9 October 2025 APFF Roundtable

This page contains our translation of the questions posed at the 9 October 2025 APFF Federal Roundtable held at the Manoir Richelieu in Charlevoix, Quebec together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers (which were orally presented by Jean-François Benoit, François Fournier-Gendron and Jean Lafrenière).

The 9 October 2025 Financial Planning Roundtable is provided on a separate page.

The written answers of CRA contain a detailed disclaimer that they are provisional.

Q.1 Capital dividends and inclusion rate for 2024

As a result of the announcement that the capital gains inclusion rate will remain at 50% for 2024, corporations that paid a capital dividend on a gain realized after June 24, 2024 will have to recalculate their capital dividend account ("CDA") based on the 50% inclusion rate.

Those who realized a capital gain before June 25, 2024 ("Period 1" under the 2024 Budget) and a capital loss after June 24, 2024 ("Period 2" under the 2024 Budget) may have paid an excess capital dividend, since the CDA reduction due to the loss realized in Period 2 will be greater than expected (50% instead of ⅓).

In the September 2024 Notice of Ways and Means Motion [1] . ("NWMM"), rules were provided to adjust the 2024 CDA at year-end, based on the effective inclusion rate for the year. Those rules made it possible to avoid the excess dividend penalty in such a situation where the inclusion rate applicable to the loss turned out to be higher than the inclusion rate for the period. However, since the inclusion rate has been maintained at 50% for all of 2024, those rules no longer apply.

For example, a corporation with a December 31, 2024 year-end and a nil CDA balance on January 1, 2024:

• realized a gain of $100,000 on May 1, 2024: addition to CDA of $50,000 (50% inclusion rate);
• incurred a capital loss of $30,000 on September 30, 2024 (reduction in the CDA of $10,000, i.e. ⅓ of the loss under subparagraph 89(1.4)(a)(ii) of the NWMM; and
• paid a capital dividend of $40,000 to its shareholder on October 15, 2024. With the inclusion rate maintained at 50%, the capital loss should have reduced the CDA by $15,000 rather than $10,000. As a result, the actual balance of the CDA on October 15 would be $35,000, resulting in an excess capital dividend of $5,000.

Question to CRA

Will the CRA grant relief to taxpayers who, in those circumstances, paid an excess capital dividend in 2024?

CRA Response

In general terms, subsection 184(2) of the Income Tax Act [2] provides for a tax ("Part III Tax"), applicable to the portion of the total amount of a dividend payable by a corporation on shares of its capital stock, in respect of which it has made an election under subsection 83(2), that exceeds the balance of the CDA immediately before the dividend became payable (the "Excess"). Part III Tax, under subsection 184(2), is equal to 60% of the Excess. Under subsection 184(3), a corporation that is otherwise required to pay a tax under subsection 184(2) may, however, elect to treat the Excess as a separate taxable dividend.

The taxpayer relief provisions are a set of provisions in the Income Tax Act that accord to the Minister of National Revenue certain discretionary powers. Those provisions include the power, under subsection 220(3.1), to cancel or waive interest and penalties. However, since subsection 184(2) provides for a tax rather than a penalty, that discretionary power does not allow the CRA to cancel or waive that amount.

Thus, the only possible relief, in a situation similar to the one described, would be the election provided for in subsection 184(3) to treat the Excess as a taxable dividend to the recipient or recipients.

Q.2 Application or non-application of subsections 227(8) and 227(9) of the Act.

Canco is a taxable Canadian corporation with a December 31 year-end. Canco has only one establishment in Canada. Canco and NRco do not deal with each other at arm's length. NRco has its tax residence in a country with which Canada has a tax treaty. There is no limitation of benefits provision in the relevant tax treaty. NRco has only one establishment in that other jurisdiction and is a tax resident under the local legislation.

Canco has received a loan from NRco. The loan bears interest at a reasonable rate. Principal of the loan is advanced in accordance with Canco's needs. For Canco's 2024 fiscal period, the interest was recorded as an expense by Canco and added to the amount owed by Canco to NRco.

Canco did not withhold Part XIII tax pursuant to paragraph 212(1)(b) in respect of the interest earned by NRco during 2024. However, assume that the interest was not paid or credited to NRco by Canco in 2024.

For Canco's one-year fiscal period ending December 31, 2024, the interest on the loan was non-deductible to Canco pursuant to subsection 18(4). In those circumstances, the interest was deemed to be a dividend by virtue of subparagraph 214(16)(a)(i).

Part XIII provides for a 25% withholding tax on dividends and interest for amounts paid or credited by Canco to NRco, subject to the relevant tax treaty. Under the relevant tax treaty, the withholding rate for interest is reduced to 10%, whereas it is reduced to 5% for dividends.

In March 2025, Canco issued a Form NR4 to NRco for the amount of the deemed dividend. Canco also made a payment in March when filing its summary for the 2024 year. The payment made represented 5% of the deemed dividend.

The penalty under subsection 227(8) does not apply under subsection 227(8.5).

In reading subsection 227(9), that penalty requires two elements to be applicable. An amount must have been withheld, and the amount must have been remitted late. That interpretation was recognized by the Tax Court of Canada in Maxi Maid Services Ltd. v. The Queen [3] .

Questions to CRA

a) Does the CRA agree that Canco is not subject to the penalty under subsection 227(9) as there was no tax withheld by Canco in this situation? If so, can the CRA comment? If not, can CRA explain its reasons?

b) In addition, is the CRA entitled to assess the penalty under subsection 162(7) in this situation? If so, can CRA comment? If not, can CRA explain its reasons?

CRA Response

Comments on the application of subsection 227(8)

Subsection 227(8) provides that every person who in a calendar year has failed to deduct or withhold any amount as required by section 215 is liable to a penalty.

By virtue of paragraph 227(8.5)(a), subsection 227(8) does not apply to a corporation in respect of an amount of interest deemed by subsection 214(16) to have been paid as a dividend by the corporation, unless, if the Act were read without reference to subsection 214(16), a penalty under subsection 227(8) would have applied in respect of the amount.

You asked us to assume that the interest was not paid or credited to NRco in 2024. It should be remembered that the question of whether a corporation resident in Canada "pays" or "credits" an amount to a non-resident person for the purposes of subsection 212(1) requires an examination of all the relevant facts and circumstances of each particular situation. That being said, assuming that the interest was not paid or credited to NRco in 2024, the penalty provided for in subsection 227(8) should not apply to Canco pursuant to the exception provided for in paragraph 227(8.5)(a).

Comments on the application of subsection 227(8.3)

Subsection 227(8.3) determines the amount of interest owing where a person does not deduct or withhold an amount in respect of various amounts, including an amount of interest that is deemed, under subsection 214(16), to have been paid as a dividend.

It is important to note that the exception in subsection 227(8.5) is limited to excluding the application of the penalty in subsection 227(8) for failure to deduct or withhold to deemed dividends and does not extend to the obligation provided for in subsection 227(8.3) to pay interest on such failure .

Pursuant to paragraph 214(17)(a), the amount of accrued interest is deemed to have been paid immediately before Canco's year-end (December 31, 2024) and such amount is then deemed to be a dividend pursuant to subsection 214(16).

Pursuant to paragraph 227(8.3)(b), interest must be calculated for the period from the day on which the amount was required to be deducted or withheld to the day of payment of the Part XIII tax to the Receiver Genera. Furthermore, pursuant to paragraph 227(8.3)(b) and subsection 227(8.1), Canco and NRco are jointly and severally liable for the payment of interest.

CRA's response to Question 2(a)

Under subsection 227(9), every person who in a calendar year has failed to remit or pay as and when required by the Income Tax Act or the Income Tax Regulations, an amount deducted or withheld pursuant to the Income Tax Act or the Income Tax Regulations is liable to a penalty.

