News of Note
CRA finds that the fresh-start rule re a change of an active to an investment business is inapplicable where there also is a “fundamental change” to that business
Email this ContentA wholly-owned foreign affiliate (FA 1) of the taxpayer had carried on a business of distributing a product that had been manufactured by another foreign affiliate of the taxpayer (Producer FA). FA 1 held the trademark and other intellectual property (IP) relating to the product, and provided a royalty-free licence to Producer FA (and another FA providing distribution services) for their use of such IP in connection with the product.
However, on the “Change-in-Business Date,” a new, wholly-owned foreign affiliate (FA 2) of the taxpayer became the distributor of the product and began making royalty payments to FA 1 for its use of the IP. As these royalties were the only income stream for FA 1 after that date, FA 1 now carried on an investment business.
Whether the fresh start rules in s. 95(2)(k.1) applied, so that the taxpayer could rely on Reg. 5907(2.9) and those rules to increase the exempt surplus of FA 1 on account of a gain realized on a deemed disposition of the IP for its FMV, turned on whether such investment business of FA 1 was to be regarded as the business that it had carried on (as an active business) prior to the Change-in-Business Date.
In rejecting this proposition, the Directorate stated:
[W]hile retaining the elements of a business, they can be so materially altered that in effect the changes give rise to a new type or new field of business. … [W]hile after the Change-in-Business Date FA 1 continued to hold the Original IP as its main asset, it no longer used it in a distribution business, but rather it used it in its new licensing business instead.
… [I]t would be reasonable to conclude that … FA 1 had a fundamental change in its business - it ceased carrying on its distribution business and entered into a new field of business, which is not of the same kind and type as, and not a continuation of, the business it carried on before the Change-in-Business Date. This change to the business operations of FA 1 … would go beyond the change in nature of a business from active to passive contemplated in paragraph 95(2)(k).
The effect of this interpretation is to render it highly uncertain when s. 95(2)(k.1) applies.
Neal Armstrong. Summary of 10 February 2023 Internal T.I. 2019-0816681I7 under s. 95(2)(k).
Income Tax Severed Letters 22 April 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that limitations on withdrawals from a privately-funded RDSP may potentially be overcome through requesting a lump-sum withdrawal
Regarding how withdrawal limitations under the s. 146.4 rules might apply where the beneficiary of an RDSP had Down syndrome and a life expectancy of 60 years, CRA indicated:
- Lifetime disability assistance payments (LDAPs), as defined in s. 146.4(1), are required by s. 146.4(4)(k) to begin no later than the end of the taxation year in which the beneficiary turns 60. Furthermore, the effect of the formula in s. 146.4(4)(l) is to ensure that the RDSP's property is not exhausted before the beneficiary reaches the age of 80 (and that it will be mostly, but not completely, depleted via LDAPs at that age).
- Where the plan permitted disability assistance payments (DAPs) that were not LDAPs (“non-LDAPs”), such payments could be requested for various reasons, including where the beneficiary was in financial distress.
- Additionally, the holder of the RDSP could request that the issuer terminate the RDSP if the only property in the plan was the assistance holdback amount (AHA); and conversely, if the FMV of the property held in the RDSP exceeded the AHA, the RDSP could not be terminated until this excess was fully eliminated.
- However, this excess amount could be withdrawn through the payment of a non-LDAP, assuming the plan allowed for such payments (and if the plan did not permit non-LDAPs, the holder could consider transferring the property - on a tax-deferred basis, if s.146.4(8) was satisfied - to a financial institution offering terms allowing for non-LDAPs.)
- Additional considerations applied under an RDSP that was primarily government-assisted.
Neal Armstrong. Summaries of 2 December 2024 External T.I. 2023-0973581E5 under s. 146.4(4)(l) and s. 146.4(4)(n).
We have translated 5 more CRA interpretations
We have translated a further 5 CRA interpretations released in June of 1999. Their descriptors and links appear below.
