News of Note
The Joint Committee comments on the August 15 draft legislation
Email this ContentComments of the Joint Committee on the August 15, 2025 draft legislation include:
- Regarding proposed s. 149(13), it is recommended that a de minimis test be introduced so that small nonprofit organizations are not required to file an annual information return.
- The exclusion in the definition of exempt interest financing expense for borrowings that are used to acquire purpose-built residential rentals should be extended to: land that can reasonably be considered to be necessary for the use and enjoyment of such property, and outlays or expenses incurred by the borrower that are included in computing the cost to the borrower of the purpose-built rental or related land.
- S. 85.1(4) excludes rollover treatment for a drop-down described in s. 85.1(3) where there is a “relevant disposition” as part of the same series of the rolled-down shares, property substituted therefor or of property deriving any portion of its FMV from such shares or property – but with a narrow exclusion (i.e., carve-out) for dispositions of shares of a Canadian-resident corporation. Detailed examples are provided to illustrate the proposition that this carve-out rule in s. 85.1(4)(a)(i) (and a similar rule in s. 87(8.3)(b)) should be expanded to include dispositions of property by a Canadian taxpayer (given inter alia that this generates tax to the Canadian system), and dispositions of some types of non-share property such as indebtedness also should not be problematic.
- An exception should also be included in s. 85.1(4)(a)(i)(B) for non-share consideration described in s. 85.1(3)(a), so that the transfer of such non-share consideration (or property that derives its value from such non-share consideration) would not affect the application of s. 85.1(3).
- S. 85.1(4)(a)(ii)(B) describes one of the “bad” transferees for purposes of what is a relevant disposition, namely, a non-resident who is not at arm’s length with the taxpayer throughout the series, but with a safe-harbour carve-out for a controlled foreign affiliate (CFA) of the taxpayer as described in s. 17. This carve-out is problematic because it requires that such CFA not deal at arm's length with the taxpayer throughout the series. For example, where Canco acquires a foreign corporation (CFA2), which thus would not be a CFA at the commencement of the series, and then contributes CFA2 to an existing CFA, CFA2 would not be a CFA of Canco prior to the acquisition of CFA2 for purposes of the above carve-out .
- Where there is a merger of CFAs of Canco, there is no continuity rule deeming the merged corporation to be a continuation of the predecessors. As a result, it could not be considered to be an s. 17 CFA for purposes of the portion of the series preceding such merger.
Neal Armstrong. Summaries of Joint Committee, “August 15, 2025 Legislative Proposals,” Submission of the Joint Committee dated 15 September 2025 s. 149(13), s. 18.2(1) – EIFE, – ATI – D(b), s. 18.2(20). s. 126(4.7), s. 85.1(4)(a)(ii) and s. 85.1(4)(a)(ii)(B).
Toews – Tax Court of Canada finds that an assessment to deny a leveraged donation was statute-barred because CRA could not now substantiate s. 237.1(7.4) penalties
The Minister assessed the taxpayer to fully deny his charitable donation claim for his 2008 taxation year respecting his participation in a leveraged donation scheme (the “Scheme”). This assessment was made in reliance on s. 237.1(6.1), which prohibited a claim by a person in respect of a tax shelter where any person was liable to a penalty under s. 237.1(7.4) which was unpaid (here, four persons had been so assessed) and was made beyond the normal reassessment period in reliance on s. 237.1(6.2), which provided that otherwise statute-barred assessments could be made as necessary to give effect to s. 237.1(6.1). S. 237.1(7.4) provided that every person who, whether as principal or as agent, sells, issues or accepts consideration in respect of a tax shelter before the issuance of a tax shelter identification number (here, none was ever issued) is liable to a specified penalty.
