Income Tax Severed Letters - 1998-10-02

Principal Issues: How is inventory used to determine income from a business?

Position: Provided the taxpayer with a copy of the Business and Professional guide as well as a couple of bulletins dealing with inventory.

Reasons: The answer to the correspondent’s basis questions are mostly set out in the guide.

Principal Issues: Whether the fact that a court overseeing a divorce orders the proceeds of rental property to be apportioned between ex-spouses on a 60:40 basis will be cause for the Department to reassess such ex-spouses where income or losses from the particular rental property were reported by only one spouse.

Position: Not necessarily.

Reasons: It is a question of fact whether attribution applies, that is, whether property is transferred or lent by an individual to or for the benefit of his or her spouse, whether directly or indirectly. However, since attribution on capital gains ceases to apply after a divorce or separation (if an election is filed), a court order may affect how capital gains or losses arising after the divorce or separation will be reported.

Principal Issues: Acquisition of Control

Position: Acquisition of control may occur if shares are issued to unrelated persons even if the corporation is controlled after the issuance by a related group

Reasons: See subsection 256(7)

Principal Issues: Validity of the Income Tax Act and Revenue Canada’s right to collect federal and provincial income taxes as it pertains to 1950 case involving the Attorney General of Nova Scotia v. the Attorney General of Canada and Lord Nelson Hotel Limited (1950) S.C.R. 31.

Position: Income Tax Act is constitutional

Reasons: The above-mentioned Supreme Court case did not indicate that the federal government did not have the power to impose direct taxes.

Principal Issues:
Father disposes of the remainder interest in his principal residence (the “Residence”) to his adult daughter (who already has her own residence) and retains a life interest in the Residence. They both subsequently sell their interests. How does principal residence exemption apply to the subsequent disposition?

Principal Issues:
Whether a housing corporation within the meaning of paragraph 149(1)(i) can issue official receipts for donations.

Position:
Gifts to a housing corporation exempt from tax under paragraph 149(1)(i) are considered to be charitable gifts for which receipts can be issued.

Reasons:
Definition of charitable gift in 110.1(1)(a)(iii).

Principal Issues: forgivenes of unpaid amounts

Position: general comments

Reasons:

Principal Issues: Treatment of relocation payment pre September 30, 1998

Position: amounts may be taxable or non-taxable depending on employee circumstances

Reasons:
amount paid as forgivable loan is income as forgiven, not at the time loan is made. If payment reimburses loss per IT470 R paragraph 37, amount is not taxable.

Principal Issues: Is proposed plan a wage loss replacement plan

Position: general comments only - question of fact

Reasons: question of fact

Principales Questions:
Déductibilité des intérêts lorsqu’un bien génère des gains en capital.

Position Adoptée: Question de fait.

Principal Issues: employment expenses

Position: certain travel, vehicle and supplies are deductible. Meals in metropolitan area and books are not deductible. Entertainment costs are deductible only against commission income.

Reasons: section 8 makes no provision to deduct such expenses against salary income.

Principal Issues: Can farm land be a replacement property for a milk quota ?

Position: NO

Reasons: Eligible capital property must be replaced with eligible capital property

Principal Issues: Voluntary disclosure and attendant care ?

Position: Suggest to contact taxation services office

Reasons: TSO Responsibility

Principal Issues:
Whether expenses in respect of i) prenatal and other type of classes offered by various boards of health or other health agencies, ii) the Cord Blood Programme, which involves taking blood cells from new-born babies in case the child suffers an illness in the future, and iii) private blood banks, qualify as medical expenses.

Position:
Question of fact, but likely no.

Reasons:
There were two possibilities, i.e., that they qualify under 118.2(2)(a) or 118.2(2)(o). The former was ruled out since to qualify thereunder payments must be in respect of medical services, which, in our view, must involve a medical condition. In our view, the particular expenses fail to meet this condition. The particular expenses do not qualify under the former provision since to qualify thereunder the expenses must be diagnostic, which they weren’t.

Principal Issues: Whether the reimbursement or payment of membership, license and certificate fees by the employer would be taxable to the employee.

Position: Depends upon who is the primary beneficiary of the payment.

Reasons: In situations where an employee maintains a membership, license or certificate in a particular organization because of a legal requirement or because of a job requirement, such as a specification contained in a classification standard or in a job description, the payment or reimbursement of reasonable membership, license or certificate fees by the employer would not be considered to be a taxable benefit to the employee.

Principal Issues:

Whether the example in para. 21 of IT-232R2, Losses – Their Deductibility in the Loss Year or in Other Years, is incorrect. This example illustrates the effect of subsection 111(1.1) of the Act.

Position: Following the step-by-step mechanics of subsection 111(1.1), the example in the bulletin is shown to be correct.

Reasons: The references in subsection 111(1.1) to the amounts claimed under paragraph 111(1)(b) mean the total amount of net capital losses that are available for deduction thereunder.

Principal Issues: Two questions concerning "related persons" for the purpose of section 55 involving trusts.

Position: In one situation parties are related, in the other not.

Reasons: 55(5)(e)(ii) and (iii).

Principal Issues: Whether income from commodity futures trading would be included in "investment income" for purposes of calculating an individual's CNIL, where the individual is a "speculator."

Position: No, provided the individual is reporting his or her gains or losses from trading as business income or losses and not capital gains or losses.

Reasons: The gain of a speculator is normally considered business income. However, the Department allows speculator to choose between income treatment and capital gain treatment. Where the speculator chooses income treatment, the income does not enter into the calculation of CNIL since, according to the definition of investment income and investment expense, there is no provision to include income from a business.

Principal Issues: application of paragraph 256(1.4)(b)

Position: generally not applicable where corporation required to purchase shares as a consequence of the occurrence of a specified triggering event

Reasons: No shareholder has the right to cause the corporation to redeem acquire or cancel the shares

Principal Issues: Whether property use by a foreign affiliate to earn rental income that is deemed by subparagraph 95(2)(a)(ii) to be income from an active business would be "excluded property".

Position: Yes

Reasons: The property would be use or held to earn income from an active business. Income that is treated as income from an active business under 95(2)(a)(ii) is also active business income for purposes of the excluded property definition in subsection 95(1)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX 980703
D. Boychuk

Attention: XXXXXXXXXX

July 2, 1998

Dear Sirs:

Re: Allocation of Income

Principal Issues: Itar 26(5) does not apply to shares received in exchange.

Position:wording of provision.

Reasons: