Income Tax Severed Letters - 2000-03-03

Principal Issues: Contingent share rights - Are options or rights described in subparagraph 251(5)(b)(i) relevant for the purpose of paragraph 125(7)(b) of the CCPC definition.

Position: Yes.

Reasons: The law.

Principal Issues: Will a severance payment be a retiring allowance if the employee being terminated independently seeks and obtains employment with an affiliate before receiving the severance?

Position: No.

Reasons: Strict application of the wording of IT-337R3 par. 3(b) and Technical News No. 7.

Principal Issues: In the situation where an estate does not itself have de facto control over a corporation, but the corporation is controlled by the related group consisting of the trustees of the estate, whether the estate would be affiliated with the corporation?

Position: No.

Reasons: None of the trustees of the estate is affiliated with another.

Principal Issues: How is safe income attributed to preferred shares that are convertible into common shares.

Position: Question of fact but if the portion of a capital gain that was reduced by the dividend arose from safe income of the corporation generally the preferred shares should share pro-rata with the common shares based on the number of common shares that could be acquired if the shares had actually been converted.

Reasons: The law.

Principal Issues: Whether a seniors' residence will qualify as a former business property.

Position: It depends on the facts.

Reasons: While the described operation of the seniors' residence may be compared to that of a hotel or motel, the determination of whether or not real property is used principally for the purpose of gaining or producing gross revenue can only be made following an actual review of all of the facts.

Principal Issues: Whether U.S. taxes paid by an individual who owns all the shares of a Nova Scotia ULC which owns all the shares of a U.S. LLC are eligible for a deduction under subsection 20(11) or 20(12) or a foreign tax credit under subsection 126(1).

Position: No. Subsection 20(11) does not apply. The taxpayer may be entitled to the subsection 20(12) deduction and/or a foreign tax credit under subsection 126(1).

Reasons: There is no foreign source income that has been included in computing the taxpayer's income for the purposes of subsection 20(11). The tax paid is non-business income tax and there is nothing in subsection 20(12) which precludes a deduction under that subsection from creating a loss.
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XXXXXXXXXX 1999-001029
S. Leung
Attention: XXXXXXXXXX

Principal Issues:
Where a municipal corporation or a subsidiary of a municipal corporation invests surplus cash in shares, would any dividends received on the shares and any capital gain realized on the disposition of the shares be considered to be income from activities carried on outside the geographical boundaries of the municipality for the purposes of paragraph 149(1)(d.5) and (d.6)?

Position:
Factual determination. Based on the facts provided, it would seem reasonable to consider any dividends received and any capital gain realized on the disposition of the shares to be income from activities carried on within the geographical boundaries of the municipality.

Reasons:
Wording and intent of the legislation.

Principal Issues: In the situation where an estate does not itself have de facto control over a corporation, but the corporation is controlled by a second trust having the same group of trustees as the estate, whether the estate would be affiliated with the corporation ?

Position: No.

Reasons: none of the trustees of the estate is affiliated with another and any decision made by the estate and the trust requires majority approval by the trustees.

Principal Issues: Confirmation of position in Question 22 1995 APFF.

Position: No change.

Reasons:

Principal Issues: Est-ce que les deux sociétés sont associées?

Position: Pas assez de faits pour nous prononcer. Toutefois pas associées en raison de 256(1.2) et 256(1.3).

Reasons: Application des dispositions

Principal Issues: Can a partnership pay a retiring allowance to a retiring partner who used to be an employee?

Position: Question of fact.

Reasons: Generally admission to partnership is reward for previous service but there may be limited situations where a payment may be considered a retiring allowance in recognition of the partner's previous service as an employee.

Principal Issues: Where amounts are paid as tenant inducement to induce a tenant to enter into a lease can the payments of rent to be received be considered a right to receive production and as a consequence the inducement would be a matchable expenditure.

Position: Generally a lease for the use of property would be included in the definition of "right to receive production". Whether a matchable expenditure under any of 18.1(1) (a),(b) or (c) is a question of fact.

Reasons: Plain reading of 18.1.

Principal Issues: An individual has made a will that provides for a gift of a portion of the residue to unnamed recipients in furtherance of charitable objectives. There is absolute discretion in the Trustees whether to make the gift, and to whom. The testator is now incapacitated and cannot change her will. The testatator's advisors have established a private foundation and seek an opinion whether that provides sufficient certainty as to the identity of the recipient of the gift to enable a tax credit to be claimed in the year of death under subsection 118.1(5).

