30 minute read 2 Jun. 2022
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TaxMatters@EY – June 2022

By EY Canada

Multidisciplinary professional services organization

30 minute read 2 Jun. 2022
TaxMatters@EY is a monthly Canadian summary to help you get up to date on recent tax news, case developments, publications and more. From personal and corporate tax issues to topical developments in legislation and jurisprudence, we bring you timely information to help you stay in the know.

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In this issue, we discuss:

(Chapter breaker)

Chapter 1

Expanded availability of medical expense tax credit will facilitate providing fertility and surrogacy benefits to employees on a tax-free basis


Caitlin Morin and Lawrence Levin, Toronto

The federal budget tabled on April 7, 2022 proposes to expand the availability of the medical expense tax credit (METC) to certain expenses related to a surrogate mother or a donor of sperm, ova or embryos.1

In addition to making the METC available to taxpayers who need to pay medical expenses of surrogates and donors to become parents, these amendments will make it easier for employers to offer fertility and surrogacy benefits to employees on a tax-free basis through a private health services plan (PHSP). These types of benefits are becoming an increasingly common component of employee benefits programs as employers look for new ways to attract talent and meet the unique needs of today’s employees.


For Canadian tax purposes, any benefit received by an employee in the course of employment is generally taxable to the employee in the year of receipt, unless it fits in one of the exceptions to this rule. There is no exception for an employer reimbursement of fertility and surrogacy expenses, but an exception is available for a benefit derived from employer contributions to a PHSP. Employer contributions to a PHSP are not a taxable benefit to the employee, and employees are not taxed on benefits paid under a PHSP.

Private health services plan

A PHSP is defined in subsection 248(1) of the Income Tax Act (the Act) as a contract of insurance in respect of hospital or medical expenses (or any combination of such expenses) or a medical or hospital care insurance plan (or any combination of such plans), except certain provincial or federal insurance plans.

The Canada Revenue Agency considers a plan to be a PHSP when certain conditions are met, including that the plan includes an insurance element and that “all or substantially all” (generally 90% or more) of the premiums paid in the calendar year relate to medical expenses that are eligible for the METC.2 A self-insured plan will meet the “all or substantially all” requirement for a calendar year if all or substantially all of the benefits paid to all employees that year are for medical expenses that are eligible for the METC.

The CRA will generally consider a benefits plan that fails to qualify as a PHSP to be an employee benefit plan (EBP). An EBP is an arrangement under which the employer or someone not dealing at arm’s length with the employer makes contributions to another person (the custodian of the EBP) and under which payments will be made to or for the benefit of employees or former employees. With limited exceptions, all benefits received under an EBP must be included in the employee’s income from employment in the year of receipt.3

Medical expense tax credit

The METC is a 15% non-refundable tax credit that is available for certain medical or disability-related expenses. For 2022, the METC is available for qualifying medical expenses in excess of the lesser of $2,479 and 3% of the individual’s net income. A taxpayer can only claim the unreimbursed portion of the medical expense unless the reimbursement is included in taxable income.

To qualify for the METC, expenses must meet the requirements of section 118.2 of the Act. Expenses that currently qualify for the METC include, among others, fertility-related procedures and artificial insemination or in vitro fertility programs. However, the METC is not currently available to taxpayers who need to pay the expenses of individuals other than the intended parents, including expenses associated with obtaining eggs or sperm from a donor or fees associated with a surrogate mother. This is because eligible expenses for the METC must generally be in respect of services received by the “patient,” defined as the taxpayer, the taxpayer’s spouse or common-law partner or certain dependants of the taxpayer.

Employer-provided fertility and surrogacy benefits

Under the current rules, it may be difficult for a benefit plan that provides fertility and surrogacy benefits to qualify as a PHSP and, by extension, for an employer to provide such benefits to employees on a tax-free basis. That’s because if more than 10% of the premiums/benefits paid relate to donor and surrogacy expenses (and any other expenses that are ineligible for the METC), the plan will not be a PHSP. If the plan fails to qualify as a PHSP, all benefits received by employees under the plan would likely be taxable as benefits received under an EBP.

