News of Note
CRA comments on how to apply the more closely-connected test in s. 212.3(16) where Canco has overlapping officers with its non-resident parent
Email this ContentA US-resident public company (US Pubco) wholly owns US Holdco, which in turn wholly owned USCo, as well as Canco, which has foreign subsidiaries. In 2021, Canco acquired the shares of US Sub from US Holdco for FMV consideration. At the time of acquisition, Canco, Canco’s foreign subsidiaries, and US Sub carried on Business Segment 1; whereas , US Holdco carried on Business Segment 2.
Two of the three Canadian-resident senior officers of Canco, all working in Canada (the CEO and CFO) were also the CEO and CFO of US Pubco and US Holdco; and their compensation was based on the consolidated results of the group, whereas that of the third executive of Canco, who managed the day-to-day operations of Business Segment 1, was based solely on the results of Business Segment 1, which includes US Sub’s results. Conversely, the compensation of another (non-resident) executive, who managed the day-to-day operations of Business Segment 2, was based solely on the results of Business Segment 2.
In a lengthy and diffuse (it’s-a-question-of-fact) response, CRA indicated inter alia that, for s. 212.3(16) purposes:
- at the investment time, the business activities of US Sub were part of Business Segment 1 and were similar to the business activities carried on in Canada by Canco in the same business segment; therefore, the business activities of US Sub appeared to be closely connected with the business activities of Canco for purposes of the "more closely connected business activities" test in s. 212.3(16)(a);
- the “reasonably expected” test in the preamble to s. 212.3(16)(c) referenced a test “by an objective observer with knowledge of all of the pertinent facts”; and
- regarding whether it is sufficient that the performance evaluation and compensation of the officers of Canco be based on the results of the business segment of which US Sub was a part, rather than being tied specifically to the results of US Sub, CRA indicated that, for the purposes of s. 212.3(16)(c)(iii), “one must generally demonstrate that some proportion of the performance evaluation and compensation of the officers is based to some extent on the operating results of the subject corporation.”
Neal Armstrong. Summary of 2 April 2026 External T.I. 2021-0917901E5 under s. 212.3(16).
Income Tax Severed Letters 24 June 2026
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that the s. (g)(iv) exclusion from the indefeasible-vesting exception to the 21-year deemed disposition rule can apply to a s. 94(3) trust
Although the definition of trust in s. 108(1) generally excludes a trust from the application of the 21-year deemed disposition rule in s. 104(4) where all interests in the trust have vested indefeasibly, there are exclusions to this rule, for instance, that in s. (g)(iv) of the definition, which refers to a “trust that is … resident in Canada” where (speaking generally) one or more non-resident beneficiaries have more than a 20% FMV interest in the trust.
CRA found that the quoted wording applied to a trust that was not factually resident in Canada but was deemed to be resident in Canada pursuant to s. 94(3) – so that it would be excluded from the benefit of the indefeasible-vesting exception where, for instance, it had a U.S. resident beneficiary who was entitled to 50% of its income and capital.
Before so concluding, CRA indicated that:
- ss. 94(3)(a)(i) and (ii) provide that a deemed resident trust is deemed to be resident in Canada for purposes of applying s. 2 and for computing its income under Part I;
- the subjecting of such a trust to Part I tax on its worldwide income extended to income arising from deemed dispositions under, for instance, s. 104(4); and
- the definition of "trust" in s. 108(1) impacted the application of the deemed disposition rule in s. 104(4) so that such definition was relevant for computing the trust's income for the year.
Neal Armstrong. Summary of 2 June 2026 STEP Roundtable, Q.14 under s. 108(1) – trust – (g)(iv).
Wilson 555 – Tax Court of Canada finds that a property acquired under a s. 85(1) roll for condo development was capital property, with no change of use until well after rezoning approval
After it was determined that a developer would seek to develop, as residential condos, two properties in the group that had been acquired as capital properties for rental as office buildings, they were transferred in January 2008 on a s. 85(1) rollover basis to a newly-incorporated group company. In June 2008, an application for a zoning change to industrial use was made, in February 2010, the zoning change was approved, and in September 2011, a bank agreed to finance the project. In May 2012, the office buildings were demolished, and project construction commenced in October 2012.