Bodie J found that the Scheme was a tax shelter and, in particular, a gifting arrangement for which the taxpayer incurred a “limited-recourse debt”, as determined under s. 143.2(6.1) given that a certain Mr. Ciccone had told the taxpayer that he would not have to repay the loan made to him. However, although all of the four persons had been assessed for the s. 237.1(7.4) penalty, Bodie J found that the Crown had failed to establish that they were “liable” for such penalty, i.e., had fulfilled the requirements for its imposition.
In particular, although Mr. Ciccone may have promoted the Scheme, there was not real evidence of him (or the other three) “selling” anything, a word which should be “limited to a transfer or exchange for a price and should not encapsulate a meaning comparable to the word ‘promotes’.” There also was a paucity of specific evidence as to the involvement of the four in “issuing anything” or “accepting consideration.”
As the Crown had not established that any of the four was liable to the s.237.1(7.4) penalty, the Minister had not been entitled to rely on s. 237.1(6.2) to reassess beyond the normal reassessment period – so that the taxpayer retained his credit for the full leveraged donation amount.
Neal Armstrong. Summary of Toews v. The King, 2025 TCC 123 under s. 237.1(7.4).
Income Tax Severed Letters 12 September 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Pintal – Court of Quebec finds that the work space percentage of home expenses was based only on the actual hours of business use
The taxpayer operated a daycare center in the basement of the home of her and her partner and, following their move to a second home, the daycare was operated in the basement and part of the first floor of the second home.
She claimed expenses (such as utilities, insurance, maintenance, municipal taxes, and mortgage interest) relating to the use of the residence, based on the relative daycare floor area of 30.2% and 38.5% for the two homes, respectively. Revenue Quebec reduced these deductible expense proportions to 7.5% and 9.6%, respectively, on the basis that the daycare spaces had annual business-use hours of 9.5 hours per day for 228 days of the year which, expressed as a percentage of the total hours in the year, should be applied to the above floor-area percentages.
In confirming the application of the Revenue Quebec percentages, Huppé JCQ stated:
Whether or not she chose to use the spaces dedicated to the daycare for personal purposes does not change the fact that these spaces were located in the very place where she lived and were immediately available to her if she wished. Those spaces were, first and foremost, a residence. It was only incidentally that they also served for daycare during certain specific periods.
He fully confirmed her claims for various other expenses such as food, furniture costs and expenses for taking the children on outings.
Neal Armstrong. Summary of Pintal v. Agence du revenu du Québec, 2025 QCCQ 2913 under s. 18(12).
Franco-Nevada settles its transfer-pricing dispute on the basis of no FAPI, and 30% mark-up for its management charges, re its Barbados and Mexican subsidiaries
Franco-Nevada has settled its appeal of CRA reassessments of its 2013 to 2019 taxation years in respect of its Barbados and Mexican subsidiaries on the basis that:
- it will not be required to recognize any FAPI in respect of those subsidiaries for those taxation years; and
- the service fees charged by Franco-Nevada for certain services provided to those subsidiaries will be adjusted to increase the markup applied to Franco-Nevada's cost of providing those services from the current range of 7% to 20%, to 30%.
Franco-Nevada will not be subject to tax on the additional service fees for those years due to the application of non-capital losses.
Neal Armstrong. Summary of 11 September 2025 Press Release of Franco-Nevada Corporation entitled “Franco-Nevada Reaches Settlement on Canadian Tax Disputes” under s. 247(2).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in March of 2000. Their descriptors and links appear below.
These are additions to our set of 3,316 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 25 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Osagie – Tax Court of Canada finds that the taxpayer was entitled to the new housing rebate because her intention to satisfy its requirements was legitimately frustrated
The taxpayer did not satisfy one of the mandatory requirements for the Ontario new housing rebate (contained in ETA s. 254(2)(g)) because, when the new residential unit in Caledon was ready for occupancy, she leased it to a third party for a number of months before her family moved in, rather than her family being the first occupants.