Federal budget 2022 proposal

Budget 2022 proposes to provide a broader definition of “patient” for purposes of the METC where an individual relies on a surrogate or a donor of sperm, ova or embryos to become a parent. The proposal would allow certain medical expenses to be eligible for the METC. Eligible expenses include those that are incurred in Canada and paid by the taxpayer, their spouse or common-law partner with respect to a surrogate mother (e.g., expenses paid by the intended parent to a fertility clinic for an in vitro fertilization procedure for a surrogate mother) or a donor of sperm, ova or embryos.

In addition, Budget 2022 proposes to allow reimbursements paid by the taxpayer to a patient under this expanded definition to be eligible for the METC, provided that the reimbursement is made in respect of an expense that would generally qualify for the METC (e.g., reimbursements paid by the taxpayer for expenses incurred by a surrogate mother with respect to an in vitro fertilization procedure or prescription medication related to the pregnancy). The METC would also be available for fees paid to fertility clinics and donor banks to obtain donor sperm or ova to become a parent.

These measures would apply to expenses incurred in the 2022 and subsequent taxation years. As of the date of writing, the legislation implementing these measures has not yet been released, and therefore is not expected to become law until later this year.

For a benefit plan that provides fertility and surrogacy benefits, these amendments will reduce the risk of the plan failing to qualify as a PHSP on the basis that more than 10% of the premiums/benefits paid relate to expenses of individuals other than the intended parents. The plan will still need to meet all the conditions to qualify as a PHSP in order for employees not to be taxed on benefits paid under the plan, including fertility and surrogacy benefits.


Employers offering fertility and surrogacy benefits, and those considering adding them to their benefits offerings, should take note that if these amendments are passed, they may more easily provide these benefits to employees on a tax-free basis under a PHSP. Employers should contact their tax or legal advisor for assistance in determining whether their benefit plan qualifies as a PHSP.


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Chapter 2

Review prescribed rate loan strategy before July 1, 2022


Alan Roth, Toronto


With the prevalence of higher federal and provincial top marginal personal income tax rates in recent years, Canadian individuals may be looking for an effective way to split income with family members who are in a lower income bracket.

Low interest rates have offered a tax planning opportunity to anyone interested in income splitting with their lower-income spouse (or common-law partner) and/or children or grandchildren. This tax planning may be carried out using a prescribed rate loan. Despite the existence of rules that restrict certain income splitting techniques involving the use of private corporations,1 prescribed rate loan planning remains an acceptable and effective income splitting strategy. Caution should, however, be exercised when splitting income with a family member who may be subject to the tax laws of another country (for example, a spouse or partner who is a US citizen).

The rate of interest that must be charged on these loans has been 1% since the third quarter of 2020. Because it is expected that recent increases in interest rates will cause the prescribed rate to increase to 2% effective July 1, 2022, there may be an opportunity now to lock in a greater benefit than will be available after that date.

How the prescribed rate is set

The prescribed interest rate for new loans is reset each calendar quarter, based on the average rate of three-month Bank of Canada treasury bills (T-bills) sold during the first month of the previous calendar quarter, rounded up to the next highest whole percentage point.2 Once the average three-month T-bill rate exceeds 1%, the prescribed interest rate will increase from 1% to 2%.

The average of the rates published for April 2022 (1.02% and 1.38% on April 12 and April 26, respectively)3 exceeds 1%; therefore, the rate for the third quarter, beginning July 1, 2022, should be 2%.4 This means that prescribed rate loans entered into on July 1 or later will have an interest rate of double the amount that would apply to loans entered into before that date.

Putting a prescribed rate loan in place

Generally, with prescribed rate loan planning, the higher-income spouse or partner loans cash to their partner, or to a trust, for the benefit of the spouse or partner and/or minor children or grandchildren. The loan proceeds are invested to earn a higher rate of return than the prescribed rate. The net income from the invested funds (i.e., net of interest expense paid on the prescribed rate loan) is taxable in the hands of the lower-income family members at lower tax rates than would apply to the lender. The tax saving, then, is the net income multiplied by the difference in tax rates of the two parties. When the prescribed rate is higher, the investments will need to generate a higher rate of return to achieve the same tax savings.

It should be noted that once a prescribed rate loan has been entered into, the interest rate does not fluctuate even if the published prescribed rate changes.

To ensure that the income attribution rules do not apply,5 interest charged on the loan must be paid within 30 days of the end of each calendar year. The lender reports this interest received as income, while the loan recipient reports the investment income and deducts the interest in the year it is paid.

If cash is not readily available for a loan but you have a portfolio of securities, you could sell these investments to your family members, or to a trust for their benefit, in exchange for a prescribed rate loan equal to the value of the investments at that time. You would be required to report the disposition of the investments at fair market value on your personal income tax return.6 Although any resulting capital gains are taxable, capital losses realized could be denied under the superficial loss rules.

For purposes of this planning, the loan is generally payable on demand and should have sufficient flexibility, such that any portion of it is payable 30 days after demand, and the borrower has the right to repay it at any time without notice or penalty. Legal counsel should be consulted to draft the terms of the promissory note. A separate bank or broker account can be set up to preserve the identity and source of the investments, and the resulting income.

Refinancing a prescribed rate loan

Be aware that simply changing the interest rate on an existing loan that was established when interest rates were higher to the current low prescribed rate — or repaying the loan with a new prescribed rate loan — would cause the new loan to be offside, and attribution would apply, so that any income earned on the loaned funds would be reported by the lender.

There are available strategies for repaying a loan for this purpose without attracting attribution.7 Therefore, if you wish to refinance a prescribed rate loan, consult with your EY advisor.

Action to be taken now

If you’re contemplating putting in place a prescribed rate loan, you have the chance to do so before the rate changes on July 1, 2022. If this step is properly executed, the current 1% interest rate should apply throughout the duration of the loan.

If you’re considering this, or any other prescribed rate loan strategies, consult your EY tax advisor to determine the most effective plan for your personal situation. Remember in particular to seek professional advice if one of the participants is subject to tax in the US or another country, as implementing the strategy above may lead to unintended consequences.

  • Show article references# 
    1. The rules regarding the tax on split income limit income-splitting opportunities with children and certain adult family members for income derived directly or indirectly from a private corporation. Income that is subject to the tax on split income is taxed at the highest marginal personal income tax rate. For more information, see the February 2018February 2020 and November 2020 issues of TaxMatters@EY.
    2. Section 4301 of the Income Tax Regulations.
    3. Source: Bank of Canada, selected treasury bill yields.
    4. As of the date of writing, the change in rate has not been announced. Editor’s note: CRA announced the change in rate to 2% on May 27.
    5. In certain circumstances it may be desirable to have the attribution rules apply (e.g., where the investment generates a loss).
    6. If you sell to your spouse or partner, you’ll need to elect out of the roll-over under subsection 73(1) of the Income Tax Act.
    7. Refer to EY’s Managing Your Personal Taxes 2021-22 Chapter 9.


(Chapter breaker)

Chapter 3

Federal Court rejects claims that a spreadsheet communicates legal advice given by counsel and is protected by solicitor-client privilege

MNR v BMO Nesbitt Burns Inc., 2022 FC 157

Emily Gair, Vancouver, and David Robertson, Toronto

Under the Income Tax Act (the Act), the Minister of National Revenue is granted broad powers to request books, records and documents for the purpose of the enforcement and administration of the Act. These powers are not without limits, however. The Minister is precluded from obtaining disclosure of information or documents in certain circumstances, including where the information or document is protected by solicitor-client privilege.

This recent Federal Court of Canada case involved an application made by the Minister pursuant to section 231.7 for an order requiring the respondent, Investmentco, to comply with the Minister’s request for information made pursuant to section 231.1 of the Act. More specifically, the Minister requested that the respondent provide a copy of a spreadsheet referred to as the master summary pricing model (MSPM) in its unredacted form.

