News of Note
CRA finds that earnout gains from QSBCS recognized in a subsequent year benefited from the increased CGD limit in that year
Email this ContentIn 2023, Mr. X disposed of shares which were qualified small business corporation shares (“QSBCS”) under a contract containing an earnout clause and applied the cost recovery method as set out in IT-426. In 2023, he reported a capital gain based on the minimum amount received up front and claimed the full amount as being eligible for the capital gains deduction (“CGD”). In 2025, further proceeds became determinable pursuant to the earnout clause, thereby generating recognition of a further capital gain in that year. CRA indicated that as the CGD limit had increased since 2023, Mr. X could make a 2025 claim taking that increased limit into account.
However, it noted that if reserves were claimed pursuant to s. 40(1)(a)(iii), s. 110.6(31) would prevent an individual from benefiting from a subsequent increase in the CGD limit through having deferred the recognition of part of the capital gain to a year in which the increased deduction was otherwise available.
Neal Armstrong. Summaries of 13 May 2026 External T.I. 2024-1033121E5 F under s. 110.6(2.1) and s. 110.6(31).
We have translated 8 more CRA severed letters
We have translated a CRA interpretation released last week and two recently released rulings, and also a further 5 CRA interpretations released in March and February of 1999. Their descriptors and links appear below.
These are additions to our set of 3,626 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).
Income Tax Severed Letters 28 July 2026
This afternoon's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Frontier Lithium – Federal Court finds that CRA failed to adequately respond to a cogent request that it grant a late CEE renunciation under s. 66(12.741)
On December 14, 2021, Frontier entered into subscription agreements with investors pursuant to which it agreed to incur $12 million in Canadian exploration expenses (CEE) by the end of 2022 and to renounce such CEE to the investors with an effective date of December 31, 2021 pursuant to the look-back rule in s. 66(12.66). However, due to a delay in securing the necessary permits, $5 million of the required CEE was not incurred until 2023. As a result, only $7 million had been validly renounced under the look-back rule.
In May 2025, Frontier sought CRA approval pursuant to s. 66(12.741) for a late renunciation of the $5 million of CEE for the 2023 year. CRA denied this request. First, the subscription agreements did not allow for the renunciation of CEE incurred after 2022. Second, in its opinion it would not be “just and equitable” to authorize the second renunciation, as Frontier had made no attempt to amend the subscription agreements to permit the CEE to be incurred in 2023. Furthermore, any financial devastation suffered by Frontier resulted from its own failures regarding the flow-through share filings and failure to ensure that the necessary permits were in place before proceeding with the financing.
Regarding CRA’s first ground for refusal, Régimbald J found that Frontier had made a “sufficiently strong” submission to “require a proper analysis and response” from CRA. The text of the “flow-through share” definition in s. 66(15) merely required an agreement in writing for the issuer to incur the CEE within the 24-month general rule period, and the s. 66(12.6) text merely required that the CEE indeed be incurred within the general rule period, and such text contained no requirement that the CEE be incurred within any shorter period specified in the subscription agreements. Instead, “the CRA provided no explanation as to why its interpretation prevailed over Frontier's arguments and better complied with the text of the provisions, the purpose of the flow-through program and the intent of Parliament.”
CRA’s decision that it would not be just and equitable to authorize a late second renunciation was questionable. CRA did not meaningfully address Frontier’s submission that it would be financially devastated without such authorization. Furthermore, other findings under this heading were adversely influenced by CRA’s unexplained conclusion (as per above) that making a second renunciation under s. 66(12.6) was not technically possible.
CRA’s decision was set aside and remitted for reconsideration.
Neal Armstrong. Summaries of Frontier Lithium Inc. v. Canada (Attorney General), 2026 FC 998 under s. 66(12.741) and Federal Courts Act, s. 18.1(2).
CRA rules that a French non-trading property company (SCI) is not a corporation
A Société Civile Immobilière (SCI), which was subject to Articles 1832 and following of the French Civil Code, was formed to acquire and rent an immovable. Its capital was contributed by Partner 1 and Partner 2, both of whom resided in Canada. The immovable was managed by a manager designated by the partners, in this case, Partner 1.
