• 2019 Ruling-0795761R3-Variation of a Trust- by Jeanne Posey

This CRA Ruling concerns a fairly straight forward 21-year trust deemed disposition plan which required an amendment to the trust deed. The CRA was asked to rule on whether the amendment results in a "resettlement" of the trust and whether subsection 107(2) applies to the trust property distribution.


The existing trust (the "Existing Trust") was a Canadian resident trust settled by a non-arm's length party and met the definition of a "personal trust" pursuant to subsection 248(1) of the Act. The Existing Trust had dependent beneficiaries, perpetual beneficiaries, and charities as contingent beneficiary.

The dependent and perpetual beneficiaries were residents of Canada for income tax purposes.

The division date ("Division Date") of the Existing Trust was the earliest of the following:

  1. the 21st anniversary of the date of the Existing Trust;
  2. a set number of years after the death of the last survivor of the dependent beneficiaries and perpetual beneficiaries living on the date of the Trust deed; and
  3. the day after the first date on which there are no dependent beneficiaries and no perpetual beneficiaries then living.

The deed provided for the distribution of income and capital of the Existing Trust, but also stated that the Trustee shall not pay to or apply for the benefit of any of the beneficiaries any part of the capital of the Existing Trust property prior to the Division Date.

The Existing Trust allowed the Trustee, to amend, alter, or restate at any time in his sole discretion the terms of the trust.

Proposed transactions:

In contemplation of the 21-year anniversary of the Existing Trust, the trustee contemplated a series of transactions. They were as follows:

  1. A freeze would be implemented such that the Existing Trust would own a particular class of shares in the capital stock of a Holdco. The Articles of Amendment for Holdco would be amended to provide a new class of shares that a new discretionary trust (the "New Trust") would subscribe for. The income and capital beneficiaries of the New Trust would be the same as the Existing Trust.
  1. The trustee would amend the Division Date of the Existing Trust to be:

    i. prior to the 21st Anniversary of the Existing Trust; or

    ii. such earlier date as the Trustee in his absolute discretion shall determine.

  1. Once the trust deed of the Existing Trust was amended, the trustee would distribute to the dependent beneficiaries, in accordance with the provisions of the trust agreement, a specified number of shares in the capital stock of Holdco in satisfaction of their capital interests in the Existing Trust.
  1. Following the distribution, the Existing Trust would cease to exist and be wound up.


  1. Resettlement of a Trust:

A resettlement of a trust occurs when a variation of the trust is of significant magnitude to cause a fundamental change in the terms of the trust. If this were to occur, there would be an actual disposition of the trust's property from the "old" trust to the "resettled" trust. As discussed in Purves (Re), [1984] B.C.J. No. 3059 (SC), a "resettlement" occurs when there is, in effect, a creation of an entirely new trust. While this determination will always be fact driven, courts have held that it is permissible to view an arrangement not at as resettlement, but rather as a variation. In Ball's Settlement (Re), [1968] All ER 438 (Ch.D.), Megarry J said "if an arrangement changes the whole substratum of the trust, then it may well be a that it cannot merely be regarded as varying that trust. But, if an arrangement, while leaving the substratum, effectuates the purpose of the original trust by other means, it may still be possible to regard that arrangement as merely varying the original trusts, even though the means employed are wholly different and even though the form is completely changed."

Therefore, if there is no fundamental change to the trust as a result of the variation, there will be no resettlement of the trust.

  1. Disposition by the beneficiary of all or part of his or her beneficial interest due to the amendments:

In order for the proposed amendments to amount to a "disposition", as defined in the Act, there would need to be a resettlement of the trust, meaning there is a variation of significant magnitude that would amount to a fundamental change in the terms of the trust. Where the variation has not resulted in a fundamental change to the trust, there will be no resettlement, but rather a variation, which would not cause a disposition by the beneficiaries of all or part of their beneficial interest.

Provided the trust allows for a variation of its terms, such variations may be effected by resolution. In all other cases, variations and amendments must be approved by the Court of Queen's Bench, pursuant to subsection 42(2) of the Trustees Act RSA 2000 c T-8.

  1. Will subsection 107(2) of the Act apply to the distribution:

Pursuant to subsection 107(2) of the Act, a personal trust may distribute trust property on a tax-deferred basis to Canadian resident beneficiaries in satisfaction of all or part of their capital interest in the trust. If applicable, the trust is deemed to have disposed of trust property, and the beneficiary is deemed to have acquired the property at an amount equal to the cost amount at the time of the distribution.

