News of Note
CRA indicates that the Ontario government avoids source deduction and T4A reporting obligations by routing PSW incentive payments to their employers
Email this ContentAn Ontario government program to attract personal support workers (PSWs) provided for the payment to them of cash incentives, such as a clinical placement stipend of up to $5,400, and a recruitment incentive payment of $10,000.
CRA indicated that, given the program was designed to have employers deliver such payments directly to PSWs, the amounts received by the PSWs would be included in their employment income under s. 5(1); and would be subject to source deductions and T4 reporting by the employer.
It further noted that if the Province had instead designed a program to deliver the above payments directly to the PSWs, the amounts received by them would have been included in their income pursuant to s. 56(1)(r)(i) (i.e., as “earnings supplements provided under a project sponsored by a government … in Canada to encourage individuals to obtain or keep employment”) so as to impose source deduction and T4A reporting obligations on the Province.
Neal Armstrong. Summary of 22 January 2026 External T.I. 2025-1078871E5 under s. 5(1).
We have translated 5 more CRA interpretations
We have translated a further 5 CRA interpretations released in May of 1999. Their descriptors and links appear below.
These are additions to our set of 3,563 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).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 1999-05-28 | 6 January 1999 Internal T.I. 9816727 F - METHODE DE REMPLACEMENT- MATERIEL CONSOMME | Income Tax Act - Section 37 - Subsection 37(8) - Paragraph 37(8)(a) - Subparagraph 37(8)(a)(ii) - Clause 37(8)(a)(ii)(B) - Subclause 37(8)(a)(ii)(B)(V) | “materials consumed” does not refer to use of equipment |
| Income Tax Act - Section 127 - Subsection 127(27) | overhead costs incurred in constructing engines are not included/ property used for testing purposes and then disposed of, could qualify | ||
| 10 February 1999 Internal T.I. 9829297 F - SÉCHOIRS A BOIS - AMORTISSEMENT | Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(c) | buildings comprised of cells used to dry wood together with the heating equipment in another building constituted “kilns” used in processing | |
| 14 April 1999 Internal T.I. 9831627 F - INTEREACTION 1100(11) ET 13(21.2)E)(III) | Income Tax Act - Section 13 - Subsection 13(21.2) - Paragraph 13(21.2)(e) - Subparagraph 13(21.2)(e)(iii) | rental property restriction rules do not apply to s. 13(21.2)(e)(iii) property | |
| Income Tax Regulations - Regulation 1100 - Subsection 1100(11) | Reg. 1100(11) does not apply to a s. 13(21.2)(e)(iii) property | ||
| 21 January 1999 Internal T.I. 9900197 F - DÉDOMMAGEMENT PAYÉ À UN LOCATAIRE | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Damages | damages paid for having caused tenant disruption from renovations were an addition to building cost if such renovations were capital expenditures | |
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) | interest for damages received for loss of a subtenant was taxable – interest on damages for personal loss and on exemplary damages was non-taxable | ||
| Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | interest and legal fees incurred re damages paid for having caused tenant disruption from renovations were an addition to building cost if such renovations were capital expenditures | ||
| 14 April 1999 Internal T.I. 9901637 F - CATEGORIE 41 -LIE A SOI MEME | Income Tax Regulations - Schedules - Schedule II - Class 41 - Paragraph (a.1)) - Subparagraph (a.1)(iv) | (a.1)(iv) exclusion for NAL acquisition did not apply where the taxpayer acquired the property that it previously had leased | |
| Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | a person does not deal not-at-arm’s-length with itself unless deemed to do so |
Zhang - Tax Court of Canada finds that a settlement agreement, which could be reasonably inferred, was enforceable by it – and s. V-I-4(b) requiring a previous supply does not require its assessment
Mr. Tan and his spouse, Mrs. Zhang, moved into a residence (the Eldora property) in July 2014 when its reconstruction by them was completed. They then sold the property in February 2015. In July 2017, one month after having received an occupancy permit therefor, they sold a second residential property (the Olive property) after having completed its reconstruction in September 2016.
After the appellants’ appeal of CRA reassessments of both sales transactions on the basis that they were taxable rather than exempt and imposing a gross negligence penalty on Mr. Tan, the appellants’ counsel (Mr. Laregina) sent a proposal to the Justice lawyer that the matter be settled principally on the basis that the sale of the Eldora property was an exempt supply pursuant to s. V-I-4(b), and that the sale of the Olive property be treated as taxable; and that the gross negligence penalty be reversed.
Ultimately, the Justice lawyer responded, agreeing to those terms except for the deletion of the gross negligence penalty, to which Mr. Laregina responded with his acceptance. However, when the Justice lawyer drafted the minutes of settlement, it became apparent that she considered the settlement agreement to also include an agreement that the couple would be assessed under the self-supply rule under s. 191(1) in respect of the substantial completion of the Eldora property in October 2014 (a month which CRA had not audited or assessed) and that they would be expected to waive the right to object to such assessments.
