Income Tax Severed Letters - 1998-05-29

Principales Questions:

Quelles implications fiscales résulteraient du fait qu’un contribuable donne des biens culturels certifiés qu’il possEde en inventaire A un établissement désigné?

Position Adoptée:

Principal Issues:

(1) Whether an option which allows an employee to choose between coverage in a health spending account and vacation is a flexible benefit plan.
(2) Whether the establishment of such a plan in return for a reduction in vacation will be taxable to the employee.

Position:

(1) The plan is likely a flexible benefit plan.
(2) Whether the forfeiture of vacation is taxable to the employee depends of whether it results from a valid renegotiated employment contract.

Reasons:

Principal Issues:

Whether residency as determined under Article IV of the Canada-U.S. Income Tax Convention is relevant for the purposes of paragraphs 4 and 5 of Article XIII of the Convention? Does the term alienation in the Convention include a deemed disposition pursuant to 128.1(4) of Act?

Position: Yes to both questions.

Reasons:

Principal Issues:

Whether the reduction to the ACB of property under paragraph 110.6(21)(b) should be based on the elected capital gain where the election is excessive.

Position:

According to the legislation, yes. However, the legislation does appear to penalize excessive elections on “non-qualifying real property” more severely than other types of property. The Department of Finance is aware of this issue.

Reasons:

Principal Issues:

Requested a brief explanation of the Canadian film or video production tax credit.

Position:

General overview provided as well as an overview of the proposed film or video production services tax credit.

Reasons:

Principal Issues:

distinction between "supplies" and "equipment" with respect to deductions available to employees

Position:

hand tools, pneumatic tools with limited life, chisels, bits, safety equipment, creepers and storage units are capital equipment for which no deduction is available to employees; analytical supplies, to the extent that they are used up or consumed as they are used (such as the paper and ink used in an automotive diagnostic machine) would be deductible provided that the conditions for deductibility are otherwise met

Reasons:

Principal Issues:

Application of the Indian Act exemption to a Status Indian’s business income when the revenue-generating activities take place off reserve, but the main customers are located on reserve.

Position:

Question of fact as to whether the location of the customers is a significant connecting factor..

Reasons:

Principal Issues:

Aging of tax accounts as a consequence of two amalgamations occurring on the same day.

Position:

A corporation which is created by an amalgamation and which is subsequently amalgamated with another corporation on the same day will have a taxation year. Therefore, the first amalgamation is relevant in determining the aging of tax accounts in the predecessor corporations.

Reasons:

Principal Issues: TAXATION OF INCOME OF SELF-EMPLOYED INDIAN

Position: GENERAL COMMENTS BUT LIKELY TAXABLE

Reasons: WORK CARRIED ON OFF RESERVE

Principal Issues:

Reasonable expectation of profit
Making payment arrangements. waiver of interest

Position:

Whether a taxpayer has a reasonable expectation of profit is a question to be determined after a careful review of the facts. A waiver of the interest, and terms of payment for the taxes owing, can be granted by the Department in certain circumstances. Again, the particular facts of the case have to be reviewed.

Reasons:

Principal Issues: Whether T5s should be filed where funds are withdrawn from an EFA to purchase funeral insurance? Who is responsible for issuing T5s w.r.t. 148.1(3) amounts?

Position: No answer. The custodian is responsible for issuing T5s.

Reasons: Not enough information. The custodian is generally the one who must return funds to the purchaser if the contract is cancelled.

Principal Issues:

Whether a spousal trust can claim a tax credit under section 118.1 in the year the spouse dies?

Position:

Yes, if the cash is actually transferred to the donee. The tax credit can be claimed against the income tax arising from the 21-year rule in 104(4). The trust can choose to treat the as an income beneficiary or claim a tax credit. No 104(6)(b) deduction allowed.

Reasons:

Principal Issues:

whether an employee is taxed on the benefit of employer assistance with travel to work when seconded to a work place 700 km away & normally allowed to work at home rather than relocate

Position:

in the particular facts presented, yes

Reasons:

Principal Issues:

An individual put a deposit on a house he wished to purchase but subsequently received a job offer in another city and relinquished his deposit to the vendor. Is the deposit deductible as a moving expense?

Position:

No.

Reasons:

Principal Issues: What are essential requirements to ensure that fees paid to a particular institution qualify as medical expenses under paragraph 118.2(2)(e).

Position: General comments only.

Reasons: N/A

Principal Issues:

health spending accounts - expenses incurred prior to participation in the plan

Position:

a plan which reimburses such expenses is not a plan of insurance & thus not a PHSP

Reasons:

Principal Issues:

The tax treatment of income from gifts, grants, sponsors, prizes, etc. received by an athlete on the boundary between amateur and professional.

Position:

Only general comments provided.

Reasons:

Principal Issues:

Can a mutual fund trust/mutual fund corporation invest in a qualified limited partnership?