CRA Ruling:

  1. The proposed amendments to the Trust will not in and of themselves amount to a resettlement of the Trust or a disposition by the Trust of its property.
  2. The proposed amendments to the Trust will not in and of themselves, result in a disposition by any beneficiary of all or part of his or her beneficial interest in the Trust for purposes of the Act.
  3. Subsection 107(2) will apply to the distributions by the trust of the shares in Holdco to the beneficiaries in satisfaction of their capital interest in the Trust.


Where a trust deed permits a variation of a trust, a trustee may make a variation to the trust, despite the trust being irrevocable. Provided the proposed variation to the trust is not fundamental to the terms of the trust, the variation will not constitute a resettlement, and therefore there would not be a disposition of the trust property. However, as with all cases, determining whether an amendment constitutes a variation, or a resettlement is fact dependent which will require careful consideration prior to implementing any such variation.

  • BP Canada Energy Company v. M.N.R., 2017 FCA 61 & AD-19-02R Obtaining Information for Audit Purposes- by Sarah Ykema

On June 3, 2019, CRA released AD-19-02R "Obtaining Information for Audit Purposes", which communicates their views on how the Federal Court of Appeal ("FCA") decision in the BP Canada Energy Company's ("BP Canada") case impacts current auditing procedures. The communiqué outlines where CRA thinks they can still request tax accrual working papers ("TAWPs") including the taxpayers uncertain tax positions.

Relevant Facts in BP Canada:

  • In the course of an audit of BP Canada, the CRA requested TAWPs in order to ascertain the specifics of certain dollar amounts that were listed in two accounts related to refund interest.
  • Within the TAWPs was highly sensitive information. The corporation outlined uncertain tax positions taken in the course of preparing the current and deferred tax amounts for the audited financial statements.
  • BP Canada provided a redacted version of the TAWPs to the CRA auditor but refused to provide an un-redacted version.
  • The CRA brought an application under subsection 231.7(1) of the Act to compel BP Canada to provide the full, un-redacted, TAWPs.

FCA Decision and CRA's Response:

The CRA has many tools to request documents and information from taxpayers in order to ensure compliance with the Act. Subsection 231.1(1) is broadly worded and gives the CRA authority to:

"inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records"

Corporations, and their external accountants, are required to document many items when preparing financial statements under relevant accounting standards and estimate what the potential current and deferred tax liabilities of the corporation are. This may be completed well in advance of the tax return due date. Part of this documentation is the TAWP, which highlights any potential tax risks and positions taken by the corporation in determining the tax provision for the financial statements.

The FCA held that BP Canada was not required to produce the un-redacted TAWPS, stating:

In practical terms, this means that the Minister cannot enlist taxpayers who maintain TAWPs to perform the core aspect of audits conducted under the Act.

The CRA stated view in AD-19-02R is that there are still situations where they can and should request TAWPs to support a specific item under audit. These include circumstances where there is a high degree of non-compliance risk, uncertainty or large tax reserves.

This appears contrary to the judgement in BP Canada, as the Court specifically states that taxpayers are not required to self-audit. The CRA auditor in the BP Canada case was able to finalize her audit work without getting the un-redacted TAWPs for 2005. It is not the responsibility of the taxpayer to provide the CRA with an analysis of the uncertain tax positions, as the CRA has substantially larger budget behind them than most taxpayers to audit and analyze possible issues based on the data the CRA requests.

AD-19-02R also goes onto to say that CRA officials should be objective when reviewing this material, which is inherently biased towards the taxpayer's position. The CRA auditor is supposed to do their own research and come to their own conclusions from the relevant facts. CRA's position is that a request for TAWPs is not a self-audit since the onus is on the taxpayer in a self-assessment tax system, such as Canada's, to report and pay the correct amount of tax.


  1. The obligation to under Canada's self-assessment tax system does not require taxpayers to tax themselves on amounts which they believe not to be taxable. Taxpayers are entitled to file their tax return on the basis most favourable to them.
  2. Although auditors are entitled to be provided with "all reasonable assistance" in performing their audits, pursuant to paragraph 231.1(1)(d) of the Act, they are unable to compel taxpayers to reveal their "soft spots" (i.e. providing the CRA with working papers that may contain uncertain tax positions).
  • Bygrave v. The Queen, 2019 TCC 138- by Dallas Kleckner

In the recent Tax Court of Canada decision of Bygrave v. The Queen, 2019 TCC 138, the Court was tasked with determining whether a sale of real estate was on account of income or capital.


