LN TAX AND TRADE NEWSLETTER
4 The Proust Questionnaire
1. Editor's NoteWelcome to the July edition of the LN Tax and Trade Newsletter. In this issue, we examine the CRA’s reversal of its December 19, 2025 position on partnership residence under the Common Reporting Standard — a development with practical consequences for limited partnerships used in cross-border structures — and the Canadian and U.S. tax risks that can arise when a family member is added to title on real property. We have also copied the celebrated Vanity Fair Proust Questionnaire. In each issue, a member of the firm will take a turn answering its questions; this month, Peter A. Saad steps up. We hope you enjoy the issue.
2. International TaxCRA REVERSES DECEMBER 19, 2025 CRS POSITION ON NFE PARTNERSHIPSOn December 19, 2025, the Canada Revenue Agency (CRA) revised paragraph 3.32 of its Guidance on the Common Reporting Standard (CRS) to adopt a broader administrative position on partnership residence. Under the revised wording, a partnership could be treated as resident in Canada if all partners were resident in Canada, if the place of effective management and control of the partnership’s business was in Canada, or if the partnership was formed under the laws of a province or territory. |
Why the Issue Matters for NFE PartnershipsThe issue was of particular significance for limited partnerships classified as non-financial entities (NFEs), because a change in partnership residence could affect whether a partnership falls within Canada’s due diligence and reporting regime under Part XIX of the Income Tax Act. An entity is generally treated as a passive non-financial entity (NFE) if more than 50% of its income is derived from passive sources, such as dividends, interest, rent, or royalties. Under the CRS, reporting financial institutions must identify and report the controlling persons of a passive NFE. Paragraph 149 of the CRS Implementation Handbook1 explains that a controlling person includes any natural person who exercises control through direct or indirect ownership of the partnership’s capital or profits, through voting rights, or otherwise through control of the partnership’s management. The sharing of tax information among tax authorities is a central mechanism for combating offshore tax evasion. The Common Reporting Standard (CRS), developed by the Organisation for Economic Co-operation and Development (OECD), provides for the automatic exchange of information about financial accounts maintained in one participating jurisdiction for residents of another. Canada is a signatory to the CRS and, according to the CRA, as of January 1, 2020, 91 jurisdictions had agreed to exchange CRS information with Canada. The United States is not a signatory to the CRS and instead relies on the Foreign Account Tax Compliance Act (FATCA), enacted in 2010. Under FATCA, foreign financial institutions must identify accounts with U.S. indicia and report them either through an applicable intergovernmental agreement or, where no such agreement exists, directly to the Internal Revenue Service. |
Comparison to U.S. LLC ReportingA comparable reporting concern has arisen in the United States in relation to certain limited liability companies (LLCs), which provides a useful point of reference for understanding why the Canadian partnership issue matters. Before December 12, 2016, non-U.S. persons frequently used Delaware LLCs to hold assets with minimal public disclosure of beneficial ownership. Delaware requires only limited formation information, and beneficial ownership details are not publicly available on state databases. Although a Delaware LLC is required to pay an annual tax to the State of Delaware, a single-member LLC that did not carry on business in the United States was generally treated as a disregarded entity and often had no ordinary U.S. income tax return filing obligation. The U.S. Treasury and the IRS responded by requiring certain foreign-owned single-member U.S. LLCs to be treated as domestic corporations for the limited purposes of IRC section 6038A. Beginning January 1, 2017, those entities were required to file Form 5472 together with a pro forma Form 1120, even where the LLC held only personal-use assets. Failure to file Form 5472 on time, or to file a complete form, may result in a USD $25,000 penalty. Form 5472 generally requires disclosure of any transaction broadly described in IRS Regulation section 1.482-1(i)(7): (7) Transaction means any sale, assignment, lease, license, loan, advance, contribution, or any other transfer of any interest in or a right to use any property (whether tangible or intangible, real or personal) or money, however such transaction is effected, and whether or not the terms of such transaction are formally documented. A transaction also includes the performance of any services for the benefit of, or on behalf of, another taxpayer. That broad definition may require a single-member LLC to file Form 5472 where non-monetary transactions, or transactions for less than full consideration, occur between the LLC and its sole member. One example is the provision of rent-free accommodation by the LLC to its member. A jurisdiction that is party to a bilateral tax treaty with the United States, or to a Tax Information Exchange Agreement (TIEA) with the United States, may be able to ascertain the existence of the LLC through the information-exchange provisions in the treaty or TIEA.
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CRA’s Revision and Subsequent ReversalAgainst that background, the CRA’s December 19, 2025 revision to paragraph 3.32 was notable. It provided that a partnership could be considered resident in Canada for CRS purposes if it was formed under provincial or territorial law, or if all of its partners were resident in Canada, thereby materially broadening the circumstances in which a partnership could be brought within Canada’s CRS due diligence and reporting regime. The revised wording appeared to depart from the narrower prior administrative position, under which residence turned on the place of effective management of the partnership’s business. For many limited partnerships used in cross-border structures, that place of effective management would not be in Canada. On April 10, 2026, however, the CRA reversed course for the current reporting period and restored paragraph 3.32 to its prior wording. Under the restored position, a partnership is considered resident in Canada for CRS purposes where the place of effective management of the partnership’s business is in Canada. Canadian formation alone, or the residency of the partners alone, is therefore insufficient for the current reporting period to render a partnership resident in Canada under Part XIX. The April 10 addendum effectively restores the place-of-effective-management test that applied before the December 19, 2025 revision. The CRA’s April 10, 2026 reversion therefore preserves, for the current reporting period, the ability of certain non-resident structures that use Canadian-formed partnerships to remain outside the CRS reporting regime where effective management is not in Canada.
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Developments Since the ReversionOn July 2, 2026, the CRA published a revised consolidated version of its Guidance on the Common Reporting Standard. The consolidated guidance carries forward the restored wording of paragraph 3.32: a partnership is considered resident in Canada under Part XIX where the place of effective management of the partnership’s business is situated in Canada. The formation-based and partner-residence tests introduced on December 19, 2025 do not appear in the current version. The place-of-effective-management test therefore continues to govern partnership residence for CRS purposes as of the date of this alert, although the CRA has cautioned that paragraph 3.32 remains under review and may be revised for future reporting periods. The July 2, 2026 revisions also incorporate the amendments to Part XIX of the Income Tax Act published in the Notice of Ways and Means Motion of May 2026, which are scheduled to come into force on January 1, 2027. Those amendments are contained in Part 1 of Bill C-31, the Budget 2025 Implementation Act, No. 2, which was tabled in the House of Commons on May 6, 2026, completed second reading on June 3, 2026, and is presently before the Standing Committee on Finance, with a pre-study underway in the Standing Senate Committee on National Finance. Bill C-31 would also implement the OECD’s Crypto-Asset Reporting Framework (CARF) as a new Part XXI of the Income Tax Act. Of note for partnerships and other reporting financial institutions, the enhanced reporting measures will require disclosure, beginning with the 2027 reporting period, of whether each account holder and, in the case of a passive NFE, each controlling person has provided a valid self-certification; whether an account is a preexisting or new account and whether it is a joint account; the role by virtue of which each person is a controlling person of an entity; and, for dual-resident account holders, reporting to both jurisdictions of residence. None of the pending amendments alters the partnership residence test in paragraph 3.32. Sunita Doobay, Partner.3. Private Client and Cross-Border Canada–U.S. Tax IssuesADDING A FAMILY MEMBER TO REAL PROPERTY TITLE: CANADIAN AND U.S. TAX RISKS TO CONSIDERAdding a family member to the title (beneficial and legal) of real property, especially U.S.-situated property owned by Canadian residents, can trigger complex Canadian and U.S. tax consequences, including gift tax liabilities that may extend beyond the donor’s lifetime. |
 Adding the next generation to title — not so fast: the tax and estate risks of joint ownership. Adding a child or other family member to title to real property can have significant Canadian and U.S. tax consequences, even where no money changes hands. For Canadian income tax purposes, a transfer of beneficial ownership may result in a deemed disposition at fair market value under the Income Tax Act. Under the Income Tax Act because a parent and child generally deal at non-arm’s length, the parent may be treated as having disposed of the transferred interest for proceeds equal to its fair market value. In Dyjack v. Shaw, 2025 ONSC 1937 the Ontario Superior Court of Justice focused on the U.S. gift tax liability that arose when an adult daughter was added to title to a Florida property. The decision did not address any Canadian income tax consequences. For U.S. purposes, the addition of a child to title to U.S.-situated property may trigger gift tax, even where the transferor is a Canadian tax resident who owns the property as a Florida snowbird. U.S.-situated assets, including real property, vehicles and artwork, should therefore be reviewed carefully. State-level gift, estate or probate tax may also need to be considered depending on where the asset is located and how it passes on death. |