Wong J found that since, in a rollover transaction, the transferee “stands in the place of the original purchaser so intention should be examined at the time of the original purchases”, the properties’ character as capital property flowed through to the taxpayer.
Regarding when there was a change of use for the purposes of ss. 13(7) and 45, she noted the “long-standing principle that ‘a clear and unequivocal positive act implementing a change of intention’ is necessary”. She found that such a change of use did not occur until the time the bank agreed to finance the residential condominium project, as it was not until this point that all the conditions required to proceed with the condominium development had been fulfilled.
Neal Armstrong. Summary of Wilson 555 Avenue Inc. v. The King, 2026 TCC 104 under s. 45(1)(a).
We have translated 5 more CRA interpretations
We have translated a further 5 CRA interpretations released in April of 1999. Their descriptors and links appear below.
These are additions to our set of 3,601 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 |
|---|---|---|---|
| 1999-04-16 | 28 January 1998 External T.I. 9722275 F - CONVENTION CANADA-IRLANDE | Treaties - Income Tax Conventions - Article 22 | withholding rate on s. 212(1)(l) lump sum payment out of an RRSP reduced to 15% under Other Income article of 1966 Canada-Ireland treaty |
| 25 March 1999 External T.I. 9805975 F - 15(1.1) STOCK DIVIDEND AFTER AN ESTATE FREEZE | Income Tax Act - Section 15 - Subsection 15(1.1) | s. 15(1.1) not engaged if stock dividend paid proportionately to all shareholders | |
| 30 March 1999 External T.I. 9822845 F - PENSION ALIMENTAIRE | Income Tax Act - Section 56.1 - Subsection 56.1(4) - Commencement Day | judicial confirmation of support obligation and numerical correction did not give rise to a commencement day | |
| 27 October 1998 External T.I. 9824750 F - KNOW-HOW | Income Tax Act - Section 248 - Subsection 248(1) - Property | know-how not having IP statutory protection is not “property” – but can be transferred as part of goodwill | |
| Income Tax Act - Section 85 - Subsection 85(1.1) | know-how not constituting statutorily-protected IP is not “eligible property” unless transferred as part of goodwill | ||
| 26 March 1999 Internal T.I. 9903097 F - BFT- REDEVANCES - COUT DE LOCATION | Income Tax Regulations - Regulation 5202 - Cost of Manufacturing and Processing Capital | royalties paid for secret formulae could be “essential and integral to the manufacturing activity” |
CRA confirms that a s. 94(3)(a) trust had a non-resident portion arise on the death of a resident contributor so that it could elect under s. 94(3)(f)
A non-resident trust with only non-resident beneficiaries was a deemed resident trust under s. 94(3)(a) because three resident individuals had previously made direct contributions to the trust, and those contributions continue to be held by it. However, one of the contributors (A) died on September 1, 2025.
CRA indicated that, upon such death, the contribution of A ceased to form part of the deemed resident trust's resident portion, and became a non-resident portion, since A had ceased to be a resident contributor on death. Accordingly, the deemed resident trust could elect under s. 94(3)(f), with a resulting deemed disposition under s. 69(1) of the property in the non-resident portion to a non-resident portion trust.
If the property forming the non-resident portion earned dividend income of $5,000 from January 1 to August 31, 2025, and $10,000 from August 1, 2025 to December 31, 2025, the $5,000 would be included in the deemed resident trust's T3 return for 2025; and the $10,000 would be considered to belong to the non-resident portion of the trust and would be subject to Part I tax only to the extent of the application of s. 104(13) (i.e., not at all with only non-resident beneficiaries).
Regarding the allocation of expenses between the deemed resident trust and the non-resident portion trust, CRA stated that, based on the Canderel findings, a taxpayer can choose any method of determining profit that provides an accurate picture of the taxpayer's profit for the year, provided that it is not inconsistent with the provisions of the Act, rules of law, and well-accepted business principles.
Neal Armstrong. Summary of 2 June 2026 STEP Roundtable, Q.13 under s. 94(3)(f).
CRA indicates that s. 105(1) can apply to the benefit arising from a trust paying the premiums on a policy owned by a corporation even though that corporation was not a trust beneficiary
A discretionary Ontario trust owns a life insurance policy on the life of Mrs. A, for which the Trust pays the insurance premiums (as authorized under the Trust indenture), and for which Mr. B (who is one of the trust beneficiaries) is the beneficiary.
