News of Note
CRA provides general guidelines on how to allocate foreign tax to a short Canadian tax year for FTC purposes
Email this ContentA CCPC (“Canadian Target”), which previously had a calendar taxation year, loses its CCPC status on May 1 as a result of an arm’s length US corporation (“US Buyer”) agreeing with it that it will cause a Canadian subsidiary of US Buyer (“US Buyer Sub”) to purchase its shares, thereby causing the “First Stub Year” to end pursuant to s. 249(3.1). That purchase occurring on 11:06 am on November 30 causes the ‘Second Stub Year” to end pursuant to ss. 249(4)(a) and 256(9). Moments before the end of the Second Stub Year, Canadian Target realizes a gain that is subject to FIRPTA tax as a result of closing the sale to US Buyer of its US subsidiary (“US Target”), which continues to have a calendar taxation year.
In order for an FTC to be available to Canadian Target pursuant to s. 126(1), the U.S. tax paid needs to be “for the year” in which the credit is claimed. CRA indicated that the relevant question here was how the foreign tax should reasonably be allocated among the Canadian taxation years that overlapped with the foreign fiscal period.
Here, as Canadian Target’s only U.S. tax liability was attributable to the capital gain realized immediately prior to 11:06 am on November 30, and that gain fell within Canadian Target’s Second Stub Year, it appeared reasonable to allocate all of the U.S. tax relating to that gain to Canadian Target’s Second Stub Year.
More generally:
- The allocation exercise referred to above is one essentially of looking at the amount of the income that drives US tax, and the equivalent income that drives Canadian tax, and then trying to achieve a match.
- To do that, the stream of income must be examined. If there is an even distribution of earnings throughout the year, then that would call for a daily proration. If the income is from a seasonal business, a more reasonable approach would be to match that season to the Canadian tax period. If the income comes from a single discrete event, the date of that event should determine the Canadian tax timing.
- CRA expects consistency in the approaches used, although unusual income events (like an extraordinary lump-sum payment) may warrant an unusual approach.
Neal Armstrong. Summary of Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.7 under s. 126(1).
CRA doubts that Canco can claim an FTC for a US sub’s distribution that produces a capital gain but is treated under the Code as a distribution out of E&P subject to US withholding tax
The repurchase by a US subsidiary (“USCo”) of shares of USCo held by its Canadian parent (“CanCo”) gave rise to a capital gain for Canadian purposes and to a dividend subject to 5% withholding tax for U.S. purposes. Could CanCo claim a foreign tax credit “FTC”) under s. 126(1) for such tax?
CRA noted two conditions for the FTC. First, there must be “qualifying income” from a source in the US. Second, it must not be a foreign tax that “can reasonably be regarded as having been paid by the taxpayer in respect of income from a share of the capital stock of a foreign affiliate of the taxpayer.”
Regarding the first condition, as the distribution was taxed as a dividend by the US, Art. X(3) of the Treaty indicated that it could be taxed by the US as such. Therefore, the dividend was deemed to “arise” in the US by Art. XXIV(2)(a) of the Treaty. Although that provision begins with the words “subject to the provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in [the US],” the “arising” sourcing language in Art. XXIV(2)(a) is similar to the “qualifying incomes” domestic definition referring to income “from sources” in the US – leading to the conclusions that the first condition was met.
The second condition was to be interpreted in light of its main objective, of preventing a taxpayer from claiming relief from taxation under the Act twice respecting the same source of income – once as a s. 113(1) deduction and again through an FTC. Here, if the US tax was based on earnings and profits, and those earnings were also captured in a surplus account in Canada, thereby supporting a s. 113 deduction, there would be such a resulting double benefit, and CRA would deny the deduction.
Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.6 under s. 126(1).
CRA indicates that on the partial repayment of USD debt with forgiveness of the balance, the s. 39(2) gain or loss is computed on a net basis.
How is a gain or loss under s. 39(2) computed where a foreign currency-denominated debt is partly repaid, with the remaining principal amount being forgiven?
For instance, a taxpayer borrows U.S.$1,000,000. On maturity, U.S.$300,000 of the principal amount is repaid, and the balance is forgiven. On the issuance date, the spot rate is U.S.$1.00 equals Cdn. $1.25; and on the maturity date, U.S.$1.00 equals either Cdn.$1.50, or Cdn.$1.00.
CRA noted that Agnico-Eagle computed the s. 39(2) gain or loss on the repayment of a debt issued at its FX face amount by comparing A – B, where:
- A is the issuance (i.e., borrowing) amount, and
- B is the repayment amount,
with the amounts borrowed and repaid in foreign currency being converted to Cdn. dollars using the respective spot rates on the two dates.
CRA also noted its historical position that no foreign exchange gain or loss arises in the context of a debt forgiveness because there is no transaction that would result in realizing such a gain or loss.