Failure to deduct or withhold an amount, and failure to remit or pay an amount to the Receiver General, are separate failures that give rise to different penalties. The penalty under subsection 227(8) may apply for failure to deduct or withhold an amount. Where an amount has been deducted or withheld, a penalty under subsection 227(9) may apply for failure to remit or pay that amount.

Since it is necessary for an amount to be deducted or withheld for the penalty under subsection 227(9) to apply, Canco would not be subject to that penalty, having not previously deducted or withheld any amount in respect of the dividend deemed paid to NRco. The conclusion that the penalty in subsection 227(9) does not apply in such a case is also consistent with the fact that paragraph 227(8.5)(a) exempts such a deemed payment from the application of the penalty in subsection 227(8).

CRA Response to Question 2(b)

Subsection 162(7) provides that every person who fails to file an information return as and when required by the Income Tax Act or the Income Tax Regulations, or to comply with a duty or obligation imposed by the Income Tax Act or the Income Tax Regulations is liable in respect of each such failure, except where another provision of the Income Tax Act (other than subsection 162(10) or 162(10.1) or 163(2.22)) sets out a penalty for the failure, to a penalty equal to the greater of $100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100, during which the failure continues.

The exception provided for in paragraph 227(8.5)(a) takes into account the fact that a corporation may not be able to determine before the end of its taxation year that it does not meet the debt/equity ratio provided for in subsection 18(4) and that an amount of interest must be recharacterized as a dividend pursuant to subparagraph 214(16)(a)(i).

Paragraph 227(8.5)(a) reflects Parliament's intention not to penalize the failure to withhold or deduct an amount under section 215 in that particular case. Consequently, in those circumstances, Canco's failure to withhold or deduct an amount under section 215 should not give rise to the penalty provided for in subsection 162(7). In addition, the existence of subsection 227(9) precludes the application of the penalty provided for in subsection 162(7) with respect to Canco's failure to withhold or deduct an amount under section 215. This is so even though subsection 227(9) is not applicable in this case, given that Canco did not previously deduct or withhold any amount in respect of the dividend deemed paid to NRco.

Q.3 Amalgamation and QSBCS

The situation

Mr. A was the sole shareholder of a corporation resident in Canada ("Targetco") incorporated under the Business Corporations Act [5] (Quebec). On January 1, 202X, Mr. A sold, for cash consideration, all of the shares he held of the capital stock of Targetco to a corporation resident in Canada ("Acquireco"). The share sale agreement did not specify the time of the transaction. Mr. A and Acquireco dealt with each other at arm's length.

That sale resulted in an acquisition of control of Targetco. Pursuant to subsection 256(9), control of a corporation that is acquired at a particular time is deemed to be acquired, subject to certain exceptions, at the beginning of the day on which that time occurs or, if the corporation so elects, at the time on that day that control is actually acquired. Targetco did not make that election so that control of Targetco was, subject to certain exceptions, deemed to have been acquired at the beginning of January 1, 202X.

Also on January 1, 202X, Targetco and Acquireco amalgamated to form a new company ("Amalco"). Pursuant to paragraph 87(2)(a), Amalco's first taxation year was deemed to begin at the time of the amalgamation. The effective date of an amalgamation is governed by corporate law and usually corresponds to the date indicated in the articles of amalgamation and, where applicable, to the time indicated on such certificate. In the case of Amalco, the certificate of amalgamation issued by the Registraire des entreprises du Québec did not specify the time at which the amalgamation took place. In that situation, the amalgamation generally took place on the first moment of the date indicated in the articles of amalgamation. Consequently, it appears that Amalco's first taxation year was deemed to begin on the first moment on January 1, 202X.

To qualify the shares held by Mr. A of the capital stock of Targetco as QSBCSs, paragraph (a) of the definition of QSBCS in subsection 110.6(1) provides that the shares must, among other things, be shares of an SBC at the determination time, i.e., at the time of disposition of the shares and not at the first moment of the day of disposition of the shares.

One of the conditions that must be met for a corporation to be an SBC is that all or substantially all of the fair market value of its assets at that time is attributable to assets that are used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it.

Questions to CRA

In these circumstances, can the CRA confirm when the "all or substantially all of the FMV of the assets" test must be satisfied?

Can the CRA also confirm that this test must be met at the Targetco level without taking into account Acquireco's assets?

For example, if Acquireco has a significant amount of cash in its bank account on January 1, 202X to pay the purchase price of Targetco's shares, could this result in Targetco not qualifying as a SBC?

CRA Response

For a share to qualify as a QSBCS, several conditions must be satisfied. Among other things, paragraph (a) of the definition of QSBCS in subsection 110.6(1) requires that, at the "determination time", the share is a share of the capital stock of a small business corporation owned by, among others, the individual.

Subsection 248(1) defines the term "SBC" [small business corporation] as being, subject to subsection 110.6(15), a particular corporation that is a CCPC all or substantially all of the FMV of the assets of which at the particular time is attributable to assets, including assets that are used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it.

The "at the … time" test, both for purposes of paragraph (a) of the QSBCS definition and for purposes of qualifying as a SBC in that context, must be satisfied at the actual time of disposition of the shares.

You stated that where the election provided for in subsection 256(9) is not made, control of a corporation that is acquired at a particular time is deemed to be acquired at the beginning of that day on which that time falls. However, the text of that paragraph expressly provides that such deeming provision does not apply for the purposes of determining if a corporation is, at any time, an SBC or a CCPC.

Consequently, in the situation submitted, the particular or determination time relevant to determining whether Targetco qualified as an SBC for purposes of paragraph (a) of the QSBCS definition is the actual time of disposition of the shares by Mr. A.

With respect to the amalgamation, paragraph 87(2)(a) provides that the corporate entity formed as a result of the amalgamation shall be deemed to be a new corporation the first taxation year of which shall be deemed to have commenced at the time of the amalgamation, and a taxation year of a predecessor corporation that would otherwise have ended after the amalgamation shall be deemed to have ended immediately before the amalgamation.

The question of when in the day an amalgamation occurs is a question of law that must be determined in light of the applicable corporate law. In this regard, paragraph 1.15 of Income Tax Folio S4-F7-C1 [6] . ("Folio") indicates that the time of the amalgamation is generally the earliest moment on that date in the absence of a particular time specified in the certificate of amalgamation. However, as set out in paragraph 1.16 of the Folio, in certain situations the CRA will consider an amalgamation to occur at a particular time on the amalgamation date even though no time is specified in the certificate of amalgamation. For example, if there is a series of transactions occurring on the same day, which is followed by an amalgamation on that same day for which no time is specified, the amalgamation will be considered to occur at the time specified in the arrangement (i.e., the closing agenda or other document setting out the order of transactions), insofar as the series occurs logically.

In the situation submitted, the CRA is of the view that, for the purposes of determining whether the shares of the capital stock of Targetco qualified as a QSBCS at the time of their disposition by Mr. A, it would be reasonable to consider that the logical order of the transactions is, first, the disposition by Mr. A of the shares he held in the capital stock of Targetco, followed by the amalgamation between Targetco and Acquireco. Consequently, only the assets of Targetco, without taking into account those of Acquireco, should be taken into account in determining whether Targetco qualified as an SBC at the time of the disposition of the shares by Mr. A.

Q.4 Estimated instalment method and death: how interest is calculated

Instalments due for any period after death are not payable, but those due before death remain in default if not made on time and will result in insufficient instalment interest.

