Issue concerns timing of determination of whether two corporations are connected for tax purposes
After allowing the Crown’s appeal, the Federal Court of Appeal awarded it one set of costs for a Tax Court proceeding and another set of costs for the subsequent appeal court hearing, to be determined according to the applicable tariffs.
Canada v. Vefghi Holding Corporation, 2026 FCA 70, arose from an application under r. 58 of the Tax Court of Canada Rules (General Procedure), SOR/90-688a, which raised a question regarding the timing of the determination of whether two corporations (an issuer and a beneficiary) were connected for the purposes of s. 186(1)(a) of the Income Tax Act, 1985, where a trust designated a portion of a taxable dividend received on a share of capital stock of a taxable Canadian corporation under s. 104(19) of the Act, such that the beneficiary was deemed to have received the amount.
In September 2023, a judge of the Tax Court of Canada answered that the determination would be made when the trust received the taxable dividend, provided that the beneficiary was deemed under s. 104(19) to have received the amount in the same taxation year as the trust received the taxable dividend.
According to the judge, if the beneficiary was deemed to have received the amount in a taxation year after its taxation year in which the trust received the taxable dividend, then the determination would be made in the beneficiary’s subsequent taxation year.
The Crown appealed the judge’s order. Vefghi Holding Corporation and S.O.N.S. Environmental Ltd., which were beneficiaries of separate family trusts, cross-appealed.
Crown’s appeal succeeds
In August 2025, the Federal Court of Appeal allowed the Crown’s appeal. The appeal court gave the following answer, which aligned significantly more with the Crown’s proposed response than with the cross-appellants’ suggested answer:
Where there was compliance with the conditions of s. 104(19) of the Act and a trust designated the amount under that subsection, such that the beneficiary was deemed to have received the amount, the determination would be made at the end of the trust’s taxation year when it received the dividend from the issuer.
The parties then filed written cost submissions. The Crown requested costs equal to 45 percent of solicitor‑client costs for the Tax Court proceeding and tariff costs for the appeal.
The cross-appellants did not want the appeal court to award costs. Alternatively, they asked the appeal court to remit the issue of costs of the Tax Court proceeding to that court.
Cost award
Last Apr. 10, the Federal Court of Appeal found each cross-appellant responsible for half of the costs it awarded to the Crown.
The appeal court decided to rule on, rather than remit, the issue of costs of the Tax Court proceeding, given the retirement of the Tax Court judge who had initially answered the r. 58 question.
While the Crown referred to Tax Court decisions where that court had awarded enhanced costs, the appeal court noted that the Crown failed to cite any Federal Court of Appeal ruling where it had allowed an appeal from a Tax Court decision and awarded enhanced costs for the Tax Court hearing after considering the factors in r. 147(3) of the Tax Court of Canada Rules (General Procedure).
The appeal court held that the Crown failed to establish why it would be appropriate to require the cross-appellants to pay enhanced costs.
The appeal court added that the Crown failed to show why the work volume and the complexity of the issues in the appeals would call for it to exercise its discretion to award costs for the Tax Court proceeding above the tariff rate.
