CURRENT ISSUES OF INTEREST

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1 CURRENT ISSUES OF INTEREST Jeff Howald, CPA, CA KPMG LLP Waterloo K. A. Siobhan Monaghan KPMG Law LLP Toronto 2015 Ontario Tax Conference

2 Table of Contents PART I: WHAT S NEW FROM CRA?... 3 Income Tax Folios:... 3 (a) S4-F5-C1: Share for Share Exchange... 3 (b) S4-F7-C1: Amalgamations of Canadian Corporations... 4 (c) S4-F16-C1: What is a Partnership?... 8 (d) S1-F5-C1: Related Persons and Dealing at Arm s Length... 9 (e) S3-F6-C1: Interest Deductibility (f) S1-F3-C2: Principal Residence (g) Other: Select Technical Interpretations of Interest: (a) Determination of Loss CRA Document C (b) Late-Filed Eligible Dividend Designation Technical Interpretation E (c) Debt Forgiveness and Contingent Amounts Technical Interpretation E (d) Subsection 55(2), SIOH and Paragraph 55(5)(f) Technical Interpretation C (e) Refunds of Tax Following Late-Filed Returns Technical Interpretation E (f) Ontario CMT Adjustment in Statute-Barred Year Technical Interpretation I7 22 (g) Earn-Outs and Cost Recovery Technical Interpretation E (h) T1135s and Death Technical Interpretation E Select CRA Recent Positions on Partnerships: (a) Incorporation of a Partnership Delay in Transfer of Legal Title Technical Interpretation E (b) Suspended Losses and Partnership Dissolution Technical Interpretation I (c) Former Partners and Partnership Dissolutions Technical Interpretation E (d) Partnership Losses and Former Partners Technical Interpretation I Other Select Compliance Issues of Interest: (a) Updated Voluntary Disclosure Form (b) Audits of Small Businesses (c) T1013 Client Authorizations Digital Signatures and Other issues (d) Waivers and Refund Requests J. Howald & K. A. S. Monaghan 1

3 PART II: NEW GRADUATED RATE ESTATE REGIME AND CHARITABLE DONATION RULES: CLARIFICATIONS Testamentary Trust Created By a Will Multiple Wills, But Only One Estate Risk in Delaying Distributions from Estate First 36 Months Maximizing GRE Benefits 4 Taxation Years in 36 Months Designations to Tax Income in a Trust Further Restrictions (a) Interprovincial Planning Spousal Trust (b) Inability to Utilize Tax Credits (c) Late Designation Death of Life Interest Beneficiary Post-Mortem Planning Complications Estate Donation More Flexibility but More Complications (a) Substituted property (b) Public Foundation as a Beneficiary Issue (c) No More Donation Sharing with Spouse on Death PART III: FEDERAL AND ONTARIO BUDGET MATTERS Federal Budget 2015: (a) Selected Personal Tax Measures (b) Selected Business Tax Measures Ontario Budget Highlights: (a) Integration with Federal Legislation: Capital Gains on Partnership Interests (b) Integration with Federal Legislation: Taxation of Trusts and Estates (c) Tax Credits (d) Electricity Sector Changes J. Howald & K. A. S. Monaghan 2

4 This paper highlights some of the significant income tax developments over the past year of interest to owner-managers and their tax advisors. Part I summarizes some of the updated and new Income Tax Folios and select recent positions of interest from the Canada Revenue Agency ( CRA ). Part II describes selected issues concerning estates and trusts while Part III highlights significant changes announced in the 2015 Federal and Ontario budgets. PART I: WHAT S NEW FROM CRA? Income Tax Folios: The Income Tax Folio project was formally announced by CRA in June 2014 and is intended to replace CRA Interpretation Bulletins and Income Tax Technical News. This process is anticipated to take several years but Folios are being published as they are completed. The Folios are organized by broad categories into seven series, with each series to be made up of several Folios that represent general topics. Each Folio is in turn subdivided into topic-specific chapters. As a Folio is released, it is open for comment for a period of 3 months. Nonetheless, CRA has stated that during the comment period the Folio chapter may be relied upon as an accurate summary of CRA s interpretation of the law. The intention is that Folio content will be updated when an interpretation changes or other major developments occur. While Folios should not be taken as a complete summary of the relevant law, they do represent CRA s interpretation of the law as it relates to the most material aspects of the subject. 1 Over the course of the past year or so, CRA has released nine new Folios and has updated eight previously released Folios. While we have focused on the Folios that we anticipate to be of most interest to owner-managers and their advisors, all of Folios, and a description of any activity in the Folio project in the last twelve months, may be found on CRA website. (a) S4-F5-C1: Share for Share Exchange This new Folio chapter was released on June 12, It relates to share for share exchanges governed by section 85.1 of the Income Tax Act (the Act ) 2 and replaces and cancels Interpretation Bulletin IT- 450R, Share for Share Exchange, dated April 8, The Folio contains a relatively comprehensive description of the conditions that must be satisfied to qualify for the section 85.1 tax-deferred rollover and updates material in IT-450R in a number of ways. Consistent with CRA s previously stated administrative position, Paragraph 1.3 of the Folio clarifies that a partnership is a taxpayer for purposes of 85.1, and so may be a vendor for that purpose. Section 85.1 requires that the consideration the vendor receives for its shares be limited to shares of a single class of the acquiring corporation. 3 The Folio expressly points out that a right to acquire shares to be issued by the acquiring corporation at a future date will not satisfy this requirement. Thus, the shares to be issued should be authorized and issued at the time of the exchange. This may be contrasted with section 85 under which the tax-deferred transfer may be available notwithstanding that e the share consideration will be issued in the future. (Obviously, subsection 85(1) applies to a broader range of transactions than share-for-share exchanges, and in many ways is far more flexible. However, J. Howald & K. A. S. Monaghan 3

5 subsection 85(1) requires a joint election by the vendor and acquiring corporation, something not required for the section 85.1 rollover.) The Folio maintains CRA s administrative practice with respect to fractional shares provided the cash or other non-share consideration received in lieu of a fraction does not exceed $200, the vendor may choose to reduce the adjusted cost base ( ACB ) of the new shares received by the value of the nonshare consideration or report the gain or loss on the disposition of the fractional share. Where the nonshare consideration exceeds $200, the vendor must report any gain or loss from the disposition. The odd (and seemingly incorrect) reference to a possible deemed dividend under subsection 84(3) arising in respect of a fractional share in paragraph 6 of IT-450R has not been carried over into the Folio. (b) S4-F7-C1: Amalgamations of Canadian Corporations The Folio on amalgamations was first published in late November 2014, but was updated effective May 8, It replaces Interpretation Bulletin IT-474R2. The Folio consolidates CRA s views on a number of issues previously addressed in various forums but not reflected in IT-474R, Amalgamations of Canadian Corporations, dated January 8, Noteworthy in the Folio is CRA s express reference to the decision in Envision Credit Union v R 4 in the context of what constitutes a qualifying amalgamation for purposes of subsection 87(1). In particular, the Folio states that if the governing corporate statute provides that the amalgamated corporation is seized of and holds all the property, rights and interests of the predecessors, the amalgamation will be considered to satisfy that condition in subsection 87(1). If an amalgamation does not satisfy the conditions of subsection 87(1) (e.g., because the corporations are not taxable Canadian corporations), the tax consequences of the amalgamation will depend on the governing corporate law. If the corporate law provides that the predecessors cease to exist and a new corporation is formed on the amalgamation, the Folio states that the predecessors generally will be considered to have disposed of any property held immediately before the amalgamation. The Folio does not address what the proceeds are or what the cost of the property is to the new corporation. The Folio states that where an amalgamation satisfies the conditions of subsection 87(1), but the Act is silent on a particular tax attribute of a predecessor, that attribute generally does not flow through to the new corporation. However, in Envision, although the amalgamation was found not to satisfy the conditions of subsection 87(1), the Tax Court concluded that because the governing corporate law provided that the amalgamating corporations continued, their tax attributes flowed through to the amalgamated corporation. 5 While the decision was appealed and the case was ultimately decided by the Supreme Court of Canada on a different basis, it might be interesting to consider whether CRA s position might be challenged on the reasoning in the Tax Court decision. The Folio expressly states that the provisions of subsections 49(3), (3.1) and (4) do not apply where an option granted by a predecessor is exercised following the amalgamation. (These provisions are relevant to options other than options to acquire shares or debt of the option granter). Thus, in CRA s view, there is no provision of the Act that allows the option premium previously received and taxed as a capital gain to be reversed and treated as part of the proceeds for the property disposed of on exercise of the option. Presumably, on the same reasoning, a premium received by a predecessor for obligating itself to acquire a property under a put would not be reversed if the put was exercised following the amalgamation. This seems harsh and it is unfortunate that CRA is not more accommodating in its J. Howald & K. A. S. Monaghan 4

6 interpretation of the relevant provisions. While the Folio does not address the consequence to an amalgamated corporation of the exercise of an option acquired by a predecessor, it appears that the cost to the amalgamated corporation of any property acquired on exercise of the option would include any amount the predecessor paid for the option. Effective Date of Amalgamations The Folio confirms that the effective date of an amalgamation will be governed by the relevant corporate law and that, in the absence of a particular time specified in the certificate of amalgamation, CRA will generally accept that the amalgamation is effective from the earliest moment on the date specified. However, the Folio cautions that even if a certificate of amalgamation is silent as to the time of an amalgamation, if a series of transactions occurs before, but on the same day as, the amalgamation, the effective time of the amalgamation will be considered to be at the time that makes sense to give effect to the series of transactions occurring in a logical order. Taxation Year-Ends and Acquisitions of Control The Folio contains significantly more detail on acquisitions of control and amalgamations than IT-474R did, but for the most part the statements are consistent with CRA s prior positions. In particular, if there is an acquisition of control and amalgamation on the same day, CRA will generally accept that the deemed taxation year under subsection 249(4) and paragraph 87(2)(a) are simultaneous, so the acquired corporation will have only a single taxation year. However, several exceptions to this position are identified in the Folio. If the amalgamation is specified to occur at a particular time in the certificate of amalgamation, CRA views that time as determinative of the time of the amalgamation. If a subsection 256(9) election is made regarding the time at which control is acquired, CRA does not consider itself bound by its administrative position. Moreover, this administrative position does not apply where control is acquired by virtue of a horizontal amalgamation. The deemed year end under subparagraph 256(7)(b)(ii) precedes the deemed year end under paragraph 87(2)(a), and consequently CRA will not accept that the predecessor has only one taxation year in that circumstance. Importantly, but not surprisingly, CRA also states its administrative practice applies only where the predecessors do not engage in transactions outside the ordinary course of business on the day of the amalgamation. Obviously, whether a transaction is outside the ordinary course of business may not always be clear. CRA suggests that a closing agenda describing the transactions indicates the transactions are outside the ordinary course of business. However, it is not clear why all transactions outside the ordinary course of business should affect CRA s position. In some cases, the transactions may have no effect on the income or loss calculation and there would appear to be no reason to require the predecessor to recognize two taxation years. Consider the following example: Buyco acquires control of Target by purchasing all of the Target shares. On the same day, Parent of Buyco makes a loan to Target so that Target is able to repay third party debt, the terms of which require repayment immediately following an acquisition of control and do not permit the amalgamation of Buyco and Target to occur prior to the debt repayment. Immediately after repaying the debt, Buyco and Target amalgamate. Would the loan to Target J. Howald & K. A. S. Monaghan 5

7 be considered to be a transaction outside the ordinary course of Target s business such that Target will have two year ends? What purpose would that serve other than added compliance? Nonetheless, CRA s position on this issue is consistent with its position on the effective time of an amalgamation where transactions occur on the same day as the amalgamation. Of course, if there are successive amalgamations on a particular day, additional taxation years will have to be recognized. The Folio offers the following example in Paragraph 1.21: Corporation A owns all of the issued shares of both Corporation B and Corporation C. In order to merge the operations of all three corporations, a short-form horizontal amalgamation of Corporation B with Corporation C is implemented to form Corporation BC. Then Corporation BC is amalgamated with Corporation A in a short-form vertical amalgamation to form Corporation ABC. In such a situation, Corporation B and Corporation C will each be deemed by paragraph 87(2)(a) to have a tax year-end immediately before they amalgamate. Similarly, new Corporation BC will be deemed by paragraph 87(2)(a) to have a tax year-end immediately before its amalgamation with Corporation A. Consequently, any tax attributes (including non-capital losses and investment tax credits available for carry-forward) of either Corporation B or Corporation C which will be available to Corporation ABC will have aged by two tax years as a result of the two amalgamations. This position appears consistent with the provisions of the Act. Corporation BC is a different corporation than each of Corporation B and Corporation C (though it is the continuation of both of them) and is a different corporation than Corporation ABC, which is a continuation of Corporation A and Corporation BC (and its predecessors). While the extra tax years are unlikely to be very important for non-capital losses, given that they may be carried forward for 20 years, the number of taxation years of a particular corporation may be relevant for a number of other provisions of the Act. For example, the carry-back period for losses is three taxation years. The maximum period for a capital gains reserve under paragraph 40(1)(a) is five taxation years. Debt Obligations of the Predecessors The Folio contains a number of Paragraphs concerned with indebtedness of a predecessor. Subsection 87(7) applies where debt of a predecessor becomes debt of the amalgamated corporation. In that circumstance, paragraph 87(7)(d) provides that the provisions of the Act apply to the new corporation as if it had incurred or issued the debt on the same terms and at the same time as the predecessor corporation. This allows for various attributes associated with the debt to be carried over to the amalgamated corporation. For example, section 78 requires an amount deducted in computing income in a particular taxation year, but not actually paid in that year, to be included in income in the third taxation year following the year in which it was deducted if the amount is owed to a person who did not deal at arm s length with the debtor at the time the expense arose, and it remains unpaid at the end of the second taxation year following the particular year. Thus, the Folio points out, if an amount owing by a predecessor arose at a J. Howald & K. A. S. Monaghan 6

8 time when the predecessor did not deal at arm s length with the person to whom the amount was owing, that amount will be considered to have been incurred by the amalgamated corporation at the time the predecessor incurred it and the taxation years of the predecessor and of the amalgamated corporation will be aggregated for purposes of determining if the debt is repaid before the end of the second taxation year. To illustrate, assume that a corporation (Debtor) has a calendar year taxation year. In January 2015, it incurs a debt in respect of a management fee payable to its principal shareholder. On June 1, 2015, all of the Debtor shares are acquired by an arm s length purchaser (Buyco). Buyco and the selling shareholder agree that the management fee will not be paid until Buyco is satisfied with respect to certain representations in the share purchase agreement. On June 15, 2015, Debtor and Buyco amalgamate to form Amalco which chooses a December 31 year-end, in keeping with the taxation years of the other corporations in the Buyco corporate group. The management fee is paid on January 31, Although less than 12 months will have passed between the date the expense arose and the date it is paid, under section 78 it may be included in Amalco s income in 2016: it remains unpaid at the end of the second taxation year (the two years being June 1 to June 14, 2015 and June 15, 2015 to December 31, 2015,) following the taxation year in which it arose (January 1, 2015 to May 31, 2015). Where control of a corporation is acquired and that corporation has debt denominated in a foreign currency, the corporation may be entitled to make a designation under paragraph 111(4)(e) to realize an accrued foreign exchange gain on a foreign currency denominated debt that arises because of the application of subsection 111(12). It may choose to do so in order to use up capital losses that might otherwise expire or because it has financed a subsidiary with foreign currency denominated debt in the same currency and has an offsetting loss on the receivable that it will be required to recognize. In such event, if the corporation subsequently amalgamates with another, the new corporation would, under paragraph 87(7)(d), be considered to be the corporation that realized the gain in respect of the foreign currency denominated debt for purposes of subsections 40(10) and (11). As a result, no double taxation of the same gain would arise when the new corporation actually repays the debt. If foreign denominated debt between predecessors is cancelled as a consequence of an amalgamation, neither the creditor nor the debtor will realize a foreign exchange gain or loss. Bump Designations Although a designation under paragraph 88(1)(d) to bump the cost of certain non-depreciable capital property acquired on an amalgamation of a corporation and its direct wholly-owned subsidiary must, under the provisions of the Act, be made in the first tax return of the amalgamated corporation, CRA acknowledges in Paragraph 1.39 of the Folio that it will accept a late-filed designation in certain circumstances. CRA states that its acceptance of a late-filed designation will be conditional on the taxpayer agreeing to make a proportional designation of the bump amount among all property eligible for the bump and to accept that CRA in its discretion may determine what portion of the bump will be added to the cost of any property. The late-filed designation will not be accepted in cases of retroactive tax planning, where the designation is part of a tax avoidance scheme or if it would be necessary to issue a reassessment of a statute-barred year. Notwithstanding CRA s position, the Federal Court of Appeal decision in Nassau Walnut 6 may support the position that a designation, unlike an election, may be filed late, at least where there is no J. Howald & K. A. S. Monaghan 7

9 retroactive tax planning. 7 However, obviously it would be prudent to make the designation on a timely basis if at all possible. Paid-up Capital In the context of the paid-up capital ( PUC ) of an amalgamated corporation, the Folio cautions against streaming capital to a particular class or series of shares to accommodate a surplus strip and against steps taken to duplicate PUC, suggesting it will apply section 245 (the GAAR ) and the principles from the Supreme Court of Canada s decision in Copthorne Holdings Ltd. v R. 8 The Folio confirms that where redeemable preferred shares are issued to shareholders for the sole purpose of satisfying the conditions of subsection 87(1) regarding continuity of shareholders, it will not apply the GAAR notwithstanding that the shares are redeemed immediately after the amalgamation. This is often done in the context of amalgamation squeeze out transactions. However, in the context of PUC shifting, the Folio makes no mention of the position in Supplement 1 to Information Circular IC88-2, General Anti-Avoidance Rule Section 245 of the Income Tax Act, dated July 13, In paragraph 9 of that Supplement, CRA has suggested it will not apply the GAAR if PUC is shifted to redeemable preferred shares in an arm s length context to provide shareholders with a capital gain rather than deemed dividend. It is not known if this omission is an oversight. (c) S4-F16-C1: What is a Partnership? This Folio was published in May 2015 and outlines the factors that CRA uses to determine whether a partnership exists. Although the Act recognizes the existence of partnerships and addresses income tax consequences of transactions involving partnerships, it does not contain a definition of partnership. As the Folio correctly observes, whether a partnership exists for tax purposes is to be determined with regard to provincial and territorial partnership statutes as described in three Supreme Court of Canada cases: Continental Bank, 9 Spire Freezers 10 and Backman. 11 In the case of a foreign entity or arrangement, CRA will refer to the relevant foreign law and any relevant agreements to determine the characteristics of the entity or arrangement and compare those characteristics to those of Canadian entities or arrangements including partnerships, corporations, trusts or co-ownerships. If the foreign arrangement more closely resembles a Canadian partnership, it will be treated as a partnership for Canadian tax purposes. Whether a partnership exists is a mixed question of fact and law. To conclude that a partnership exists in the common law provinces, CRA states that one must demonstrate that two or more persons are: carrying on business; in common; with a view to profit. This language is consistent with the common law provinces partnership legislation. J. Howald & K. A. S. Monaghan 8