As part of the Financial Strategies and Instruments Roundtable at the 2011 APFF Conference (Question 10), the Department of Finance Canada stated that an individual who chooses the estimated tax method to make their instalments and whose death during the year results in an increase in their tax liability, could be subject to penalties and interest, subject to an application for relief that could be granted by the Minister, but without specifying whether that would be granted and whether it would apply to all or only part of the instalments.

Questions to CRA

(a) Is the CRA of the view that, in such a situation, relief from interest and penalty otherwise applicable in respect of instalments could be granted under subsection 220(3.1)?

(b) If so, can the CRA indicate whether the relief would apply to all or only a portion of the instalments?

CRA Response

Instalments due before the date of death must be paid on time. If those payments are late or insufficient, interest and possibly a penalty may apply until the date of death.

In response to your questions:

(a) Depending on the circumstances of each case, the CRA may consider interest and penalty relief on a request filed under subsection 220(3.1). Based on the facts as well as various factors, including those listed in response to Question 4(b), the taxpayer must demonstrate that the taxpayer was unable to comply due to circumstances beyond their control.

(b) Each request is examined individually and the CRA takes into account various factors such as the time of death, the method used to calculate the instalments, as well as the supporting documents provided. Depending on the facts of each situation, relief may be provided for all or part of the instalments.

For more information on deadlines and filing requirements for a deceased person, please see: Doing taxes for a deceased person > Prepare tax returns for someone who died - Canada.ca

Q.5 Labour Mobility Deduction for Tradespersons - Temporary Relocation Expenses

Temporary relocation expenses eligible for the deduction are reasonable amounts associated with expenses incurred for:

• a temporary lodging of the taxpayer if, throughout the period of temporary relocation:
  • the taxpayer maintains the taxpayer’s ordinary residence as their principal place of residence;
  • the taxpayer's ordinary residence remains available for the taxpayer’s occupancy and is not rented to any other person;
• the taxpayer's transportation for one round trip per eligible temporary relocation, between the ordinary residence and the temporary lodging;
• meals consumed by the taxpayer during the round trip mentioned in the previous point.

In addition, the expenses giving rise to the deduction do not include an expense for which the taxpayer is entitled to receive a reimbursement, an allowance or any other form of assistance (other than an amount included in income). A reading of the legislation does not allow us to establish beyond a doubt whether the deduction can be made where only a portion of the expenses is borne by the employee.

The following situation applies:

A taxpayer incurs accommodation expenses of $200 per night for a 15-day period, but receives a non-taxable allowance of $125 per night from the employer.

Question to CRA

Could the employee deduct the difference between the $3,000 expense (15 nights at $200) and the allowance received of $1,875 (15 x $125), i.e. an amount of $1,125 (assuming the employee satisfies all the other conditions), or does receiving an allowance of $125 per day automatically exclude the entire accommodation expense, regardless of the amount received?

CRA Response

Subject to the additional rules in subsection 8(14), paragraph 8(1)(t) provides for the labour mobility deduction ("LMD"). Among other things, the LMD allows an eligible tradesperson to deduct eligible temporary relocation expenses, which include temporary lodging expenses incurred to travel long distances to earn income from temporary employment in construction, where all requirements are satisfied.

Under subparagraph 8(14)(e)(iii), however, no deduction may be claimed for eligible temporary relocation expenses for which a taxpayer is entitled to receive a reimbursement, allowance or any other form of assistance in respect of the expenses unless the reimbursement, allowance or assistance is included in computing the taxpayer's income and is not deductible in computing the taxpayer's income.

The purpose of that subparagraph is to exclude from eligible temporary relocation expenses any portion of the expenses for which a taxpayer is entitled to receive a reimbursement, an allowance or any other form of assistance, unless such reimbursement, allowance or assistance is included in computing the taxpayer's income and is not deductible in computing the taxpayer's income.

Consequently, in the situation described, where we have assumed that all the conditions of paragraph 8(1)(t) and subsection 8(14) are otherwise satisfied and that the allowance is not included in computing the employee's income, the employee may deduct the difference between the $3,000 expense (15 nights at $200) and the non-taxable allowance received of $1,875 (15 x $125), i.e., an amount of $1,125.

Q.6 Intergenerational Business Transfer - Relevant Group Entity

In Question 10 of the CRA Roundtable at the 2024 Annual Tax Conference of the Canadian Tax Foundation,[7] , the CRA was asked whether the mere fact of a simultaneous sale by an individual of qualified small business corporation shares ("QSBCSs") to two corporations (each controlled by a different child of the individual) prevented the individual from benefiting from the relief provided for in paragraph 84.1(2)(e) of the Act for each of the two simultaneous transfers.

The CRA's response was that, provided multiple dispositions occur simultaneously as part of the same genuine intergenerational transfer at the same disposition time, and that no exception has been sought before the transfer in respect of the same business, CRA would consider that the condition set out in paragraphs 84.1(2.31)(a) and 84.1(2.32)(a) would be satisfied.

We understand that the mere fact of a simultaneous sale of shares of the capital stock of a corporation to two purchasers will not prevent an individual from benefiting from the relief provided for in paragraph 84.1(2)(e) for each of those two (simultaneous) transfers, provided that the other conditions set out in subsection 84.1(2.31) or 84.1(2.32) are satisfied.

Consider the following situation:

Ms. X holds all of the shares of the capital stock of Opco (an operating corporation whose activities constitute eligible activities).

• The shares of the capital stock of Opco qualify as QSBCSs.
• The fair market value ("FMV") of those shares is $600,000.

Ms. X also holds all of the shares of the capital stock of Realtyco.

• Realtyco's only asset is a commercial building that it leases to Opco, which Opco uses exclusively in the active operation of its business;
• The shares of the capital stock of Realtyco qualify as QSBCSs;
• The FMV of the shares of the capital stock of Realtyco is $600,000;

Ms. X wishes to sell all the shares of the capital stock of Opco and Realtyco to a corporation in which her child will be the sole shareholder.

Question to CRA

To the extent that Ms. X simultaneously sells the shares of the capital stock of Opco and Realtyco to a corporation wholly owned by her child, does the fact of selling all of the shares of the two corporations simultaneously, one of which is a specified group entity, mean that the condition set out in paragraph 84.1(2.31)(a) or 84.1(2.32)(a) is not satisfied for each of the transfers?

Ultimately, Ms. X wishes to sell her sole business, which is carried on through two corporations, to her child.

CRA Response

Question 10 of the Canadian Tax Foundation Roundtable dealt with the condition set out in paragraphs 84.1(2.31)(a) and 84.1(2.32)(a), which read as follows:

“Paragraph (2)(e) applies at the time of a disposition of subject shares (in this subsection referred to as the “disposition time”) by a taxpayer to a purchaser corporation if the following conditions are met:

(a) the taxpayer has not previously, at any time after 2023, sought an exception to the application of subsection (1) under paragraph (2)(e) in respect of a disposition of shares that, at that time, derived their value from an active business that is relevant to the determination of whether the subject shares satisfy the condition set out in subparagraph (b)(iii);”

The answer we gave to that question was based on the interpretation to be given to the words "has not previously sought", in a context where the shares held by the parent were simultaneously sold to two holding companies, each controlled by an adult child. In particular, we have interpreted those words in light of the following objectives of the intergenerational transfer rules, as reflected in the Explanatory Notes:

“Paragraph (e) and subsections (2.3), (2.31), and (2.32) serve the dual purpose of:

• accommodating the genuine intergenerational transfer of an active business from an individual owner-manager to their adult owner-manager child or grandchild (including a niece or nephew and grandniece or nephew), and
• protecting the integrity of section 84.1 as an anti-avoidance rule that governs the taxation of corporate

[...]

