What Business Owners, Investors, and High-Income Individuals Need to Know

CRA technology is becoming more sophisticated, real estate tax treatment continues to generate major court disputes, and even ordinary decisions involving work expenses, investments, retirement benefits and estate planning can create unexpected tax consequences.

The Q3 2026 edition of Tax Tips & Traps (Issue 155) reviews several important CRA developments and recent court decisions affecting Canadian taxpayers.

Below is a practical breakdown of the major issues covered this quarter and why they matter.

Tax Tidbits: CRA Complaints, AI Audits and Record Keeping

Several shorter developments this quarter provide a useful glimpse into how CRA administration and enforcement are evolving.

CRA Service Complaints Are Rising

The Office of the Taxpayer's Ombudsperson reported a surge in CRA complaints. Common concerns include:

• Delays and poor information from CRA telephone contact centres
• Delays processing T1 adjustments
• Delays responding to service complaints
• Collection activity
• Difficulties accessing CRA online accounts after taxpayers have been locked out

CRA Is Using AI to Identify Unusual Returns

CRA is using artificial intelligence tools designed to identify taxpayers whose filings differ from industry norms and historical filing patterns.

This does not necessarily mean that an unusual tax position is incorrect. However, a return that differs significantly from expected patterns may face additional scrutiny even where the taxpayer has documentation supporting the position taken.

Poor Records Can Be Expensive

In a recent court case, a taxpayer's record keeping was found to be so unreliable that GST paid on subcontractor fees was not allowed as an input tax credit.

Action: Keep accounting records current, organized and well supported. As CRA develops more sophisticated compliance systems, reliable documentation becomes increasingly important.

Real Estate: When Does Investment Property Become Inventory?

A May 29, 2026 Tax Court of Canada case considered whether two real estate properties were held as capital investments or business inventory and, importantly, whether their use changed before they were eventually sold.

The properties generated approximately $13.25 million in gains when sold in 2017.

Why the Distinction Matters

The characterization of real estate can significantly affect taxation.

Where property is held as a capital asset, gains may receive capital gains treatment. Where property is held as inventory for resale or development, the gain may instead be treated as business income.

CRA's administrative position provides that where the nature of a property changes, the gain may need to be apportioned based on the value at the time the property was converted.

The History of the Properties

The properties were originally acquired in 1996 and 1998 and operated for many years as income-producing commercial rental properties.

Discussions about converting the properties into residential condominiums began in 2005 and 2006. Development agreements began in 2008, rezoning was approved in 2010, financing was approved in 2011, and demolition and construction began in 2012.

The properties were transferred to a new corporation in 2008 and ultimately sold in 2017.

The Taxpayer's Position

The taxpayer argued that the properties had originally been acquired and held as capital assets and therefore the $13.25 million of gains should receive capital gains treatment.

The taxpayer also argued that merely exploring redevelopment possibilities did not automatically change the properties from capital investments into inventory.

CRA's Position

CRA argued that all of the gains should be treated as business income. CRA relied on the 2008 rollover into the new corporation as the relevant acquisition date when determining the taxpayer's intention.

Taxpayer Wins — Mostly

The court disagreed with CRA's approach.

It found that the original intention of the ownership group when the properties were purchased in 1996 and 1998 was relevant and that the properties had originally been held on capital account.

The next question was therefore when the properties were actually converted from capital property to inventory.

The court accepted that preliminary development discussions, agreements and rezoning efforts were still exploratory and preparatory. The owners retained the ability to abandon the condominium project and continue operating the properties as income-producing investments.

The court concluded that the change occurred on September 16, 2011, when financing was secured and the taxpayer became irrevocably committed to the condominium development.

Action: Changing the purpose of real property can have significant tax consequences. Seek professional advice before converting an investment property into development or resale inventory, or vice versa.

Mutual Fund Trailing Commissions: GST/HST Changes

CRA has determined that mutual fund trailing commissions generally no longer meet the definition of a financial service and therefore constitute taxable supplies subject to GST/HST.

CRA had initially indicated that it would begin enforcing this treatment for taxable supplies made by dealers on or after July 1, 2026.

That enforcement date has now been delayed until January 1, 2028 to provide the industry with additional time to prepare.

CRA nevertheless encourages dealers to apply the new tax treatment as soon as possible.

Some trailing commissions were already taxable under existing rules, and their tax status has not changed.

Input Tax Credits

Dealers that collect GST/HST on trailing commissions before January 1, 2028 may generally claim input tax credits for GST/HST paid on business expenses attributable to those taxable supplies, subject to the normal rules.

Mutual fund managers paying GST/HST on those commissions may also be entitled to recover the tax paid.

However, where a dealer claims input tax credits before the enforcement date for inputs associated with trailing commission supplies, CRA will enforce the corresponding obligation to remit GST/HST on those supplies.

Action: Investment dealers and advisors should review how the new GST/HST treatment may affect trailing commissions well before the 2028 enforcement date.

Voluntary Disclosures Program: CRA's Second Chance

On June 15, 2026, CRA released additional guidance about the Voluntary Disclosures Program (VDP).

The program allows taxpayers in certain circumstances to come forward and correct previous tax omissions or errors.

Will Using the VDP Trigger Future Audits?

CRA states that voluntarily coming forward through the program does not automatically result in increased monitoring or surveillance of future tax returns.

Is It Financially Worthwhile?

Taxpayers must still pay the underlying tax owing. However, CRA notes that qualifying applications may receive:

• Up to 100% relief from certain penalties
• Significant interest relief

What If the Outcome Is Uncertain?

CRA indicates that the revised program is intended to provide taxpayers with more clarity regarding the relief they may receive.

Taxpayers can also request a pre-disclosure discussion to better understand their circumstances before formally applying.

Action: CRA continues to develop new systems and technology for identifying unreported income. Taxpayers with unresolved issues may wish to consider addressing them sooner rather than later.

Travel from Home to Work: A Long Commute Is Still Personal

A June 23, 2026 Tax Court of Canada case examined whether a taxpayer could deduct lodging, vehicle, hydro and internet expenses incurred because he worked several hours away from his family residence.

The taxpayer lived in Kimberley, British Columbia. Unable to find suitable work nearby, he accepted employment first in Salmon Arm and later in Kelowna, both requiring drives of more than five hours from his home.

Because his spouse did not wish to relocate, the taxpayer rented apartments closer to his workplaces and returned home once or twice each month.

Taxpayer Loses

The court concluded that the taxpayer had not demonstrated that his employment ordinarily required him to work away from his employer's place of business or at different locations.

The court reaffirmed the longstanding principle that travel between home and a regular workplace is a personal expense, regardless of whether the commute is short or extremely long.

The taxpayer also failed to support his hydro and internet claims. His employer did not confirm on Form T2200 that those costs were required as part of his employment.

Further, the taxpayer admitted there was personal internet use and had no documentation allocating the cost between personal and employment use.

CRA's denial of the expenses was upheld.

Action: A long commute does not automatically turn travel or accommodation into deductible employment expenses.

Employment Expenses for Commission Salespersons

A June 17, 2026 Tax Court of Canada case considered an employee's deduction of $86,231 in fees paid to a corporation he controlled.

The taxpayer earned commission income and used the corporation to prepare a business plan intended to increase future sales. The work was subcontracted to the taxpayer's son.

The corporation also had approximately $500,000 of non-capital losses, meaning the fee would not generate immediate corporate income tax.

Taxpayer Loses

Although the employer required the taxpayer to prepare a business plan, the employment agreement did not require the taxpayer to hire and personally pay a third party to prepare it.

The court emphasized that an employment contract must generally require both:

• The employee to perform the activity; and
• The employee to personally incur the related expense without reimbursement.

The court also found that the amount had not actually been paid before the end of the taxation year. For this type of deduction, simply incurring the expense was not sufficient.