10 A joint venture is an arrangement that has attributes similar to a partnership, but is not recognized for tax purposes. The Folio cites the three requirements from Woodlin Developments Ltd. v. MNR 12 as relevant to determining whether a joint venture exists: a joint property interest in the subject matter of the venture; a right of mutual control and management of the enterprise; and a limitation of the objective of the business to a single undertaking or a limited number of undertakings. On occasion, CRA has expressed views on certain foreign relationships. For example, it has ruled that an Irish common contractual fund would be respected as a co-ownership arrangement for purposes of the Act where the unitholders had proportionate undivided co-ownership interests as tenants in common in the property which the arrangement governed. 13 When asked how it might classify a limited liability limited partnership ( LLLP ) under U.S. law, CRA said it would only make such determination in the context of a ruling request. An LLLP is a relatively new modification of a limited partnership which is recognized in some U.S. jurisdictions. Like a limited partnership, an LLLP consists of one or more general partners and one or more limited partners but the general partners receive limited liability for the debts and obligations of the LLLP. 14 At the IFA Canada Conference held in Calgary in May 2015, CRA indicated that LLLPs governed by Florida law are being analyzed and invited submissions regarding the classification of these entities. CRA s main concern is that LLLPs seem to have both legal personality and full, or at least very extensive, limited liability for all members, at least where they do not affirmatively opt out of such limitation. Thus, notwithstanding the other partnership-like features of these entities, CRA is wondering whether these two factors, taken in the context of U.S. law, should be considered to be so significant that these entities should be classified as corporations for Canadian tax purposes. 15 CRA representative at the Conference also suggested that CRA was considering a request from a taxpayer seeking classification of a US limited liability company ( LLC ) as a partnership, notwithstanding CRA s longstanding position that an LLC is to be treated as a corporation for Canadian income tax purposes. 16 (d) S1-F5-C1: Related Persons and Dealing at Arm s Length An update to CRA s Folio on related persons and dealing at arm s length, first released on May 2, 2014, was released on June 9, Although categorized under the Individuals Series of Folios, the Folio addresses the topic in the broader context in which it is relevant in the Act. During the initial comment period, the CPA-CBA Joint Committee on Taxation (the Joint Committee ) made a submission to CRA suggesting a number of changes be made to the Folio. 17 The update addresses some of the Joint Committee s suggestions, albeit not with the language suggested by the Joint Committee. The update clarifies that whether a partnership deals at arm s length with someone other than a partner at a particular time will be determined with regard to the relationship between that person and the directing minds of the partnership at that time. J. Howald & K. A. S. Monaghan 9

11 From the outset, the Folio stated that the three factors that have been identified by the courts as relevant to determining whether unrelated persons do not deal at arm s length are: whether there is a common mind which directs the bargaining for both parties to a transaction; whether the parties to a transaction act in concert without separate interests; and whether there is de facto control. The update clarifies that not all three factors need be present in all cases, and that different weighting might be given to the factors in different circumstances. Moreover, whereas the first draft of the Folio stated that parties that act in a highly interdependent manner in respect of a transaction of mutual interest could be assumed to be acting in concert and therefore not dealing at arm s length, the revised Folio takes a somewhat more balanced view. It states that such circumstances can be an indication that the parties are acting in concert and in the same interest and therefore are not dealing with each other at arm s length. This relaxing of the position is more in keeping with the jurisprudence which states that working together to achieve a common goal, mutually desirable to all parties, is not indicative of a non-arm s length relationship: most business transactions are presumably pursued because all parties see some benefit. (e) S3-F6-C1: Interest Deductibility CRA s Folio describing its administrative positions regarding interest deductibility was first released on March 6, 2015 and was open for comment until June 6, The Folio was updated July 16, 2015, but the changes were relatively minor. This Folio is more than 25 pages long and covers a broad range of topics from interest on money borrowed to purchase common shares to loss consolidations and tracing, covering a number of topics not covered by Interpretation Bulletin IT-533, Interest Deductibility and Related Issues, dated October 31, 2003, which it replaces. The Folio expressly acknowledges that the purpose of earning income test can be satisfied on the basis of gross income rather than net income and that such purpose may be ancillary, citing the Supreme Court of Canada s decision in Ludco Enterprises Ltd et al. v The Queen. 18 In the context of borrowing money to purchase common shares, the Folio provides: Generally, CRA considers interest costs in respect of funds borrowed to purchase common shares to be deductible on the basis that at the time the shares are acquired there is a reasonable expectation that the common shareholder will receive dividends. However, it is conceivable that in certain fact situations, such reasonable expectation would not be present. If a corporation has asserted that it does not pay dividends and that dividends are not expected to be paid in the foreseeable future such that shareholders are required to sell their shares in order to realize their value, the purpose test will not be met. However, if a corporation is silent with respect to its dividend policy, or its policy is that dividends will be paid when operational circumstances permit, the purpose test will likely be met. Each situation must be dealt with on the basis of the particular facts involved. J. Howald & K. A. S. Monaghan 10

12 The Folio describes two different fact patterns as illustrative of its position: If an investment vehicle expressly states dividends will not be paid and earnings will be reinvested to increase asset value and that equity holders will be required to sell their interests to realize the value, interest on money borrowed to acquire the investment will not be deductible. On the other hand, if a corporation issues common shares to raise capital and states that earnings will be reinvested for the foreseeable future but dividends will be paid when operational circumstances permit, the income earning purpose test will generally be considered to be met. The message appears to be that care must be taken in what is said about dividends. Loss Consolidations In contrast to its acceptance of the Ludco principle, in the context of loss consolidation transactions CRA believes there should be a positive spread between the dividend rate on the preferred shares and the interest rate charged on the indebtedness incurred to acquire them. Moreover, CRA states that the capacity of the issuer of preferred shares to produce income is a factor in assessing whether the purchaser meets the requisite purpose test. The Folio states that CRA will accept loss consolidation transactions undertaken between corporations that are: related and affiliated; related but not affiliated; or affiliated by reason of de jure control, but not related. 19 The transactions undertaken must not be blatantly artificial, and must be legally effective and otherwise comply with the provisions of the Act. 20 Curiously, although a number of CRA s statements in this Folio regarding loss consolidations go beyond interest deductibility per se, the Folio refers taxpayers to Income Tax Technical News 30 for additional information regarding loss consolidations. It is not clear why the material there was not included in the Folio since the Folios are intended to replace Technical News. ITTN 30 refers to Supplement 1 to IC88-2 and the statements there regarding borrowing capacity of the issuer of the preferred shares. This aspect is not expressly referred to in the Folio, but might be covered by the requirement that the transactions not be blatantly artificial and this cross reference. 21 It would obviously be desirable if all the relevant considerations were consolidated in a single place. Tracing and Linking The Folio contains fairly detailed guidance on tracing or linking the borrowed money to an incomeearning use where the borrowed money is commingled with other funds and where the property acquired with the borrowed money is replaced. A number of examples in the Folio illustrate the principles. CRA will accept cash damming or a flexible approach to tracing or linking the borrowed money to eligible uses. However, timing of transactions is important where direct tracing is not possible. Thus, for example, a specific use of money cannot be linked to money borrowed after the money was used. Moreover, where borrowed money was used partly for an eligible purpose and partly for an ineligible one, CRA asserts that it is not open to the taxpayer to use the flexible approach and apply any J. Howald & K. A. S. Monaghan 11