  • In 1998, Stephen Bygrave (the "Taxpayer") and his brother Patrick Bygrave ("Patrick") purchased a home in Vaughan, Ontario ("Cranston Park").
  • Cranston Park was the Taxpayer's principal residence since 1999 and he continues to reside there with his family.
  • In 2006, the Taxpayer purchased a second property (the "Subject Property") in the pre-construction phase with the intention of moving into the Subject Property to reside closer to work.
  • In December 2008, the father of the Taxpayer and Patrick passed away and in March 2009, their mother moved into Cranston Park to live with them. Patrick would later move from Cranston Park to a property of his own.
  • The Taxpayer refinanced the mortgage on Cranston Park in order to purchase Patrick's share of the property.
  • Cranston Park was a larger property than the Subject Property and was more conducive to the Taxpayer and his mother's needs.
  • Upon taking possession of the Subject Property in 2010, the Taxpayer immediately sold same, reporting that the sale was a transaction on account of capital (meaning that a capital gain arises, such that only 50% of the gain is taxable).
  • If not for his father's passing and his mother moving in with him, the Taxpayer would have moved into the Subject Property.
  • On December 18, 2014, Canada Revenue Agency reassessed the Taxpayer's 2010 tax return and recharacterized the capital gain as business income (i.e. 100% taxable).


Was the gain from the sale of the Subject Property on account of income or capital?


The gain was on account of capital.


The Court reviewed the relevant case law, in particular, the factors set forth in Friesen v. Canada, 1995 3 SCR 103 ("Friesen"). Those factors, and their application to the facts of the case, are as follows:

  • The taxpayer's intention with respect to the real estate at the time of purchase and the feasibility of that intention and the extent to which it was carried out. An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade (resulting in business income treatment).

In reference to this factor, the Court in the instant case cited the following passage from Canada Safeway Limited v. Canada, 2008 FCA 24, in which the court remarked on the timing of when intention must be examined:

"...the most determinative factor is the intention of the taxpayer at the time of acquiring the property. If that intention reveals a scheme for profit-making, then the Court will conclude that the transaction is an adventure in the nature of trade."

Here, the Taxpayer's intention at the time of purchase was to live in the Subject Property as his primary residence. The change in plan only came about after his father passed away and his mother moved in with him. Had it not been for his father's passing, the Taxpayer would have moved into the Subject Property.

In considering whether the Taxpayer had any secondary intentions, the Court reviewed the decision of Happy Valley Farms Ltd. v. The Queen, (1986), 86 DTC 6421 which, at paragraph 11, the court states the following:

"To give a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say he must have in his mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for the purposes of capital."

Finding that the Taxpayer had no secondary intention at the time of purchase, the Court held that this factor indicated the sale of the Subject Property was on account of capital.

  • The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer's business or occupation is related to real estate transactions, the more likely it is that the income will be considered business income rather than capital gain.

The Taxpayer's occupation (and that of Patrick's) was unrelated to real estate transactions (i.e. they were both transit operators). This factor favored a finding that the sale of the Subject Property was on account of capital.

  • The nature of the property and the use made of it by the taxpayer.

The Subject Property was never lived in by the Taxpayer and was sold immediately after he took possession. This factor favored a finding that the sale was on account of income.

  • The extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the taxpayer. Transactions involving borrowed money and rapid resale are more likely to be adventures in the nature of trade.

The Taxpayer refinanced Cranston Park to purchase Patrick's interest, however, there was no evidence of borrowed money used to finance the Subject Property. The Taxpayer did indicate however that he could not afford both properties. Although the period of time between entering the purchase contract to buy the Subject Property and the subsequent sale was long (approximately four years), he only held tile for three months after taking possession. In consideration of the foregoing, the Court held this to be a neutral factor.

Based the Courts analysis of the Friesen factors above, in particular, that of intention, the Court held that the sale of the Subject Property was on account of capital.


Prior to concluding that a transaction is on account of capital, it is necessary to consider the factors as set out in Friesen to the particular facts. When a taxpayer's primary intention is frustrated, a careful review of any secondary intentions will be necessary in order to make any such determination.

  • Canada (National Revenue) v. Lin 2019 FC 646- by Jason Lau


  1. In 2005, Mr. Xue Lin immigrated from China to Canada with his wife and daughter, Ms. Min Wang and Ms. Lin Lin.
  2. Shortly afterwards, Mr. Lin returned to China and continued maintaining his social and economic ties there. He paid taxes to the Chinese government as he was a Chinese resident. For income tax purposes, Mr. Lin was a non-resident of Canada, while Ms. Min Wang and Ms. Lin Lin were resident in Canada.
  3. In September 2016 Mr. Lin, his wife, and his daughter each received identical letters from the CRA notifying them that their "personal income tax returns and any other related or associated entities" for the period between January 1, 2006 and December 31, 2015 were selected for audit, and that they may have failed to disclose offshore holdings via form T1135. Additionally, the letters requested each taxpayer provide certain information outlined in the audit questionnaire.
  4. In June 2017, Ms. Min Wang and Ms. Lin Lin provided partial responses to the questionnaires, notably omitting bank and investment account statements for the audit years. Mr. Lin did not provide a response to the questionnaire at all.
  5. After further communications and missed deadlines, CRA notified the taxpayers that compliance orders would be sought under subsection 231.7(1) of the Act if they did not provide the information by December 20, 2017.
  6. The court found in favor of the Respondents and dismissed the Minister's application for compliance orders.