They then brought this motion to enforce the settlement agreement, which they claimed had been entered into upon Mr. Laregina's acceptance of the counteroffer. Before finding that the appellants’ interpretation of the terms of the settlement agreement (i.e., excluding any agreement re the pre-2015 period) was correct and granting their motion, Rabinovitch J rejected the Crown’s submission that the Tax Court lacked jurisdiction to enforce a settlement agreement in this case because no signed consent to judgment had been filed pursuant to s. 170 of the Rules.
Rabinovitch J went on to find that instead the question in this case was whether a settlement agreement was reached under the common law of contract in Ontario. This question was illuminated by the Apotex decision (2016 FCA 155), which indicated that the parties not having signed a more formal document to record their agreement after the fact did not prevent them from having formed a binding contract before any such a document was prepared. Furthermore, under the Apotex test as to what a reasonable person would have concluded from what the parties said or did, the appellants had established that there was matching offer and acceptance on all essential terms; and that although there may have been a unilateral mistake on the part of the Crown regarding the terms of the agreement, a unilateral mistake as to terms is generally insufficient to render a contract void at common law unless the other party knows that the mistaken party is operating under an invalid assumption or voidable under the law of equity where it ought to have known of such mistake. No such circumstance had been established here.
Finally, regarding the Crown’s claim that the principled settlement rule was not complied with under the alleged terms of the agreement because the appellants had not in fact been assessed under the s. 191(1) rule, so that the settlement agreement violated the policy of s. 4(b), Rabinovitch J stated:
Subsection 4(b) of Schedule V … covers the sale of a single unit residential complex made by a builder who has “was deemed under subsection 191(1) or (2) of the Act to have received a taxable supply of the complex or unit by way of sale, and that supply was the last supply of the complex or unit made by way of sale to the builder.” It does not require an assessment to have been issued in respect of that supply.
Neal Armstrong. Summary of Zhang v. The King, 2026 TCC 71 under ETA s. 309.
Canadian taxpayers may not be able to rely on the presence of hybrid mismatch rules in other jurisdictions to avoid adverse consequences under the Canadian proposals
Comments on the second round of hybrid mismatch rules include the following:
The hybrid payer rules can lead to results that do not appear to have been contemplated. For example, if a U.S. corporation has a wholly owned disregarded Canadian unlimited liability company (ULC) and the ULC provides contract R&D services to its shareholder on a cost-plus basis, the ULC's revenue does not qualify as dual-inclusion income because it its disregarded for U.S. purposes. Accordingly, even though the ULC is subject to Canadian tax on its profits, all of its otherwise deductible expenses could be denied under the hybrid payer rules.
Furthermore, anomalous results occur because dual-inclusion income is computed on an entity-by-entity basis, not a jurisdictional basis, as contemplated in the BEPS Action 2 report. For example, an operating company may pay a management fee to a separate legal entity that incurs compensation expense. If both entities are hybrids, the management fee could be disregarded for foreign tax purposes, causing the compensation expense to create a double-deduction mismatch. While the operating income qualifies as dual-inclusion income, the income and expense arise in separate legal entities and cannot be offset, potentially resulting in the denial of the compensation expense under the hybrid payer rules.
Under the Canadian hybrid-payer rules, a deduction will be denied only to the extent that it has not already been denied in the investor's country under that jurisdiction's own hybrid mismatch rules. However, a deduction may be allowed in the U.S. under its consolidated loss dual consolidated loss (DCL) rules but denied in Canada under its hybrid payer rules, which could occur because the U.S. includes subpart F or tested income when computing dual-inclusion income, whereas Canada does not.
Furthermore, Canada generally denies a deduction upfront and allows it later if sufficient dual-inclusion income arises; whereas the DCL rules allow the deduction initially unless the loss is later used to offset non-dual-inclusion income.
Finance has been asked for further guidance on whether the U.S. DCL rules qualify as hybrid foreign or foreign hybrid mismatch rules.
Regarding the imported mismatch arrangement rules, the Canadian rules align with the Action 2 recommendations in that an “imported payment” (i.e., a deductible payment by a Canadian taxpayer) can be linked with an “offshore mismatch payment” (i.e., the payment giving rise to an offshore hybrid mismatch) without the two payments being linked causally or factually in any way. Instead it is sufficient that the recipient of one payment be the payer of another within a chain of entities connecting the Canadian taxpayer with the payer of the mismatch payment.
Neal Armstrong. Summaries of Mark Dumalski, “The Unexpected Implications of Canada's Latest Anti-Hybrid Proposals,” International Tax Highlights, Vol. 5, No. 2, May 2026, p. 4 under s. 18.4(15.6) and s. 18.4(15.94).
Hunt – Federal Court of Appeal finds that the s. 207.05 advantage tax was not a penalty subject to a due diligence defence, and that it was not constitutionally invalid
The taxpayer challenged the validity of advantage-tax assessments made on him pursuant to s. 207.05 in respect of his TFSA on the grounds that ss. 207.05 and 207.06, in substance, imposed a penalty for which a defence of due diligence was available rather than a tax. He also argued that, since under those provisions the Minister effectively had the discretion as to the rate of tax to be imposed (by being able to waive anywhere between 100% and 0% of the tax), those provisions were contrary to s. 53 of the Constitution Act, 1867, which established a "no taxation without representation" principle.