13 repayment as first reducing the portion of the borrowed funds that relates to the ineligible use. CRA states the repayment must be applied proportionately based on the eligible and ineligible portions. 22 (See Paragraphs 1.34, 1.38, 1.42, and 1.43 of the Folio.) There may be circumstances in which a borrower may wish to take a different position, although doing so might invite a challenge by CRA. Interest on Accounts Payable The Folio states that, on an administrative basis, interest on overdue amounts payable for services will be deductible under section 9, notwithstanding that interest is considered a capital expense (see Paragraph 1.93). Where a credit card is used by a small business owner for a combination of personal and business expenses, any financing (interest) charges may be apportioned between personal and business on a proportionate basis (see Paragraph 1.97). Contingent Interest The Folio expressly addresses the potential effect of section 143.4, relating to contingent amounts, added to the Act in response to Collins v. The Queen. 23 Where section applies, the amount of an expenditure that would otherwise be deductible in a year for income tax purposes is reduced by the contingent amount. However, if the contingent amount is paid in a particular subsequent year, it is considered in that year: to have been incurred by the taxpayer in the particular year; to have been incurred for the same purpose and to have the same character as the expenditure previously reduced; and to have become payable by the taxpayer in respect of the particular year. The Folio observes that that section may affect the deductibility of interest for taxation years ending on or after March 16, (f) S1-F3-C2: Principal Residence CRA released an update to the Folio on principal residence on February 3, In addition to some modest changes to reflect legislative amendments, the most notable changes relate to the status of a housing unit as a principal residence. In particular, previous references to seasonal residences have been removed and replaced with a more general description. The update reiterates that the receipt of incidental income from a housing unit will not necessarily result in the property losing its status as a principal residence. Although the Folio does not provide any examples, presumably the rental of a parking spot associated with a condominium or cooperative unit, or the rental of a room would be considered incidental. However, care must be taken if there are two units in a single home. 24 Another example of incidental rental income might be income from a temporary rental while on sabbatical or vacation, such as individuals who rented out their homes during the Vancouver Olympics. Since 2005, a residence may be designated as a principal residence by a taxpayer if it is ordinarily occupied by the taxpayer s child, although a taxpayer may only have one principal residence. The update clarifies that if a housing unit was acquired for the purposes of earning income but is rented to a J. Howald & K. A. S. Monaghan 12

14 child who ordinarily inhabits the property, the housing unit may qualify as a principal residence if the other conditions for that status are satisfied. (g) Other: Other new Folios and updates since September 1, 2014 are listed below: i.) S1-F1-C1: Medical Expense Tax Credit released September 3, ii.) S1-F2-C2: Tuition Tax Credit updated on September 12, 2014 and March 12, iii.) S1-F1-C2: Disability Tax Credit updated on September 12, iv.) S6-F2-C1: Disposition of an Income Interest in a Trust released September 19, 2014 and updated on March 17, v.) S6-F1-C1: Residence of a Trust or Estate released on September 19, vi.) S3-F9-C1: Lottery Winnings, Miscellaneous Receipts and Income (and Losses) from Crime released on December 9, 2014 and updated on April 3, vii.) S1-F3-C3: Support Payments updated on March 5, viii.) S1-F2-C3: Scholarships, Research Grants and Other Education Assistance updated on April 3, ix.) S3-F8-C1: Principal-business Corporations in the Resource Industries released on April 3, x.) S2-F3-C1: Payments from Employer to Employee released April 14, xi.) S4-F2-C1: Deductibility of Fines and Penalties released on July 10, xii.) S2-F1-C1: Health and Welfare Trusts released July 27, Select Technical Interpretations of Interest: (a) Determination of Loss CRA Document C6 Subsection 152(1.1) permits a taxpayer to seek a determination of loss. It provides in part: Where the Minister ascertains the amount of the taxpayer s non-capital loss for a taxation year and the taxpayer has not reported that amount as such a loss in the taxpayer s return or income for that year, the Minister shall, at the request of the taxpayer, determine the amount of the loss The Tax Executives Institute ( TEI ) has periodic liaison meetings with the Department of Finance ( Finance ) and CRA at which various issues are discussed. In 2013, TEI recommended that the Act be amended to require CRA to make an initial determination of losses for a taxation year at the same time and in the same manner as the initial determination of income for that year. Finance expressed support for an interpretation of subsection 152(1.1) that would accommodate a taxpayer s request, when it files its return, that the Minister determine its loss, such that no amendment to the Act would be required. This is considered important because, while a year in which a non-capital loss is realized may become statute-barred, the effect is not the same as when a year in which income is realized is statute-barred. In the loss case, it is open to the Minister to adjust the loss in the year in which the loss is to be used. Given the 20 year carry-forward period for non-capital losses, this can create substantial uncertainty for a taxpayer. However, where a determination of loss in respect of a J. Howald & K. A. S. Monaghan 13

15 taxation year is made, the provisions of the Act regarding the binding nature of the determination, rights to object, and reassessment periods apply to that determination as if it were a notice of assessment. 25 As a follow up to the discussions with Finance, at the November 2014 TEI-CRA liaison meeting, CRA was asked if it would interpret subsection 152(1.1) in the manner suggested by Finance. Unfortunately, CRA confirmed that it will not issue a determination of loss to a taxpayer who requests one on filing its return. CRA s rationale is that subsection 152(1.1) requires the Minister to determine that the amount of the taxpayer s loss for a taxation year is different than that reported by the taxpayer in its return before it can issue a determination. Thus, if the return is accepted as filed, the amount of the taxpayer s loss has not been ascertained by CRA to be an amount that differs from the amount the taxpayer reported in the return and the conditions of subsection 152(1.1) are not satisfied. As a result, CRA does not view itself as having the statutory authority to issue a determination of loss simply because the taxpayer requests one at the time its return is filed. CRA observed that this interpretation has been confirmed by the courts. Although CRA does not refer to any particular case, Burnet v MNR 26 may be the case CRA had in mind. It appears clear that, to achieve the result sought by TEI, the Act will have to be amended to require the Minister to issue a notice of loss determination at the taxpayer s request where the taxpayer and the Minister agree with the loss as reported by the taxpayer. (b) Late-Filed Eligible Dividend Designation Technical Interpretation E5 An eligible dividend is defined under subsection 89(1) as a taxable dividend paid after 2005 by a corporation resident in Canada to a person resident in Canada which is designated as such under subsection 89(14). To make a designation, the corporation must notify shareholders in writing that the dividend is an eligible dividend at the time it is paid. A late designation of a taxable dividend as an eligible dividend is permitted under subsection 89(14.1) if, in CRA s opinion, it would be just and equitable to allow a designation under subsection 89(14). An application for a late designation may be made for taxable dividends paid on or after March 29, 2012 but must be made before the day that is three years after the day on which the designation was required to be made (i.e., within three years of the date the dividend was paid). This Technical Interpretation, dated March 12, 2015, addresses circumstances in which a Canadiancontrolled private corporation ( CCPC ) paid a dividend to its shareholders but did not designate the dividend as eligible because it did not believe it had a sufficient general rate income pool ( GRIP ) balance. The facts in the Technical Interpretation can be illustrated with the following timeline: J. Howald & K. A. S. Monaghan 14

16 A CCPC (Canco) declared and paid a dividend to its shareholders. The dividend was not designated as an eligible dividend under subsection 89(14). CRA assessed Canco's taxation year in which it paid the dividend, denying its claim for the full small business deduction ( SBD ). Canco appealed the assessment but CRA s position was upheld, albeit more than three years after Canco paid the dividend. As a result of the assessment, Canco's GRIP balance (at time 1 above) increased, so that it ultimately had sufficient GRIP to designate the dividend as an eligible dividend in the taxation year in which it was paid. CRA was asked to address two questions: 1. Whether, once CRA s assessment has been upheld, Canco can designate the dividend as an eligible dividend under subsection 89(14), as a result of the increase in its GRIP balance. 2. Whether CRA would accept an eligible dividend designation made on a timely basis when Canco is initially reassessed, but that would become effective only when its GRIP balance is known at the end of the appeals process. While subsection 89(14.1) was enacted as a relieving provision, it is applicable only to dividends paid after March 28, Nonetheless, CRA was asked to consider these questions in the context of a dividend paid before March 29, 2012 and one paid after that date. CRA confirmed that a late eligible dividend designation cannot be made for a dividend paid before March 29, 2012, due to the contemporaneous designation requirement in subsection 89(14) applicable to dividends paid before that date. 27 CRA observed that subsection 89(14.1) is a relieving provision that allows late eligible dividend designations to be made only in very specific circumstances. In particular, CRA must be of the opinion that it would be just and equitable to accept a late designation, 28 and Canco must make the designation within three years of the day it was required to do so under subsection 89(14). CRA referred to its previously published positions that a late designation cannot be made if it falls outside the scope of subsection 89(14.1), 29 noting that eligible dividend designations are not referenced J. Howald & K. A. S. Monaghan 15

17 in Regulation 600. In the hypothetical case, a late designation could not be made because it would fall outside the three-year window specified in subsection 89(14.1). As to the second question, CRA concluded that, regardless of when the dividend was paid, CRA cannot accept and hold in abeyance an eligible dividend designation made at the time of an initial assessment, which, if upheld, would result in a GRIP balance. CRA's conclusion might be considered inconsistent with its position with respect to comparable provisions dealing with excess capital dividend account designations that are the subject of a subsection 184(3) election. In a 2013 technical interpretation, CRA said that it will generally hold this election in abeyance until final resolution of the appeal. This was in fact a change in CRA s prior position in the context of subsection 184(3). 30 However, CRA s position may be understandable in the context of a taxable dividend. If an appeal goes much beyond the three year window, the taxation years of the dividend recipients may be statutebarred and it may be difficult for them to file a request for a refund of any tax paid because the dividend was originally treated as a non-eligible dividend, when it might have been designated as eligible. In contrast, in the case of an excess capital dividend designation, CRA would presumably reassess the recipients of the dividend all of whom could object. A corporation may, of course, make the eligible dividend designation on a timely basis (or late with CRA s consent) but if it is subsequently determined that the GRIP is insufficient, the corporation would be liable for a penalty in respect of the excess eligible dividend designation, subject to any relief it might obtain under Part III.1 of the Act by jointly electing with all shareholders to treat the excess dividend as a non-eligible dividend. (c) Debt Forgiveness and Contingent Amounts Technical Interpretation E5 Section includes provisions that reduce the amount of an expenditure that is otherwise deductible, or would otherwise form part of the cost or capital cost of property, if the taxpayer has a right to reduce or eliminate the amount required to be paid in respect of the expenditure. The amount of the expenditure that may be so reduced is a contingent amount. 31 Section 80 contains the debt forgiveness rules, which generally apply where a commercial obligation is settled or extinguished for an amount less than the principal amount of the debt. Commercial obligation is defined as a commercial debt obligation issued by a debtor. A commercial debt obligation generally includes a debt obligation on which interest is deductible or would be deductible, if charged. Under paragraph 20(1)(c), interest payable on an amount payable for property acquired for the purpose of earning income is generally deductible in computing income. The question addressed in this Technical Interpretation is how the debt forgiveness rules would interact with the rules in section if a debt obligation issued in circumstances to which section applied is subsequently settled or extinguished. In particular, a commercial debt obligation was issued in respect of the acquisition of property. The debt obligation included an embedded right to reduce the amount payable if the taxpayer satisfied certain conditions within a year. The embedded right was assumed to qualify as a contingent amount as defined under subsection 143.4(1). As a result, the taxpayer s cost of the property acquired was reduced by the contingent amount under subsection 143.4(2). The question was whether the debt forgiveness J. Howald & K. A. S. Monaghan 16