For French legal purposes, the SCI was considered a legal person and had the capacity to contract with third parties. Its patrimony was liable for the debts it contracted. The responsibility of its partners for these debts was unlimited, but proportionate to the capital held by them in the SCI.
For French tax purposes, the SCI was not subject to French corporate tax. Instead, its income and losses were allocated to the two Partners in proportion to their interests.
CRA ruled that the SCI will not be considered a corporation for purposes of the Act. It did not go the next step of ruling that it would be treated as a partnership rather than a co-ownership arrangement.
Neal Armstrong. Summary of 2023 Ruling 2023-0962051R3 F under s. 248(1) – corporation.
CRA rules on a s. 55(3)(a) spin-off to purify a farming business
CRA ruled on a s. 55(3)(a) spin-off transaction undertaken so that the shares of the transferee corporation (Newco) would qualify as shares of the capital stock of a family farm or fishing corporation - whereas the transferor corporation (Opco 1) held both passive investments in non-active business subsidiaries and assets used directly or indirectly (through related corporations) in an active farming business. Accordingly, the spin-off involved transferring the latter category of assets to Newco which would be controlled by father through special voting shares (his only Newco shares) but with the common shares held by two of his children and a family trust.
A preliminary step in the transaction included the distribution of shares of Opco 1 by a family trust to a Holdco. CRA stated that this distribution could result in the s. 104(4) deemed disposition date being determined with regard to s. 245(2), and that an RC312, Reportable Transaction and Notifiable Transaction Information Return was required to be filed in respect of this distribution.
Neal Armstrong. Summary of 2024 Ruling 2023-0985741R3 F under s. 55(3)(a).
CRA finds that a non-resident pharmaceutical company engaged in contract manufacturing in Canada was not carrying on business in Canada
A non-resident pharmaceutical corporation (“NonResCo”) agreed with an indirect Canadian subsidiary (“CanCo”) that CanCo would devote approximately 10% of its Canadian premises to the manufacturing of pharmaceutical products for NonResCo using equipment and materials provided to it by NonResCo at no charge, with the finished products shipped to NonResCo for sale by it. In addition, NonResCo agreed to a “Technology Transfer”, primarily in order to assist CanCo in getting into production. NonResCo further agreed to provide “Business and Management Services” to CanCo for a fee. Such services were performed almost entirely in the foreign country, but NonResCo employees would occasionally travel to Canada to provide the services in person.
In finding that the provision of the Business and Management Services and CanCo’s involvement (as described above) in CanCo’s pharmaceutical manufacturing (the “Pharmaceutical Manufacturing Business”) constituted two separate businesses, CRA stated:
Manufacturing pharmaceutical products involves specialized know-how and techniques to manufacture products at precise specifications, whereas Business and Management Services could apply to a wider scope of businesses that have corporate tasks to complete including those of a financial or administrative nature. …[T]here is not a sufficient connection between the two business activities to say they are one business.
In finding that the Business and Management Services business was not carried on in Canada, CRA stated:
… NonResCo’s physical presence in Canada providing Business and Management Services is not substantial, so it is not a business that is carried on in Canada by NonResCo.
In also finding that NonResCo did not have a substantial presence in Canada regarding the Pharmaceutical Manufacturing Business, it stated:
The Equipment is not at the disposal of NonResCo – possession and control of the Equipment has passed to CanCo. It is CanCo whose business benefits from the revenues earned from manufacturing, and CanCo is the entity that carries out the day to day operations of the Equipment. …
NonResCo does not have a long term physical presence that is conducting some substantial aspect of their business in Canada. Once the “Technology Transfer” is complete, NonResCo has a very limited physical presence in Canada for the Pharmaceutical Manufacturing Business at all, as the Equipment is at the disposal of CanCo.
Accordingly, NonResCo was not required to register for regular GST/HST purposes and (based on a similar analysis) could not voluntarily register.
Neal Armstrong. Summary of 29 April 2025 GST/HST Interpretation 247054 under ETA s. 240(1).