New paragraph 84.1(2.31)(a) is intended to ensure that a taxpayer's interest in a business is effectively transferred only once from a taxpayer to their child pursuant to the exception in paragraph 84.1(2)(e). This condition precludes the use of paragraph 84.1(2)(e) by a taxpayer to receive successive distributions of corporate surplus in the form of capital gains in respect of the same business.”

For the same reasons, to the extent that the shares of the capital stock of Opco and the capital stock of Realtyco are sold simultaneously to the corporation held by the adult child, in the context of the same bona fide intergenerational transfer of business, and no exception has previously been claimed in respect of the same active business carried on (“ABCO”), we would consider that the condition set out in paragraphs 84.1(2.31)(a) and 84.1(2.32)(a) would be satisfied for each disposition.

Q.7. Application of Section 80 and Reduction of Adjusted Cost Base

Background

• • Aco is a Canadian-controlled private corporation ("CCPC") within the meaning of the definition in subsection 125(7).
  • Aco is a specified shareholder [8] of Bco.
  • Aco has a December 31 year-end.
  • Aco held an advance receivable from Bco in the amount of $1,000 (“Advance #1”).
  • In addition, Aco had issued a commercial debt obligation to a third party in the amount of $800 [9] .
  • In 2023, that debt was settled for no consideration. Pursuant to subsection 80(10), Aco applied the forgiven amount for the commercial debt obligation ($800) against the adjusted cost base ("ACB") of Advance #1, bringing its ACB to $200.
  • In 2024, Aco made a further advance of $1,800 to Bco ( "Advance #2") bringing the total advances receivable from Bco to $2,800 with a total ACB of $2,000 (collectively, the "Total Advance").
  • At the end of 2024, Bco repaid $1,500 of the Total Advance to Aco.

Application of the Income Tax Act

In summary, section 80 provides for a reduction in the debtor's tax attributes [10] before the inclusion of a gain on debt forgiveness in the debtor's income. If, after applying the reductions pursuant to subsections 80(2) to 80(9), a balance remains, subsection 80(10) permits a reduction in the ACB of capital property that are shares of the capital stock of corporations of which the debtor is a specified shareholder and of debts issued by such corporations, provided that such corporations are not related to the debtor. A reduction applied pursuant to subsection 80(10) reduces the ACB of the property to which it relates by virtue of paragraph 53(2)(g).

Questions to CRA

We would like your interpretation of the interrelationship between the partial repayment of the Total Advance, the determination of the ACB attributable to it and the inclusion of a capital gain in Aco's income. More specifically, in a situation where the amount of the advances fluctuates over time based on new advances made by Aco and repayments made by Bco, it is not clear when this capital gain should be included in Aco's income.

Based on our analysis and understanding of the Income Tax Act, the following treatments are possible:

1. First-in, first-out method: each advance would be considered a separate property, and any repayment would apply first to the first advance not repaid. The capital gain would be realized when the amount of the repayment exceeds the ACB of the advance to which it is applied.

• Aco would have two advances receivable from Bco as follows:
  • Advance #1 of $1,000 with an ACB of $200;
  • Advance #2 of $1,800 with an ACB of $1,800.
• Bco's repayment of $1,500 would be applied as follows:
  • full repayment of Advance #1 of $1,000;
  • partial repayment of Advance #2 of $500.
• The tax treatment under this approach would be as follows:
  • the capital gain on Advance #1 would be $800 ($1,000 - $200);
  • the capital gain on Advance #2 would be nil ($500 - $500).

2. Average ACB method: the average ACB would be calculated on the basis of the cumulative advances. The capital gain would be realized each time there is an advance repayment.

• Aco would have a single advance receivable from Bco of $2,800 with an ACB of $2,000.⁹
• Aco would receive a partial repayment of $1,500, with the ACB attributable to that portion being $1,071.42 ($2,000 x $1,500/$2,800).
• The tax treatment under this approach would be as follows:
  • Aco should realize a capital gain of $428.58 ($1,500 - $1,071.42).

CRA Response

First, we have assumed that the legal transactions described above are governed by the law applicable in the Province of Quebec, namely the Civil Code of Quebec ("CCQ").

We have also assumed that any change in the principal amount of an advance does not result in the novation of the advance.

Whether the Total Advance constituted a single property of Aco or, alternatively, each of Advance #1 and Advance #2 constituted a separate property of Aco is a question of fact and law that can only be resolved following an analysis of all the relevant facts specific to a given situation, including the agreement between the debtor and its creditor detailing the rights, privileges, restrictions and conditions applicable to the advance.

Since your question only briefly describes a hypothetical situation, it is not possible for us to give a definitive opinion on this issue. We can, however, make the following general comments.

Assuming that the Total Advance constituted a single property of Aco, we are of the view that, upon partial repayment of the Total Advance, the ACB to Aco attributable to the portion repaid should be determined on a pro rata basis pursuant to subsection 43(1).

Subsection 43(1) provides that, for the purpose of computing a taxpayer’s gain or loss for a taxation year from the disposition of part of a property, the adjusted cost base to the taxpayer, immediately before the disposition, of that part is the portion of the adjusted cost base to the taxpayer at that time of the whole property that can reasonably be regarded as attributable to that part.

In the given situation, it would be reasonable to consider that the ACB, to Aco, attributable to the repaid portion of $1,500 would be $1,071.42 ($2,000 x $1,500 / $2,800). Aco would therefore realize a capital gain of $428.58 following the partial repayment of the Total Advance.

Alternatively, assuming that each of Advance #1 and Advance #2 constituted a separate property of Aco, it would be necessary to determine whether subsection 47(1) could apply in the given situation.

Generally speaking, subsection 47(1) applies automatically and provides for a method of calculating the average cost to the taxpayer of all identical properties acquired by the taxpayer.

In addition, subsection 248(12) provides that one bond, debenture, bill, note or similar obligation issued by a debtor is identical to another such obligation issued by that debtor if both are identical except as regards the principal amount.

Once again, the question of whether one property is identical to another is a question of fact that can only be resolved following an analysis of all the relevant facts in a given situation. Generally speaking, to determine whether two advances are identical, an examination of the rights, privileges, restrictions and conditions attached to each is required.

In the given situation, if Advance #1 and Advance #2 were identical properties within the meaning of subsection 47(1), the average ACB of each advance should be determined pursuant to subsections 47(1) and 47(2) as follows:

• • Advance #1 of $1,000 whose ACB, to Aco, would be $714.28 ($2,000 x $1,000/$2,800);
  • Advance #2 of $1,800 whose ACB to Aco would be $1,285.72 ($2,000 x $1,800/$2,800).

Generally speaking, where a debtor owes several debts to the same creditor, the debtor has the right - subject to certain restrictions - to indicate, when paying, which debt the debtor intends to discharge [11] .

Assuming that Bco's payment of $1,500 was applied first to the full repayment of Advance #1 and then to the partial repayment of Advance #2, we are of the view that the applicable tax treatment should be determined as follows:

• the capital gain on Advance #1 would be $285.72 ($1,000 - $714.28);
  • the ACB, for Aco, attributable to the portion repaid on Advance #2 would be $357.14 ($1,285.72 x $500/$1,800).
• The capital gain on Advance #2 would therefore be $142.86 ($500 - $357.14);
  • Aco would realize a total capital gain of $428.58.

If the $1,500 payment were instead applied to the partial repayment of Advance #2, Aco would also realize a capital gain of $428.58, given that the ACB, to Aco, of Advance #2 would be calculated pursuant to subsection 47(1).

Alternatively, if it turned out that Advance #1 and Advance #2 were not identical properties and that the $1,500 repayment was applied first to the total repayment of Advance #1 and then to the partial repayment of Advance #2, we are of the view that the applicable tax treatment should then be determined as follows:

• • the capital gain on Advance #1 would be $800 ($1,000 - $200);
  • the ACB, to Aco, attributable to the portion repaid on Advance #2 would be $500 ($1,800 x $500/$1,800).

