News of Note
Income Tax Severed Letters 27 May 2026
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Fadali – Tax Court of Canada finds that the s. 296(2.1) requirement on CRA to apply available rebates when assessing HST reduced a late-filing penalty
Derksen J. found that the taxpayer was not entitled to claim ITCs respecting his construction expenses of a new home that he had sold in December 2020 because they were incurred while he was not yet a registrant. However, he could (and, in fact, at a subsequent juncture, did) claim a rebate under s. 257 for the same expenses.
Derksen J. further found that if the taxpayer had filed a rebate application under s. 257 at the time he was assessed in June 2021 to deny those ITCs, he would have been entitled to it. Accordingly, s. 296(2.1) required the CRA to take such a rebate amount into account when assessing the taxpayer before the rebate application had in fact been made. Consequently, having regard to the similar issue in Villa Ste-Rose, the quantum of the late filing penalty assessed against the taxpayer under s. 280.1 (for filing his December 2020 return over a year late) should be reduced accordingly.
Neal Armstrong. Summary of Fadali v. The King, 2026 TCC 86 under ETA s. 123(1) – builder – (f) and s. 296(2.1).
CRA extends the effective date for the taxability of trailing commissions
In its 10 February 2026 version of GST/HST Notice 344 CRA confirm earlier comments made in 22 December 2025 GST/HST Interpretation 246664 that “[a]s a result of … industry developments” it “will enforce the application of the GST/HST to supplies made by dealers on or after July 1, 2026, in exchange for trailing commissions.” In a revised version of the Notice issued on 26 May 2026, CRA changed the effective date, by stating:
The CRA will enforce the application of the GST/HST to:
- these supplies made by dealers on or after January 1, 2028
- any such supplies made before that date where the dealer has treated the supplies as taxable by claiming input tax credits (ITCs) on business inputs attributed to those supplies, with such enforcement applying from the first such supply to which inputs were attributed and related ITCs claimed
The comments in the revised Notice effectively acknowledge that this change will reduce net CRA collections since the mutual fund managers will claim ITCs for the GST/HST charged on the trailing commissions, and their taxability will now generate ITCs to the dealers.
Neal Armstrong. Summary of GST/HST Notice 344, Application of the GST/HST to Mutual Fund Trailing Commissions, 26 May 2026 under s. 123(1) – financial service – (l).
CRA confirms that a capital distribution by an estate to a non-resident beneficiary is deemed to be of “income,” and must be reported on an NR4
CRA confirmed that a capital distribution that was not derived from a capital dividend, paid by a resident estate to non-resident beneficiaries, would not be subject to Part XIII tax - notwithstanding that s. 212(11) deemed such capital distribution to be a payment of income for purposes of s. 212(1)(c) - given that it was not specifically described in s. 212(1)(c)(i) or (ii).
However, because s. 212(11) deemed the distribution to be a distribution of income, the estate was required to report it on an NR4 form (but should note its exempt status by using the exemption code, “S”).
Neal Armstrong. Summaries of 12 June 2023 External T.I. 2022-0956461E5 under s. 212(1)(c) and Reg. 202(1)(b).
We have translated 6 more CRA interpretations
We have translated a further CRA interpretation released last week and 5 CRA interpretations released in May and April of 1999. Their descriptors and links appear below.
These are additions to our set of 3,574 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 27 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA finds that fees paid to a landowner to access a CCUS construction site were not part of the capital cost of the resulting Class 57 property
The taxpayer, which proposed to construct a qualifying CCUS project in Canada, agreed with the landowner, whose land was required to access the project site, to pay fees for the right to access that land during project construction, and to thereafter restore the land to its original condition.
CRA indicated that the access fees appeared to be an expenditure incurred in connection with a separate asset of a capital nature and, accordingly, would not be included in the cost of the prospective Class 57 asset. There was insufficient information to determine the particular depreciable class for such separate property.
The fees incurred to restore the property arguably should receive the same treatment, i.e., as an addition to such separate class of depreciable property. Otherwise, it would have to be determined whether their current deduction was denied by s. 18(1).
Neal Armstrong. Summary of 25 November 2025 External T.I. 2025-1049831E5 under s. 127.44(1) – qualified CCUS expenditure, s. 13(21) – UCC – A.
CRA elaborates on types of residential-use property that are excluded property
The specified leasing property rules may restrict CCA claims of a lessor so that there is no tax benefit to it from having leased the equipment rather than making a secured loan. Excluded properties, which are excluded from the rule's ambit, includes in Regulation 1100(1.13)(a)(ii), "furniture, appliances, television receivers, radio receivers, telephones, furnaces, hot water heaters, and other similar properties designed for residential use."
CRA confirmed that the following items could be excluded property pursuant to Reg. 1100(1.13)(a)(ii) if the other conditions were satisfied: heat pumps (wall-mounted and central), air conditioners (wall-mounted and central), furnaces, boilers, as well as equipment and accessories such as electric baseboard heaters and convectors, hot-water heaters, humidifiers, generators, electrical panels and outlets.
It considered that boilers, water heaters, and furnaces were expressly covered by the Regulation’s “furnaces” and “hot-water heaters” language. The other listed items, “given their nature, the context provided and the fact that they are intended for residential use,” came within the phrase "and other similar properties."
Neal Armstrong. Summary of 4 February 2026 External T.I. 2025-1083931E5 F under Reg. 1100(1.13)(a)(ii).