CRA rules on applying its formula for prorating foreign tax between a FAPI and non-FAPI business for FAT purposes
A CFA of the Canadian taxpayer (“FA Opco” or “FA”) carried on a business giving rise to FAPI (the “FAPI Business”), as well as an active business. FA Opco had incurred non-capital losses in carrying on its active business for purposes of the Foreign Country tax laws and also had unused discretionary deductions in respect of that active business.
It was projected that in respect of a particular taxation year, FA Opco would generate net income from both the FAPI business and the active business and partially eliminate corporate income tax imposed by the Foreign Country through the use of its loss carryforwards and the discretionary deductions.
CRA ruled as to methodology for determining the amount of foreign accrual tax (“FAT”) applicable to the FAPI from the FAPI Business. This methodology was summarized as follows in 28 May 2025 IFA Roundtable Q. 5, 2025-1063771C6:
CRA … generally considers it reasonable to determine FAT applicable to the amount of FAPI of FA for a taxation year of FA by multiplying the total foreign tax paid by FA to the foreign country for a taxation year of FA by the fraction that the amount of the net income from … [the] FAPI Business … represents of the total net income of FA for the taxation year of FA, both as computed under foreign tax law. …
[Once] FA’s activities that generate FAPI [are] reasonably identified … the second logical step requires the determination of the following amounts:
A - the amount of gross income from the FAPI Business for the taxation year computed under foreign tax law.
B - the total amount of deductions allowed under foreign tax law and claimed by FA in the taxation year that may reasonably be regarded as directly applicable only to the FAPI Business.
C - the amount of gross income from all sources for the taxation year computed under foreign tax law that is subject to foreign tax.
D - the total amount of deductions allowed under foreign tax law and claimed by FA in the taxation year which are not directly allocable to either the FAPI Business or to other income-generating activities, multiplied by the ratio of A over C (or allocated between the two streams of income on other reasonable grounds).
Once those values are determined, the formula to compute the net income of FA from the FAPI Business becomes: A – B – D. The resulting amount divided by the total net income of FA for the taxation year determines the fraction which, applied to the amount of total foreign tax paid by FA, determines the amount of foreign tax “that may reasonably be regarded as applicable” to FAPI in that taxation year (i.e. the FAT).
Neal Armstrong. Summary of 2025 Ruling 2024-1039511R3 under s. 95(1) – FAT.
CRA confirms that a regular registrant is denied ITCs on HST that is charged to it under the simplified regime, and that s. 211.17(1) does not preclude a net refund under the SAM formula
A selected listed financial institution (SLFI) that was registered under the regular GST/HST registration provisions purchased intangible personal property (the “IPP”) from a non-resident supplier, which was registered under the simplified regime for non-residents.
CRA indicated that because the SLFI did not provide proof of its regular GST/HST registration to the non-resident, it was considered to be a specified Canadian recipient, so that the non-resident was required to charge GST/HST on that specified supply (at the Ontario rate of 13%, given that the usual place of business, as defined in s. 211.17(1), of the SLFI was in Ontario.)
Because such HST was charged under the simplified regime, the SLFI was precluded, under s. 211.17(1), from claiming any ITC for such HST.
Regarding the application of the specified attribution method (SAM) formula to the SLFI, CRA indicated that it would be applied in the usual manner in this simplified regime context, i.e., the federal GST charged to the SLFI would be slotted into A of the formula, converted to a blended HST rate based on the investor percentages and with the actual Ontario HST paid to the non-resident then subtracted from that result to arrive at the resulting effect on the net tax of the SLFI insofar as this IPP purchase was concerned.
Although s. 211.17(1) provided that the SLFI recipient was generally not allowed to claim an ITC, rebate, refund, or remission in respect of the GST/HST that was required to be collected by the non-resident under the simplified regime, s. 211.17(1) would have no application to restrict the SLFI from claiming a net tax refund for the reporting period if that was the result of the application of the SAM formula, including with respect to this acquisition of the IPP.
Neal Armstrong. Summaries of 3 April 2025 GST/HST Interpretation 248372 under ETA s. 211.14(1) and s. 225.2(2).
We have translated 5 more CRA interpretations
We have translated a further 5 CRA interpretations released in March of 1999. Their descriptors and links appear below.
These are additions to our set of 3,618 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).
Neal H. Armstrong editor and contributor