These are additions to our set of 3,535 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 26 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Burlington Loan Management – English Court of Appeal finds that purchasing an interest claim on the basis of treaty exemption did not indicate a purpose of “taking advantage” of that exemption
BLM, a substantial Irish-resident investment company, purchased a proved claim to post-administration interest in the administration of Lehman Brothers International (Europe) ("LBIE" – a UK resident) from an unrelated Caymans company (“SICL”) for a cash purchase price which exceeded what SICL would have received in light of UK withholding tax of 20% - but generated an 8% profit to itself because of the withholding tax exemption under the UK-Ireland treaty. Art. 12(1) provided:
Interest derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State.
HMRC denied BLM’s refund claim on the basis of Art. 12(5) of that Treaty, which excluded the application of Art. 12 “if it was the main purpose or one of the main purposes of any person concerned with the … assignment … to take advantage of … Article [12].
Snowden LJ found that although BLM was relying on Art. 12(1), the Art. 12(5) exclusion nonetheless was not engaged. He stated:
[T]o "take advantage" of a provision such as Article 12(1), within the meaning of an anti-abuse provision such as Article 12(5), cannot simply be synonymous with to "obtain the benefit" of that provision. That would have the result that the treaty would be self-defeating. …"[T]o take advantage of" the article in question must mean obtaining the benefit of the article in a way that is contrary to the object and purpose of the treaty. …
[G]enerally, one of the principal objectives of the UK-Ireland Treaty was to promote the movement of capital between the UK and Ireland by the elimination of double taxation. In the current context, the movement of capital in question was the payment of interest on the SAAD Claim from a source in the UK. … [E]nabling BLM, as a resident of Ireland, to bid a higher price to acquire the SAAD Claim on the assumption that it would only be taxed on those monies in Ireland and not also in the UK was precisely in line with the objects and purposes of the UK-Ireland Treaty.
Snowden LJ went on to indicate that “Article 12(5) would plainly have been engaged” if, instead, SICL had, for instance, incorporated a wholly-owned Irish subsidiary and had contributed the SAAD Claim to it so as to allow the subsidiary to claim the Art. 12(1) exemption.
Neal Armstrong. Summary of Revenue and Customs v Burlington Loan Management DAC [2026] EWCA Civ 461 under Treaties – Income Tax Conventions – Art. 12, Art. 3.
Global Real Assets Trust is proposing to issue preferred units in order to reduce or eliminate gating for its current units
Although GRAT (which has over 80% of its NAV invested in illiquid private real estate and infrastructure assets held outside Canada) has suspended cash redemption of its various series of units (the “Units”), it is proposing to issue preferred units (the “Preferred Units”), with the proceeds used in part to implement a “Special Redemption Transaction” under which it would honour redemption requests for Units at a redemption price equal to 100% of the applicable series NAV, subject to specified conditions.
The Preferred Units themselves will have a commercially unattractive quarterly redemption right.
GRAT’s income and net taxable gains for ITA purposes will generally be allocated to the holders of Units and Preferred Units in the same proportion as the distributions received by them. Counsel considers that, although there is risk on the point, s. 104(7.1) of the ITA should not apply.
Neal Armstrong. Summary of Preliminary prospectus of Global Real Assets Trust (“GRAT” or the “Trust”) for issuance of 6.85% cumulative redeemable Series 1 Preferred Units (the “Preferred Units”) under Offerings – REIT, Trust and LP Offerings – Preferred Unit Offerings - MFTs.
Frontera proposes to sell its Columbia oil and gas business and distribute most of the cash proceed as a RoC distribution
Frontera, a TSX-listed corporation, is expected to sell, pursuant to a BC Plan of Arrangement, all of its Colombian oil and gas business to Parex Resources, an Alberta TSX-listed corporation. This would be accomplished through the sale of a Swiss holding company to an Alberta Buyco subsidiary of Parex. The consideration will consist of approximately US$500 million in cash, the assumption of unsecured notes in the amount of US$310 million, and a contingent payment of US$25 million if a Colombian authority agrees to extend a key agreement within one year of the completion of the Plan of Arrangement.
It is contemplated that, outside of the Plan of Arrangement, most of the US$500 million in cash will be distributed to Frontera shareholders as a return of capital. The US$25 million contingent payment, if received before the amount of the return of capital distribution is finalized by the Frontera Board of Directors, will also be included in the RoC distribution. Otherwise, that payment likely would be distributed as a dividend or through a share buyback. (S. 84(4.1)(b) requires that a sales proceeds PUC distribution must be made on a one-off basis.)
Following the above transactions, Frontera will continue to hold, through subsidiaries, significant infrastructure assets in Colombia.
Neal Armstrong. Summary of Circular of Frontera Energy Corporation ("Frontera") respecting an arrangement with Parex Resources Inc. ("Parex") and Parex AcquisitionCo Inc. (“Purchaser”) under Spin-offs and Distributions - Ss. 84(4.1)(a) and (b) distributions of proceeds.
CRA rules on a PUC increase and distribution from a Canadian qualified REIT subsidiary of a US REIT so as to skirt Art. IV(7)(b) of the Canada-US Treaty
A corporation (the “Corporation”), which has elected to be taxed as a REIT for US tax purposes and is a qualifying person for purposes of the Canada-US Income Tax Convention (the “Treaty”), wholly owns a Canadian holding company (“CS1”) which, in turn, wholly owns a Canadian operating subsidiary (“CS2”). CS1 and CS2 are qualified REIT subsidiaries and fiscally transparent for U.S. tax purposes.
CS1 will increase the corporate capital of its shares in an amount not exceeding its retained earnings, and then distribute an equal amount of capital to the Corporation in cash (less the amount of Part XIII tax withheld and remitted by it). The resulting deemed dividend will not be included in the income of the Corporation under U.S. tax law, nor would such an amount be included in its income if CS1 were not fiscally transparent.
Rulings by CRA included that Art. IV(7)(b) of the Treaty will not apply to treat the above dividend as not having been paid to or derived by the Corporation, and that the 5% withholding rate pursuant to Art. X(2) will apply.
Neal Armstrong. Summary of 2024 Ruling 2023-0984461R3 under Treaties – Income Tax Conventions – Art. 4.
CRA finds that a company that hauled (but did not cut) timber did not generate a logging tax credit
A hauling company transported the cut timber owned by another company from the cut block to the sawmill for volume-based fees.
Under s. 2 of the Logging Tax Act (B.C.), a taxpayer was required to pay logging tax equal to the lesser of 10% of its income derived from logging operations in BC and 150% of the credit that would have been allowable under s. 127(1) of the ITA.
The generating of the logging tax credit under s. 127(1) depended upon the taxpayer having “income for the year from logging operations in the province” as defined in Reg. 700(1), which was not the case for the hauling company because it did not cut or sell timber.
Accordingly, its logging tax credit (and, by implication, its B.C. logging tax) was nil.
Neal Armstrong. Summary of 19 November 2025 External T.I. 2025-1082241E5 under Reg. 700(1).
CRA rules that a taxable capital gain from closing on a sale of Chinese private company shares in China “arose” in China
The taxpayer, who was a citizen of China, wished to sell his minority shareholdings in three private Chinese manufacturing companies to his mother (a citizen and resident of China) after he had become a resident of Canada. In accordance with the practices for sales of private company shares in China, the closing for the sale of the shares for cash would occur on the premises of the Chinese private companies.
Since the taxpayer is a non-resident of China for Chinese income tax purposes, he is taxed in China only on his Chinese-sourced income pursuant to the domestic Chinese income tax law. For these purposes, Income derived from the transfer of property located within China is deemed to be income sourced from China under such domestic law.
CRA ruled that:
- The taxable capital gain from the taxpayer’s disposition of his shares will be sourced to China for purposes of s. 126(1)(b) and the determination of “qualifying income” in ss. 126(7) and (9).
- To the extent that the gain arises in China under Chinese income tax law, the gain will be considered to have arisen in China under Articles 13(5) and 21(4) of the Treaty. (In this regard, the CRA summary states that, for the purposes of Article 13(5) of the Treaty, “the word ‘arise’ has the meaning that it has under Chinese income tax laws pursuant to Article 3(2) of the Canada-China Income Tax Treaty.”)
Neal Armstrong. Summary of 2024 Ruling 2023-0976381R3 under s. 126(1)(b).
Neal H. Armstrong editor and contributor