Thus, the capital gain on Advance #2 would be nil ($500 - $500);

• • Aco would realize a total capital gain of $800.

On the other hand, if the $1,500 payment were applied to the partial repayment of Advance #2, Aco would realize no capital gain.

Q.8. Application of CRA's new positions on subsection 55(2)

In the document entitled "CRA Update on Subsection 55(2) and Safe Income - Where Are We Now?"[12] ("Update"), presented as part of the CRA Roundtable at the Canadian Tax Foundation Conference 2023, the CRA revised some of its positions regarding the calculation of safe income. In the Update, it is stated that all positions that constitute a change in position (the "New Positions") from positions previously released (the "Old Positions") will apply prospectively to calculations of safe income for taxation years beginning after November 28, 2023.

Assume the following facts:

• • A corporation ("Opco") was incorporated in 2000.
  • Opco's fiscal period ends on December 31 of each year.
  • In September 2025, Opco begins a series of transactions that will include the payment of a dividend to which the provisions of subsection 55(2) will apply.

Question to CRA

For clarification purposes, can the CRA confirm whether, when calculating safe income in September 2025, Opco must calculate its safe income using the new positions from its incorporation in 2000 to September 2025, or whether Opco can use the old positions for the years 2000 to 2023 and the new positions only for the years 2024 and 2025?

CRA Response

As stated in the Update, the new positions apply only to safe income calculations for taxation years commencing after November 28, 2023. In other words, a corporation's safe income must be calculated for each taxation year in accordance with the CRA positions applicable to that year.

Consequently, in this situation, Opco will have to determine its safe income as of September 2025 by calculating its safe income for each of its taxation years since incorporation using the old positions for its taxation years commencing before November 29, 2023 (i.e., 2000 to 2023) and the new positions for its taxation years commencing after November 28, 2023 (i.e., 2024 and 2025).

Q.9 Subparagraph 55(5)(e)(i)

In general, paragraph 55(3)(a) deals with situations where a person unrelated to the dividend recipient acquires a significant interest in or has a significant increase in its interest in the payer or recipient corporation during the series of transactions. A significant increase is calculated both in absolute terms and as a percentage. There is currently no threshold for determining what constitutes a "significant increase".

According to the rule in subparagraph 55(5)(e)(i), "a person shall be deemed to be dealing with another person at arm’s length and not to be related to the other person if the person is the brother or sister of the other person, (...)".

However, the remainder of subparagraph 55(5)(e)(i) provides an exception to that rule (the "Exception") by stating:

"(...) except in the case where the dividend was received or paid, as part of a transaction or event or a series of transactions or events, by a corporation of which a share of the capital stock is a qualified small business corporation share or a share of the capital stock of a family farm or fishing corporation within the meaning of subsection 110.6(1)”.

Setting the scene and structure of the corporate group

• • Sister A and Sister B each held 100% of the shares of the capital stock of Holdco A and Holdco B.
  • Holdco A and Holdco B each held 50% of the shares of the capital stock of Opco and of the capital stock of Investmentco.
  • The shares of the capital stock of Opco and the capital stock of Investmentco had a nominal paid-up capital and an ACB and FMV of $1,000.
  • The safe income of each of Opco and Investmentco was nominal.
  • The shares in the capital stock of Opco were QSBCSs.
  • The shares of the capital stock of Investmentco were not QSBCSs.
  • For personal and commercial reasons, Sister A no longer wished to hold, directly or indirectly, shares of the capital stock of Investmentco and Sister B no longer wished to hold, directly or indirectly, shares of the capital stock of Opco.¹¹
  • At the same time, Opco repurchased the shares of its capital stock held by Holdco B and Investmentco repurchased the shares of its capital stock held by Holdco A.

Since the shares of the capital stock of Opco were QSBCSs, the repurchase of the shares of the capital stock of Opco held by Holdco B would not be subject to subsection 55(2), even though it is in the same series of transactions as the repurchase of the shares of the capital stock of Investmentco.

On the other hand, the repurchase of the shares of the capital stock of Investmentco held by Holdco A as part of the series of transactions would remain subject to subsection 55(2).

Question to CRA

Can the CRA confirm whether one or both repurchases were subject to subsection 55(2)?

CRA Response

For the purposes of the dividend arising on the repurchase of shares of the capital stock of Opco in connection with a transaction, event or series of transactions or events, Sister A and Sister B would, by virtue of subparagraph 55(5)(e)(i) and paragraphs 251(2)(a) and 251(6)(a) be related persons. In addition, Holdco A and Holdco B would be related to each other by virtue of subparagraph 251(2)(c)(ii) and Holdco A and Holdco B would be related to Opco and Investmentco by virtue of subparagraph 251(2)(c)(iii). Consequently, no triggering event described in subparagraphs 55(3)(a)(i) to 55(3)(a)(v) would be present since all the persons involved would be related to the dividend recipient, Holdco B, and paragraph 55(3)(a) could apply to the dividend received by Holdco B.[13] .

Since the Exception does not apply to the dividend received by Holdco A on the redemption of shares of the capital stock of Holdco, paragraph 55(3)(a) could therefore not apply to the dividend received by Holdco A. Subsection 55(2) could apply to the dividend received by Holdco A.

Q.10 Application of subsection 220(4.5) to the alternative minimum tax caused by the deemed disposition provided for in paragraph 128.1(4)(b).

In the 2023 Budget, Finance Canada announced changes to the alternative minimum tax ("AMT"). Following consultations with stakeholders, further changes were announced in the 2024 Budget, which were enacted on June 20, 2024. The effective date of the amendments was January 1, 2024.

For 2024 and subsequent years, the AMT rate was increased from 15% to 20.5%, while the AMT exemption for individuals was increased from $40,000 to the amount of the fourth tax bracket for individuals ($177,882 in 2025). Among other changes, the inclusion rate for capital gains, allowable capital losses and gains on listed personal property has been increased from 80% to 100%.

Under paragraph 128.1(4)(b), an individual who ceases to be resident in Canada at a particular time is deemed to have disposed, at the time that is immediately before the time that is immediately before the particular time, of each property owned by the individual (other than property described in subparagraphs 128.1(4)(b)(i) to 128.1(4)(b)(v)) for proceeds equal to their FMV. Depending on the amount of capital gains realized by the individual who ceased to be resident in Canada, the AMT could now apply to the individual.

Subsection 220(4.5) allows an individual to elect to defer payment of an amount of tax arising on the deemed disposition under paragraph 128.1(4)(b) of a property (other than a right to a benefit under, or an interest in a trust governed by, an employee benefit plan) by providing adequate security to the CRA.

Question to CRA

Does the election under subsection 220(4.5) allow an individual to defer the payment of an AMT amount caused by a deemed disposition of property under paragraph 128.1(4)(b)?

CRA Response

By virtue of section 127.5, subject to section 127.55 and subsection 120.4(3), the tax payable by an individual for a taxation year may have to be calculated pursuant to the minimum tax rules set out in Division E.1. To the extent that an individual ceases to be resident in Canada at a particular time in a taxation year, so that paragraph 128.1(4)(b) applies, it is possible that the amount of minimum tax calculated pursuant to paragraph 127.5(a) will be greater than the tax otherwise payable by the individual under Division E, exclusive of section 120. In such a case, the tax payable under Part I will be calculated pursuant to section 127.5.

Subsection 220(4.5) allows an individual to elect to defer payment of an amount of tax payable as a result of a deemed disposition of property under paragraph 128.1(4)(b) (other than a right to a benefit under, or an interest in a trust governed by, an employee benefit plan) at any particular time in a taxation year (referred to as the individual’s “emigration year”). If the individual makes the election on or before the individual's balance-due date for the emigration year, the Minister of National Revenue shall accept adequate security furnished by the individual.

