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Tax Perspectives: Review of 2021 & 2022 Outlook

2021 was a significant year from a Canadian tax perspective. This article provides an overview of important Canadian legislative and judicial tax developments of 2021, and looks ahead to potential significant Canadian tax changes in 2022.

Our commentary is divided into sections as follows:

Part 1 - Overview of Canadian Tax Developments in 2021


On April 19, 2021, the Government of Canada (the “Government”) released the 2021 federal budget (the “Budget 2021”).[1]Budget 2021 was the Government’s first federal budget in over two years and its first major announcement of measures intended to address the recovery of the Canadian economy from the fallout of the COVID-19 pandemic.Approximately eight months later on December 14, 2021 and following the summer 2021 federal election, the Government provided an economic and fiscal update (the “2021 Fiscal Update”). In the 2021 Fiscal Update, the Government reaffirmed its commitment to certain tax measures announced in Budget 2021 and announced certain new, targeted tax measures.

2021 also saw:

  • the enactment of certain tax measures that were previously announced by the Government in the 2019 federal budget (“Budget 2019”); and
  • a series of amendments to the Income Tax Act (Canada) (the “Tax Act”) and the regulations thereunder relating to a myriad of federal relief measures (extended, modified and new) aimed at alleviating financial hardship due to the COVID-19 pandemic.

In the immediately following sections, we provide an overview of some of the more noteworthy 2021 measures.

Interest Deductibility Limits

Budget 2021 proposed a new earnings-stripping rule intended to address the potential erosion of the Canadian tax base through what the Government considers to be the inappropriate deduction of interest expense payable by a Canadian taxpayer, such as where (i) interest is paid to related parties resident in low-tax jurisdictions, (ii) the underlying debt is used to finance investments that earn non-taxable income, or (iii) the Canadian taxpayer bears a disproportionate burden of a multinational group’s third-party borrowings.

The new rule will limit the amount of net interest expense that a corporation, trust, partnership or Canadian branch of a non-resident may deduct in computing its taxable income to no more than a fixed ratio of “tax EBITDA”. For these purposes, “tax EBITDA” means taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization, as computed under Canadian tax rules.

Canadian group members will be entitled to transfer unused interest deductibility capacity to other Canadian members of the group whose net interest deductions would otherwise be limited by the rule. In addition, a Canadian member of a consolidated group may be entitled to a higher interest deduction limit where it is able to show that the ratio of net third party interest to book EBIDTA of its consolidated group indicates that the higher interest deduction limit would be appropriate.

Exemptions from the new rule are proposed to be available for Canadian-controlled private corporations (“CCPCs”) if the taxable capital employed in Canada of the corporation and its associated corporations is less than $15 million, and for groups of corporations and trusts whose aggregate net interest expense among their Canadian members does not exceed $250,000. In addition, the new rule is not expected to apply to standalone Canadian corporations and Canadian corporations that are members of a group none of whose members is a non-resident.

Once enacted, the new rule is proposed to apply to taxation years that begin on or after January 1, 2023, will be phased in gradually with a fixed ratio of 40% for taxation years that begin in the 2023 calendar year and 30% for taxation years that begin on or after January 1, 2024, and will apply to both new and existing borrowings.

In Budget 2021, the Government stated that it expected to release draft legislative proposals for public comment in the summer of 2021; however, as at December 31, 2021, no such draft legislation has been released. We now expect the draft proposals to be released in 2022.

Hybrid Mismatch Arrangements

In alignment with the work of the Organisation for Economic Co-operation and Development (“OECD”) in connection with the BEPS project, Budget 2021 proposed to introduce new rules to address “hybrid mismatch arrangements".

Hybrid mismatch arrangements involve arrangements that use differences in the income tax treatment of entities or instruments under the tax laws of Canada and one or more other countries to claim a deduction in one country in respect of a cross-border payment, the receipt of which is not included in the ordinary income of the recipient in the other country. They also include arrangements where a deduction is claimed in two or more countries in respect of a single economic expense.

Under the new rules, a payment made by a Canadian resident under a hybrid mismatch arrangement will not be deductible for Canadian income tax purposes to the extent that such payment is deductible in another country or is not included in the ordinary income of the recipient. Conversely, where a non-resident makes a payment under a hybrid mismatch arrangement that is deductible in another country, no deduction in respect of the payment will be permitted against the income of a Canadian resident; any amount of the payment received by a Canadian resident under a hybrid mismatch arrangement will also be included in income and, if the payment is a dividend from a foreign affiliate, will not be deductible in computing the taxable income of the Canadian resident.

Budget 2021 proposed to implement the new rules in two separate legislative packages. The first legislative package was to be limited to the deduction/non-inclusion mismatches in respect of hybrid instruments, and was expected to be released in 2021 for stakeholder comment and to be applicable as of July 1, 2022; however, as at December 31, 2021, no such draft legislation has been released. We now expect the draft legislation to be released in 2022. The second legislative package is to address other forms of hybrid mismatch arrangements, and is proposed to be released after 2021 and applicable no earlier than 2023.

Transfer Pricing

In Budget 2021, the Government announced its intention to begin a consultation process on Canada’s transfer pricing rules with a view to protecting the integrity of the tax system while preserving Canada’s attractiveness for foreign investment. This announcement was a response to the Supreme Court of Canada’s decision on February 18, 2021 to dismiss the Government’s application for leave to appeal the Federal Court of Appeal’s decision in Canada v. Cameco Corporation (2020 FCA 112), which affirmed the Tax Court of Canada’s decision not to apply Canada’s domestic transfer pricing rules to certain long-term uranium purchase contracts between the corporate taxpayer and its Swiss subsidiary. The Government believes that the Cameco decision may encourage the inappropriate shifting of corporate profits outside of Canada (thereby reducing the Canadian tax base), and stated that the intention of the consultation process would be to allow stakeholders to comment on possible measures to improve Canada’s domestic transfer pricing rules. Further commentary from our Firm on the Cameco decision can be found here.

As at December 31, 2021, the public consultation process on Canada’s transfer pricing rules has not commenced.