Bodie J. nonetheless accepted that the new housing rebate was available to her because her intention of occupying the property from the outset as her place of residence had been frustrated due to COVID-related challenges. He stated that “the family had no real choice but to stay in Windsor until the conditions caused by the pandemic stabilized and to earn rental income from their unoccupied property in the interim.” He refrained from discussing principles of statutory interpretation.
Neal Armstrong. Summary of Osagie v. The King, 2025 TCC 114 under ETA s. 254(2)(g).
CRA rules on the use of s. 107.4(1) to effect the spin-off by a REIT of a portion of its operations to a new REIT
CRA ruled on a transactions for the spin-off by an existing REIT of a portion of its operations (the “Segment”) to a newly formed REIT.
In addition to numerous transactions to properly package the Segment, the Plan-of-Arrangement transactions included the REIT settling the New REIT, subscribing a modest amount (in the form of a REIT note issued by it to New REIT) in consideration for New REIT units equal in number to the number of outstanding REIT units, distributing a modest amount of cash to a depositary for its unitholders, and selling its units of the New REIT to the unitholders for such cash. At that point, New REIT might just marginally exceed the numerical thresholds in Regs. 4801 and 4803.
The REIT was then to transfer the Segment to New REIT in a gratuitous transfer that apparently was intended to qualify as a “sideways” transfer in accordance with s. 107.4(2), with CRA ruling that the transfer would be a “qualifying disposition” under the definition in s. 107.4(1), so that the rollover rules in s. 107.4(3) could apply.
The proposed transactions also contemplated that the “Investor” (a tax-exempt resident, perhaps a pension corporation) would transfer a significant portfolio of properties to New REIT in consideration for New REIT units, including non-voting Series B units that were convertible into the “regular” Series A listed units.
CRA also ruled that the transactions would not by themselves adversely affect the qualification of the REIT as a mutual fund trust. This, inter alia, was adverting to the proposed giving by the REIT of an indemnity to the subsidiaries of New REIT to make them whole if any residual guarantees of Segment entities in respect of properties retained in the REIT entities were called upon.
Neal Armstrong. Summary of 2021 Ruling 2021-0894161R3 under s. 107.4(1).
CRA publishes substantial changes to the VDP
CRA has substantially amended its ITA Circular and GST/HST Memorandum on the voluntary disclosure program (VDP). It has ditched the concept of the “Limited Program,” e.g., not waiving any interest if there is some indication of intentional conduct or, perhaps, if the taxpayer is large and sophisticated.
CRA now recognizes two categories of voluntary disclosure, with corresponding scaling of the degree of relief. If the VDP application was “unprompted”, then the application will be eligible for the "general relief," i.e., receiving 75% relief of the applicable interest and 100% relief of the applicable penalties. Where there is a “prompted” application, the applicant will receive 25% relief of the applicable interest and up to 100% relief of the applicable penalties. (As before, where there is a “wash transaction” for GST/HST purposes, there is 100% interest relief.)
An unprompted application includes one made following an education letter or notice that offers general guidance and filing information related to a particular topic such as unreported income or ineligible expenses. A prompted application would include an application made following verbal or written communication about an identified compliance issue related to the return or other disclosure, or one made after CRA had already received information from third-party sources regarding the potential involvement of the taxpayer or a related taxpayer in tax non-compliance.
The applicant should include documents for foreign-sourced income or assets for the most recent 10 years, for Canadian-sourced income or assets for the most recent six years, and for the most recent four years regarding information about GST/HST.
CRA indicates that these changes to the VDP will come into effect on October 1, 2025, and that applications received prior to that date will be considered for VDP relief under the old guidelines. Presumably, somebody will make an application for judicial review if CRA rigidly refuses to apply the more generous relief regarding applications that were made prior to October 2025.
Neal Armstrong. Summary of IC00-1R7 dated 10 September 2025 under ITA s. 220(3.1) and summary of GST/HST Memorandum 16-5-1 dated 10 September 2025 under ETA s. 281.1(1).
Income Tax Severed Letters 10 September 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
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Neal H. Armstrong editor and contributor