The amount of the security for a given taxation year is the lesser of the amounts provided for in paragraph 220(4.5)(a):

(i) the amount determined by the formula

A - B - [((A - B)/A) × C]

where

A is the total amount of taxes under Parts I and I.1 that would be payable by the individual for the emigration year if the exclusion or deduction of each amount referred to in paragraph 161(7)(a) were not taken into account,

B is the total amount of taxes under those Parts that would have been so payable if each property (other than a right to a benefit under, or an interest in a trust governed by, an employee benefit plan) deemed by subsection 128.1(4) to have been disposed of at the particular time, and that has not been subsequently disposed of before the beginning of the particular year, were not deemed by subsection 128.1(4) to have been disposed of by the individual at the particular time, and

C is the total of all amounts deemed under this or any other Act to have been paid on account of the individual’s tax under this Part for the emigration year, [14] and

(ii) if the particular year immediately follows the emigration year, the amount determined under subparagraph (i), and in any other case, the amount determined under this paragraph in respect of the individual for the taxation year that immediately precedes the particular year, […]

In the case where the AMT applies because of the deemed disposition resulting from the individual's emigration, we are of the view that the description of A in the formula in subparagraph 220(4.5)(a)(i) can refer to the amount of AMT payable by the individual for the year of emigration, since the AMT is provided for in Part I and, more specifically, in Division E.1. The description of B in the formula is the tax that would have been payable by the individual for the year of emigration if paragraph 128.1(4)(b) had not applied in respect of property not subsequently disposed of by the individual. Consequently, the election provided for in subsection 220(4.5) will allow the individual to defer only the payment of an amount of tax corresponding to the excess of the AMT over the tax that would otherwise have been payable by the individual for the year of emigration but for the application of paragraph 128.1(4)(b).

Q.11 Validity of CDA election

In the context of Question 9 of the Federal Tax Roundtable at the 2020 APFF Conference, the CRA was asked whether it would accept a CDA election whose amount is determined by a mathematical formula.

In its response, the CRA stated that it expected that the election form (T2054) and the accompanying resolution will refer to the amount of the dividend covered by the election. The CRA also specified the amount of penalties applicable in the case of a late-filed election.

Consider the following situation:

ABC Inc. sold its shares of the capital stock of Subsidiary D Inc. to an unrelated third party on August 1, 2025. The terms of the sale price were as set out in a typical share sale agreement, which established an estimated sale price based on the financial data available at the time the sale agreement was signed. The final sale price will be determined no later than November 1, 2025, i.e. 90 days after signature, with the production of audited financial statements. ABC Inc. adopted a resolution on August 2, 2025 providing for the payment of a capital dividend pursuant to subsection 83(2) corresponding to the portion of the non-taxable gain realized on the sale of the shares of Subsidiary D Inc., the amount of which will not be known with certainty until November 1, 2025.

Questions to the CRA

Further to its 2020 response, could the CRA comment on the following two questions?

(a) Would the CRA consider the election made and filed with the CRA on August 2, 2025 to be invalid because it is not accompanied by an amount?

(b) Would the CRA consider an election filed late with the CRA after November 1, 2025 with applicable penalties, and in the absence of a new resolution specifying an amount, as valid?

CRA Response

The CRA's position, as stated in Technical Interpretation 2020-0852211C6, [15] remains that, in general, the amount of the dividend covered by the subsection 83(2) election must be reported on Form T2054 [16] and the resolution authorizing the election must be filed in order for the election to be considered valid, regardless of whether the election is filed on time or late and accompanied by payment of the penalty established under subsection 83(4).

Q.12 Confirming the tax treatment of Simple Agreements for Future Equity

This is a request for the CRA's views on the tax treatment of the “Simple Agreement for Future Equity” ("SAFE") financial instruments, which are used primarily by start-up companies to raise funds.

Definition of a SAFE:

A SAFE is a financing agreement in which an investor provides funds to a company in exchange for the right to receive shares of that company at a future date, generally upon a future financing or winding-up event. Unlike convertible bonds, SAFEs have no maturity date or accrued interest. Nor do they confer any traditional debt rights on the investor. The SAFE remains outstanding indefinitely until a conversion event occurs, at which time it is converted into shares at a preferential price.

Questions to the CRA

Given those characteristics, we are inquiring as to the tax status of such an instrument to the investors. More specifically, we wish to know whether the CRA considers that a SAFE:

(a) should be treated, under the provisions of section 51, as a right to convert into shares, or

(b) constitutes a deferred share issuance, in which case another treatment would apply.

CRA Response

The tax treatment of a particular financial instrument must be determined in light of all the relevant factual and legal circumstances.

Since the statement in this question presents only a summary description of the characteristics of a SAFE, it is not possible for us to give a definitive opinion. We can, however, offer the following general comments.

The question seems to be concerned with the possible realization of a gain or loss on the fulfilment of a condition set out in the SAFE that results in the issuance of shares (the "Issuance Event"). Our comments will therefore focus solely on that aspect, assuming that this is a capital transaction for the SAFE holder.

We have also assumed that the SAFE described above is governed by the law applicable in the Province of Quebec.

The preamble to subsection 51(1) sets out the conditions for its application:

“Where a share of the capital stock of a corporation is acquired by a taxpayer from the corporation in exchange for

(a) a capital property of the taxpayer that is another share of the corporation (in this section referred to as a “convertible property”), or

(b) a capital property of the taxpayer that is a bond, debenture or note of the corporation the terms of which confer on the holder the right to make the exchange (in this section referred to as a “convertible property”)

and no consideration other than the share is received by the taxpayer for the convertible property, [...]" [emphasis added].

For that paragraph to apply to a SAFE, it must constitute a bond, debenture, note or share of the issuing corporation at the time of its conversion.

In a Canadian context, for an instrument issued by a corporation to constitute a "share" within the meaning of subsection 51(1), the CRA generally considers that it must be so qualified by the applicable corporate statute.

For the instrument to constitute a "bond," "debenture" or "note" within the meaning of subsection 51(1), the CRA generally considers that it must be established to be a debt owed by the issuing corporation, with a principal amount payable.

To the extent that, until the Issuance Event, the SAFE is not considered to be a share under the applicable corporate statute and does not confer any of the rights or impose any of the obligations generally associated with a share under such statute, the CRA would take the position that the instrument is not a share within the meaning of subsection 51(1).

To the extent that it is reasonable to conclude that the intention of the parties was not to create a debt and that the SAFE does not refer to any amount of principal, any interest, any maturity date, any terms of repayment and that it confers a priority ranking lower than that of the issuer's ordinary creditors, the CRA would take the position that the instrument does not constitute an "bond." "debenture" or a "note" within the meaning of subsection 51(1).

If the SAFE is not subject to section 51 at the time of an Issuance Event, the question would arise as to whether such an event constitutes a disposition of the contractual rights reflected in the instrument, within the meaning of the definition set out in subsection 248(1). The CRA also notes that section 49.1 could be relevant to such a question:

“For greater certainty, where a taxpayer acquires a particular property in satisfaction of an absolute or contingent obligation of a person or partnership to provide the particular property pursuant to a contract or other arrangement one of the main objectives of which was to establish a right, whether absolute or contingent, to the particular property and that right was not under the terms of a trust, partnership agreement, share or debt obligation, the satisfaction of the obligation is not a disposition of that right.”

It would conceivable for the CRA to determine, in light of all the characteristics of a given instrument and its legal characterization under the applicable private and corporate law, that there was no disposition on the conversion of the SAFE into shares.