Even if all other conditions had been satisfied, the court concluded that the amount claimed was unreasonably high. It estimated that a reasonable amount would have been approximately $21,558.

Action: Commission employees should ensure that their employment agreement actually requires them to incur an expense and that the expense is paid in the appropriate year.

GIS and OAS: Retroactive Lump-Sum Payments

A May 7, 2026 Federal Court of Appeal case examined a taxpayer who received a $69,144 lump-sum payment relating to salary and interest from a wrongful dismissal dispute covering earlier years.

For income tax purposes, the salary portion qualified as a retroactive lump-sum payment and could effectively be taxed as though it had been received in the earlier years to which it related.

However, the treatment was different when determining eligibility for the Guaranteed Income Supplement (GIS).

Taxpayer Loses

The entire lump-sum payment was included in the taxpayer's income for GIS purposes in the year received.

This pushed the taxpayer's income above the threshold and resulted in the loss of GIS for the twelve-month period beginning the following July.

The court confirmed that although income for GIS purposes is calculated similarly to taxable income, the two calculations are not identical.

The newsletter notes that the same general concept can also apply to Old Age Security (OAS).

Action: Before receiving a significant one-time payment, consider whether it could reduce or eliminate income-tested benefits such as GIS or OAS.

RESPs When Moving to the United States

Families leaving Canada for the United States should carefully consider what happens to an existing Registered Education Savings Plan (RESP).

Several important issues may arise:

• Making a Canadian resident, such as a grandparent, the subscriber may simplify administration.
• The Canada Education Savings Grant is only available while the beneficiary is a resident of Canada.
• CESG amounts already received may generally remain in the RESP.
• Income may continue accumulating inside the RESP without Canadian tax.
• The United States does not provide the same tax-deferred treatment for an RESP.
• Income earned in the RESP while the holder is a U.S. resident may therefore be subject to U.S. tax.
• Complex IRS reporting requirements may apply.
• Failure to comply with U.S. reporting obligations can result in substantial penalties.
• State income tax rules may create additional considerations.

Action: Families moving to the United States should review both Canadian and U.S. tax consequences before deciding whether maintaining the RESP remains appropriate.

Qualified Disability Trusts: Multiple Family Contributors

A Qualified Disability Trust (QDT) is a testamentary trust that may benefit from graduated tax rates.

QDTs are subject to several technical requirements, including restrictions affecting elections made by disabled beneficiaries.

A June 2, 2026 CRA Technical Interpretation considered whether several family members could structure their wills so that assets ultimately flow into a single testamentary trust for a disabled beneficiary.

The example involved multiple relatives, such as divorced parents and grandparents.

The first family member to die would create and fund the trust. As other relatives subsequently died, their wills would direct additional estate assets into the existing trust.

CRA's View

CRA indicated that property transferred through a person's will to an existing testamentary trust does not necessarily disqualify the trust from remaining a testamentary trust, provided the contribution occurs on or after the individual's death and as a consequence of that death.

As a result, the existing trust could potentially continue qualifying as a QDT.

CRA cautioned, however, that whether a particular contribution meets these requirements depends on the specific facts and legal circumstances.

Action: Properly structured wills may allow multiple family members to direct assets into a single Qualified Disability Trust while preserving access to graduated tax rates.

Final Thoughts

The Q3 2026 edition of Tax Tips & Traps reinforces several recurring themes in Canadian tax planning:

• Documentation matters.
• Intent must be supported by actions and evidence.
• CRA is increasingly using technology to identify unusual filings.
• Tax consequences do not always follow common-sense assumptions.

A long commute does not necessarily create deductible travel expenses. A retroactive payment may receive favourable income tax treatment while still affecting GIS or OAS. Development planning may eventually change an investment property into business inventory. And tax structures that cross the Canada-U.S. border can create entirely new reporting obligations.

If any of these issues apply to you, obtaining professional advice before taking action can help avoid unexpected tax consequences later.

Questions? Contact Kaplan Reinemo Professional Corporation.