Clean Energy Investment

Rate Reduction for Zero-Emission Technology Manufacturers

Budget 2021 proposed to reduce the federal corporate income tax rates on certain eligible zero-emission technology manufacturing and processing income to: (i) 7.5% (if that income would otherwise be taxed at the 15% general corporate rate); and (ii) 4.5% (if that income would otherwise be taxed at the 9% small business rate). To qualify for a rate reduction, at least 10% of a taxpayer’s gross revenue from all active business carried on in Canada must be derived from eligible zero-emission technology manufacturing or processing activities. The reduced rates are proposed to apply to taxation years that begin after 2021 and to be gradually phased out beginning in 2029 and fully phased out for taxation years beginning in 2032.

CCA for Clean Energy Equipment

Budget 2021 proposed to amend the list of eligible clean energy equipment included in capital cost allowance (“CCA”) classes 43.1 and 43.2 by expanding such CCA classes to include various clean energy equipment and to remove certain equipment that burns fossil fuels and/or waste fuels. The expansions of CCA classes 43.1 and 43.2 will apply in respect of eligible property that is acquired and becomes available for use on or after April 19, 2021. The removal of property from such classes will apply in respect of property that becomes available for use after 2024.

Tax Incentive for Carbon Capture, Utilization and Storage

Budget 2021 proposed to introduce an investment tax credit to promote the adoption of carbon capture, utilization and storage technologies. The Government proposed a 90-day consultation period with various stakeholders, following which legislation to implement the investment tax credit would be introduced at the “earliest opportunity.”As at December 31, 2021, no such legislation has been released.

Digital Services Tax

Budget 2021 proposed to implement a digital services tax (“DST”) as an interim measure until an acceptable multilateral approach comes into effect. The Government’s aim is to ensure that the revenue earned by large businesses, whether foreign or domestic, from engagement with online users in Canada is subject to Canadian tax. Generally, the DST will apply at a rate of 3% of revenue earned from certain digital services that rely on engagement, data and content contributions of Canadian users. The DST will apply to an entity that has (or is part of a business group that has) global revenue from all sources of at least €750 million in the previous calendar year and in-scope revenue associated with Canadian users of more than $20 million in the particular calendar year.

The DST proposal was subject to a public consultation process, which ran from April 19, 2021 to June 18, 2021. On December 14, 2021, the Government released draft legislation regarding the DST. The draft legislation provides that the DST will be imposed as of January 1, 2024, but only if the OECD/G20 Inclusive Framework’s multilateral approach has not come into force by that date, and will apply retroactively to revenues earned as of January 1, 2022.

Mandatory Disclosure Rules

Budget 2021 proposed new mandatory disclosure rules that (i) broaden the Tax Act’s “reportable transaction” rules, (ii) create a new regime for reporting avoidance transactions and other “transactions of interest” (referred as “notifiable transactions”), and (iii) require the reporting of “uncertain tax treatments” by corporations when certain conditions are met. Taxpayers (along with advisors and promoters) that fail to comply with the proposed disclosure rules may be subject to significant penalties and, in some cases, extended reassessment periods.

Budget 2021 proposed that any amendments made in respect of the above would apply to taxation years that begin after 2021; however, to the extent the proposed measures apply to transactions, the amendments would only apply to transactions entered into on or after January 1, 2022. Budget 2021 stated that penalties would not apply to transactions that occur before the date on which the enacting legislation receives Royal Assent.

The mandatory disclosure rules were subject to a public consultation process, which ran from April 19, 2021 to December 30, 2021.

COVID-19 Business Support Programs

In 2021, a multitude of amendments were made to the Tax Act and its regulations to extend and vary existing federal relief measures such as the Canada Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy (“CERS”), and to introduce new measures such as the Canada Recovery Hiring Program (“CRHP”), the Tourism and Hospitality Recovery Program, the Hardest-Hit Business Recovery Program and the Local Lockdown Program. At the time of writing, these newer measures are legislated to be available until May 7, 2022 and may be further extended by regulation until July 2, 2022.

Our Firm has written extensively on the various business support measures throughout the pandemic. Our forward-looking December 2021 commentary, with links to earlier commentary, is available here.

2021 Fiscal Update

The 2021 Fiscal Update set out the Government’s assessment of the fiscal health of the country, outlined the economic measures previously adopted and proposed by the Government to address the immediate needs of individuals and businesses relating to COVID-19 pandemic and to support Canada’s economic recovery therefrom, and reaffirmed the Government’s intention to implement certain tax measures announced in Budget 2021, including the DST and tax incentives to promote clean energy investment. The 2021 Fiscal Update did not announce any changes to the corporate or personal federal income tax rates, but did announce the following new tax measures:

  • a 25% refundable tax credit for small businesses that incur qualifying expenditures relating to air quality improvements at qualifying locations between September 1, 2021 and December 31, 2022; and
  • a refundable tax credit to return fuel charge proceeds paid by eligible farming businesses under the federal carbon tax, starting in the 2021-2022 federal carbon tax year.

Enactment of Previously Announced Measures

On June 29, 2021, federal legislation came into force enacting certain measures that the Government had previously announced in its 2020 Fall Economic Statement and Budget 2019, including the following tax measures:

  • limits to the amount of employee stock options that may be eligible for the 50% stock option deduction;
  • expansion of the foreign affiliate dumping (“FAD”) rules;
  • restrictions on the use of the “allocation to redeemers” methodology by mutual funds;
  • amendments to address certain perceived deficiencies to the securities lending arrangement rules; and
  • amendments to the domestic transfer pricing rules to provide for the priority of such rules over other provisions of the Tax Act and for broadening the extended reassessment period applicable to assessments under such rules.

See our Firm’s commentary on Budget 2019 here for background information on these newly enacted measures.


In this section, we review the following decisions of the Supreme Court of Canada (“SCC”), Federal Court of Appeal (“FCA”) and Tax Court of Canada (the “TCC”):

GAAR in a Treaty Shopping Context (Alta Energy, SCC)

On November 26, 2021, the SCC released its decision in the closely followed treaty shopping/GAAR case, Canada v. Alta Energy Luxembourg S.A.R.L. (2021 SCC 49). In a 6 to 3 decision, the majority upheld the lower court decisions and held that the general anti-avoidance rule (“GAAR”) in subsection 245(2) of the Tax Act did not apply to deny the taxpayer (“Alta Luxembourg”) the benefit of the Canada-Luxembourg Tax Treaty (the “Treaty”).