In finding that those provisions did not impose a penalty, Stratas JA indicated inter alia that “recharacterizing the regime as imposing a penalty” so as to “bring into operation a defence of due diligence … would undermine [the] intricate and detailed scheme provided under the provisions.”
In finding that the discretion accorded to the Minister under s. 207.06(2) did not violate s. 53, he indicated that the provision did not establish “a standardless sweep for the Minister,” whose waiver discretion thereunder was to be guided by the factors listed in that provision and “by the need to curb abuse of the tax-free savings account regime bearing in mind the purposes of that regime.” – and, to boot, a waiver decision of the Minister under s. 207.06(2) was “a reviewable decision subject to legal constraints set by Parliament in s. 207.06, not a purely policy-based guess by the Minister about what a number should be”.
Neal Armstrong. Summaries of Hunt v. Canada, 2026 FCA 88 under s. 207.06(2) and Constitution Act, 1867, s. 53.
CRA concludes that the rules for avoiding recapture of clean energy ITCs on related corporation transfers can apply to successive such transfers
Aco acquired a clean technology property and properly claimed the clean technology investment tax credit, then transferred the property on an s. 85(1) rollover basis to a related taxable Canadian corporation (Bco) which, in turn, transferred the property on an s. 85(1) rollover basis to yet another related taxable Canadian corporation (Cco), which then sold the property to an unrelated third-party purchaser.
CRA confirmed that the first transfer, by virtue inter alia of being a related corporation transfer, would not, by virtue of subsection 127.45(13), be subject to the rule for recapture of ITCs under subsections 127.45(11) and (12). On a proactive reading of the rule in s. 127.45(14) requiring that the rule in s. 127(34) be read “with such modifications as the circumstances require,” CRA also concluded that the second related corporation transfer was not subject to recapture.
The recapture instead did not occur until the sale to the third party.
Neal Armstrong. Summary of 27 January 2026 External T.I. 2025-1080051E5 under s. 127.45(14).
Income Tax Severed Letters 6 May 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA doubts that a lifetime benefit trust can qualify as such in Ontario
A will that is drafted in a province such as Ontario, which is subject to a 21-year accumulations limit, will establish a lifetime benefit trust (LBT) for the benefit of the testator's dependent mentally infirm child, provides for the residue clause to pass to the child’s siblings, and is silent as to what happens after the end of the accumulations period.
Upon the passage of the accumulations period, the LBT income would fall into the residue and become payable to the siblings. Would the LBT qualify as such from the testator's death until year 22 (or thereafter)? CRA responded:
[W]e believe that the accumulations legislation still in force in some provinces conflicts with the LBT rules in the Act. We have serious reservations about whether the arrangement described above could qualify as an LBT, given the possibility that trust income could be diverted away from the mentally-infirm LBT beneficiary after the end of the accumulations period. This result would be inconsistent both with the text of subparagraph 60.011(1)(b)(i) and with the overall policy goals of the LBT regime.
… [H]owever, we are considering the question further and will provide a more detailed response in a forthcoming technical interpretation [see 14 October 2022 External T.I. 2021-0913801E5].
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable Q. 14, 2021-0883211C6 - Revised - Lifetime benefits trust under s. 60.011(1)(b)(i).
CRA confirms that a lessee will not be able to claim a clean technology ITC under a lease-to-own arrangement, and that this arrangement could trigger recapture of any lessor ITC
Would the lessor or the lessee under a lease-to-own arrangement in respect of clean technology property be eligible to claim the clean technology investment tax credit (CT ITC) under s. 127.45?
CRA noted that the CT ITC was dependent inter alia on the taxpayer having “acquired” the clean technology property in the year, and referred to its position in Folio S3-F4-C1 generally stating that a taxpayer will be considered to acquire depreciable property at the earlier of obtaining title to the property or acquiring all the incidents of ownership, such as possession, use, and risk. Furthermore, a property that was used by the lessee under a lease arrangement before it was acquired by it could not satisfy the requirement in para. (b) of the “clean technology property” definition that the property must not have been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer.
Turning to the lessor, CRA noted that where the taxpayer, having acquired a clean technology property, then leases it to another person, the conditions in para. (c) of the “clean technology property” definition (respecting, generally, the leasing being in the ordinary course of a described principal business and to a qualifying taxpayer or partnership) would need to be satisfied. Furthermore, if the lessee acquires the property less than 10 years after its acquisition by the lessor under a lease-to-own arrangement, the CT ITC claimed by the lessor generally would be subject to recapture under s. 127.45(11).
Neal Armstrong. Summary of 15 December 2025 External T.I. 2024-1043191E5 under s. 127.45(1) - clean technology property.
We have translated 5 more CRA interpretations
We have translated a further 5 CRA interpretations released in June and May of 1999. Their descriptors and links appear below.
These are additions to our set of 3,545 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).
Neal H. Armstrong editor and contributor