CRA then indicated that in the situation where a foreign exchange indebtedness is partially repaid and partially forgiven, s. 39(2) and s. 80 each apply to their respective portions of the indebtedness. Accordingly, in the above example, the formula is adjusted by reducing A by the forgiven amount of U.S.$700,000. Thus, in the first scenario, there is a capital gain under s. 39(2) of $75,000 (1.25*$300,000 – $300,000); and in the second scenario, there is a loss of $75,000 (1.25*$300,000 – 1.5*$300,000).
The above formula would have to be further adjusted, for example, where the debt was issued at a discount or premium.
Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.5 under s. 39(2).
Income Tax Severed Letters 20 May 2026
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
When issuing a s. 116 certificate, CRA will not require s. 116 withholding on the portion of redemption proceeds generating a deemed s. 84(3) dividend
A corporation resident in Canada redeems shares held by a non-resident, resulting in a deemed dividend under s. 84(3) and the application of the s. 116 rules.
CRA noted that there is no carve-out for a deemed dividend (such as that found in s. 54 - “proceeds of disposition” – (j)) from the application of the s. 116 rules to the total redemption proceeds. Thus, there would be a required remittance under s. 116(5) of 25% of the total redemption proceeds notwithstanding that the deemed dividend portion was also subject to Part XIII withholding.
However, there is an existing CRA position in respect of deemed dividends that arise under s. 212.1. According to this position, the amount of the required remittance under s. 116 where a certificate is issued will not apply to the base on which the s. 212.1 Part XIII remittance was computed, i.e., it will not apply to the deemed dividend portion of the proceeds. This position, which was previously applicable to s. 212.1, will now be extended, and IC72-17R6 will be amended accordingly.
That said, until such time as a s. 116 certificate is issued, the required remittance under s. 116(5) will remain at 25% of the cost to the purchasing corporation, including the deemed dividend portion. As a result, there will be a double remittance until the s. 116 certificate is granted.
Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.4 under s. 116(5).
CRA no longer considers that s. 116(5) could apply to a s. 51(1) exchange
IC72-17R6, para. 40 states that although ss. 116(1) and (3) do not apply to a s. 51(1) exchange of shares of a corporation because there is no “disposition” of the shares, there nonetheless is an “acquisition” of shares by the corporation, so that s. 116(5) may apply if the shares are taxable Canadian property (“TCP”).
After agreeing that ss. 116(1) to (4) do not apply because there is no disposition, CRA went on to indicate that the purchaser referred to in s. 116(5) is someone to whom property is disposed of. Therefore, where s. 51(1) applies, there is no purchaser because there is no disposition.
On this basis, CRA has changed its position and concluded that no remittance is required pursuant to s. 116(5) on a s. 51(1) exchange. The previous position in IC72-17R6, para. 40, will be amended accordingly.
Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.3 under s. 116(5).
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 3,568 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).
CRA finds that crypto is not “goods” for s. 95(3)(b) purposes
A foreign affiliate of Canco provided investment management and trading execution services to Canco in relation to Canco’s Canadian cryptocurrency trading business.
Does the exception in s. 95(3)(b) from the application of s. 95(2)(b) for “services performed in connection with the purchase or sale of goods” apply in relation to cryptocurrencies? After referring inter alia to Canadian Wirevision, which essentially found that “goods” referred to “tangible movable property” and to the anti-base erosion objective of the s. 95(2)(b) rules, which would be satisfied where the services, by their nature, were required to be performed outside of Canada, but not here where such services could be performed in Canada, CRA concluded that cryptocurrency, being intangible property, was not “goods.”
Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.2 under s. 95(3)(b).
CRA indicates that s. 84(2) generally does not apply to a payment made by Amalco to a shareholder dissenting to the amalgamation
A shareholder dissents to an amalgamation and receives a payment from the amalgamated corporation for the fair value of its shares. Would s. 84(3) apply?
After noting its longstanding position that s. 84(3) would not apply to a payment made to a shareholder dissenting to an amalgamation by the amalgamated corporation, so that capital gains treatment would apply, CRA went on to indicate that it would not generally view such payments as falling under s. 84(2).
However, if it determined that applying s. 84(2) was necessary to give effect to the provision’s underlying anti-avoidance purpose, then it may be invoked.
Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.1 under s. 84(2).
CRA postpones the implementation of its new GST/HST policy on trailing commissions
In 22 December 2025 GST/HST Interpretation 246664, CRA rejected a submission that GST/HST did not apply to dealer trailing commissions earned by a dealer (the “New Dealer”) who is not the dealer (the “Original Dealer”) who arranged the sale and issuance of the subject mutual fund trust units or shares, and concluded:
Effective July 1, 2026, mutual fund trailing commissions paid by [mutual fund] Managers to both Original Dealers and New Dealers will generally be subject to GST/HST.
However, on May 13, 2026, the CRA verbally informed various industry groups that it intends to grant a material extension to the implementation deadline for this new policy; and that it will provide further details regarding the enforcement of its administrative position in a notice to be published by the end of the month.
Neal Armstrong. Summary of EY Tax Alert – Canada, “CRA intends to postpone new administrative position on GST/HST treatment of trailing commissions,” 2026, Issue No. 30, 14 May 2026 under ETA s. 123(1) – asset management service.
Neal H. Armstrong editor and contributor