 FCA 222) had “held that the pre-2016 version of subsection 152(9) did not permit the Minister to include in its alternative argument transactions which did not form the basis of the taxpayers' reassessment” and that the 2016 amendments (expanding s. 152(9) to permit the advancing of an additional source of income) should be narrowly construed on the basis that “Parliament is taken to have been aware of the jurisprudence limiting subsection 152(9) to the transactions that formed the basis of the taxpayers' reassessment.” She stated:
I find it plain and obvious that amended subsection 152(9) does not enable the Minister to raise new arguments and bases arising from an entirely new set of transactions. An assessment of tax liability under the FAPI rules requires a determination of the income of a Canadian taxpayer's foreign affiliates. The Minister made no such … determination … prior to reassessment.
The FAPI pleadings were struck.
Neal Armstrong. Summaries of Liu v. The King, 2026 TCC 126 under s. 152(9), Rule 8 and Statutory Interpretation – Prior Cases.
GST/HST Severed Letters April 2025
This morning's release of 17 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their April 2025 release) is now available for your viewing.
CRA rules on a classic pipeline with a slow note repayment schedule
CRA ruled on classic postmortem pipeline transactions under which:
- Holdco, holding portfolio investments, will repurchase and redeem a portion of its shares held by the estate, with the resulting deemed dividends designated as eligible dividends, and the resulting capital loss carried back under s. 164(6);
- the estate will transfer all its common shares of Holdco on an s, 85(1) rollover basis to a Newco in consideration for a demand promissory note and preferred shares;
- after one year, Holdco and Newco will amalgamate to form Amalco; and
- Amalco will gradually repay the note held by the estate at a rate of 1/3 of the original principal amount each year.
Neal Armstrong. Summary of 2024 Ruling 2024-1031041R3 F under s. 84(2).
Neal H. Armstrong editor and contributor