Justice Boswell noted that the criteria for the issuance of a compliance order was summarized in Canada (National Revenue) v Chamandy, 2014 FC 354, which were as follows:

  1. The person against whom the order is sought was required under section 231.1. or 231.2 to provide the access, assistance, information or document sought by the Minister.
  2. The Court must be satisfied that the person did not provide the requested information despite being required to do so.
  3. The Court must be satisfied that that the information sought is not protected from disclosure by solicitor-client privilege.

The application for compliance orders was dismissed because it was not clear which parties were subject to audit in the CRA letters (see fact #3 above); Justice Boswell believed they were "addressed to both the individuals and their connected entities. The entities are not specified, and it is not clear who is being audited – the individual Respondents or unnamed entities". Both the Minister and Respondents agreed that solicitor-client privilege was not a factor. The Court did not give an opinion on criterion #2.

Take Away

Though the CRA has vast powers to inspect a taxpayer's books and records and compel them to provide information in the course of administering and enforcing the Act, this case demonstrates the limitations of such powers. While it was clear that the CRA was in possession of information that led them to believe the respondents were non-compliant in their tax affairs, the audit letters' overly broad scope and indeterminate addressees ultimately undermined the CRA's attempt to move forward in their audit.

  • Mazzaferro v The Queen (2019 TCC 147)- by Jas Sangra

This case is a good reminder that the subsection 15(2) shareholder loan rules extend beyond the shareholders themselves and the importance of obtaining tax advice whenever an individual borrows from a corporation.


  • The taxpayer borrowed money from a corporation owned by her brother and her brother's wife;
  • The taxpayer paid back the loan, but not within the first year after the year in which it was issued;
  • The CRA assessed the taxpayer with a full income inclusion with respect to the amount of the loan; and
  • The assessment was done beyond the normal three year assessment period.


  • Could the CRA assess beyond the normal assessment period?
  • Did the CRA properly include the loan amounts in the taxpayers income?


Section 152(4)(a)(i) of the ITA states that:

(4) The Minister may at any time make an assessment, reassessment or

additional assessment of tax for a taxation year, interest or penalties, if any,

payable under this Part by a taxpayer or notify in writing any person by whom a

return of income for a taxation year has been filed that no tax is payable for the

year, except that an assessment, reassessment or additional assessment may be

made after the taxpayer's normal reassessment period in respect of the year only


(a) the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect,

carelessness or wilful default or has committed any fraud in filing

the return or in supplying any information under this Act

(emphasis added)

Subsection 15(2) of the Income Tax Act states that if a corporation makes a loan to one of its shareholders, or a person connected with a shareholder, the loan must be included in calculating the shareholder or connected person's income for the year in which the loan was received.

Pursuant to subsection 15(2.1), a person is connected with a shareholder of a corporation if they do not deal at arm's length with the shareholder. Paragraph 251(1)(a) states that "related persons" are deemed "not to deal with each other at arm's length". Related persons include siblings and siblings in law.

Subsection 15(2) does not apply if the loan is repaid within one year after the end of the taxation year in which the loan was made, provided that the repayment is not part of a series of loans and repayments. Generally speaking, paragraph 20(1)(j) provides for a corresponding deduction when the loan is subsequently repaid.


Assessment Beyond the Normal Reassessment Period

The court held that the taxpayer can be assessed beyond the normal reassessment period because:

  • By not reporting the shareholder loan on her tax return, the taxpayer made a misrepresentation.
  • By not getting tax advice with regard to this transaction, the taxpayer was found to have been neglectful or careless for the purposes of a reassessment past the normal reassessment period.

Was the Loan Income?

In this case the taxpayer was connected with the shareholders of the corporation issuing the loan because they were "related persons" and therefore she did not deal with them at arms length. Because the loans were issued to the taxpayer, but not paid back within the first year after the end of the taxation year in which the loan was made, the full amount of the loan was held to be correctly included in the taxpayer's income for the year in which the loan was issued.


This provision of the Act is often used by the CRA to catch shareholders who take loans from a corporation and fail to repay them within the required time period, but it also applies to people who are connected to the shareholders as well. It is important to get tax advice when dealing with unusual corporate transactions, as there may be adverse tax consequences to what may appear to be a basic and legitimate transaction.

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