Position:

Yes, provided they are a limited partner and not a general partner and the QLP restricts its activities to those described in paragraph (f) of the definition of QLP in Regulation 5000(7).

Reasons:

Principal Issues:

A taxpayer is paying child support to his spouse in respect of four children pursuant to a court order made before May 1997. The taxpayer is required to pay support in respect of each child as long as the particular child can be regarded as being a “child of the marriage” pursuant to the definition of this term in the Divorce Act (1985) Canada (the Divorce Act). This definition refers to “a child of two spouses or former spouses who, at the material time, is sixteen years of age or over and under their charge but unable, by reason of illness, disability or other cause, to withdraw from their charge or to obtain the necessaries o life.” The taxpayer’s son is XXXXXXXXXX of age and attends university on a full-time basis. The taxpayer feels that the spouse may be using the support paid in respect of him for her own benefit as he is using student loans for his support. The taxpayer also has a XXXXXXXXXX daughter that is employed on a full-time basis. The taxpayer proposes to apply for a court order to modify the original order on the basis that the spouse is not using child support for the benefit of the son and that the daughter is no longer a child of the marriage. In the alternative, the modified court order may specify that support amounts paid in respect of the son be paid to the son by the spouse.

The issue is whether the initial order will have been varied with the result that there would be a commencement day (subparagraph 56.1(4)(b)(ii)).

Position:

With respect to the daughter, the revision could result in a commencement day. In the case of the son, a variation would occur. This would also be the case with respect to the second alternative concerning the son.

Reasons:

Principal Issues: Whether contributions to "Civil Service Retirement System" ("CSRS") in the United States qualify as "non-business-income taxes" for the purposes of section 126 of the Act.

Position: No.

Reasons: See our response letter of Oct. 30/95 in file # 950661.

Principal Issues:

Interest income from a term deposit issued by a reserve based trust company.

Position:

Insufficient information, but not exempt unless it can be shown that it was generated on the reserve.

Reasons:

Principal Issues:

Interest income from a term deposit issued by a reserve based trust company.

Position:

Insufficient information, but not exempt unless it can be shown that it was generated on the reserve.

Reasons:

Principal Issues:

Is interest income from a bank branch on reserve exempt?

Position:

Insufficient information, but not exempt unless it can be shown that it was generated on the reserve.

Reasons:

Principal Issues: Tax treatment of lump-sum RRSP payments paid to residents of countries which have an income tax convention with Canada.

Position: - Where a convention refers to pensions but does not contain a definition for pension (i.e. for substantially all of Canada's conventions), lump-sum RRSP payments are pension payments but lump-sum RRSP payments are not periodic pension payments as defined section 5 of the ITCIA.

- Where a convention defines the term pension (currently only 5 conventions), it is necessary to look to the particular definition as to whether a lump-sum RRSP payment is a pension for purposes of that convention.

- Also, lump-sum RRSP payments are not considered to be "income from a trust" for the purposes of Canada's conventions.

Reasons: This is in line with the Department of Finance's views for such payments and is also supported by the Feb. 24, 1998 Notice of Ways and Means Motion to Amend the ITCIA.

Principal Issues:

Interest income earned in a savings account in a bank on reserve.

Position:

Not exempt unless it can be shown that it was generated on the reserve.

Reasons:

Principal Issues: What is the tax rate on RRIF payments made to residents of the Netherlands.

Position: The tax rate on lump-sum RRIF payments is 25%.
The tax rate on RRIF payments that are periodic pension payments is 15%.

Reasons: The tax rates are based on paragraph 212(1)(q) of the Act, section 5 of the Income Tax Conventions Interpretation Act and Article 18 of the Canada-Netherlands Income Tax Convention.

Principal Issues: Tax rate on RRIF payments made to resident of Ireland.

Position: - Any RRIF payment that is a periodic pension payment (PPP) as defined under section 5 of the Income Tax Conventions Interpretation Act (ITCIA) is a pension for the purposes of Article XI of the Canada-Ireland Income Tax Agreement (the "Convention") and is exempt from tax.

- Any RRIF payment that is not a PPP as defined in section 5 of the ITCIA (e.g. a lump-sum RRIF payment) is not a pension for the purposes Article XI of the Convention; such a lump-sum RRIF payment is subject to tax at the rate of 15% under Article VI of the Convention which deals with other income.

Reasons:

Principal Issues: Tax rate on RRIF payments made to resident of Ireland.

Position: - Any RRIF payment that is a periodic pension payment (PPP) as defined under section 5 of the Income Tax Conventions Interpretation Act (ITCIA) is a pension for the purposes of Article XI of the Canada-Ireland Income Tax Agreement (the "Convention") and is exempt from tax.

- Any RRIF payment that is not a PPP as defined in section 5 of the ITCIA (e.g. a lump-sum RRIF payment) is not a pension for the purposes Article XI of the Convention; such a lump-sum RRIF payment is subject to tax at the rate of 15% under Article VI of the Convention which deals with other income.

Reasons: