News of Note
Castro – Quebec Superior Court grants judicial review of an ARQ refusal to backdate a QST registration by more than 30 days
Email this ContentAfter a long and difficult history (see, e.g., Castro) the Castros requested in 2023 that the ARQ retroactively register, for QST purposes, a corporation to which they had transferred real estate in 2010. They hoped that, by virtue of such retroactive registration, the corporation would now be the one liable for the QST on the transfer, be able to claim a corresponding input tax refund, and that the ARQ assessments of them in 2016 for failure to charge QST on the 2010 transfer could be annulled.
The ARQ refused the request on the basis that they had not complied with the relevant ARQ Bulletin requiring that either the retroactive backdating not exceed 30 days or that the applicants demonstrate that, on the transfer date, the corporation had been obligated to register for QST purposes (the "Decision").
The Castros now sought judicial review of the Decision (and sought review in the Federal Court of the corresponding CRA refusal).
Vaillancourt JCS noted that the Quebec equivalent of ETA s. 241(1) did not place limits as to the discretion of the ARQ as to what extent to retroactively register a taxpayer, referred to Stemijon as authority for the proposition that “[i]t is a well-established legal principle that a decision based solely on policy, and not on the law, cannot be considered reasonable” and then stated:
For this reason alone, the Decision must be considered unreasonable. The Minister refused to exercise his discretion, while the decision-maker believed that the request could not be accepted due to a requirement that is not found in the statute. He improperly concluded that the Bulletin limited his discretionary power and, in doing so, he refused to exercise his discretion.
After noting various arguments of the ARQ suggesting that the Castros’ position “rested on fragile grounds”, he indicated that this did not matter because none of such considerations were addressed in the Decision. The Decision was remitted to the ARQ for reconsideration.
Neal Armstrong. Summary of Castro c. Agence du revenu du Québec, 2025 QCCS 3494 under ETA - s. 241(1).
LBL – Federal Court of Appeal finds that tobacco sales to a reserve Indian for flash resale to the ultimate customers were exempted under the Indian Act
A Sobeys subsidiary (“LBL”) sold $98 million of tobacco products during a 14-month period to a status Indian (Ms. MacNaughton) operating a variety store on an Indian reserve. As soon as LBL delivered the products to the store vicinity, and it received the cash consideration, the products were loaded onto the waiting trucks of customers, in turn, of Ms. MacNaughton.
Before going on to confirm that the sales by LBL were exempted under s. 87 of the Indian Act, Woods JA noted that the parties had framed the issue before her as one of whether Ms. MacNaughton was the recipient of the tobacco products, i.e., the one liable to pay the consideration therefor, and suggested that the s. 87 exemption instead required that the products have become the personal property of Ms. MacNaughton. She then stated:
I have concluded that it is sufficient for the purpose of this appeal to consider whether the Tax Court erred in finding that the Products were sold and delivered to Ms. MacNaughton. Quite simply, the “owner” and the “recipient” are bound to be one and the same person in this case.
On this basis, she concluded that the Tax Court had not made a palpable and overriding error in finding that the products had been sold and delivered by LBL to Ms. MacNaughton, given the evidence before the Tax Court that:
- the witnesses considered Ms. MacNaughton to be LBL’s client;
- the documentary evidence was largely supportive of that view; and
- the flash resales to the customers were a common type of sale.
Neal Armstrong. Summaries of Canada v. LBL Holdings Limited, 2025 FCA 186 under General Concepts – Ownership, Indian Act s. 87 and Federal Courts Act, s. 27(1.3).
Income Tax Severed Letters 5 November 2025
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in January of 2000. Their descriptors and links appear below.
These are additions to our set of 3,361 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).
CRA issues a Memorandum on the purpose-built rental housing rebate
CRA has issued a new GST/HST Memorandum on the purpose-built rental housing rebate. Points include:
- The requirement to have commenced construction after September 13, 2023, is interpreted as commencing the excavation for the project after that time, so that a prior excavation-commencement date would disqualify even if there was a subsequent change of owner and in the basic nature of what was being constructed.
- A unit owned by the owner of a multiple-unit residential complex (MURC) would not have a qualifying residential rental use for the purposes of the prescribed property definition, so that such unit would be required to represent under 10% of the units in the MURC in order for the MURC to be prescribed property.
- The deemed substantial renovation rule under subsection 190(1), where all but not a portion of a building is converted from commercial use (e.g., office use) to residential use, can qualify as a substantial renovation for purposes of engaging the rebate. This assumes that the property was not in the process of being constructed and was not being used at all as a residential complex on September 13, 2023.
Neal Armstrong. Summaries of GST/HST Memorandum 19-3-9, Purpose-built Rental Housing Rebate, 3 November 2025 under ETA s. 256(3.1), Real Property (GST/HST) Regulations. s. 4(2), s. 4(2)(b), s. 3.
0808414 B.C. – Federal Court of Appeal finds that the proceeds of depreciable property were not reduced by assumed pension obligations
The taxpayer sold a contract-manufacturing business to an affiliated Canadian company. Although it conceded that the FMV of the (Class 29) machinery and equipment included in the sale would have been $56.5 million if sold alone, it argued that such FMV should be reduced by the estimated amount of the pension obligations assumed by the purchaser ($8.2 million) since the business was sold as a going concern.
After referring to Daishowa‑Marubeni, Webb JA stated:
[T]he pension obligations were not imbedded in the Equipment, they arose because the vendor had pension obligations to its employees. …
[I]n applying section 69 of the Act, the proceeds of disposition are not determined for the business per se, but rather separately for each particular asset comprising the business … that was sold. The pension obligations and any other liabilities or obligations assumed by the purchaser would be part of the consideration paid for the various assets. Such obligations and liabilities would not reduce the fair market value of the Equipment.
Neal Armstrong. Summary of 0808414 B.C. Ltd. v. Canada, 2025 FCA 193 under s. 69(1)(b).
CRA finds that s. 84.1(2.31)(g)(i) accommodates a transfer of management (including part management) by a parent to both a child and a 3rd party
Aco, wholly-owned by Mr. A, held 60% of the units of a general partnership (SENC) and Bco, wholly-owned by an arm’s length third party, held the other 40%. On January 1, 2025, Mr. A sold 55% of the shares of Aco to a corporation controlled by his son (Cco) and the remaining 45% to Bco.
At issue was the condition in s. 84.1(2.31)(g)(i) (the “Condition”) which, in context, required that, within the 36 month (or longer) period following the disposition to Cco, the taxpayer (Mr. A) must have taken reasonable steps to transfer the “management” (as defined in s. 84.1(2.31(i)) of each relevant business of Aco and of any relevant group entity (SENC) to his child.
CRA stated:
In practice, it is not uncommon for more than one person to be involved in directing or supervising the activities of a business. The Condition does not require that the parent be the sole or principal person involved in the management of the business within the meaning of paragraph 84.1(2.31)(i). Nor does the Condition preclude a person from transferring the management of a business in which the person is involved to more than one person.
… If … it were shown that Child would exercise a sufficiently significant power previously exercised by Mr. A in relation to the business of Aco and SENC, either alone or with Mr. B, following the disposition of the Shares, we believe it would be possible to establish that Mr. A had transferred the management of Aco to Child for the purposes of the Condition.
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.15 under s. 84.1(2.31)(g)(i).
CRA indicates that the equivalence of cash held to future years’ expenses is insufficient to establish that such cash was used in the business
In the course of its active services business, Opco contracted to provide services to an unrelated third party in consideration for $100,000 received in cash at the time of the agreement, of which it expected to use $80,000 to cover ongoing expenses during the three-year term of the contract (for a net profit of $20,000) – but with no contractual restriction as to its use of the $80,000 cash.
In doubting that it followed from this that the $80,000 portion of the cash deposited was to be considered as an asset used principally in an active business carried on by Opco for purposes of (c)(i) of the QSBCS definition, CRA referred to the Ensite decision, and then stated:
In determining whether cash (cash on hand, short-term investments, etc.) can be considered to be an asset used principally in an ABCO [active business carried on] the test is not to compare the total amount of such cash with the potential expenses that the corporation may incur in the coming years, but rather to determine whether its withdrawal could have a destabilizing effect on the business’s operations or whether its holding is necessary to satisfy a condition that must be met before engaging in commercial activities.
… [A] permanent accumulation of cash in excess of a company's reasonable needs for working capital will generally not be considered to be an asset used principally in an ABCO.
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.14 under s. 110.6(1) – QSBCS – (c)(i).
CRA indicates that there is only one penalty month if an election due on February 28 was filed on or before March 31 of the following month
A corporation, whose deadline for filing an s. 85(1) election was the last day of February (February 28), did not file the election until March 28 (or 31) of the next month. RCT 85-243, after referring to the Interpretation Act, stated that “[in] calculat[ing] from a particular date a month is that period of time from that date to the day before the same date in the next month on the calendar”. On this basis, the number of “each month or part of a month” from February 28 to the March 28 (or 31) filing date for purposes of computing the s. 85(8) penalty would be two, i.e., the period to March 27 would constitute one complete month, and the period consisting of March 28 (or March 28 to March 31) would be a part of a month.
CRA indicated that the above approach did not represent its current practice, and the penalty would be based on there only being one penalty month. After referring to ss. 85(6) and 85(8), it stated:
[T]he analysis of the provisions listed above favours an interpretation whereby the calculation of the number of "each month or a part of a month" in the period must exclude the date on which the election must be made, but include the date on which the election is made.
Thus, where an election must be made no later than the last day of a particular calendar month, the month in question ends on the last day of the subsequent calendar month.
Neal Armstrong. Summary of 9 October 2025 APFF Roundtable, Q.13 under s. 85(8).
CRA finds that a conditional contractual obligation to issue shares in consideration for a cash advance might be subject to s. 49.1 on the share issuance
A SAFE (“Simple Agreement for Future Equity”) is a financing agreement in which an investor provides funds to a company in exchange for the right to receive shares upon the occurrence of a future event, generally a future financing or a winding-up event, at a preferential price.
CRA indicated that, assuming the SAFE was not a share, or a bond, debenture or note, the future issuance event would not come within s. 51(1). However, s. 49.1 was also relevant to the question as to whether the conversion of a SAFE into shares, and it was conceivable that there would be no disposition on such conversion.
Neal Armstrong. Summaries of 9 October 2025 APFF Roundtable, Q.12 under s. 51(1) and s. 49.1.
Neal H. Armstrong editor and contributor