In 2011, two American firms founded an American company for the purpose of acquiring and developing unconventional oil and natural gas properties in North America. That American company, in turn, created a wholly-owned Canadian subsidiary, Alta Energy Partners Canada Ltd. (“Alta Canada”), in order to carry on the business in respect of a property in northwestern Alberta. During 2012, a reorganization resulted in Alta Luxembourg being incorporated and becoming the sole shareholder of Alta Canada. Prior to that reorganization, a ruling was obtained from the Luxembourg tax authorities that the reorganization was in compliance with Luxembourg’s tax legislation and administrative policies.

In 2013, Alta Luxembourg sold its shares of Alta Canada to a third-party and realized a capital gain in excess of $380 million. Alta Luxembourg directed that its proceeds from the sale be paid to its sole shareholder in exchange for the sole shareholder issuing promissory notes to Alta Luxembourg. The promissory notes were subsequently set off, in part, by an existing interest-free loan and profit-participating loan, such that no portion of the sale proceeds were retained by Alta Luxembourg. Following the sale, Alta Luxembourg did not conduct any other business or hold other investments.

The capital gain on the 2013 sale was reported to the Luxembourg tax authorities. In Canada, Alta Luxembourg claimed an exemption from Canadian tax on the basis that the gain should not be included in its “taxable income earned in Canada” under paragraph 115(1)(b) of Tax Act because the shares were “treaty‑protected property” under Article 13(4) and (5) of the Treaty. Article 13(4) of the Treaty provides an exemption for residents of Luxembourg from Canadian tax arising from a capital gain on the sale of shares the value of which is derived principally from immovable property situated in Canada and in which the business of the company was carried on (i.e., the “business property exception”).

The Minister denied the treaty exemption on the basis that the business property exemption in Article 13(4) of the Treaty did not apply and, in the alternative, that the GAAR in section 245 of the Tax Act should apply.

The taxpayer appealed to the TCC, and the TCC allowed the taxpayer’s appeal. Hogan J. held that the taxpayer satisfied the requirements of the business property and that the GAAR did not apply. The Crown then appealed to the FCA, where the sole issue was whether the GAAR applied. The FCA confirmed the TCC’s decision, and the Crown appealed to the SCC.

On appeal to the SCC, the Crown raised two main arguments:

  • the FCA had failed to conduct the proper GAAR analysis, and improperly focused on the text of the Treaty when determining object, spirit and purpose of the provisions relied upon; and
  • the Taxpayer engaged in “treaty shopping” because it had limited economic or commercial ties to Luxembourg, and was simply trying to get the benefit of the Treaty without actually conducting business in Luxembourg, and that “treaty shopping” is an abuse of the Tax Act or the Treaty.

Alta Luxembourg raised two main arguments in response:

  • the text of the Treaty provisions was clear and the rationale for the relevant provisions can be found in the text of these provisions. A textual, contextual and purposive analysis of those provisions does not indicate any purpose of the provisions beyond the plain words of the text in the Treaty provisions; and
  • the Minister, in seeking to have the GAAR apply, was attempting to add a limitation on accessing treaty benefits to corporations with “sufficient substantive economic connections” to their country of residence, which limitation is not present in the words of the Treaty.

In a 6-3 decision, the majority of the SCC sided with Alta Luxembourg and dismissed the appeal. The majority held that so-called “treaty shopping” is not necessarily abusive, and cautioned that courts should be reluctant to use the GAAR to impose value judgments as to what they think may be “right” or “wrong” when it comes to tax law and policy. As stated by Côté J. (at paragraphs 94 and 96):

The Treaty makes it clear that Canada and Luxembourg agreed that the power to tax would be allocated to Luxembourg where the conditions of the carve-out were met. There is nothing in the Treaty suggesting that a single-purpose conduit corporation resident in Luxembourg cannot avail itself of the benefits of the Treaty or should be denied these benefits due to some other consideration such as its shareholders not being themselves residents of Luxembourg. In this case, the provisions operated as they were intended to operate; there was no abuse, and, therefore, the GAAR cannot be applied to deny the tax benefit claimed.


A final note on the Minister’s implication that treaty shopping arrangements are inherently abusive. A broad assertion of “treaty shopping” does not conform to a proper GAAR analysis. In accordance with the separation of powers, developing tax policy is the task of the executive and legislative branches. Courts do not have the constitutional legitimacy and resources to be tax policy makers (Canada Trustco, at para. 41). It is for the executive and legislative branches to decide what is right and what is wrong, and then to translate these decisions into legislation that courts can apply. It bears repeating that the application of the GAAR must not be premised on “a value judgment of what is right or wrong [or] theories about what tax law ought to be or ought to do” (Copthorne, at para. 70). Taxpayers are “entitled to select courses of action or enter into transactions that will minimize their tax liability” (Copthorne, at para. 65).[6]

Our Firm’s more detailed commentary on this decision is available here.

Priority of Tax Claims on Bankruptcy and Insolvency (Canada North Group, SCC)

In Canada v. Canada North Group Inc. (2021 SCC 30), the SCC held in a 5 to 4 decision that courts supervising a restructuring of debt owed by a corporation have the authority to order super priority charges to facilitate the restructuring process.

In this case, Canada North Group and six related corporations initiated restructuring proceedings under the Companies’ Creditors Arrangement Act (“CCAA”). The initial CCAA application requested a package of relief, including the creation of three charges: (i) an administration charge in favour of counsel, a monitor and a chief restructuring officer for the fees they incurred; (ii) a financing charge in favour of an interim lender; and (iii) a directors’ charge protecting the directors and officers against liabilities incurred after the commencement of the restructuring. The CCAA judge made an order that these charges (“Priming Charges”) were to “rank in priority to all other security interests ... charges and encumbrances, claims of secured creditors, statutory or otherwise”, and that they were not to be otherwise “limited or impaired in any way by ... the provisions of any federal or provincial statutes.”

The Crown subsequently filed a motion for variance of the order, arguing that the Priming Charges could not take priority over the deemed trust created by subsection 227(4.1) of the Tax Act for unremitted source deductions. The motion to vary was dismissed, and the Crown’s appeal to the Court of Appeal was also dismissed. The Crown then appealed to the SCC.

The SCC released four sets of reasons: two for the majority judges and two for the dissenting judges. Three of the five judges in the majority determined that the Priming Charges prevailed over the deemed trust created by subsection 227(4.1) of the Tax Act on the basis that the deemed trust does not create a proprietary interest in the debtor’s property. Further, a court-ordered super priority charge under the CCAA is not a security interest within the meaning of subsection 224(1.3) of the Tax Act. As a result, there is no conflict between subsection 227(4.1) of the Tax Act and the court order, or between the Tax Act and section 11 of the CCAA, which confers jurisdiction on the supervising court to “make any order that it considers appropriate in the circumstances”. This jurisdiction is constrained only by restrictions set out in the CCAA itself and the requirement that the order made be appropriate in the circumstances. As restructuring under the CCAA often requires the assistance of many professionals, giving super priority to Priming Charges in favour of those professionals is required to derive the most value for the stakeholders. For a monitor and financiers to put themselves at risk to restructure and develop assets, only to later discover a deemed trust supersedes all claims, would defy fairness and common sense.

Without attaching to specific property, creating the usual right to the enjoyment of property or the fiduciary obligations of a trustee, the interest created by subsection 227(4.1) lacks the qualities that allow a court to refer to a beneficiary as a beneficial owner. Furthermore, under Quebec civil law, subsection 227(4.1) does not establish a legal trust as it does not meet the requirements set out in arts. 1260 and 1261 of the Civil Code of Quebec. The main element of a civil trust is absent in the deemed trust established by subsection 227(4.1): no specific property is transferred to a trust patrimony, and there is no autonomous patrimony to which specific property is transferred. Whether Her Majesty is a “secured creditor” under the CCAA or not, the supervising court’s power in section 11 thereof provides a very broad jurisdiction that is not restricted by the availability of more specific orders.

Two of the concurring judges in the majority noted the differences between the CCAA and the Bankruptcy and Insolvency Act (“BIA”) in respect of the deemed trust for unremitted source deductions. In the BIA, the Crown’s right of beneficial ownership under subsection 227(4.1) is confirmed and the amount is specifically excluded by section 67 of the BIA from being part of the property of a bankrupt. In contrast, although the CCAA protects the Crown’s right to unremitted source deductions, it does not specifically provide that the trust property should be put aside.

Interpretation of “business conducted” in the FAPI rules (Loblaw, SCC)

In Canada v. Loblaw Financial Holdings Inc. (2021 SCC 51), the SCC considered the meaning of the phrase “business conducted principally with” in paragraph (a) of the “investment business” definition in subsection 95(1) of the Tax Act, and held that providing capital and exercising corporate oversight did not amount to conducting business with a foreign affiliate. It followed from this conclusion that the taxpayer was able to avail itself of an exception to the foreign accrual property income (“FAPI”) regime for financial institutions that meet certain conditions. The decision includes a number of taxpayer-friendly statements, including the following (at paragraphs 41 and 60):

This narrow question of statutory interpretation requires us to draw upon the well-established framework that “statutory interpretation entails discerning legislative intent by examining statutory text in its entire context and in its grammatical and ordinary sense, in harmony with the statute’s scheme and objects” […] Where the rubber hits the road is in determining the relative weight to be afforded to the text, context and purpose. Where the words of the statute are “precise and unequivocal”, their ordinary meaning will play a dominant role […] In the taxation context, a “unified textual, contextual and purposive” approach continues to apply […] In applying this unified approach, however, the particularity and detail of many tax provisions along with the Duke of Westminster principle (that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable) leads us to focus carefully on the text and context in assessing the broader purpose of the scheme […] This approach is particularly apposite in this case, where the provision at issue is part of the highly detailed and precise FAPI regime. I must emphasize again that this is not a case involving a general anti-avoidance rule. The provision at issue is part of an exception to the definition of “investment business” within the highly intricate, highly defined FAPI regime. If taxpayers are to act with any degree of certainty under such a regime, then full effect should be given to Parliament’s precise and unequivocal words.


As for the Crown’s allegation that the purpose of the arm’s length requirement is anti-avoidance, this similarly amounts to an attempt to create a specific anti-avoidance rule absent any express legislative intent. To permit this argument to succeed would require us to rewrite the legislation. In the words of McLachlin C.J. and Major J., “[w]here Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe”. [emphasis added]

Our Firm’s more detailed commentary on this decision is available here.

De Facto Control (Bresse Syndics, FCA)

In Bresse Syndics Inc. v. Canada (2021 FCA 115), the FCA affirmed the decision of the TCC in CO2 Solution Technologies Inc. v. The Queen (2019 TCC 286) and dismissed the taxpayer’s appeal.

The issue was whether a public corporation exercised control (de jure or de facto) over the taxpayer, CO2 Solution Technologies Inc., such that the taxpayer was not a Canadian-controlled private corporation (“CCPC”) within the meaning of subsection 125(7) of the Tax Act and not entitled to enhanced scientific research and experimental development (“SR&ED”) credits available only to CCPCs.

In 2004, CO2 Solution Inc. (“Pubco”) became a public corporation. As part of a reorganization in 2005: (i) Pubco transferred its SR&ED activities to the taxpayer; (ii) Pubco and the taxpayer entered into a research agreement; and (iii) a Quebec trust (the “Trust”), the trustees of which needed to be (pursuant to the terms of the deed of trust) members of Pubco’s board of directors, became the taxpayer’s sole shareholder. Following the reorganization, the taxpayer claimed enhanced SR&ED credits in its 2009 tax return. The CRA disallowed the credits on the basis that the taxpayer was controlled directly or indirectly by Pubco and, thus, was not a CCPC. The TCC concluded that Pubco had both the de jure and the de facto control, and dismissed the taxpayer’s appeal. The taxpayer then appealed to the FCA.

Before the FCA, the taxpayer argued that there was no de jure control because the deed of trust was a document “external” to the corporation, and that there was no de facto control because the deed, as well as certain other documents, were not legally-enforceable arrangements as required per McGillivray Restaurant Ltd. v. R. (2016 FCA 99). [2] In upholding the TCC’s decision, the FCA stated (at paragraph 26):

I agree with the appellant that the de jure control analysis must, in principle, be limited to the internal documents of the corporation in question, which, prima facie, excludes Fiducie's deed of trust. However, according to Duha Printers, it can be relevant to examine the deed creating a trust that is a shareholder of a corporation in order to determine whether this instrument restricts the ability of trustees to exercise their voting rights on the shares held by the trust (Duha Printers at paras. 48-50).

However, the FCA concluded that it did not need to determine whether the deed of trust imposed on the trustees this type of restriction (such that Pubco would have had de jure control) since: (i) it was sufficient to conclude that Pubco had de facto control; and (ii) the deed conferred on Pubco “a legally enforceable right and ability to effect a change to the board of directors [of the taxpayer] or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability” (i.e., the test for de facto control set out in McGillivray). Having concluded that the deed of trust resulted in Pubco having de facto control, the FCA stated that it was unnecessary to determine whether other documents were also legally-enforceable arrangements that gave Pubco control over the taxpayer.

This decision was released in June 2021. Two months later, the FCA released its decision in Deans Knight (discussed below), which also addressed the concept of control.

Actual Control (Deans Knight, FCA)

In Canada v. Deans Knight Income Corporation (2021 FCA 160), the FCA reversed the TCC decision with respect to the application of the GAAR to a tax loss monetization arrangement. On October 4, 2021, the taxpayer applied for leave to appeal to the SCC.

The taxpayer was a Canadian public corporation that had approximately $90 million of tax attributes consisting of non-capital losses and other deductions from carrying on a drug research and food additives business. In 2007, the taxpayer was experiencing financial difficulty and investigated opportunities to realize the value of its tax attributes. First, in early 2008, pursuant to a plan of arrangement, the existing shareholders exchanged their shares of the taxpayer for shares of a new public corporation (“Newco”), such that the taxpayer became a wholly-owned subsidiary of Newco. Then, the taxpayer and Newco entered into an investment agreement with Matco Capital Ltd. (“Matco”), a venture capital company. Under the investment agreement, Matco agreed to pay the taxpayer $3 million up front for debentures of the taxpayer that were convertible, at Matco’s option, into voting and non-voting shares providing it with 79% of the equity and 35% of the votes of the taxpayer. Matco also agreed to pay $800,000 a year later. The further payment by Matco was pursuant to its obligation to either make an offer to Newco to purchase the remaining shares of the taxpayer for $800,000 or to simply pay $800,000 without acquiring the shares.

The investment agreement contemplated that Matco would arrange an initial public offering (“IPO”) or similar transaction. The investment agreement had a number of restrictions governing the parties, including providing that the consent of Matco was required before a number of corporate steps could be taken by the taxpayer or Newco, who was the sole shareholder (paras. 98- 103).

The assets and liabilities of the taxpayer, including the $3 million proceeds from the debentures, were distributed to Newco. As a result, the taxpayer effectively became a shell with no assets (other than the tax attributes) and with the sole liability to Matco in respect of the convertible debentures.

The transactions were structured to ensure that Matco held less than 50% of the voting shares of the taxpayer so that subsection 111(5) of the Tax Act did not restrict the taxpayer from utilizing the tax attributes. The FCA noted that Matco’s option to pay the $800,000 amount without acquiring shares was necessary to avoid Matco acquiring de jure control if Matco was not able to arrange an IPO or similar transaction. An IPO or similar transaction was critical to the tax plan to preserve the tax attributes, as there would be no acquisition of control by a “person or group of persons” where the shares of the taxpayer became widely held.

In early 2009, Matco arranged an IPO of the taxpayer with Deans Knight Capital Management Ltd. Immediately prior to the closing of the IPO, Matco converted its debentures to shares of the taxpayer. The taxpayer raised $100 million on the IPO from a broad and diverse group of new investors and changed its name to Deans Knight Income Corporation. Subsequent to the closing of the IPO, Matco made an offer to Newco to purchase all of its shares of the taxpayer for $800,000, which was accepted. Matco owned less than 5% of the total equity of the taxpayer.

The proceeds raised by the taxpayer in the IPO were invested in debt securities. The taxpayer deducted the majority of its $90 million tax attributes in its 2009 to 2012 taxation years to reduce its tax liability from the debt-securities business. Note that these year were prior to the enactment of section 256.1, which deems control to have been acquired where the investor’s equity interest exceeds 75% and a non-controlling position is intentionally taken by the investor so that the target corporation’s future use of its historical losses is not restricted.

The CRA reassessed the taxpayer on the basis that: (i) there was an acquisition of control by Matco pursuant to subsection 256(8) of the Tax Act, and (ii) the GAAR applied to the transactions because they resulted in an abuse of the provisions of the Tax Act which restrict the use of tax attributes following an acquisition of control.

The TCC allowed the taxpayer’s appeal, holding that Matco did not acquire a right to purchase the majority of the voting shares for purposes of subsection 256(8) and holding further that although there was a tax benefit and an avoidance transaction, the GAAR did not apply as there was no abuse.

The Crown appealed to the FCA the findings of the TCC with respect to the abuse requirement in subsection 245(4), on the basis that the transactions circumvented the object, spirit and purpose of paragraph 111(1)(a), subsection 111(5) and subsection 256(8) of the Tax Act.

Before the FCA began its abuse analysis, it stated that notwithstanding the position of the Crown, it was sufficient to focus only on subsection 111(5).

Step 1 –What is the object, spirit and purpose of subsection 111(5)?

The FCA agreed with the TCC’s conclusion as to the object, spirit and purpose of subsection 111(5) substantially for the reasons given (TCC at paras. 100-134, set out in Appendix B to FCA judgment), summarized as “to target manipulation of losses of a corporation by a new person or group of persons, through effective control over the corporation’s actions.” However, the FCA found the use of the term “effective control” by the TCC to lack clarity. This was illustrated by the fact that the parties in their submissions at the FCA assumed that the TCC was using the term as a synonym for de jure control.

Accordingly, the FCA changed the terminology to avoid confusion and rearticulated the object, spirit and purpose as “to restrict the use of specified losses, including non-capital losses, if a person or group of persons has acquired actual control over the corporation’s actions, whether by way of de jure control or otherwise” (para. 72).