BackgroundCarolyn Alexander, a Canadian tax resident, passed away on June 28, 2021, leaving two daughters, Carrie Lynn Dyjack and Kelly Lynn Shaw. Under her Will dated January 9, 2013, both daughters were appointed as co-executors and were to share equally in the residue of the estate. During the estate administration, they learned that Ms. Alexander had previously transferred a Florida property from her sole name into joint tenancy with Ms. Dyjack by quit claim deed dated March 2, 2009. For U.S. tax purposes, the 2009 transfer was treated as a completed gift that should have been reported at the time. No gift tax return was filed. A late return was later prepared and filed during the estate administration, and the IRS assessed gift tax, penalties and interest totalling US$70,791.45. Ms. Dyjack paid that amount, together with related U.S. accounting and appraisal costs, personally. She then asked Ms. Shaw to agree that the estate should bear the cost. Ms. Shaw refused, and Ms. Dyjack applied to the Court for advice and direction regarding the estate.
U.S. Gift Tax OverviewFor U.S. federal tax purposes, adding a child to the deed of U.S. real property can be a completed gift when the deed is executed, because the child receives a present ownership interest. The transferor is generally required to file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. In 2009, the annual exclusion was US$13,000. Unlike the U.S. estate tax rules, the Canada–U.S. Tax Treaty does not provide comparable relief from U.S. gift tax for a Canadian resident who gifts an interest in U.S.-situated property. The U.S. gift tax is imposed under the rate structure in IRC section 2001(c), with marginal rates rising from 18% to 40%. Because Ms. Alexander did not file Form 709 in 2009 when she added Ms. Dyjack to title to the Florida property, the normal limitation period did not begin to run. Under IRC section 6501(c)(9), the IRS may assess gift tax at any time where a gift is not adequately disclosed. As a result, the unpaid gift tax remained assessable after Ms. Alexander’s death. Although the donor is primarily liable for gift tax, that liability can expose both the donor’s estate and the donee. In addition, the estate trustees may face personal exposure in certain circumstances, including under 31 U.S.C. section 3713(b). The practical point is that an unreported lifetime gift of U.S.-situated property can create tax exposure that continues well beyond the donor’s death. |
DiscussionThe Revenue Rule.The revenue rule is a common law principle under which Canadian courts generally will not enforce, directly or indirectly, the tax laws of another country. The principle has long been recognized in cases such as Government of India, Ministry of Finance (Revenue Division) v. Taylor, [1955] A.C. 491, and United States v. Harden, [1963] S.C.R. 366, where the Supreme Court of Canada refused to enforce a foreign tax judgment against a Canadian resident. The rule may, however, be modified by treaty or legislation where Canada has expressly agreed to assist in the collection of another country’s revenue claims. Review of the revenue rule Under common law, a court will not enforce, directly or indirectly, the revenue laws of a foreign state. The rule was established in the landmark English High Court case the King of the Hellenes v. Brostrom and Others (1923) 16 Ll. L. Rep. 190) and the House of Lords’ decision in Government of India, Ministry of Finance (Revenue Division) v. Taylor (1955, A.C. 491) and applied in the Supreme Court of Canada case United States v. Harden ([1963] S.C.R. 366) where the Supreme Court of Canada refused to enforce a California tax judgment against a Canadian resident. The Supreme Court of Canada repeated at page 370 of its decision the famous proposition cited in Government of India, Ministry of Finance (Revenue Division) v. Taylor “that in no circumstances will the courts directly or indirectly enforce the revenue laws of another country”. This was modified by the Federal Court in Hillis v. Canada, 2015 FC 1082 which the addition unless expressly allowed to do so in the home country of the person in question. |
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That assistance can extend to categories of taxes that include gift tax. However, the treaty also contains limits. In particular, assistance may be unavailable where the claim relates to a taxable period during which the taxpayer was a citizen of the requested state. The important point for Canadian clients is that the revenue rule may protect against direct enforcement of a foreign tax claim in Canada, but it does not protect U.S.-situated assets from the IRS’s domestic collection powers. In Dyjack v. Shaw, the revenue rule did not determine the result because the IRS was not asking a Canadian court to enforce a U.S. tax claim. Instead, Ms. Dyjack was seeking reimbursement from the estate after paying the U.S. gift tax herself. The question was therefore an estate administration question: whether the liability was one that should be borne by the estate as between the beneficiaries. Re Fudger, 1984 CarswellOnt 566, 18 E.T.R. 12 (Ont. H.C.J.), is useful by contrast. In that case, Hannah Lake Fudger had separate Canadian and Scottish estates governed by separate instruments. Her Ontario Will applied only to her Canadian property, while her Scottish deeds of settlement applied only to her Scottish property. After Ms. Fudger’s death, the U.K. tax authority asserted a capital transfer tax claim based on the position that she was deemed domiciled in the United Kingdom. The claim potentially reached both her Scottish and Canadian assets. The question for the Ontario court was whether the tax-payment clause in her Canadian will required the Canadian executor to pay that U.K. tax from the Canadian estate. The court held that it did not. In reaching that conclusion, the court emphasized the wording of the Canadian will. The clause directed the executor to pay taxes payable “in connection with any property passing under this my will.” Because the will was expressly limited to Canadian property, the court read the tax clause as applying only to taxes connected with the Canadian estate. It was not broad enough to shift responsibility for U.K. tax to the Canadian beneficiaries. The court also relied on the revenue rule. Canadian courts will generally not enforce the tax laws of another country, either directly or indirectly. Requiring the Canadian executor to satisfy the U.K. tax claim through the Canadian estate would have amounted to indirect enforcement of a foreign revenue claim. That provided a separate reason not to require payment from the Canadian estate. In Dyjack, the issue was not whether the IRS could enforce a U.S. tax claim in a Canadian court. Instead, the question was whether the unpaid U.S. gift tax, arising from a lifetime transfer, was an obligation that should be borne by the estate as between the beneficiaries. That is why the revenue rule did not determine the outcome in Dyjack. |
The Canadian DecisionThe Ontario Superior Court of Justice held that the U.S. gift tax was a proper liability of the estate. The Court accepted that, if the tax had remained unpaid, both estate trustees could have faced continuing exposure. The Court also found that Ms. Shaw had not shown that Ms. Alexander intended Ms. Dyjack alone to bear the gift tax burden. Although the Will referred to transferring any Florida property interest to Ms. Dyjack, the Court held that the Florida property itself passed outside the Will by right of survivorship. There was also no evidence of Ms. Alexander’s actual intention regarding the tax consequences of the 2009 transfer. The Court preferred the evidence that the IRS had broader collection tools than the objecting side acknowledged — including pursuing the estate trustees personally for up to ten years. Leaving the tax unpaid would have exposed both daughters personally, so paying it was neither gratuitous nor unnecessary, and gave rise to a claim for indemnity against the estate. Take AwayFor clients administering an estate with U.S.-connected assets, Dyjack v. Shaw is an important reminder that a foreign tax liability personally owed by the deceased may be treated as a legitimate debt of a Canadian estate. This may be the case even where the tax was not reported during the deceased’s lifetime and even where the immediate collection issue arises only after death. The analysis focuses on the nature of the liability, the estate trustees’ exposure, and whether payment was reasonably necessary in the circumstances. Two practical lessons stand out. First, the form of ownership matters. Because the Florida property passed by survivorship, the Will’s wording about the Florida property did not determine who bore the tax cost. Jointly held assets and beneficiary-designated assets often pass outside the estate and should be reviewed separately from the Will. Second, estate trustees and beneficiaries should obtain and preserve advice before paying a foreign tax liability. Where the payment is made to protect the estate and its representatives from genuine exposure, reimbursement from the estate may be appropriate.
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4. The Proust QuestionnaireIn each issue, a member of the firm takes on the celebrated Vanity Fair Proust Questionnaire. This issue: Peter A. Saad.  Peter A. Saad 1. What is your idea of perfect happiness? Starting the day with a run, taking the kids to a gym for basketball games and ending the day on the sofa with the family. 2. What is your greatest fear? Cancer. 3. What is the trait you most deplore in yourself? Impatience — I just contain it well. 4. What is the trait you most deplore in others? Dishonesty — “You can’t make a good deal with a bad person.” 5. Which living person do you most admire? My wife — she puts up with a very annoying person and yet somehow still loves me and wants to hang out. 6. What is your greatest extravagance? Raptors tickets — I don’t get to many games, but I love to sit very close when I go. 7. What is your current state of mind? Realistically optimistic. 8. What do you consider the most overrated virtue? Agreeableness. 9. On what occasion do you lie? When we have a surprise planned for someone. I don’t want to be the one to spill the beans. 10. What do you most dislike about your appearance? I don’t look at myself often, but growing up having a nose the size of the Sphinx was an easy joke for kids to make. 11. Which living person do you most despise? No one is worth spending so much energy on to despise. If they are that bad, they are already dead in my mind. 12. What is the quality you most like in a man? Empathy. 13. What is the quality you most like in a woman? Leadership. 14. Which words or phrases do you most overuse? Fine. 15. What or who is the greatest love of your life? My family.
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16. When and where were you happiest? No one event. 17. Which talent would you most like to have? Open water swimming. 18. If you could change one thing about yourself, what would it be? Reacting to things with a little bit more feelings. 19. What do you consider your greatest achievement? My family. 20. If you were to die and come back as a person or a thing, what would it be? I would come back as I am. 21. Where would you most like to live? Italy — Florence or the Amalfi Coast. 22. What is your most treasured possession? My health. 23. What do you regard as the lowest depth of misery? Comparison. 24. What is your favorite occupation? Being a contributor to helping raise people and organizations. 25. What is your most marked characteristic? Realist. 26. What do you most value in your friends? Space — I am busy, so knowing I appreciate them but it will be a journey focused on quality not quantity. 27. Who are your favorite writers? Authors of the Bible, Desmond Tutu, Winston Churchill, Mother Teresa. 28. Who is your hero of fiction? Steve Urkel. 29. Which historical figure do you most identify with? Peter from the Bible. He was hot-tempered, which I supposedly was growing up, and then was the bedrock of the modern day church. 30. Who are your heroes in real life? My family. They teach me each day kindness and generosity. 31. What are your favorite names? Theodore, Phillipe, Hannah. 32. What is it that you most dislike? People who relentlessly complain. Sometimes, you just need to shut up knowing that someone has it worse. 33. What is your greatest regret? Not celebrating my time in New York and, when I came back, I resisted accepting the next phase of life. It took too long. 34. How would you like to die? Surrounded by family knowing I did everything in my power to make the world a better place one person at a time. 35. What is your motto? “We got this.” |