The respondent had redacted portions of the MSPM on the basis that the information contained in redacted cells was protected by solicitor-client privilege. The respondent also argued, in the alternative, that the production of the redacted portion of the MSPM should not be ordered because:

  • The Minister was out of time to seek its production because the relevant audit had concluded
  • The MSPM constituted tax accrual working papers (TAWPs) and therefore should not be ordered to be produced
  • The production of the MSPM would undermine the discovery process in related proceedings in the Tax Court of Canada

Relevant statutory provisions and jurisprudence

Subsection 231.1(1) of the Act grants the Minister the authority to request and examine taxpayers’ records. Section 231.2 is a related provision whereby the Minister may issue a formal requirement to provide documents or information. Where the Minister is of the view that the taxpayer has not complied with her request for information under section 231.1 or requirement for information under section 231.2, the Minister may make an application to the Court for a compliance order pursuant to section 231.7.

Under section 231.7, a judge may order the taxpayer to provide any information or document the Minister is seeking under section 231.1 or 231.2 if the conditions necessary for the issuance of a compliance order are met. One of the conditions is that the information or document is not protected from disclosure by solicitor-client privilege.

Solicitor-client privilege is defined in subsection 232(1) of the Act which reads, in part, “the right... to refuse to disclose an oral or documentary communication on the ground that the communication is one passing between the person and the person’s lawyer in professional confidence.”

In addition to the traditional protection afforded to communication between solicitor and client, the courts have placed additional limits on the Minister’s broad powers to request documents. In particular, the Federal Court of Appeal in BP Canada Energy Company v Canada (National Revenue), 2017 FCA 61 upheld the “unwritten rule” that the Minister cannot routinely request TAWPs. In BP, the Federal Court of Appeal described TAWPs, noting that “their purpose is to identify uncertain tax positions and provide for reserves which will allow the independent auditors to certify that the financial statements fairly and accurately reflect the financial situation of the corporation under audit.” It is easily appreciated that the regular disclosure of TAWPs would provide the Minister with a “road map” for potential audit issues.


The Canada Revenue Agency conducts annual audits of Investmentco, which is a full-service investment firm and is an indirect, wholly owned subsidiary of a bank. As part of its 2016 audit of NBI, the CRA issued a request for information pursuant to section 231.1 of the Act in relation to certain books, records and documents in connection with suspected dividend rental arrangement transactions.

In response to the query, the respondent claimed solicitor-client privilege on parts of the documents requested, including the MSPM dated July 18, 2016. The respondent provided the redacted MSPM to the Minister and advised that the redacted column, which sets out certain calculations, reflected legal advice provided to NBI in two legal opinions from 2012 and 2013. More specifically, evidence was given that the MSPM computes reserves, if any, in respect of certain share repurchase transactions in a manner consistent with that legal advice and forms part of the related group’s tax accrual working papers.

On May 28, 2021, after obtaining what she viewed as unsatisfactory responses to requests for further particulars of the solicitor‐client privilege claim, the Minister brought a summary application to seek the unredacted copy of the MSPM pursuant to section 231.7.

On June 18, 2021, less than one month later and before the Minister’s summary application was even scheduled for hearing by the Federal Court, the Minister reassessed Investmentco in relation to the share repurchase transactions that the Minister alleges are part of a dividend rental agreement for Investmentco’s 2016 taxation year.

On September 16, 2021, Investmentco objected to the Minister’s reassessment of its 2016 taxation year. The correct taxation of the share repurchase transactions was also at issue in the Minister’s reassessment of Investmentco and its indirect parent’s 2012 taxation years; reassessments of its 2012 taxation years have been appealed to the Tax Court of Canada.

Federal Court Decision

Solicitor-client privilege does not apply to the redacted information

In her decision, Justice Kane of the Federal Court concluded that the MSPM is not protected by solicitor-client privilege. Drawing on the Federal Court of Appeal’s reasoning in Canada (Public Safety and Emergency Preparedness) v Canada (Information Commissioner, 2013 FCA 104, Justice Kane explained that there is a continuum of solicitor-client-privileged communications and that not all end products of legal advice falls on that continuum. In particular, Justice Kane stated that an end product of legal advice will be privileged only to the extent that it “communicates the very legal advice given by counsel.”