The FCA rejected the taxpayer’s submission that the object, spirit and purpose of subsection 111(5) is fully expressed in its text. The specific anti-avoidance rules in the Tax Act (e.g.—256.1, de facto control provisions, subsections 111(5) and its history, subsections 256(5.11) and 256(7)) do not reflect a policy that the GAAR has no application to them. Further, the submission is inconsistent with the determination by the FCA in Birchcliff Energy Ltd. v. Canada ( 2019 FCA 151), that GAAR is applicable to transactions that circumvented subsection 256(7), a specific anti-avoidance rule.

In addition, the FCA noted that the taxpayer’s submission failed to consider the purposive element, stating that clear statements of government intent and jurisprudence acknowledging the Tax Act generally aims to prevent loss trading are purposive factors that shed light on the underlying rationale of subsection 111(5) (paras. 77-81). The FCA acknowledged that the object, spirit and purpose of subsection 111(5) that it articulates does include forms of both de jure and de facto control, but GAAR is intended to supplement the provisions of the Tax Act, so there is nothing inconsistent with the conclusion even though the text is limited to de jure control (para.83). When the GAAR was introduced in 1988, the erosion of tax revenues from the unexpected application of loss carryforwards was clearly a target (paras. 80, 85).

The FCA left the Crown’s argument that the object, spirit and purpose of subsection 111(5) engages circumstances where there is a lack of shareholder continuity, being a change of shareholders rather than a change of control, as an argument “for another day”.

Step 2: Does a transaction result in an abuse?

The FCA found the transactions relating to the investment agreement to be avoidance transactions. The investment agreement gave Matco “actual control” over the taxpayer, including the approval of the IPO or a similar transaction. The investment agreement’s severe restrictions on the actions of the taxpayer and Newco (paras. 98-103) were such that there was no realistic chance that an IPO or similar transaction would be rejected by the taxpayer or Newco. Newco would forfeit the $800,000 amount if that were to occur. As “actual control” of the taxpayer was acquired by Matco pursuant to transactions by which the taxpayer’s historical losses could be used, the transactions frustrated the purpose of subsection 111(5) and the GAAR applied to restrict the taxpayer from utilizing its historical losses.

The FCA further addressed the comment of the TCC that Matco did not need control for the tax plan to work, as it would have been possible for Newco to arrange an IPO without Matco’s assistance and participation (para.109). The FCA stated that it was not relevant whether there existed another potential transaction that was not pursued. The GAAR analysis of abuse depends on whether the relevant provisions have been frustrated by the transactions that were undertaken (para. 110). On its face, this statement seems to contradict the FCA’s earlier statement in Univar Holdco Canada ULC v. Canada (2017 FCA 207) that alternative transactions that could have achieved the same result without triggering any tax would be a relevant consideration in determining whether or not the avoidance transaction was abusive (para. 19).

No Requirement to Plead “Sham” (Paletta, FCA)

In Paletta International Corporation v. Canada (2021 FCA 182), the taxpayers sought to have a 2019 TCC decision by Hogan J. set aside and a new trial ordered. According to the taxpayers: (i) the TCC decided the main issue (i.e., whether expenses related to film distribution were deductible) on a theory that was not raised by any of the parties and for which the taxpayers were not given adequate notice, and (ii) the TCC made an unfair adverse credibility finding on the film distribution issue and this finding unfairly influenced its decision on the second issue (i.e., whether gains realized on the sale of land were on income or capital account). It should be noted that the TCC itself was concerned as to whether there was procedural unfairness, and provided extensive reasons for its conclusion that there was not.

The FCA disagreed with the taxpayers submissions, and found that the taxpayers knew the case that they had to meet and had adequate opportunity to respond. In response to the taxpayers’ specific submission that the decision should be set aside for procedural unfairness since the film distribution expenses issue was decided on the application of sham, which was not raised by any of the parties, Woods JA stated (at paragraph 19):

The label of “sham” that the Court attached to the arrangement does not mean that the appellants did not have notice of the case they had to meet. That case was clearly set out in the factual assumptions. There was no reason for the assumptions to explicitly use the term “sham” or to explicitly state that there was deception. But it is obvious from the relevant assumptions that the Minister did assume that there was deception with respect to the options. The case that the appellants had to meet was clear from the pleaded assumptions.

Break Fees (Glencore, TCC)

In Glencore Canada Corporation v. The Queen (2021 TCC 63), the TCC held that break fees received in the context of a failed merger were income from a business.

In 1996, the taxpayer’s predecessor made an offer to merge with Diamond Fields Resources Inc. (“DFR”), a Canadian public mining company that owned mineral claims in a major nickel-copper-cobalt deposit at Voisey’s Bay, Labrador. The merger was pursuant to a plan of arrangement whereby the shareholders of DFR would receive shares of the taxpayer, cash and exchangeable notes with a total value of approximately $4.1 billion. DFR paid a commitment fee of $28,206,106 on execution of the merger offer agreement. The merger offer agreement also provided for a non-completion fee of $73,335,881.

After the arrangement agreement became binding, a competitor of the taxpayer that already owned shares of DFR, made an offer to purchase the remaining shares of DFR for shares, cash and exchangeable notes with a total value of approximately $4.3 billion, which was accepted by the DFR shareholders in August 1996. Accordingly, DFR paid the taxpayer the non-completion fee (together with the commitment fees, the “Break Fees”).

The taxpayer’s position was that the Break Fees were non-taxable capital receipts. The CRA disagreed, resulting in reassessments that included the Break Fees in income either pursuant to section 3 or paragraph 12(1)(x), or in the alternative, the Break Fees gave rise to a capital gain pursuant to sections 38 and 39 of the Tax Act.[3]

The TCC accepted the position of the Crown that the Break Fees were properly characterized as income. As a result, the TCC did not consider the arguments regarding paragraph 12(1)(x) or capital gains.

The TCC found that the taxpayer was clearly not in the business of acquiring and selling companies; however, the evidence clearly established that its business included the acquisition of mineral deposits. The potential acquisition of DFR was structured differently because it was a public company, such that the fact that the shares of DFR had to be acquired in order to acquire the Voisey’s Bay deposit was of no significance.

The TCC further found that the Break Fees were inextricably linked to the taxpayer’s ordinary business operations as a nickel mining company; the potential acquisition of the deposit was part of its strategy for earning income from its business. Its strategy in acquiring the deposit was to maximize shareholder value by maintaining and bolstering its ore reserves and by containing its production costs. The Break Fees were ancillary business income received in the course of earning income from business. The Break Fees were necessary and integral parts of the taxpayer’s bid for DFR, the main purpose of which was the acquisition of the nickel deposits.

