News of Note
CRA rules on a PUC increase and distribution from a Canadian qualified REIT subsidiary of a US REIT so as to skirt Art. IV(7)(b) of the Canada-US Treaty
Email this ContentA corporation (the “Corporation”), which has elected to be taxed as a REIT for US tax purposes and is a qualifying person for purposes of the Canada-US Income Tax Convention (the “Treaty”), wholly owns a Canadian holding company (“CS1”) which, in turn, wholly owns a Canadian operating subsidiary (“CS2”). CS1 and CS2 are qualified REIT subsidiaries and fiscally transparent for U.S. tax purposes.
CS1 will increase the corporate capital of its shares in an amount not exceeding its retained earnings, and then distribute an equal amount of capital to the Corporation in cash (less the amount of Part XIII tax withheld and remitted by it). The resulting deemed dividend will not be included in the income of the Corporation under U.S. tax law, nor would such an amount be included in its income if CS1 were not fiscally transparent.
Rulings by CRA included that Art. IV(7)(b) of the Treaty will not apply to treat the above dividend as not having been paid to or derived by the Corporation, and that the 5% withholding rate pursuant to Art. X(2) will apply.
Neal Armstrong. Summary of 2024 Ruling 2023-0984461R3 under Treaties – Income Tax Conventions – Art. 4.
CRA finds that a company that hauled (but did not cut) timber did not general a logging tax credit
A hauling company transported the cut timber owned by another company from the cut block to the sawmill for volume-based fees.
Under s. 2 of the Logging Tax Act (B.C.), a taxpayer was required to pay logging tax equal to the lesser of 10% of its income derived from logging operations in BC and 150% of the credit that would have been allowable under s. 127(1) of the ITA.
The generating of the logging tax credit under s. 127(1) depended upon the taxpayer having “income for the year from logging operations in the province” as defined in Reg. 700(1), which was not the case for the hauling company because it did not cut or sell timber.
Accordingly, its logging tax credit (and, by implication, its B.C. logging tax) was nil.
Neal Armstrong. Summary of 19 November 2025 External T.I. 2025-1082241E5 under Reg. 700(1).
CRA rules that a taxable capital gain from closing on a sale of Chinese private company shares in China “arose” in China
The taxpayer, who was a citizen of China, wished to sell his minority shareholdings in three private Chinese manufacturing companies to his mother (a citizen and resident of China) after he had become a resident of Canada. In accordance with the practices for sales of private company shares in China, the closing for the sale of the shares for cash would occur on the premises of the Chinese private companies.
Since the taxpayer is a non-resident of China for Chinese income tax purposes, he is taxed in China only on his Chinese-sourced income pursuant to the domestic Chinese income tax law. For these purposes, Income derived from the transfer of property located within China is deemed to be income sourced from China under such domestic law.
CRA ruled that:
- The taxable capital gain from the taxpayer’s disposition of his shares will be sourced to China for purposes of s. 126(1)(b) and the determination of “qualifying income” in ss. 126(7) and (9).
- To the extent that the gain arises in China under Chinese income tax law, the gain will be considered to have arisen in China under Articles 13(5) and 21(4) of the Treaty. (In this regard, the CRA summary states that, for the purposes of Article 13(5) of the Treaty, “the word ‘arise’ has the meaning that it has under Chinese income tax laws pursuant to Article 3(2) of the Canada-China Income Tax Treaty.”)
Neal Armstrong. Summary of 2024 Ruling 2023-0976381R3 under s. 126(1)(b).
Income Tax Severed Letters 15 April 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA has expanded its mandatory disclosure guidance
CRA has made a few additions to its webpage on the mandatory disclosure rules, for instance:
- Reporting persons may file an optional disclosure (so as to avoid the GAAR penalty or the extended statute-barring period) even where the subject arrangement is one which CRA has stated, for example, on its GAAR web page, that it could apply GAAR to the arrangement (para. 16).
- A professional would not be considered an advisor for s. 237.4 purposes if the professional did not provide any assistance or advice with respect to creating, developing, planning, organizing, or implementing the notifiable transaction (para. 76).
- For example, in the context of NT-2023-02 (regarding avoidance of the 21-year trust rule), where a professional issued a letter to a trustee recommending that the Old Trust should never make a distribution designated under s. 104(19) or a capital distribution under s. 107(2) to a corporation in which a New Trust or a non-resident beneficiary is a shareholder, the professional will not be considered an advisor for purposes of s. 237.4 where such a distribution in fact was made (para. 77).
- CRA has issued the following further exception to NT-2023-02:
In a tiered structure, where Opco has two shareholders (100 Class “A” Common Shares owned by Trust X, 100 Class “B” Common Shares owned by Holdco), Holdco has two shareholders (100 Class Common Shares owned by Trust Y, 100 Preferred Shares - aggregate redemption value $1,000,000 - owned Ms. X) and Opco pays a $1,000,000 dividend on its Class “B” Common Shares to Holdco who then uses the proceeds to redeem all the preferred Shares held by Ms. X, the transactions would not be considered substantially similar to NT-2023-02.
Neal Armstrong. Summaries of Mandatory disclosure rules – Guidance, 26 April 2026 CRA Webpage including under s. 245(5.1), s. 237.4(1) – advisor and s. 237.4(3).
CRA reverses its position that partnerships can be resident in Canada for CRS purposes otherwise than on the basis of their place of effective management
On December 19, 2025, the CRA amended its “Guidance on the Common Reporting Standard” (CRS) to add a position that a partnership will be considered to be resident in Canada for purposes of the CRS rules if it was formed under provincial law, or all its partners were residents. This expansion of scope was relevant to Ontario or other provincial limited partnership that had been used by non-resident investors as a convenient vehicle to invest in non-Canadian assets, or to a limited partnership that had only Canadian partners, including a general partner that was deemed to be resident in Canada due to its Canadian incorporation but with its central management and control (and that of the partnership) outside Canada.
CRA has now reverted to the previous version of the relevant paragraph, which read (and now again reads) as follows:
3.32 A Canadian financial institution can take the form of a partnership. If the place of effective management of a partnership's business is situated in Canada, the partnership is considered resident in Canada under Part XIX.
The amended version of the Guidance continues to be dated December 19, 2025, i.e., this change is retroactive.
Neal Armstrong. Summaries of Guidance on the Common Reporting Standard, Part XIX of the Income Tax Act, 19 December 2025 including under s. 270(1) – Canadian financial institution – (a).
Where a post-mortem pipeline entails an s. 88(1)(d) bump, any CDA from life insurance should be paid out before Newco is introduced to the structure
In post-mortem pipeline transactions, the estate might transfer shares of “Investco” to “Newco” in exchange for a Newco promissory note, with Investco and Newco subsequently being amalgamated, thereby permitting access to bump treatment under s. 88(1)(d). However, the availability of the bump may be adversely affected if life insurance proceeds received by Investco were distributed out of its capital dividend account (CDA) to Newco (in turn, distributed by Newco to the estate).
In this regard, s. 88(1)(d)(i.1) provides that the cumulative bump room will be further reduced by not only taxable dividends that are deductible under s. 112 but also capital dividends received. Accordingly, the payment of a substantial capital dividend out of the CDA of Investco arising from the life insurance death benefit may entirely eliminate the bump room pursuant to s. 88(1)(d)(i.1)(B).
The purpose of s. 88(1)(d)(i.1) is to prevent the payment of tax-free dividends without any corresponding reduction in share basis so as to artificially increase the available bump room. However, applying s. 88(1)(d)(i.1) to capital dividends arising from life insurance implicitly assumes that a tax-free distribution has reduced inside basis without affecting outside basis, where, in fact, no outside basis was ever attributable to the insurance proceeds, i.e., the provision does not distinguish between capital dividends representing previously taxed economic value and those arising solely from statutory non-taxable amounts.
This anomaly can be avoided if the life insurance proceeds are paid out of the Investco CDA to the estate before Newco is introduced as part of the pipeline transaction.
Neal Armstrong. Summary of Henry Shew and Florence Marino, ”The interaction between corporate-owned life insurance and bump transaction,” Tax for the Owner-Manager, Vol. 20, No. 2, April 2020, p. 3 under s. 88(1)(d)(i.1).
We have translated 6 more CRA interpretations
We have translated a CRA interpretation released last week and a further 5 CRA interpretations released in June of 1999. Their descriptors and links appear below.
These are additions to our set of 3,530 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 26 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
There is no bump on the amalgamation following an intergenerational business transfer
In an intergenerational business transfer (“IBT”), there generally is no acquisition of control of the target company (“Targetco”) for tax purposes because its shares are sold to a corporation controlled by the seller's children (“Childco”), who are related to the sellers.
Accordingly, when there is a vertical amalgamation of Targetco and Childco, the cost of the target corporation's eligible assets cannot be bumped by virtue of the s. 88(1)(d.2) rule – which provides that if control of the target corporation was transferred between related persons, the relevant acquisition of control date for purposes of the bump calculation is the date of the last transfer between arm's length parties (generally establishing the historical cost), rather than the most recent transfer between non-arm's length parties.
S. 88(1)(d.3), which deems control to have been acquired by an unrelated person at the time of death, has no application to an IBT.
The absence of a bump is significant, for example, for agricultural corporations, where a substantial portion of the share value is often attributable to farmland.
Neal Armstrong. Summary of Julien Théberge, “Intergenerational Business Transfer: Appearance of Parity with a Third-Party Sale?”, Tax for the Owner-Manager, Vol. 20, No. 2, April 2020, p. 2 under s. 88(1)(d.2).
Parliament did not require the correction of subsequently-discovered errors in a return
It can be inferred that Parliament did not intend to impose an obligation to correct a subsequently discovered error in an income tax or GST/HST return given that it could have specified, and chose not to – see, for example:
- S. 32.2 of the Customs Act (requiring an importer who discovers a past error in reporting an importation to correct it); and
- Reg. 8401(6) (requiring the correction and reissuance of a T4 if a pension adjustment is altered for certain reasons, and there is a change in the amount of employment income previously reported).
It is suggested that it follows that a failure to correct such a subsequently discovered error is not a criminal offence (e.g., under ITA s. 239(1)(d), making it an offence to wilfully evade payment of taxes), and it should not trigger penalties that did not already apply at the time of filing. Such failure also is not a ground to permit the CRA to reassess beyond the normal reassessment deadline if the original filing had not constituted a misrepresentation attributable to carelessness or neglect (see ITA s. 152(4)(a)(i) and ETA s. 298(4)).
There remains the question of whether a lawyer or CPA would be in violation of any professional conduct rules by not addressing a subsequently discovered error, but it would seem that if the client is not obligated to act, nor should the advisor. Also note, for example, that an Ontario lawyer “must endeavor to obtain for the client the benefit of every remedy and defence authorized by law” under the Law Society of Ontario, Rules of Professional Conduct, Commentary to Rule 5.1-1.
Neal Armstrong. Summary of David Sherman and Balaji Katlai, “Is a taxpayer required to correct a past error?” Tax for the Owner-Manager, Vol. 20, No. 2, April 2020, p. 1 under s. 239(1)(d).