Considering the MSPM specifically, Justice Kane emphasized that the MSPM “is a set of computations with some associated text” which “reflects the operational implementation, outcome or end product of legal advice provided.” Though the MSPM reflects the operational implantation or end product of legal advice, Justice Kane concluded that production of the unredacted MSPM would not disclose the legal advice provided to Investmentco. For this reason, Justice Kane was not satisfied that the MSPM was protected by solicitor-client privilege.

The Court should review the underlying legal opinions to determine if the MSPM constitutes communications protected by solicitor-client privilege

In coming to her decision, Justice Kane reviewed the two 2012 and 2013 legal opinions in their unredacted form, which were kept under seal.

Justice Kane acknowledged that a court should exercise its discretion to review solicitor-client communications “sparingly” and only where the necessity to do so is established. In these circumstances, Justice Kane determined it was necessary to review the 2012 and 2013 legal opinions, as it was not possible to determine whether the redacted MSPM reflected the legal advice provided based only on the review of the MSPM.

The MSPM should be ordered to be produced

The respondent advanced three alternative arguments for the non-disclosure of the MSPM. Having considered these alternative arguments, Justice Kane determined that there was no impediment to issuing the order under section 231.7 of the Act for the production of the MSPM as requested pursuant to section 231.1 of the Act.

The audit for Investmentco’s 2016 taxation year has not concluded and there is a remaining open inquiry about the share repurchase transactions

The respondent argued that the Minister’s audit of the share repurchase transactions for 2016 had ended, as the Minister had issued her notice of reassessment in respect of this issue for the 2016 taxation year.

The respondent submitted that a reassessment by the Minister or a notice of objection to the reassessment led to an impartial review by the CRA Appeals Division, which is a separate process with different information-gathering powers.

As the file was now with the CRA Appeals Division, the Respondent submitted that the Minister was out of time to use her audit powers to seek production of the MSPM under section 231.1 and 231.7 of the Act.

In responding to these arguments, Justice Kane emphasized that there are no time limits for the Minister’s exercise of her authorities pursuant to section 231.1 or 231.7. Additionally, Justice Kane did not agree “that the audit ended with the Minister’s notice of reassessment (June 2021)” nor did she agree that the “notice of objection puts an end to the Minister’s authority pursuant to sections 231.1 or 231.7.” On this basis, Justice Kane indicated that requests for information are not restricted to the pre-assessment period.

Even if the redacted MSPM constitutes TAWPs, it should be produced

The respondent submitted that the redacted MSPM constitutes TAWPs and relied on BP to argue that its production should not be compelled. In BP, the Federal Court of Appeal concluded that allowing the Minister unrestricted access to TAWPs, without having to advance any particular justification for their production, would impose on taxpayers a requirement to routinely provide the Minister with their uncertain tax positions every year. This would, in effect, compel taxpayers to “self-audit.” In determining that the Minister is precluded from having general and unrestricted access to TAWPs on a prospective basis, the Federal Court of Appeal stated that the “the Minister cannot enlist taxpayers who maintain TAWPs to perform the core aspect of audits conducted under the Act.”

Justice Kane emphasized that subsequent jurisprudence has clarified that, when requested in the context of an active audit of particular issues, and where the production of the TAWP would not offend the principle that a taxpayer is not required to self-audit, TAWPs may be produced (see Canada (National Revenue) v Atlas Tube Canada ULC, 2018 FC 1086).

Justice Kane concluded that, to the extent that the MSPM constituted TAWPs, it had not been established that its production would impose an obligation on the respondent to self-audit into the future or that its uncertain tax positions would be revealed. Further, Justice Kane stated that its production should be allowed as it was sought for the specific purpose identified in the 2016 audit regarding the share repurchase agreements.

Ordering production of the MSPM does not improperly undermine the discovery process or circumvent the discovery rules in the Tax Court of Canada

In responding to the respondent’s concerns that the production of the MSPM would improperly undermine the discovery process or circumvent the discovery rules in the Tax Court of Canada, Justice Kane simply concluded that the Tax Court of Canada can address the scope of discovery in the context of those proceedings and can address any argument that the production of the MSPM has prejudiced Investmentco or its indirect parent in their appeals with respect to their 2012 taxation years.