Such a determination could be made in the context of a request for an advance income tax ruling, where the CRA could analyze the instrument in its entirety and its legal character.

Q.13 Anomaly in computing penalties when an election must be filed

The technical interpretation "Penalty for filed elections and returns", dated March 26, 1986 [17] . (the "1986 Interpretation") raises an anomaly in the calculation of penalties when an election referred to in subsection 85(1) must be filed. That anomaly stems from the fact that the late-filing penalty is calculated based on the "number of months or parts of months", which creates unfairness in certain situations.

For example, a corporation with a November 30, 202X year-end that made an election under subsection 85(1) on June 25, 202X will have until May 31, 202X+1 to file its election. If the corporation files its election on June 30, 202X+1, one month late, it will have to pay a one-month penalty.

On the other hand, a corporation with an August 31, 202X year-end that filed an election under subsection 85(1) on June 25, 202X will have until February 28, 202X+1 to file its election. If the corporation files its election on March 28/29/30/31, 202X+1, it will have to pay a two-month penalty. This is illogical, as it is still only one month late, but is paying for two months.

In the 1986 interpretation, it was stated that in view of this perceived anomaly, the memorandum was sent to Current Amendments for their consideration.

Questions to CRA

What has happened to date? Has the issue been analyzed and, if so, what avenues are being considered by the CRA and what is its position on the matter?

CRA Response

Generally, the penalty provided for in subsection 85(8) applies where the election referred to in subsection 85(1) was not made on or before the day on or before which it was required to be made under subsection 85(6). The amount of the penalty depends, among other things, “for each month or part of a month during the period commencing with the day on or before which the election is required by subsection 85(6) to be made and ending on the day the election or amended election is made”, as well as the "number of months each of which is a month all or part of which is” in that same period.

Under the second proposed scenario, we confirm that the CRA's current practice is to apply the equivalent of only one "penalty month". We agree with this position and are of the view that the 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. It follows that in the situation submitted, the late election made on March 28, 29, 30 or 31, 202X+1 will result in a penalty equivalent to only one "month or part of a month".

Q.14 Asset used principally in an ABCO [active business carried on]

The situation

The corporation ("Opco") is a CCPC which carries on an active services business.

Opco enters into medium and long-term contracts with its customers for the provision of such services. Although a contract may cover a period of several years, the amounts are received when the contract is signed and not as the contract is performed.

Thus, Opco recognizes revenue from long-term contracts using the percentage-of-completion method, with the degree of completion being measured by the ratio of units delivered to total units under the contract.

Consequently, the amounts received are classified as "deferred income" in the corporation's liabilities, and the value of the cash represents a significant portion of the total value of Opco's assets.

Based on Opco's financial history, each contract generates a profit of approximately 20% of the selling price of the services rendered. Thus, up to 80% of the amount received under a contract is used to cover the corporation's ongoing expenses to perform the services in question.

Consider the following situation at a particular time:

• • Opco has a cash balance of $50,000;
  • Opco enters into a contract with an unrelated third party for which it receives $100,000 at the time of the agreement to provide services over a 3-year period;¹⁵
  • Of this $100,000 sale, Opco expects to use $80,000 to cover ongoing expenses for the 3 years of the contract related to the services in order to generate a net profit of $20,000;
  • The amounts collected in advance are deposited in Opco's bank account, which now amounts to $150,000 immediately after the particular time;
  • Opco has no contractual obligation to retain the amounts collected to cover expenses related to the services. The monies are available at any time in Opco's sole discretion.

In order for a share to qualify as a QSBCS, as defined in subsection 110.6(1), it must be held by a taxpayer in a "small business corporation" ("SBC"). The term "SBC" is defined in subsection 248(1). Under paragraph (a) of that definition, all or substantially all of the fair market value of the assets must be attributable to assets that are used principally in an ABCO [active business carried on].

In addition, subparagraph (c)(i) of the definition of QSBCS in subsection 110.6(1) also provides that, for the 24 months immediately preceding the determination time, more than 50% of the FMV of the assets must be attributable to assets used principally in an active business carried on by the corporation.

Ensite v. Her Majesty the Queen [18] ("Ensite") clarified the expression "property used or held by the corporation in the year in the course of carrying on a business". One of the main points to note from that decision is that property "used" is property "employed" or "risked" in a business. The term "risked" means more than a remote risk, so that the withdrawal of the property would "have a decidedly destabilizing effect on the corporate operations themselves". That interpretation has also been adopted by the CRA in various technical interpretations.

In the CRA's general view, this is a question of fact for which the relevant factors include the actual use to which the cash is put in the business, the nature of the business and the current practices of the business.

Also, in Question 11.4 of the Roundtable on Federal Taxation at the 1991 APFF Convention, the CRA concluded that "term deposits with funds derived from prepaid fees could be considered to be used in the business of the corporation".

Similarly, Opco holds cash relating to services that the corporation must render in the current fiscal period, but also in the 2 following fiscal periods.

Since Opco generates on average a 20% profit on a service contract, approximately $80,000 of the total amount collected under the contract (80% of $100,000) is required to carry on its business. Thus, that part of the cash balance, i.e. 80% of the deferred revenue, would be "risked" beyond the usual meaning of that term. There would be negative repercussions on the businesses operations if more than 20% of the sums collected were disbursed.

In addition, it is a common practice for Opco to collect cash at the time of the agreement. Approximately 80% of the cash received as a result of a contract is temporary. It is intended to cover the businesses current expenses and is not held in anticipation of the replacement or purchase of fixed assets or in anticipation of the repayment of a long-term debt.

In other words, without this cash, Opco would no longer be able to assume the expenses that were incurred in order to complete the services, according to the contractual agreements reached with the customers.

Question to CRA

Considering that Opco expects a net profit of $20,000 from the amounts collected under the services contract, is it possible to consider $80,000 of the $150,000 cash balance, i.e. 80% of the $100,000 deferred revenue presented in the liabilities, as an asset used principally in an active business as described in subparagraph (c)(i) of the definition of QSBCS?

CRA Response

The question of whether a property is an asset used principally in an ABCO [active business carried on] for the purposes of the definition of QSBCS in subsection 110.6(1) is a question of fact that the CRA cannot determine in a hypothetical context. To make such a determination, the CRA must consider the actual use made of the property in the course of the business's activities, the nature of the business in question and current practices in the particular industry sector in which it operates.

The Ensite decision, cited above, remains a landmark decision in determining whether a property is an asset used principally in an ABCO. According to this Supreme Court of Canada decision, it is important to determine whether the use of the asset is related to a defined responsibility or obligation of the business. The mere fact that the use of the property has a commercial purpose is not enough. The asset must be used or risked in the business and satisfy a requirement necessary for the operation of the business. In this context, "risked" means more than exposure to a remote risk. If no longer having the property would have a decidedly destabilizing effect on the corporation's operations, the property would generally be considered to be used in the course of a business's operations.

In determining whether cash (cash on hand, short-term investments, etc.) can be considered to be an asset used principally in an ABCO, 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.

Furthermore, the CRA has indicated in the past that it recognizes that prudent financial management of a business may require that current assets (such as cash) exceed current liabilities and that this could be considered in an examination to determine whether a property is an asset used principally in an ABCO. However, 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.

Q.15 Intergenerational transfer of business and management

The situation

Since January 1, 2024, transfers of a business between certain persons not dealing at arm's length with each other while using the capital gains exemption have been possible, subject to compliance with the conditions set out in subsections 84.1(2.31) or 84.1(2.32), taking into account subsection 84.1(2.3). The conditions are numerous and their interpretation can render the implementation of a business transfer complex.

Consider the following situation (the "Particular Situation"):

• Aco was 100% controlled by Mr. A.
• Bco was 100% controlled by Mr. B, a third party dealing at arm's length with Mr. A.
• Aco held 60% of the units of a general partnership ("SENC").
• Bco held 40% of the units of SENC.
• Cco was controlled by Child (Mr. A's son).
• On January 1, 2025, Mr. A sold all the shares of the capital stock of Aco that he held (the "Shares") in the following proportions:
  • 55% to Cco;
  • 45% to Bco. After the sale of the Shares, Child therefore indirectly holds 33% of the units in SENC.
• Following the sale of the Shares, Mr. A was no longer a director of Aco.¹⁸
• Following the sale of the Shares, Mr. A was no longer involved (neither supervising nor managing) in the business of Aco nor in the business of SENC.
• The shares of the capital stock of Aco are QSBCSs, as that term is defined in subsection 110.6(1).
• The Shares constituted capital property to Mr. A within the meaning of section 54.
• Mr. A has never applied after 2023 for an exception to the application of subsection 84.1(1) by virtue of paragraph 84.1(2)(e) as described in paragraph 84.1(2.31)(a).
• Child will devote at least 20 hours per week to the business of SENC within the meaning of subsection 120.4(1.1). The business of SENC will continue to be carried on actively for at least 36 months and Cco will retain the Shares for at least 36 months.

Questions to the CRA

(a) Would all the conditions for the application of subsection 84.1(2.31) be satisfied following the sale of the Shares, including the conditions of paragraph 84.1(2.31)(g), i.e., the transfer of the management of each relevant business of the corporation in question (Aco) and of any relevant business of the group (SENC)?

(b) Would the answer to Question 15(a) be the same if Cco held 50% or fewer of the shares of the capital stock of Aco?

(c) Would the answer to Question 15(a) be different if the SENC partnership agreement provided for unanimous decision-making by the partners?

CRA Response

General comments

We understand that the questions posed above are essentially intended to obtain the CRA's position with respect to the condition set out in subparagraph 84.1(2.31)(g)(i) (the "Condition") in the Particular Situation. Our comments are limited to the Condition, but could also be applicable to the condition described in subparagraph 84.1(2.32)(h)(i) with the necessary adaptations.

The Condition will be satisfied if, subject to paragraph 84.1(2.3), within 36 months after the disposition time or such greater period as is reasonable in the circumstances (the "Stipulated Period"), the taxpayer, who disposes of the shares of the capital stock of the subject corporation, and a spouse or common-law partner of the taxpayer take reasonable steps to transfer management of each relevant business of the subject corporation and any relevant group entity to the child or at least one member of the group of children referred to in subparagraph 84.1(2.31)(f)(ii).

The question of whether a person transfers the management of a business can only be answered following a complete analysis of all the facts and circumstances present in a particular situation. In that respect, the facts described in the Particular Situation are very limited. Despite this, we can make the following general comments.

In the Particular Situation, we have assumed that SENC is a general partnership governed by the Civil Code of Québec. The Civil Code of Québec provides, among other things, that the partners of a general partnership may enter into any agreement they deem appropriate with respect to their respective powers in the management of the partnership's affairs and may appoint one or more of them, or even a third party, to manage the partnership's affairs [19] In the Particular Situation, Aco and Bco are the partners of SENC. We do not know the terms of the partners' agreement with respect to the management of SENC's affairs. In answering these questions, we have assumed that prior to the disposition of the Shares, Mr. A was involved in the management or supervision of the business of SENC while Child was not involved in any of those functions. We have also assumed that Aco is a corporation whose business is limited to holding a partnership interest in SENC and that Mr. A managed Aco's business alone until the disposition of the Shares.

We have also assumed that Mr. A's role in the business of Aco and SENC will be transferred to and assumed by Child and Mr. B after the sale of the Shares. After the disposition of the Shares, Child will be the only child of Mr. A who will take part, with Mr. B, in the management of the business of Aco and SENC.

We have also assumed that Child is the sole shareholder and director of Cco.

Furthermore, although our comments are essentially limited to whether the Condition is satisfied, we understand that Mr. A will cease to manage the business of Aco and SENC on a permanent basis so that the condition in subparagraph 84.1(2.31)(g)(ii) would be satisfied.

CRA Response to Question 15(a)

In the Particular Situation, to satisfy the Condition, Mr. A (and his spouse or common-law partner, as the case may be) must take reasonable steps to transfer the management of each relevant business of Aco and SENC to Child within the Stipulated Period following the disposition of the Shares.

Paragraph 84.1(2.3)(i) provides that, for the purposes of paragraphs 84.1(2.31)(g) and 84.1(2.32)(h), "management" refers to the direction or supervision of business activities but does not include the provision of advice. The Income Tax Act does not contain a definition of the term "direction or supervision of business activities".

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.

The CRA has already stated that "directing or supervising the activities of the business” within the meaning of paragraph 84.1(2.3)(i) involves relatively significant decision-making power in relation to the business. Generally speaking, the more the duties for which the person is responsible involve significant decision-making power, in the context of the particular business, the more they could constitute "management" within the meaning of paragraph 84.1(2.3)(i). For example, the CRA has considered that discretionary control over a corporation's cash expenditures is a significant function that could constitute managing or supervising activities of the business, within the meaning of paragraph 84(2.3)(i). [20] .

In addition, in Peter Cundill & Associates Ltd v. The Queen [21] rendered by the Federal Court (Trial Division), Justice Cullen defined a management or administration fee as, generally, an amount paid in respect of managerial services in connection with the direction or supervision of business activities. Justice Cullen reiterated the CRA's position in Interpretation Bulletin IT-468 [22] that management or administration usually includes the functions of planning, direction, control, coordination, systems or other functions at a managerial level. He also noted that “this definition suggests that the management or administration extends beyond the provision of those functions necessary for day-to-day operations and would encompass the decision-making process as it relates to the present and future direction and operation of the business.”[ FN23: Peter Cundill, par. 21: "[...] Generally speaking, a management or administration fee is an amount paid in respect of managerial services in connection with the direction or supervision of business activities. […] In Interpretation Bulletin IT-468 (the bulletin in effect for the 1985 and 1986 taxation years) it was suggested that the terms included "the functions of planning, direction, control, coordination, systems or other functions at a managerial level”. This definition suggests that the management or administration extends beyond the provision of those functions necessary for day-to-day operations and would encompass the decision-making process as it relates to the present and future direction and operation of the business. [...] ".]

We do not have enough information to know how Mr. A participates in the management of the business of Aco and SENC. In the Particular Situation, we do not know how Child and Mr. B will take part in the management of the business of Aco and SENC after Mr. A disposes of the Shares. If, after consideration of all the facts and circumstances, 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.

Consequently, the Condition could be satisfied in the Particular Situation if the facts and circumstances allowed such a demonstration, provided, in particular, that the transfer of such management was carried out within the Stipulated Period.

CRA Response to Question 15(b)

The answer to Question 15(a) would remain the same if, in the Particular Situation, Mr. A disposed of 50% or fewer of the Shares of Cco. The facts and circumstances would have to demonstrate that Mr. A transferred to Child, within the Stipulated Period, the management of the business of SENC, and of Aco, in which he was involved prior to the disposition of the Shares.

CRA Response to Question 15(c)

An agreement providing for unanimous decision-making should not, in and of itself, prevent the demonstration that a person transferred the management of a business in which the person was involved, within the meaning of the Condition. If the SENC partners' agreement provided for unanimous decision-making, it could still be shown, after an analysis of all the facts and circumstances specific to the Particular Situation, that Mr. A transferred, to Child, the management of the SENC business in which he was involved, within the meaning of the Condition. The comments in response to Question 15(a) would be applicable to Question 15(c).