A 99% interest in a limited partnership (“Third Tier LP”) was held by two U.S.-resident non-profit organizations (the “Tax Exempt Partners”), which were exempt under Art. XXI(1) of the Canada-US Treaty and were “qualifying persons”, through two intermediate partnerships. The remaining 1% interest in Third Tier LP was held by a Canadian-resident corporation (“Canco1”), which was unrelated to the Tax Exempt Partners.

Third Tier LP received timber royalties and rents (the “royalties”) from the exploitation of its Canadian real property by a corporation (“Canco2”) which was related to Canco1. None of the above partnerships carried on a trade or business in Canada, and they were treated as partnerships for US and Canadian income tax purposes.

CRA noted that:

Article IV (7)(a) might apply to deny Treaty benefits on an amount of income, profit or gain received by a resident of one of the Contracting States (e.g., the United States) through an entity that is a non-resident of the United States and that is treated as fiscally transparent in the source state (Canada) but not in the residence state (the United States).

However, that was not the case here as the partnerships were fiscally transparent for US purposes. CRA concluded that royalties derived by the Tax Exempt Partners were exempt from Canadian withholding tax under the Treaty.

Neal Armstrong. Summary of 5 November 2025 External T.I. 2020-0868261E5 under Treaties – Income Tax Conventions – Art. 4.

The taxpayer was subject to tax levied under §4999 of the Internal Revenue Code (IRC), on an excess parachute payment, i.e., compensation over a base amount paid to an employee or independent contractor on a change in control.

In finding that this tax did not qualify as “an income or profits tax” for foreign tax credit purposes, CRA stated:

T]he excise tax was essentially added to discourage the use of excess parachute payments, not as a subordinate measure that is part of a comprehensive income tax regime since that income is already taxed under the regular income tax regime of the IRC.

CRA also found that the §4999 tax did not qualify as a tax covered by Art. II(2)(b) of the Canada-U.S. Income Tax Convention (i.e., it was not a federal income tax or a substantially similar tax), so that Canada was not required to provide a credit for such tax pursuant to Art. XXIV(2)(a)(i) of such Convention.

Neal Armstrong. Summaries of 2 September 2025 External T.I. 2022-0945251E5 under s. 126(7) – non-business income tax, and Treaties - Income Tax Conventions – Art. 2.

Draft s.129(1.3) (contained in January 29, 2026 draft legislation) proposes that, subject to the exclusions in ss. 129(1.31) and (1.32), where a taxable dividend is paid by a corporation (the “payer”) to an affiliated private or subject corporation (the “payee”) that has a balance-due day after that of the payer, the dividend is deemed not to be a taxable dividend for the purposes of s. 129(1) (no dividend refund). Comments of the Joint Committee on these rules include:

• The requirement in s. 129(1.32) that the payee corporation (and grandparent corporations, if applicable) pay one or more taxable dividends of the same character as the suspended dividend, in an aggregate amount at least equal to the amount of the suspended dividend, means that RDTOH balances of the payer can become effectively trapped where the payer lacks sufficient assets to pay the required dividends to unsuspend the dividend.
• As s. 129(1.3) suspends an entire dividend of the payer, even where only a portion of that dividend gives rise to a dividend refund, the requirement that a dividend of the payee corporation exceed the amount of the suspended dividend, rather than only the portion necessary for the refund, increases the risk that dividend refunds may effectively be lost.
• Regarding the requirement (for unsuspending the payer’s dividend) that the dividend paid by the payee corporation (or grandparent corporations, if applicable) must be of the same character, this may not be feasible.
• In particular, it is not always possible for the payee to pay an eligible dividend even where it has received an eligible dividend from the payer, for example, because of a negative GRIP balance.
• Alternatively, if it is not a CCPC, it may have a low LRIP balance that must be fully depleted before it can designate any dividend as an eligible dividend.
• S. 129(1.32) does not unsuspend a dividend where the payor corporation is subject to a loss restriction event (LRE) between the time of the suspended dividend payment and the end of the particular taxation year for which the rule is being applied.
• The exception to the above LRE rule in s. 129(1.31)(b) applies where an LRE occurs within 30 days after the payment of the dividend.
• In some circumstances, a 30-day window may be insufficient - for example, where the corporation being sold is owned by a trust, s. 104(19) deems the trust’s corporate beneficiaries to receive a dividend only at the trust’s taxation year-end, so that a pre-closing purification dividend may need to be paid in the taxation year preceding the sale in order to ensure that the relevant connected status requirements are satisfied.
• Note that s. 256(9) may result in the acquisition of control occurring at the end of the day before the closing date, so that the LRE is deemed to occur before the payment of the dividends to the vendors on the closing date.
• The s. 129(1.32)(b) rule, which is understood to be intended to prevent the same taxable dividends from being used to recover RDTOH in more than one instance, would appropriately be avoided in some situations if the dividend payor could choose to not to recover its own RDTOH in order to avoid tainting the release of a suspended dividend under s. 129(1.32), until it can pay a dividend in excess of the suspended dividend amount.
• However, 2016-0649841E5 indicates that CRA automatically issues a dividend refund where sufficient taxable dividends are paid, even where the dividend payor does not expressly request the refund.

Neal Armstrong. Summary of Joint Committee, “Submission on Tax Deferral Through Tiered Corporate Structures (Part IV refund suspension),” 27 February 2026 Joint Committee submission under s. 129(3.2).

The taxpayer engaged in an upgrading of a Supervisory Control and Data Acquisition (SCADA) system for the remote control of pipeline systems. In finding that the work did not qualify as SR&ED on the basis of not satisfying the test of there being sufficient technological risk or uncertainty, Wong J. stated:

The appellant’s efforts to develop a browser‑based system and move away from using a proprietary brand of hardware was more in the nature of catching up with a browser‑based external world and bringing an outdated system into the 21st century, i.e. product research and development. …

[T]here is no evidence that the appellant used more than routine engineering or standard procedures.

The taxpayer also worked on building a system for driverless trains that would run through a central box system, which the client wanted to operate at a Safety Integrity Level (SIL) of 4. In finding that this qualified as SR&ED, Wong J. stated:

Here, the cumulative uncertainties in creating a central train control box capable of operating at the SIL 4 level combined to form a system uncertainty … . The appellant had no guidance for building a control box capable of detecting zero speed and managing train‑line functions while also operating at the highest safety level.

In applying the proxy method under s. 37(8)(a)(ii)(B) in respect of the qualifying project, which references the payroll of employees engaged “directly” in SR&ED, the taxpayer included 100% of an employee’s remuneration where the employee's work contributed directly to SR&ED; whereas, if the employee's work was considered to be supporting in nature—for example, during a weekly project manager's meeting in which the project would be discussed along with other unrelated projects—the taxpayer applied a 60% factor to the remuneration.

Wong J. found that she could not agree with the Crown's contention that applying a mathematical factor of 0.6 was unreasonable in the circumstances.

Neal Armstrong. Summaries of Willowglen Systems Inc. v. The King, 2026 TCC 7 under s. 248(1) – SR&ED and s. 37(8)(a)(ii)(B).