Lessons learned

The respondent in this case appealed to the Federal Court of Appeal in March 2022. While the reasoning and analysis of Justice Kane appears sound, it will be interesting to see whether the Federal Court of Appeal agrees with her conclusions, especially the conclusion that the audit does not end when the reassessments are issued.

Of particular interest will be whether the Federal Court of Appeal addresses the issue of how the information set out in the MSPM can be said to be relevant for a “purpose related to the administration or enforcement of the Act,” a requirement under the relevant sections of the legislation.

Given that the CRA had already assessed the relevant taxation year, how can it be said that the redacted amounts — amounts the taxpayer recorded as a reserve — have any relevance in determining the amount of tax payable by the taxpayer? Very simply, if a taxpayer determined, based on legal advice, that they did not owe any tax in respect of a particular issue, and the CRA reassessed the taxpayer $100 of tax in respect of that issue, how is the taxpayer’s calculation of its reserve relevant in determining the correct amount of tax payable? The tax is either $0 or $100. What the taxpayer set up as a reserve has no bearing on that issue.

Further, while the current outcome from the Federal Court’s decision is frustrating for taxpayers — essentially indicating that the CRA may still use its audit powers to gather information and documentation from the taxpayer when the matter at issue has already been assessed and the issue is in the hands of CRA’s Appeals Division — taxpayers should keep in mind that they too can rely on the Access to Information Act to compel further disclosure from the CRA in the course of the objection and appeals process.

Finally, for certain corporate taxpayers, this issue will to some extent become moot. As noted in EY Tax Alert 2022 No. 3, the Federal Government has released draft legislation introducing certain mandatory disclosures rules. These include proposed rules to take effect in 2022 requiring certain corporate taxpayers to report particular uncertain tax treatments to the CRA. These proposed rules would apply to a corporation that is required to file a Canadian income tax return for the particular taxation year, has at least $50 million in assets at the end of the last financial year and the corporation or its consolidated group has audited financial statements in which uncertainty in respect of the corporation’s Canadian income tax for the taxation year is reflected.



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(Chapter breaker)

Chapter 4

Recent Tax Alerts – Canada

Tax Alerts cover significant tax news, developments and changes in legislation that affect Canadian businesses. They act as technical summaries to keep you on top of the latest tax issues.

Tax Alerts – Canada

Tax Alert 2022 No. 27 – Ontario budget

Tax Alert 2022 No. 28 – Highlights from the CRA’s 2020 Mutual Agreement Procedure
On March 4, 2022, the Canada Revenue Agency released its Mutual Agreement Procedure (MAP) Program Report for the calendar year ended December 31, 2020. The report provides an overview of the operations of the MAP program, including statistical analyses of cases completed and in progress, covering cases dealing with resolution of double taxation or taxation not in accordance with a bilateral tax treaty.

Tax Alert 2022 No. 29 – Proposed hybrid mismatch rules
On April 29, 2022, the federal government released draft legislative proposals and accompanying explanatory notes to address certain hybrid mismatch arrangements.

Tax Alert 2022 No. 30 – Temporary expansion of immediate expensing incentive
On April 28, 2022, Bill C-19, Budget Implementation Act, 2022, No. 1, received first reading in the House of Commons. Bill C-19 implements the measures contained in the detailed Notice of Ways and Means Motion that was tabled on April 26, 2022 and contains certain tax measures announced in the 2022 and 2021 federal budgets, as well as various other measures.

Tax Alert 2022 No. 31 – Proposed federal investment tax credit for CCUS
The 2021 federal budget proposed an investment tax credit for businesses that incur eligible expenditures related to carbon capture, utilization and storage (CCUS) as part of the federal government’s overall plan to achieve net-zero emissions by 2050. On June 7, 2021, the Department of Finance launched consultations with stakeholders. EY participated in the consultation period, which closed on December 2, 2021.

Tax alert 2022 No. 32 – Nunavut budget


For more information on EY’s tax services, visit us at https://www.ey.com/en_ca/tax. For questions or comments about this newsletter, email Tax.Matters@ca.ey.com.  And follow us on Twitter @EYCanada.

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By EY Canada

Multidisciplinary professional services organization