CRA indicated that, if the insurance premiums were not paid as a distribution of trust capital to Mr. B, or as a payment of income included in computing his income, it appeared that, by the Trust paying the premiums on the policy for which Mr. B was the beneficiary, it could be considered that the Trust conferred a benefit on Mr. B, equal to the premiums paid, which would be included in Mr. B’s income under s. 105(1), irrespective of whether the premiums were paid out of the trust’s capital or income.
If this scenario were varied so that Mr. B was the shareholder of Opco (which, unlike Mr. B, was not a Trust beneficiary) and it was Opco who was the beneficiary of the policy, CRA considered that s. 105(1) could also apply to Opco, even though Opco was not a beneficiary of the Trust. This was so since s. 105(1) refers to the value of all benefits to a taxpayer from or under a trust, with there being no requirement in s. 105(1) that the taxpayer receiving the benefit from the trust be a beneficiary of the trust. Accordingly, similarly to the first scenario, it could be considered that the trust conferred a benefit on Opco by paying the policy premiums on a policy for which Opco was the beneficiary.
Neal Armstrong. Summary of 5 May 2026 Roundtable, 2026-1089321C6 - 2026 CALU – Q.3 under s. 105(1).
CRA indicates that it no longer discards Sched. 15s that are not required, so that it will not subsequently assess penalties where a subsequent Sched. 15 states “no change”
CRA had been following the practice of discarding Schedule 15 information where that filing was not required. If the trust, for a subsequent year, filed a Schedule 15 for that year and indicated no change from the prior year, CRA would assess a penalty because no previous information existed on file.
However, CRA indicated that it paused this practice of discarding beneficial ownership information in 2024 in order to re-examine its position - and has now determined to process and retain Schedules 15 submitted voluntarily by a trust, including some of those submitted over the past two years.
Neal Armstrong. Summary of 2 June 2026 STEP Roundtable, Q.12 under Reg. 204.2(1).
CRA indicates that reasonable efforts to obtain a TIN entail repeated attempts and should be documented, and that checking a box may be acceptable written consent to use of a TIN
S. 237(1.1) requires a “disclosing person” to provide their tax identification number to a “collecting person,” being a person who is required to make an information return under the Act. Additionally, s. 237(2)(a) requires the collecting person to make a “reasonable effort” to obtain the number.
CRA indicated that repeated attempts at the last known contact would generally be consistent with “reasonable effort,” provided the collecting person maintained adequate records of their efforts. In particular, the collecting person should keep a record of the date of the verbal or written request, an example of the request form, the names of the people contacted, and copies of any written requests. Repeatedly sending mail to the same address might not amount to a reasonable effort if the collecting person had other means of contacting the disclosing person, such as a phone number or an email address.
Regarding the offence under s. 239(2.3) to knowingly use, communicate, or permit another to use or communicate a tax identification number other than for a purpose required under the Act or otherwise by law, without the written consent of the disclosing person, CRA noted that it would generally consider this requirement to be met where the disclosing person affirmatively checks any unchecked-by-default checkbox, which is separate from or clearly distinguished from general terms and conditions, using clear and specific language describing the particular use or communication of the tax identification number in question.
Neal Armstrong. Summaries of 2 June 2026 STEP Roundtable, Q.11 under s. 237(2) and s. 239(2.3).
CRA indicates that the possibility of engaging in a notifiable transaction does not establish a filing requirement
On the settlement of a family trust, the beneficiaries include Canadian corporations owned by an individual beneficiary, who may attend a US university and become a non-resident at some point.
CRA indicated that, as no person had yet entered into, or become contractually obligated to enter into, a transaction or a series of transactions that were the same as or substantially similar to the designated transactions in NT2023-02, the above possibility was not sufficient to establish that a notifiable transaction had been entered into, nor did it create any contractual obligation to enter into one – so that no notification through an RC312 filing was yet required.
Neal Armstrong. Summary of 2 June 2026 STEP Roundtable, Q.10 under s. 237.4(4).
Neal H. Armstrong editor and contributor