Top 10 Need-to-Know Canadian Income Tax Cases from 2025

The past year saw a number of important judicial developments that continue to shape the interpretation and administration of Canada’s income tax system. This article highlights ten notable income tax cases from the year, distilling key insights that may inform planning, compliance, and dispute resolution strategies going forward.

1. Broad Requests for Information About Unnamed Persons Denied

Canada (National Revenue) v. Shopify Inc., 2025 FC 968 and 2025 FC 969

The Canada Revenue Agency (“CRA”) sought approval by the Federal Court to obtain broad information about Shopify’s merchants who had customers in Australia and in Canada that were unknown to the CRA. The request for information about customers in Australia was from the Australian Tax Office pursuant to the Convention on Mutual Administrative Assistance in Tax Matters. Shopify opposed the applications.

For the Australian customers, the Federal Court rejected the request on the basis that the CRA did not have authority to request information from Shopify pertaining to unnamed third parties for the purpose of sharing that information with another country.

For the Canadian customers, the Federal Court concluded that the CRA had not satisfied the preconditions for authorization. Based on the CRA’s request, the group targeted was ambiguous and broader than just merchants and the Federal Court was not satisfied that the information requested was to verify compliance with the Income Tax Act or the Excise Tax Act. Alternatively, the Federal Court would exercise its discretion to limit the scope of the request.

The Crown has appealed both decisions to the Federal Court of Appeal (FCA).

2. Legal Substance of Securities Lending Agreements Challenged, So Higher Non-resident Withholding Tax Applied

Canada v. Hutchison Whampoa Luxembourg Holdings S.À R.L., 2025 FCA 176

A Canadian public company declared a dividend. Prior to the dividend being paid, two significant shareholders resident in Barbados transferred their shares under securities lending agreements to related companies in Luxembourg. Then the dividend was paid, the public company withheld non-resident withholding tax at the rate of 5% pursuant to the Canada-Luxembourg Tax Treaty. The CRA assessed the public company for withholding tax based on a rate of 15% (pursuant to the Canada-Barbados Tax Treaty).

The FCA concluded that the Luxembourg companies were not the beneficial owners of the dividends because they had not assumed any risk with respect to the dividends as they entered into perfect hedges with respect of foreign exchange risk. The securities lending agreements did not have the required legal substance to represent securities lending agreements because the parties never intended for Luxembourg companies to sell or lend the borrowed shares, and there was no collateral required from the Luxembourg companies.

The taxpayer has filed an application for leave to the Supreme Court of Canada.

3. Relevant Time to Determine When Two Corporations Are Connected is the End of the Trust’s Taxation Year When Dividend Deemed Received

Canada v. Vefghi Holding Corporation, 2025 FCA 143

Two target corporations, shortly before their sale to third parties, declared and paid dividends to respective shareholder trusts. The trusts designated the dividends in their income tax returns ending December 31 in respect of corporate beneficiaries. If the corporate beneficiary were connected to the target corporation, then there would have been no Part IV tax.

The FCA concluded that the target corporations and corporate beneficiaries were not connected. The relevant time to make that determination is the end of a trust’s taxation year in which that trust received the dividend because that is the time the corporate beneficiary is deemed to receive the dividend, and not when the dividend is declared, paid or actually received. At the time of deemed receipt, the corporate beneficiary was not connected to the target corporation as the shares have already been sold.

The taxpayer has filed an application for leave to the Supreme Court of Canada.

4. Partnership Interests That Derive Value From Canadian Resource Properties Cannot Be Bumped

DEML Investments Limited v. Canada, 2025 FCA 204

The parent company of the taxpayer and a third party vendor undertook transactions in respect of the acquisition of certain Canadian resource properties. The effect of the transactions was that a newly created partnership interest was bumped up in value, the Canadian resource properties it historically held were transferred to the taxpayer and different assets were transferred to the partnership, which was sold to an arm’s length party. Put differently, the taxpayer obtained a capital loss on the sale of the partnership interest but retained cumulative Canadian oil and gas property expense in relation to the Canadian resource properties.

The FCA allowed the taxpayer’s appeal in part finding that there was no abuse of the capital loss rules, but concluded that the bump of the partnership interest was abusive as the taxpayer kept the entitlement to the resource pools.

5. Transfer of Losses Within a Related Group is Not Abusive

Canada v. Quebecor Inc., 2025 FCA 207

The taxpayer owned shares in a corporation that had low tax cost and high value. If it sold those shares, it would have had to pay tax on a large capital gain. The taxpayer’s indirect subsidiary owned shares in another corporation that had high tax cost and low value. If it sold those shares, it would have a large capital loss. Transactions were entered into to take advantage of the unrealized loss to increase the cost base of the low tax cost/high value shares.

The FCA found that the transactions did not abuse the scheme applicable to windings-up, nor the scheme applicable to capital gains and losses. Electing to complete a subsection 88(2)  wind-up instead of a subsection 88(1) wind-up is not abusive in and of itself. The FCA noted that there was a transfer or consolidation of losses between related persons, which is not abusive.

6. Crown Cannot Make Inconsistent Factual Assumptions or Ask the Tax Court to Impose New Penalties

Uppal Estate v The King, 2025 TCC 34

The CRA assessed the taxpayer on the basis that there was a failure to report income from the sale of shares because the individual was the beneficial owner of shares held both in his own name and in the name of his company, or alternatively that his company was the beneficial owner of all the shares. The Crown also asked the Tax Court to impose penalties for failing to file certain forms, although those penalties were not originally assessed.

The Tax Court of Canada (TCC) found that the Crown must plead only true assumptions of fact that support the Minister’s primary assessing position and separately plead alternative facts. The inappropriate use of assumptions of fact was prejudicial as it cannot be true that the individual was the beneficial owner of all the shares and that the company was the beneficial owner of all the shares, as the tax treatment is each position is fundamentally different. The TCC also concluded that penalties can only be imposed by the CRA, not the TCC.

For more information about this case, please see this McCarthy Tétrault article.

7. Interest on Unpaid Foreign Taxes is Not Deductible

Bank of Montreal v The King, 2025 TCC 113

The taxpayer sought to deduct interest that was paid to the U.S. tax authorities on unpaid U.S. foreign tax.

The TCC found that interest on foreign taxes on income is a consequence of the income-earning process. Those payments were not made for the purpose of gaining or producing income. As an after-the-fact expense, such expense is generally not deductible for Canadian tax purposes.

For more information about this case, please see this McCarthy Tétrault article.

8. Crown Stuck With Agreeing to Wrong Small Business Deduction

Oram's Enterprises Limited v. The King, 2025 TCC 182

The taxpayer and the Crown filed a consent to judgment on the quantum of the small business deduction for 2 years. The TCC rendered a judgment giving effect to the consent to judgment. The parties later discovered that the amounts in the consent to judgment were overstated, and prepared an amended consent to judgment with the corrected amounts then asked the TCC to amend its judgment.

The TCC determined that it can only amend its judgment if there was an error arising from an accidental slip or omission (which was not the case) or if the amendment relates to a matter on which the TCC did not adjudicate. As the judgment specifically related to the small business deduction, the TCC had no ability to amend its judgment.

9. Crown Given Broad Leeway to Raise New Position

Redpath Sugar Ltd. v. The King, 2025 TCC 179

The CRA reassessed the taxpayer based on the transfer pricing recharacterization rules in paragraphs 247(2)(b) and (d) in respect of a cross-border financing transaction, denying interest deductions related to a multi-million-dollar loan. Discoveries were completed. The Crown subsequently sought to amend its pleadings to rely on the traditional transfer pricing rules in paragraph 247(2)(a) and (c), as an alternative argument, on the basis that the interest rate was 0%.

The TCC allowed the amendment as the alternative argument also involved the arm’s length principle and the Crown position remains the same. The Crown agreed that it would have to contribute to the costs of additional discoveries.

The taxpayer has appealed to the Federal Court of Appeal.

10. Crown Allowed to Rely on New Position and Even a Different Transaction

Oldcastle Building Products Canada Inc. v. The King, 2025 TCC 107

The taxpayer appealed an assessment for failing to withhold non-resident tax, and a determination that the general anti-avoidance rule applied to reduce the paid-up capital of its common shares. The taxpayer later included in the same appeal, appeals of reassessments that disallowed the deduction of interest expense pertaining to the same transactions. Discoveries were completed. The Crown sought to amend its reply to plead the thin capitalization rules as an alternative basis for supporting the disallowance of interest expense.

The TCC found that the alternative basis or argument could be raised by virtue of subsection 152(9) and that amended subsection 152(9) allowed an alternative basis or argument even on a different transaction.

The taxpayer has appealed to the Federal Court of Appeal.