CRA provides general guidelines on how to allocate foreign tax to a short Canadian tax year for FTC purposes
A CCPC (“Canadian Target”), which previously had a calendar taxation year, loses its CCPC status on May 1 as a result of an arm’s length US corporation (“US Buyer”) agreeing with it that it will cause a Canadian subsidiary of US Buyer (“US Buyer Sub”) to purchase its shares, thereby causing the “First Stub Year” to end pursuant to s. 249(3.1). That purchase occurring on 11:06 am on November 30 causes the ‘Second Stub Year” to end pursuant to ss. 249(4)(a) and 256(9). Moments before the end of the Second Stub Year, Canadian Target realizes a gain that is subject to FIRPTA tax as a result of closing the sale to US Buyer of its US subsidiary (“US Target”), which continues to have a calendar taxation year.
In order for an FTC to be available to Canadian Target pursuant to s. 126(1), the U.S. tax paid needs to be “for the year” in which the credit is claimed. CRA indicated that the relevant question here was how the foreign tax should reasonably be allocated among the Canadian taxation years that overlapped with the foreign fiscal period.
Here, as Canadian Target’s only U.S. tax liability was attributable to the capital gain realized immediately prior to 11:06 am on November 30, and that gain fell within Canadian Target’s Second Stub Year, it appeared reasonable to allocate all of the U.S. tax relating to that gain to Canadian Target’s Second Stub Year.
More generally:
- The allocation exercise referred to above is one essentially of looking at the amount of the income that drives US tax, and the equivalent income that drives Canadian tax, and then trying to achieve a match.
- To do that, the stream of income must be examined. If there is an even distribution of earnings throughout the year, then that would call for a daily proration. If the income is from a seasonal business, a more reasonable approach would be to match that season to the Canadian tax period. If the income comes from a single discrete event, the date of that event should determine the Canadian tax timing.
- CRA expects consistency in the approaches used, although unusual income events (like an extraordinary lump-sum payment) may warrant an unusual approach.
Neal Armstrong. Summary of Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.7 under s. 126(1).
CRA doubts that Canco can claim an FTC for a US sub’s distribution that produces a capital gain but is treated under the Code as a distribution out of E&P subject to US withholding tax
The repurchase by a US subsidiary (“USCo”) of shares of USCo held by its Canadian parent (“CanCo”) gave rise to a capital gain for Canadian purposes and to a dividend subject to 5% withholding tax for U.S. purposes. Could CanCo claim a foreign tax credit “FTC”) under s. 126(1) for such tax?
CRA noted two conditions for the FTC. First, there must be “qualifying income” from a source in the US. Second, it must not be a foreign tax that “can reasonably be regarded as having been paid by the taxpayer in respect of income from a share of the capital stock of a foreign affiliate of the taxpayer.”
Regarding the first condition, as the distribution was taxed as a dividend by the US, Art. X(3) of the Treaty indicated that it could be taxed by the US as such. Therefore, the dividend was deemed to “arise” in the US by Art. XXIV(2)(a) of the Treaty. Although that provision begins with the words “subject to the provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in [the US],” the “arising” sourcing language in Art. XXIV(2)(a) is similar to the “qualifying incomes” domestic definition referring to income “from sources” in the US – leading to the conclusions that the first condition was met.
The second condition was to be interpreted in light of its main objective, of preventing a taxpayer from claiming relief from taxation under the Act twice respecting the same source of income – once as a s. 113(1) deduction and again through an FTC. Here, if the US tax was based on earnings and profits, and those earnings were also captured in a surplus account in Canada, thereby supporting a s. 113 deduction, there would be such a resulting double benefit, and CRA would deny the deduction.
Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.6 under s. 126(1).
CRA indicates that on the partial repayment of USD debt with forgiveness of the balance, the s. 39(2) gain or loss is computed on a net basis.
How is a gain or loss under s. 39(2) computed where a foreign currency-denominated debt is partly repaid, with the remaining principal amount being forgiven?
For instance, a taxpayer borrows U.S.$1,000,000. On maturity, U.S.$300,000 of the principal amount is repaid, and the balance is forgiven. On the issuance date, the spot rate is U.S.$1.00 equals Cdn. $1.25; and on the maturity date, U.S.$1.00 equals either Cdn.$1.50, or Cdn.$1.00.
CRA noted that Agnico-Eagle computed the s. 39(2) gain or loss on the repayment of a debt issued at its FX face amount by comparing A – B, where:
- A is the issuance (i.e., borrowing) amount, and
- B is the repayment amount,
with the amounts borrowed and repaid in foreign currency being converted to Cdn. dollars using the respective spot rates on the two dates.
CRA also noted its historical position that no foreign exchange gain or loss arises in the context of a debt forgiveness because there is no transaction that would result in realizing such a gain or loss.
CRA then indicated that in the situation where a foreign exchange indebtedness is partially repaid and partially forgiven, s. 39(2) and s. 80 each apply to their respective portions of the indebtedness. Accordingly, in the above example, the formula is adjusted by reducing A by the forgiven amount of U.S.$700,000. Thus, in the first scenario, there is a capital gain under s. 39(2) of $75,000 (1.25*$300,000 – $300,000); and in the second scenario, there is a loss of $75,000 (1.25*$300,000 – 1.5*$300,000).
The above formula would have to be further adjusted, for example, where the debt was issued at a discount or premium.
Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.5 under s. 39(2).
Neal H. Armstrong editor and contributor