18 rules would apply to the debt were it subsequently settled or extinguished for an amount less than its principal amount. If the debt forgiveness rules applied to the full amount of the debt, an element of double taxation would arise. Assume that the property cost $1.5 million and the contingent amount in respect of the debt issued to pay for it was $150,000. The cost of the property to the taxpayer would be reduced to $1.35 million. If the debt was subsequently settled for $1.25 million, is the forgiven amount $100,000 or $250,000? If the latter, the debt forgiveness rules would result in a reduction of tax attributes of $250,000 notwithstanding that the rules in section would have previously reduced tax attributes by $150,000 in respect of the same indebtedness. The forgiven amount of a commercial debt obligation 32 is determined by the formula, A B, where A is the lesser of the amount for which the obligation was issued and the principal amount of the obligation, and B is the sum of various amounts, one of which is the principal amount of an excluded obligation. Because an amount described in B reduces the forgiven amount, a contingent amount that qualifies as an excluded obligation would reduce the forgiven amount otherwise determined. An excluded obligation generally includes an obligation issued by a debtor, the proceeds from the issue of which were (i) included in computing the debtor s income, (ii) deducted in computing any balance of undeducted outlays, expenses or other amounts, or (iii) deducted in computing the capital cost or cost amount to the debtor of any property. 33 In this Technical Interpretation CRA agreed that subparagraphs (a)(ii) and (iii) of the excluded obligation definition would generally apply as a consequence of the reduction in the cost of the property under section In other words, the contingent amount would have been deducted in computing the cost of the property. Thus, CRA agreed that a contingent amount under subsection 143.4(1) would generally be included in the definition of an excluded obligation in subsection 80(1). 34 It is important to note that it is only the portion of the debt that is contingent that will qualify as an excluded obligation. Thus, if a taxpayer issues a debt obligation in the amount of $500,000, payable as to interest only until maturity in five years, in satisfaction of the purchase price of an asset and, under the terms of the debt obligation, the taxpayer will be relieved of paying $50,000 if it is paid in full within two years, only the $50,000 contingent amount would be an excluded obligation. In this situation, subsection 248(27) provides that, unless the context otherwise requires, an obligation issued by a debtor includes any part of a larger obligation issued by the debtor. Thus, if the creditor accepted $410,000 in full satisfaction of the entire debt, the taxpayer s forgiven amount would be $40,000 being the principal amount of the obligation ($500,000) less the sum of the amount paid on account of the debt ($410,000) and such portion of the principal amount as represents an excluded obligation ($50,000). The taxpayer s cost of the property would be $450,000, reflecting the contingent amount. However, the $40,000 forgiven amount under section 80 may not be eligible to be applied to further reduce the cost of the property because the order in which tax attributes must be reduced by a forgiven amount is specified in section 80. (d) Subsection 55(2), SIOH and Paragraph 55(5)(f) Technical Interpretation C6 Subsection 55(2), in its current form, 35 is intended to prevent a corporate shareholder from realizing, as an inter-corporate tax-free dividend, the unrealized and untaxed appreciated gain in shares of another J. Howald & K. A. S. Monaghan 17

19 corporation to the extent that that gain is attributable to anything other than income earned or realized by any corporation after 1971 and before the relevant safe-income determination time (i.e., safe income on hand or SIOH ). The determination of safe income is complex and the Act contains limited guidance. While some principles and guidelines have been developed by the jurisprudence and CRA, nonetheless, it is often difficult to determine with any real certainty a shareholder s share of the safe income on hand. Where a taxable dividend is subject to subsection 55(2), the entire dividend is deemed to be proceeds of disposition or a capital gain, 36 even if there is safe income on hand. Consequently, where the safe income is uncertain, it is common to pay a series of dividends to limit the potential subsection 55(2) exposure. Alternatively, under paragraph 55(5)(f), the dividend recipient may designate a portion of the dividend to be a separate taxable dividend such that only that portion of the dividend in excess of safe income will be subject to subsection 55(2). 37 The Act requires the designation to be made in the taxpayer s return for the year in which the dividend is received. Nonetheless, CRA s longstanding position, when issuing a subsection 55(2) assessment, is to apply subsection 55(2) only to the portion of the taxable dividend in excess of the safe income on hand. In other words, where a corporate taxpayer receives a dividend and deducts it in computing taxable income, and neglects to make a paragraph 55(5)(f) designation, where CRA believes subsection 55(2) applies to the dividend, it will assess as if the taxpayer had made the designation. This position is based on The Queen v. Nassau Walnut Investments Inc. 38 In some cases, a corporation may prefer to realize a capital gain rather than receive an inter-corporate tax-free dividend because a capital gain would result in less overall tax. In this Technical Interpretation, CRA was asked to express its views concerning a Canadian corporation (Canco) that receives an intercorporate taxable dividend that exceeds its safe income on hand in respect of the dividend payer so that subsection 55(2) applies. For tax planning reasons, Canco chooses not to make a designation under paragraph 55(5)(f) and self-assesses on the basis that subsection 55(2) applies to the entire amount of the dividend. CRA expressed the view that it could reassess Canco and reduce (i.e., limit) the capital gain to the portion of the dividend that is in excess of the safe income on hand based on the purpose test in subsection 55(2) or on the basis of the GAAR. In so concluding, CRA relied on its interpretation of the Federal Court of Appeal s decision in Nassau Walnut, namely that: subsection 55(2) applies if a dividend effects a significant reduction in a capital gain that could reasonably be considered to be attributable to anything other than safe income; paragraph 55(5)(f) is not an elective provision; the designation requirement of paragraph 55(5)(f) is, in some respects, no different than the deduction provided under subsection 112(1); and the purpose of paragraph 55(5)(f) is to prevent the conversion of that portion of a dividend that is attributable to safe income on hand into a taxable capital gain on the application of subsection 55(2). CRA also stated that the courts have consistently held that safe income should not be subject to double taxation when distributed as a dividend to another corporation. 39 J. Howald & K. A. S. Monaghan 18

20 Although CRA s position in this Technical Interpretation is consistent with comments it has made elsewhere, 40 that position may be open to challenge. Paragraph 55(5)(f) specifically states that the dividend recipient may designate any portion of the dividend to be a separate taxable dividend by making the designation in its tax return. Thus, on its face, the choice to designate rests with the taxpayer. The Act provides that a designation under paragraph 55(5)(f) is to be made in the taxpayer s return for the taxation year in which the dividend is received. In Nassau Walnut, the taxpayer failed to make the designation and sought to do so later, following CRA reassessment. The FCA permitted the taxpayer to late-file the designation on the basis that it would be unfair and punitive not to do so and that nothing in the Act precluded a designation from being filed late. At the beginning of the judgment in Nassau Walnut, Justice Robertson states that the taxpayer was "obligated to make a designation at the time it filed its return for the taxation year in question. This comment is noted by CRA as supporting its position that paragraph 55(5)(f) is not elective. However, we suggest that CRA may be misapprehending the import of this statement. The Tax Court had permitted the taxpayer to treat the portion of the dividend not in excess of safe income as a dividend on the basis that this was in keeping with the object and intent of subsection 55(2) but would not have required that a designation be filed in order to obtain the relief sought. On appeal, the FCA disagreed with that aspect of the Tax Court s decision, stating in part: Two issues arise for our consideration. First, was Nassau obligated at the time of filing its 1989 return to "make" a designation pursuant to paragraph 55(5)(f ) of the Act in order to reduce its tax liability arising from the sale of the shares? The Tax Court Judge concluded that it was unnecessary for Nassau to file a designation and, therefore, he declined to deal with the second issue. In the reasons that follow, I come to the respectful conclusion that Nassau was obligated to make a designation at the time it filed its return for the taxation year in question. Taken in its proper context, the FCA appears to be saying nothing more than that, in cases where there is safe income on hand, the taxpayer must make a designation under paragraph 55(5)(f) in order to obtain the benefit of dividing a single dividend into its safe and not safe components. While the FCA did say that paragraph 55(5)(f) is not an election provision, it did not say it was not an elective provision. Moreover, its statements were in the context of emphasizing that elections and designations are not the same, noting that the Act implicitly recognizes this distinction. By way of example, Justice Robertson referred to subsection 220(3.21) which deems certain section 80 designations to be elections for purposes of applying subsection 220(3.2), the provision that permits elections specifically listed in Regulation 600 to be filed late on application to CRA. In contrast, subsection 220(3.2) and the legislative framework that restricts the late filing of elections does not apply to designations. Justice Robertson further observed that the restrictive approach taken by the courts with respect to the election provisions is prompted by the possibility of retroactive tax planning. However, in the Nassau Walnut case, he observed that the late-filing of the paragraph 55(5)(f) designation was not motivated by retroactive tax planning. J. Howald & K. A. S. Monaghan 19

21 Given that paragraph 55(5)(f) provides that a taxpayer may designate any portion of the taxable dividend as a separate dividend, CRA s position that it is not discretionary is inconsistent with the meaning given to may in other discretionary provisions in the Act, such as paragraph 20(1)(a). Indeed, at the end of his judgment in Nassau Walnut, Justice Robertson stated: In conclusion, it is my opinion that Nassau is entitled to claim the benefit of paragraph 55(5)(f) of the Act. That right arose once the Minister issued the notice of reassessment and invoked subsection 55(2). {Emphasis added.] This language supports a permissive rather than mandated approach to paragraph 55(5)(f). Thus, if a taxpayer inadvertently does not timely file a designation, Nassau Walnut may support the taxpayer s assertion that it has a right to do so later, particularly if faced with a subsection 55(2) assessment, consistent with the permissive language of the provision. It remains to be seen whether CRA may impose that treatment on a taxpayer who chooses to treat the dividend as a single dividend subject to subsection 55(2). (e) Refunds of Tax Following Late-Filed Returns Technical Interpretation E5 Generally, a non-resident is subject to tax in Canada if it carries on business in Canada. However, bilateral tax treaties often exempt business profits from tax in Canada where the non-resident does not carry on business through a permanent establishment located in Canada. Regardless of whether a nonresident corporation may be exempt from Canadian tax because of a treaty, by virtue of clause 150(1)(a)(ii)(B), it is obliged to file a tax return for each taxation year in which it carries on business in Canada. Under subsection 152(7), CRA may issue an assessment for income tax for a taxation year where the required return is not filed. Every person paying an amount to a non-resident for services rendered in Canada must withhold and remit 15% of such payment under Regulation 105. The non-resident may be entitled to a refund of that amount on filing a return and claiming the benefit of a treaty exemption or establishing that its liability for tax is less than the total amount withheld. Subsection 164(1), the provision dealing with refunds, applies If the return of a taxpayer s income for a taxation year has been made within 3 years from the end of the year. Consequently, CRA will generally not refund tax where the taxpayer s return of income for a taxation year has not been filed within three years from the end of the taxation year. 41 The facts presented in this Technical Interpretation involved a non-resident corporation (Forco) that provided services in Canada over several years. Tax was withheld from the payments made to Forco by its clients or customers and remitted to CRA under Regulation 105. However, Forco did not file T2 returns for these years. CRA issued notices of assessment for Part I tax for these years on the basis that Forco was carrying on business in Canada. The Part I tax assessed exceeded the taxes withheld under Regulation 105, resulting in a net balance owing to CRA. Apparently on the recommendation of its tax advisor, Forco paid the assessment to minimize interest charges on the amount assessed as owing. Forco filed T2 returns for the assessed years on the basis that it had no permanent establishment in Canada so that its business profits were exempt from Canadian tax under the treaty and, at the same time, filed notices of objection to the assessments. The T2 returns were filed more than three years after the end of the assessed taxation years. J. Howald & K. A. S. Monaghan 20

22 Subsequently, Forco was determined not to be carrying on business in Canada through a permanent establishment and therefore eligible for the exemption from Canadian tax under the business profits article of the relevant tax treaty. While CRA accepted Forco s objections to reverse the assessed Part I tax, CRA did not refund the amounts previously paid by Forco because the T2 returns were filed more than three years after the end of the relevant taxation years. This timeline may be illustrated with the following diagram: Forco conceded that the amounts withheld under Regulation 105 were not refundable, but argued that CRA should refund the payment it voluntarily made in good faith following the assessments and pending the outcome of the objection process. Forco pointed to CRA letter acknowledging receipt of the notices of objection which stated that interest charges may be minimized by making a payment on account, but that any such payment would not imply agreement with CRA s assessments. CRA declined to do so. CRA confirmed that no amount paid by Forco in respect of any taxation year where the tax return was filed more than three years after the end of the relevant taxation year would be refunded. Forco was responsible for determining whether payment of the disputed amounts was appropriate in its particular circumstances. The statements in the acknowledgement letter were general J. Howald & K. A. S. Monaghan 21