Position: The situation described would not constitute a gift by will for the purposes of subsection 118.1(5).

Reasons: Where a trustee, under the direction of the will, has discretion as to whether a gift be made, to whom a gift is to be made, or the amount of a gift to be made, it is our general view that subsection 118.1(5) would not apply. The will described provides discretion to the trustee as to whether the gift be made, and to whom.

Position:
1. Elections available in certain circumstances
2. A CRT is either a testamentary or inter-vivos trust and not specifically exempted from taxation. The income may be taxed in the hands of the beneficiaries if the appropriate elections are made under section 104.

Principales Questions:

Quel traitement fiscal devrait être accordé aux compensations pour la perte d'arbres reçues par les exploitants d'érablières suite à la tempête de verglas ?

Position Adoptée:

Principales Questions : déterminer si une réserve de remplacement visant l'étalement d'une dépense anticipée au sujet de composantes majeures d'un immeuble à revenus serait déductible du revenu dans l'année du versement à un compte "in trust".

Position Adoptée : aucune détermination possible; résumé de la politique de l'Agence.

Principal Issues: 1) Is an amount paid to a deceased employee's spouse a retiring allowance or a death benefit? 2) If former employer participates in same pension plan as current employer but employee's service with former employer is not recognized under the pension plan, is the former employer considered a related employer for purposes of 60(j.1) of the Act?

Position: 1) Question of Fact 2) No

Reasons: 1) Where the employee was employed at the time of death then considered a death benefit, if not employed then considered a retiring allowance. 2) To be considered related, some or all of the service with the former employer has to be recognized in determining the retiree's pension benefits.

Principal Issues: Would shares held by an employee that are subjected to 7(1.1) of the Act be eligible for the 110(1)(d.1) deduction where the shares are purchased for cancellation by the employer corporation?

Position: Yes.

Reasons: Where all of the conditions of 110(1)(d.1) are satisfied, the fact that shares are purchased for cancellation will not result in the employee losing the 110(1)(d.1) deduction.

Principal Issues: Will shares of a certain private corporation be qualified investments for an RRSP?

Position: Question of fact.

Reasons: We need to see all of the facts to determine whether the shares would meet 4900(6) or (12) of the Regulations.

Principal Issues:
1. Whether the occurrence of a triggering event described in subsection 56(1) of the Family Relations Act of British Columbia (the "FRA") results in a transfer of property (i.e., of an interest in a family asset), and the timing of such a transfer, if any.

Principal Issues: General comments were provided on the forgiveness of a debt receivable.

Position: See principal issues

Reasons: See principal issues

Principal Issues: Can a retiring allowance that is made pursuant to a wrongful dismissal suit be paid out in instalments even though the employee did not request the payment option on or before the date the employment is terminated.

Position: Yes, provided the payment of the retiring allowance in instalments is made pursuant to the terms of the settlement agreement or the terms of an order or judgment of a competent tribunal.

Reasons: The retiring allowance is not payable to the employee until the settlement agreement or order or judgment of the tribunal is made, so the position would be similar to our position in paragraph 8 of IT-337R3.

Principal Issues:
Whether subsection 56(4.1) would apply in two scenarios.

Principal Issues:
1. Whether transfer of remainder interest in principal residence to a registered charitable foundation, subject to an agreement, would qualify for a charitable donation tax credit.
2. Whether the transfer of a remainder interest in a stock portfolio to a registered charitable foundation would qualify for a charitable donation tax credit.

Position:
1. Yes, based on the facts provided.
2. Depends upon whether the trust agreement is such that the remainder interest in the portfolio vests in the Foundation and whether the fair market value of the residual interest in the trust holding the portfolio of shares can be reasonably determined at the time of vesting.

Reasons:
1. Agreement does not require the donee to undertake any action that are not part of its objects, does not significantly limit the flexibility to the Foundation to do with the property as it wishes (once it takes possession of the property), and does not result in benefits accruing to the donor or persons not at arm's length with the donor.
2. Gift takes place when property vests in the Foundation and if fair market value cannot be determined, no donation receipt can be issued since receipt must show fair market value of gift.

Principal Issues:
1. Difference in application of the ITA in Quebec and Ontario
2. Application of the GST

Position:
1. Yes
2.Guidelines set in Technical Information Bulletin B039R on how
GST/HST applies to purchases by Indians.

Reasons:
1. Two tax returns to file in Quebec, only one in Ontario. Difference in the tax base for provincial taxes as calculation of provincial taxes in all provinces except Quebec is based on federal taxes.
2. Bulletin mentions that goods acquired on reserve by Indians are relieved of GST/HST. Mentions when goods acquired off reserve are relieved of GST/HST. Also indicates when service acquired by an Indian is relieved of GST/HST.

Principal Issues:
1. Where an employer receives a conversion benefit in respect of a group insurance policy and uses it to give its insured employees a premium holiday, will draft subsection 139.1(15) apply to deem the payment not to be an employer contribution for the purposes of paragraph 6(1)(f) and regulations made under subsection 6(4)?

2. If the employer earns interest on the investment of the conversion benefit and uses the interest to give the insured employees a premium holiday, will the provisions of draft subsection 139.1(15) apply to deem the payment not to be an employer contribution?

3. Does the premium holiday constitute a taxable benefit to the insured employees?

Position:
1. Yes, provided that all the conditions set out in draft subsection 139.1(15) are met.

2. No. It is our view that draft subsection 139.1(15) allows the employer to contribute an amount up to the value of the conversion benefit. Since interest earned by the employer does not constitute part of the conversion benefit, draft subsection 139.1(15) will not apply.

3. No, provided that the group insurance plan is one of the exceptions set out in subparagraph 6(1)(a)(i).

Reasons:
1. Wording of subsection 139.1(15).

2. Wording and intent of subsection 139.1(15).

3. Paragraph 6(1)(a).

Principal Issues:
a) Whether our policy in 9216695 continues to be our current position? In that document, we said that stock options must vest while a corporation is a CCPC in order to get subsection 7(1.1) treatment?
b) What constitutes a "fundamental change in the terms of an option agreement", which will trigger a disposition of rights under 7(1)(b)?

Position:
a) No
b) Question of fact and applicable contract law

Reasons:
a) Our position was reversed in document 9728505. Subsection 7(1.1) requires that the corporation be a CCPC at the time that the agreement to issue shares was entered into. The satisfaction of all conditions of the agreement may not be required in order to receive subsection 7(1.1) treatment.
b) Fundamental change can only be confirmed after review of the applicable law, the documents and surrounding facts.

Principal Issues: Can a taxpayer combine his or her regular RRSP with his or her spousal RRSP?

Position: Yes but the combined plan becomes a spousal plan.

Reasons: The Act provides for the transfer of property between plans with the same annuitant.

Principal Issues:
1. Since a partnership is not a person resident in Canada, can a valid section 16.1 election be entered into by a partnership which is the lessor?
2. Would the answer differ if one of the partners was a tax-exempt entity?
3. Would a valid election be cancelled if subsequently a tax-exempt entity becomes a partner?

PositionS:
1. Yes, on behalf of the individual partners if the conditions are met, such as each of the partners being resident of Canada, not being tax exempt, etc.
2. The partnership would not be able to enter into a valid election.
3. Not necessarily.

Reasons:
1. The lessee would, in law, be entering into a lease with all of the partners, as a group. As long as each of the partners met the requirements in 16.1 a valid election could be entered into with the lessee.
2. The tax-exempt would not meet the requirements of 16.1 and would preclude the lessee from entering into a valid election with the partners as a group.
3. We have not had considered this issue previously. In the absence of specific legislation similar to 16.1(1)(i) of the Act, our preliminary view is that this fact would not, in and of itself, result in the cancellation of the section 16.1 election. However, consideration will be given to whether GAAR would be applied in abusive situations.

Principal Issues:
Does CCRA have a position or published guidelines as to when first and second term shared-use-equipment would be considered to have been "converted to commercial use" for the purposes of subsection 127(27).

Position:

The law regarding first and second term shared-use-equipment is to provide ITC on property used primarily on SR&ED and also used, to a lesser extent, for other purposes. Where such property is used all or substantially all for non-SR&ED purposes with a view to profit from such use, the property will be considered to have been converted to commercial use. That position is included in a paper prepared by the Audit Directorate on the subject matter and is available on the Internet at http://www.rc.gc.ca/.

Reasons:
The intention of the law regarding the use of first and second term shared use equipment required the property to be used in SR&ED as confirmed verbally with Finance. The dictionary meaning assigned to the term "converted to commercial use" .