Key Takeaways From McCarthy Tétrault Tax Perspectives: September 2025

In our recent McCarthy Tétrault Tax Perspectives tour, speakers from McCarthy Tétrault's National Tax Group led a practical discussion of the evolving legislative and judicial tax landscape in Canada and provided attendees with strategic insights and actionable advice.

The September 2025 tour featured four presentations of particular interest in the current business climate: (i) hot topics in tax (ii) section 116 in practice, (iii) navigating the complexities of corporate foundations, and (v) GST/HST updates: recent legislative and administrative developments.

Hot Topics in Tax – Raj Juneja, Kim Brown and Matthew Kraemer

Raj Juneja, Kim Brown and Matthew Kraemer began with an update on key topics of interest in the current Canadian income tax landscape.

1. Trust Reporting – Draft Legislation

Pursuant to enhanced trust reporting rules all trusts, including bare trusts, are required to file an information return in prescribed form. The CRA provided administrative relief to bare trusts from reporting requirements for the 2023 and 2024 taxation years. This relief has not been extended for the 2025 taxation year.

In August 2025, the Department of Finance released proposed amendments to the enhanced trust reporting rules in respect of bare trusts. The draft legislation deems certain express trusts (that would not otherwise be a trust under the Income Tax Act (Canada)) to be subject to the trust reporting rules, subject to exceptions, where (i) one or more persons is considered to be a trustee of the trust and legally own property that is held for the use or benefit of one or more persons or partnerships, each of which is considered to be a beneficiary of the trust, and (ii) the trustee may reasonably be considered to act as an agent on behalf of the beneficiaries. However, the draft legislation includes new exceptions, including the following three exceptions of interest:

1. a trust whereby each beneficiary is also a legal owner of the trust property and there are no legal owners that are not beneficiaries of the trust;
2. a trust whereby (a) the property is held throughout the year solely for the use or benefit of a partnership, (b) each legal owner of the property is a partner of the partnership, and (c) a member of the partnership is (or would be, but for subsection 220(2.1)) required to file an information return for a fiscal period of the partnership that includes December 31 of the relevant taxation year;
3. a trust whereby all or substantially all of the trust property is comprised of "Canadian resource property" held for the use or benefit of one or more publicly listed companies (or the subsidiaries or partnerships of such companies).

2. Mandatory Disclosure Rules – Updated CRA Guidance

On August 20, 2025, the CRA released updated guidance with respect to the mandatory disclosure rules ("MDR"). Highlights from the updated guidance include the following:

• Series of Transactions: A taxpayer is only required to file one information return with respect to a series of transactions, provided the series of transactions is accurately described (i.e., a taxpayer is not required to file an information return for each transaction within a series).
• Clean Economy ITCs: Advisor fees with respect to claiming clean economy investment tax credits do not give rise to a reporting obligation.
• Advisor Reporting Obligations: Advisors are only required to file information returns where the advisor should "reasonably be expected to know" of their reporting requirements. This is an objective standard, determined by reference to all facts and circumstances, and without reference to the subjective intention of the person involved.
• Uncertain Tax Treatments – Short Taxation Years: There is no requirement to file an information return in circumstances where two companies amalgamate resulting in a short fiscal period, and no audited financial statements for a period that ends in the taxation year are prepared.
• GMTA and GAAR: the new Global Minimum Tax Act contains a general anti-avoidance rule (GAAR) which includes a penalty. A Canadian member of a multinational group may file an optional GAAR disclosure on behalf of the entire group to mitigate the risk of a penalty under the GMTA GAAR.

3. Regulation 105

Effective June 2024, reimbursements to non-resident's for subcontracted services to a Canadian resident are subject to withholding under regulation 105. This reflects a departure from CRA's previous longstanding policy. To facilitate the change in policy, CRA provided administrative transitional relief for taxpayers on withholding tax, penalties and interest from July 1, 2024 to September 30, 2024. Recently, CRA extended this relief to June 30, 2026.

4. Voluntary Disclosures Program – Income Tax Updates

On September 10, 2025, the CRA announced changes to the voluntary disclosure program ("VDP"), which came into effect on October 1, 2025 (the "New VDP"). Generally, the VDP provides taxpayers with an opportunity to seek relief from the CRA for any errors or omissions made while complying with their tax obligations. From an income tax perspective, the changes introduced in the New VDP will generally (a) provide enhanced penalty and interest relief, (b) create less restrictive program tracks, and (c) improve accessibility for VDP applicants including large corporations and repeat applicants. Specifically, the New VDP recognizes two new categories of voluntary disclosure: (1) prompted; and (2) unprompted.

An application is generally considered unprompted where:

• there has been no written or verbal communication about an identified compliance issue related to the disclosure; or
• the taxpayer has received an education letter or notice that offers general guidance and filing information related to the topic at issue.

An application will generally be considered prompted where:

• the taxpayer has received verbal or written communication about an identified compliance issue, which may include letters or notices, other than education letters, with one or more of the following:
  • the specific error or omission is identified;
  • a deadline to correct the error or omission is listed; or
• the CRA has already received information from third-party sources regarding potential non-compliance.

These categories replace the "Limited Program" and the "General Program." In addition to increasing the relief available under both the prompted and unprompted streams, it appears that large corporate taxpayers are no longer restricted to limited relief, and taxpayers may apply for relief under the program more than once (provided the subsequent application relates to a different matter than the previous application). Such taxpayers are now eligible for general relief on the same basis as all other taxpayers — a welcome change.

The CRA's updated policies with respect to the New VDP and its application to income tax can be viewed in full in Information Circular IC00-1R7.

GST/HST Updates: Recent Legislative and Administrative Developments – Randy Schwartz and Simon Douville

Randy Schwartz and Simon Douville provided a review of recent legislative and administrative developments in indirect tax.

1. Voluntary Disclosures Program – GST/HST Updates

In connection with the New VDP, the CRA also released updated guidance with respect to voluntary disclosures made in the context of various indirect tax acts, including the Excise Tax Act (Canada) (the "ETA"): see GST/HST Memorandum 16-5-1 ("Memo 16-5-1"). Like its income tax equivalent, Memo 16-5-1 replaces the existing "General Program" and "Limited Program" with "General Relief" and "Limited Relief" based on whether the voluntary disclosure application is "unprompted" or "prompted." Both new voluntary disclosure streams provide increased levels of relief as compared to their predecessors. Unprompted applications will typically be eligible for "general relief" comprised of 75% interest relief and 100% relief from applicable penalties, while prompted applications will be eligible for 25% interest relief and up to 100% relief from applicable penalties (i.e., "partial relief"). Memo 16-5-1 also continues to provide enhanced relief for applications involving qualifying GST/HST wash transactions. Relief for wash transactions remains at 100% for applicable interest and penalties where the "wash transaction" would be eligible for a reduction of penalty and interest under the policy set out in GST/HST Memorandum 16-3-1. Further, as under the corresponding income tax voluntary disclosure program, corporate taxpayers with gross revenue in excess of $250 million in at least two of their last five taxation years (and any related entities) no longer appear to be restricted to lesser relief. It also appears that registrants may make a second voluntary disclosure under the GST/HST program as long as the second disclosure concerns a different issue.

2. Perplexing GST/HST Interpretation

On May 30, 2024, the CRA released GST/HST Ruling No.246958 – "Zero-rated Supplies of Financial Services and Eligibility for input Tax Credits" (May 30, 2024) (the "Ruling").

Very generally, the Ruling considers the availability of input tax credits ("ITCs") in circumstances where a Canadian-resident corporation (the "Investor") qualifying as a financial institution (within the meaning of theETA) is charged GST/HST on certain advisory and support services (the "Acquisition Services") it receives in connection with its investment in a non-resident limited partnership (the "Initial Investment"). Among other things, the Ruling highlights the CRA's aversion to allowing financial institutions to claim and recover ITCs. Despite the CRA's perplexing interpretation contained in the Ruling, particularly with respect to section 123 of the ETA, financial institutions looking to claim ITCs should nonetheless be aware of this CRA position.

3. Various Highlights from the CRA/CBA 2025 Roundtable

The CRA provided some notable updates at the CRA/CBA 2025 Roundtable:

1. Section 167 Election and Application to Start-up Businesses. During the Roundtable, the CRA was asked whether a section 167 election is available where a start-up business is transferred. Unfortunately, no clear answer was provided and it appears that the status quo remains in place when it comes to section 167 elections. Taxpayers should always consider whether they are really transferring a business and be certain that they can substantiate the transfer of a business.
2. ITCs beyond the 4-year Limitation Period? Is it Possible? The CRA indicated that claiming ITCs beyond the 4-year limitation period is technically possible under very specific circumstances where (i) the supplier initially failed to charge tax, (ii) the supplier eventually charged tax after four years, and (iii) the tax so charged was the result of an assessment of the supplier.
3. Single Supply vs. Multiple Supply Test. The CRA indicated that it would not update its policy with respect to the single versus multiple supply test in light of recent Federal Court of Appeal jurisprudence in Canada v. Dr. Kevin L. Davis Dentistry Professional Corporation, 2023 FCA 76 ("Davis"). Very generally, in Davis, the Federal Court of Appeal held that the single versus multiple supply test should take into account any legislative intent to tax a certain part of a supply and not another that is clearly reflected in the applicable legislative provisions. The CRA stated that the Federal Court of Appeal's decision in Davis is an anomaly and that the CRA would not be changing its policy in light of Davis.
4. ITC Documentary Requirements. The CRA confirmed that the information required to satisfy the documentary requirements for claiming an ITC does not need to be included on a single document. This position aligns with recent jurisprudence regarding documentary requirements for ITC.
5. Section 186 – Holding Corporation/Partnership Rule. The CRA confirmed that it is currently working on an updated policy with respect to the Holding Corporation/Partnership Rules under section 186 of the ETA. The CRA's current policy has not been updated since 2011 and does not account for amendments enacted in 2021, which are generally applicable after July 27, 2018.

4. The Push or Harmonization in BC

British Columbia previously tried to adopt the harmonized sales tax ("HST") in 2009-2011. In July of 2009, the government of British Columbia announced it intended to adopt the HST and implemented the change on July 1, 2010. A subsequent referendum in August 2011 defeated the HST, and the prior provincial sales tax was reinstated in 2013. Now, the government of British Columbia is again considering harmonization, and there have been submissions by various stakeholders on this point. This is something to keep tabs on in the coming months.

Section 116 in Practice – Matthew Kraemer, Erica Hennessey and Daniel Downie

Matthew Kraemer, Erica Hennessey and Daniel Downie discussed some practical ways to navigate section 116 in the context of an arm's length deal.

Where a buyer acquires "taxable Canadian property" from a non-resident of Canada, the buyer may be liable for 25% of the purchase price under section 116. The impact of section 116 on a deal can be significant and dealing with section 116 can be complex. Because of this, section 116 (when applicable) should be considered early and thoroughly by both the vendor and the buyer.

The commercial dynamics often dictate a risk sharing (between vendor and buyer) for the vendor's tax liability. This risk-sharing exercise can give rise to several practical issues and questions that often need to addressed in the purchase and sale agreement and an escrow agreement. This presentation discussed some of these issues and how they can be addressed.

The presenters examined various purchase and sale examples while highlighting the following items that may need be considered by the parties:

• the TCP status of the property being disposed of;
• the residence of the vendor;
• if the property is TCP, determining whether subsection 116(5) applies to the disposition; and
• language that may need to be included in the purchase and sale agreement and, if applicable, the escrow agreement.

Navigating the Complexities of Corporate Foundations – Robert Hayhoe and Nicole D'Aoust

Robert Hayhoe and Nicole D'Aoust concluded the presentation with a discussion on charitable giving with a focus on navigating the complexities of corporate foundations.

1. Structure, Pros and Cons of Corporate Foundation

Corporations typically choose among three main approaches when it comes to charitable giving: (a) direct giving, (ii) establishing a corporate foundation, or (iii) utilize a donor advised fund ("DAF"). While direct giving remains the most popular method due to its simplicity, both corporate foundations and DAFs are gaining traction for their unique advantages in terms of structure, control, and strategic impact.

A corporate foundation is a distinct legal entity, typically registered as a charity, that is established and funded by a business to carry out charitable activities or make grants to other organizations. Most corporate foundations are structured as private foundations, which allows the business to retain a significant degree of control over governance and decision making.

Corporate foundations offer several advantages compared to other methods of charitable giving. As a separate legal entity, a foundation provides liability protection and a clear distinction between business and charitable activities. The use of a corporation foundation also creates opportunities for brand expansion, employee engagement, and innovation in philanthropy. From a financial perspective, corporate foundations are generally tax-exempt, and can issue official donation receipts, which can be attractive for both the business and its stakeholders. Furthermore, having a dedicated foundation enables more strategic, long-term planning for charitable initiatives.

However, these benefits come with certain trade-offs. Establishing and maintaining a corporate foundation involves a significant administrative burden, including compliance with corporate law, tax rules, and charity regulations. There are ongoing legal, accounting, and operational costs to consider. Governance can also be complex, especially when directors of the foundation are also employees of the business, raising potential conflicts of interest.

2. Key Legal Considerations

Legal structuring is critical when establishing a corporate foundation. Consideration must be given to the following criteria:

• Charitable Purpose: a corporate foundation must have a charitable purpose in order to qualify as a registered charity.
• Private vs Public: Most corporate foundations are set up as private foundations, which allows the business to maintain control, whereas public foundations require the majority of director's to deal at arm's length with the business.
• Recipients of Charitable Donations: Charitable gifts must be made to qualified donees, such as other registered charities, as special rules apply when making charitable donations to non-qualified donees.

Directors have a fiduciary duty to act in the best interests of the foundation, which can be challenging if they are also employees of the business. To ensure good governance, it is important to develop clear policies on fundraising, gift acceptance, conflicts of interest, and director responsibilities. Advisory and operational committees can also play a valuable role in oversight and engagement.

3. Key Operational Considerations

Corporate foundations can either run their own charitable programs or make grants to other organizations. When making grants to non-qualified donees, special rules apply, and the foundation must maintain direction and control or meet qualifying disbursement requirements. Foundations are also subject to a disbursement quota, which requires them to spend a minimum percentage of their assets annually on charitable activities or gifts to qualified donees. Notably, for foundations with assets over $1 million, this quota has recently increased from 3.5% to 5%, effective for fiscal years after 2023.

Compliance is an ongoing responsibility. Foundations must file annual information returns (such as the T3010), maintain proper records, and adhere to both tax and corporate law requirements. Administrative expenses must also be carefully managed and documented. While there is no strict limit, administrative costs should be reasonable and justifiable, with up to 30% often considered acceptable depending on the circumstances. Any reimbursement of business expenses by the foundation should be governed by clear agreements to ensure transparency and compliance.

Additionally, conflicts of interest must be vigilantly avoided, particularly in transactions or investments that could benefit directors, officers, or other non-arm's length persons.