Repayable Loan as Government Assistance (CAE, TCC)

In CAE Inc. c. La Reine (2021 CCI 57), the TCC ruled that an interest-bearing, unsecured, non-forgivable loan made to the taxpayer by the Government was government assistance.

CAE, a flight simulator systems manufacturer, incurred over $700 million of SR&ED expenditures in developing such systems. Industry Canada “contributed” $250 million over five years to CAE to fund the research. After the five-year period, CAE was required to “reimburse” Industry Canada 135% of the amounts contributed (i.e., $337.5 million) in specified amounts over a period of fifteen years.

The TCC accepted the taxpayer’s argument that the “contribution” was a loan, but found that the loan did not have commercial terms. In particular, the effective interest rate on the loan (2.5%) was approximately 5 percentage points below a market rate and the loan did not contain traditional commercial covenants. The TCC noted that by virtue of the reference to the words “any other form” in the “government assistance” definition in subsection 127(9), and based on the cases including Immunovaccine Technologies Inc. v. Canada (2014 FCA 196), the meaning of “government assistance” is broad and captures loans that are made on non-commercial terms. Accordingly, the TCC held that the loan constituted “government assistance” in respect of which SR&ED benefits could not be claimed, was not deductible by virtue of paragraph 37(1)(d) and, to the extent that it was not spent on SR&ED, was includible in income under paragraph 12(1)(x).


Legislative developments in 2021 from a Canadian sales tax perspective (i.e., goods and services tax ("GST"), the harmonized sales tax ("HST"), the Quebec sales tax ("QST"), the provincial sales tax ("PST") of British Columbia and Saskatchewan, and the retail sales tax (“RST”) of Manitoba) mostly comprise the enactment of new federal and provincial measures previously announced in the 2020 Fall Economic Statement and provincial budgets, including new registration and collection requirements for non-resident businesses and digital platform operators. A detailed summary of these measures can be found here, under Sales Tax - Legislation prepared by our firm last year.

Enactment of Previously Announced the GST/HST Measures

Effective July 1, 2021, “non-resident suppliers” (i.e., persons who are not registered under Subdivision D of Division V of Part IX of the Excise Tax Act (Canada) (the "ETA") and who do not carry on business in Canada) and certain digital platform operators must register under the new simplified GST/HST registration regime and collect GST/HST on sales of intangible personal property and services made or facilitated to consumers (i.e., persons who are not registered under Subdivision D of Division V of Part IX of the ETA) located in Canada where the threshold amount from such sales exceeds, or is expected to exceed, $30,000 over a 12-month period.

These rules also apply to operators of short-term accommodation platforms that facilitate the supply of short-term accommodations situated in Canada by non-resident suppliers and suppliers of Canadian accommodation-related supplies (including reservation fees and administration fees).

Non-resident suppliers and certain digital platform operators facilitating supplies of qualifying goods (referred to in the ETA as a "qualifying tangible personal property supply") delivered, or made available, to consumers in Canada (excluding supplies sent by mail or courier from an address in Canada) are also subject to new GST/HST registration and collection obligations where the revenue from such sales exceeds, or is expected to exceed $30,000, over a 12-month period; however, these businesses must register under the standard GST/HST registration regime and not under the simplified registration regime described above.

Other previously announced GST/HST measures enacted in 2021 include: (i) the adoption of rules to extend eligibility for input tax credits (“ITCs”) for holding companies to holding partnerships and trusts, and (ii) the simplification of the rules regarding documentary requirements for claiming ITCs by increasing the current ITC information thresholds to $100 (from $30) and allowing billing agents to be treated as intermediaries for purposes of the ITC information rules.

Harmonization of the QST Rules for Electronic Commerce

On May 20, 2021, the Government of Québec announced in Information Bulletin 2021-3 its intention to harmonize the rules for electronic commerce under the QST regime in place since 2019 with GST/HST changes that came into effect on July 1, 2021. The provincial changes subsequently came into force on July 1, 2021. While the QST rules are now largely harmonized with the GST/HST rules for electronic commerce, some rules may apply differently, particularly with respect to registration requirements under the standard or simplified GST/HST and QST regimes for non-residents selling qualifying goods to consumers located in Quebec.

Elimination of the Restrictions for Claiming Input Tax Refunds and ITCs on Certain Restricted Expenses

Effective January 1, 2021, restrictions for claiming input tax refunds ("ITRs") by "large businesses" in respect of certain restricted expenses (e.g., certain meals and entertainment expenses, telecommunications, electricity, etc.) have been eliminated in their entirety, allowing such businesses to claim a full ITRs for the QST paid, or that became payable, in respect of their acquisition of property and services to which the ITR restrictions would have otherwise applied. Additionally, effective April 1, 2021, similar restrictions on the recapture of the provincial component of the HST in Prince Edward Island were eliminated, allowing "large businesses" previously subject to these restrictions to claim full ITCs on their expenses of specified property and services.

Enactment of the Proposed British Columbia PST Rules for Non-Resident Businesses

In addition to the rules enacted in prior years regarding registration and collection requirements for certain non-resident vendors for British Columbia (“BC”) PST purposes, effective April 1, 2021: (i) Canadian vendors of goods, and (ii) Canadian and foreign vendors of taxable software and telecommunication services made to consumers in the province are required to register for BC PST, and to collect and remit the applicable PST in respect of the taxable sales made in the province if their "specified B.C. revenue threshold” exceeds, or is expected to exceed, $10,000 over a 12-month period. These rules were initially announced in the 2020 Budget, but were delayed to provide relief to businesses in response to the COVID-19 pandemic. Non-resident vendors should review their BC PST registration and collection as the terms "telecommunication services" and "software" are broadly defined.

Unlike other Canadian federal and provincial jurisdictions, the current legislation does not include a registration requirement for digital platform operators that facilitate the sale of goods, software or telecommunication services by Canadian and foreign vendors to consumers located in the province; however, digital platform operators should nonetheless review their BC PST obligations as they may be subject to the new rules if they make taxable sales otherwise subject to PST in the province (e.g., in respect of taxable service fees charged to vendors located in the province).

New PST Registration and Collection Requirements in Manitoba for Electronic Commerce Businesses

Manitoba is the most recent province to announce new registration and collection rules for digital platform operators and sellers of streaming services and other media services, whether or not they have a physical presence in Manitoba. These rules are similar to those adopted in other Canadian provinces and came into effect on December 1, 2021.

Online sales platform operators that (i) enable or facilitate the retail sale of goods made to consumers located in the province, and (ii) collect payment on behalf of the online vendor are now required to register as vendors, and collect and remit the applicable RST on the taxable sales made to consumers located in the province. Similar rules apply to online accommodation platform operators.

Vendors making sales of streaming services and other media services to consumers located in the province are also subject to these new rules, and are required to register as vendors and to collect and remit the applicable RST in respect of such sales.

An administrative bulletin recently issued by the Manitoba Minister of Finance ("Bulletin 064") provides some clarifications as to how PST applies to streaming services and sales made by online sales platform operators and online accommodation platform operators, and the associated responsibilities.

Saskatchewan Status Quo

In 2020, the Government of Saskatchewan enacted new registration and collection rules on a retroactive basis for e-commerce businesses and digital platforms operators (a more comprehensive summary can be found here). No significant legislative changes were announced or enacted in 2021 regarding electronic commerce in Saskatchewan.


Part 2 - Outlook for 2022


Significant tax measures announced by the Government in Budget 2021 remain outstanding at the close of the 2021 year. We expect that the Government will seek to advance these tax measures, but success in moving forward on these measures may depend, in part, on how much of the Department of Finance’s time, attention and resources will be spent in 2022 on COVID-19 related support programs and other COVID-19 related emergencies. There may also be important global developments and judicial decisions impacting the Canadian tax landscape, including by the Supreme Court of Canada.

Draft Legislation on Interest Deducibility Limitation Rules and Hybrid Mismatch Arrangements

As discussed above, in Budget 2021, the Government proposed new interest deductibility rules and rules intended to address hybrid mismatch arrangements.

In respect of the interest deductibility rules, the Government stated that it expected to release draft legislative proposals for public comment in the summer of 2021; however, no such draft legislation has been announced as at December 31, 2021. We anticipate that the Government will release draft legislation in early 2022, with the public consultation process commencing shortly thereafter.

In respect of the hybrid mismatch arrangement rules, the Government stated that it intended to implement the rules in two legislative packages. The first package was supposed to be released for stakeholder comment in 2021, but has not been released as of December 31, 2021. The second package was to be released after 2021. We expect that the Government will seek to significantly advance these measures in 2022.

Digital Services Tax, Mandatory Disclosure Rules and Transfer Pricing

The 2022 year may also see the enactment of the DST and mandatory disclosure rules proposed in Budget 2021, and a consultation on Canada’s domestic transfer pricing rules, in each case as discussed above.


On August 15, 2021, shortly after the start of the fourth wave of the COVID-19 pandemic in Canada, the Government called for a general federal election that was held on September 20, 2021. Although Prime Minister Justin Trudeau won a third term as prime minister, the results were mostly unchanged from the 2019 federal election and the Prime Minister did not secure a majority government.The Liberal Party’s election platform contained a number of key tax initiatives to make sure that Canadians pay “their fair share”, including:

  • increasing the federal corporate income tax rate by 3% on banks and insurance companies that earn more than $1 billion per year, and the introduction of a temporary Canada Recovery Dividend that such banks and insurance companies would pay to the Receiver General of Canada;
  • creating a federal minimum tax of 15% per year applicable to high-income individuals;
  • implementing a tax on luxury cars, boats and planes (as previously announced in Budget 2021);
  • revising the GAAR to restrict the ability of federally regulated entities, including banks and insurance companies, to use tiered structures to move Canadian-source profits to low-tax jurisdictions;
  • working with Canada’s international partners to implement a global minimum tax;
  • eliminating flow-through shares for oil, gas, and coal projects to help promote clean growth and Canada’s transition to a net-zero economy; and
  • implementing a national anti-flipping tax and a national tax on ownership of vacant land and residential property by non-resident non-Canadians.

Given that the Trudeau Liberals did not succeed in winning a majority of the seats in the House of Commons, it is unclear whether and to what extent the tax measures announced in the 2021 federal election will be proposed and enacted in 2022; however, it is anticipated that the Government will proceed with at least some of these measures.

OECD Developments

On October 8, 2021, the OECD announced that 136 countries, including Canada (and all of the G20), committed to fundamental changes to the international corporate tax system that support the OECD’s two-pillar solution to address the tax challenges arising from the digitalization of the economy. The changes would provide new taxing rights that reallocate some portion of the profits of large multinational enterprises (“MNEs”) to countries where the MNEs’ customers are located (i.e., addressing the allocation of taxing rights) (“Pillar One”) and adopt a global minimum effective tax rate of 15% (“Pillar Two”).

The implementation of Pillar One and Pillar Two will introduce significant changes to the international corporate tax system. There has been an agreement to focus efforts to finalize and implement Pillar One and Pillar Two by 2023. This is an ambitious timeline that may not adequately allow for stakeholder comment.


As noted above, business support measures such as the CHRP, the Tourism and Hospitality Recovery Program, the Hardest-Hit Business Recovery Program and the Local Lockdown Program are legislated to be available until May 7, 2022 and may be further extended by regulation until July 2, 2022. If 2020 and 2021 are any guide, it would not be surprising to see further developments with respect to Canada’s COVID support programs as the country continues to grapple with the realities of the COVID-19 pandemic.


Despite the SCC’s general hesitance to grant leave to appeal lower court decisions on tax matters, leave to appeal was granted in Collins Family Trust v. Canada (Attorney General) (2020 BCCA 196). This case considers whether, having regard to the Court’s previous judgments on rectification in 2016, equitable rescission is still a remedy available to taxpayers to avoid unintended tax consequences of prior transactions. As at December 31, 2021, the leave application in Deans Knight (discussed above) is also pending. These cases could have important implications.


[1]       Our Firm’s more detailed tax commentary on Budget 2021 is available here.

[2]       Subsection 256(5.11) was not considered since it was enacted with effect subsequent to the year in question.

[3]       Section 56.4, which deals with restrictive covenants, was not applicable as it applies generally to payments made after late 2003.




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