Income Tax Severed Letters - 2001-11-09

Principal Issues: Application of subsection 14(3) of the Act in the case of a partial disposition of eligible capital property.

Position: Apply subsection 14(3) of the Act on a pro-rata basis where there is a partial disposition of eligible capital property.

Reasons: The Act does not specify how to apply subsection 14(3) of the Act in those situations where there is a partial disposition of eligible capital property. The pro-rata approach provides a common sense result.

Principal Issues: whether certain nutritional substances and botanical medicines recommended by a nutritionist and a naturopath qualify as medical expenses under 118.2(2).

Position: Unless included under 118.2(2)(a), must be prescribed by medical practitioner and dispensed and recorded by a pharmacist

Reasons: requirements of 118.2(2)(n).

Principal Issues:

1. Will a non-qualified investment to which paragraph 4900(1)(s) of the Regulations applies, be considered to be acquired by a deferred plan on January 1, 2002 if held by the plan past December 31, 2001.

2. If the plan trust holds the property past December 31, 2001 will Part XI.1 apply?

Position:

1. No

2. Yes, Part XI.1 tax applies and the tax is based on the fair market value of the property at the time the property was acquired.

Reasons:

Principal Issues: Would the superficial loss rules deny capital loss treatment for an index-based investor who realizes a loss on a mutual fund and immediately reinvests in an unrelated exchange traded fund that reflects the same market.

Position: Question of fact whether properties are identical - general comments given.

Reasons: Question of fact

XXXXXXXXXX 2001-008038
Cornelis Rystenbil, CGA
November 22, 2001

Principal Issues:
If units of a class of a multi-class mutual fund trust are changed (exchanged, converted, reclassified or redesignated) to another class or series of the same mutual fund trust, is there a disposition? The trust agreement establishing the particular mutual fund trust provides that each class of the trust will have different underlying assets and also provides for changes between classes.

Principal Issues:
Whether paragraph 149(1)(l) applies equally to a non-resident NPO and a resident NPO.

Position:
The conditions set out in paragraph 149(1)(l) apply equally to resident and non-resident NPO's.

Reasons:
No reference distinguishing between residents and non-residents in paragraph 149(1)(l).

Principal Issues:
Whether the following amounts are "qualifying amounts" for the purposes of the section 110.2 deduction for lump-sum amounts:
(a) Lump-Sum Pay Equity Payments - paid in accordance with the Pay Equity Act of Ontario, using a proportional value comparison method.
(b) Lump-Sum Retroactive Salary Payments - due to a retroactive conversion to a gender-neutral classification system, resulting in increased salaries.
(c) Lump-Sum Retroactive Salary Payments - due to a retroactive negotiated annual economic increases of a new collective agreement.

Position:
(a) General comments provided.
(b) General comments provided.
(c) No

Reasons:
Subsection 110.2(1) definition of qualifying amount requires that the amount be received pursuant to:
(1) an order or judgment of a competent tribunal,
(2) an arbitration award or
(3) a contract by which the payor and the individual terminate a legal proceeding.

Principal Issues: Two individuals ("Individual A" and "Individual B"), who have separated from each other, share the custody of their child. In XXXXXXXXXX , a court order (the "Order") was issued which provided that, with respect to child care expenses, Individual A was to pay 60% and Individual B was to pay 40%. When one of these individuals paid 100% of the expenses to the caregiver, the other party would make the appropriate reimbursement. Can Individual A, who reimbursed Individual B, claim his 60% share of the expenses under subsection 63(1) of the Income Tax Act (the "Act")? Individual B refuses to provide any receipt with respect to the child care expenses.

Position: File referred to the TSO for action. Individual A is entitled to claim child care expenses; but only to the extent that they were, inter alia, incurred with respect to a period of time that the Child resided with him and enabled Individual A to engage in the activities listed in paragraph (a) of the definition of "child care expense" in subsection 63(3) of the Act. By virtue of paragraph 63(1)(d) of the Act, Individual B cannot claim a deduction in respect of the expenses for which she was entitled to a reimbursement from Individual A.

Reasons: Since each parent resides with the child where there is shared custody and assuming that neither is residing with a "supporting person" during the year, each parent could claim child care expenses incurred in a taxation year for an eligible child if, inter alia, the expenses were incurred at the time the parent resided with the child and only to the extent that they were paid by that parent to enable the parent to engage in the activities noted above. However, each parent must substantiate his or her claim with a receipt from the "payee" as required by subsection 63(1) of the Act. Given the circumstances, the TSO may wish to consider an alternate arrangement for Individual A to substantiate his claim.

Principal Issues: When is a trust created under the terms of a will considered to have been created?

Position: Generally, on the death of the person who created the trust.

Reasons: A testamentary trust is defined in 108(1) to be a trust that, among other things, arose on the death of an individual. As a result, the general presumption is that such a trust is created upon the death of that individual.

Principal Issues:
Whether upon the vesting of all interests in a trust, the 21-year rule of 104(4) will not apply?

Position:
Correct.

Reasons:
As noted previously in E9427445, the definition of "trust" in subsection 108(1) excludes, for purposes of 104(4) inter alia, a trust all interests in which, at that time, have vested indefeasibly - other than those trusts described in (g)(i) to (vi).

Principal Issues: Withholding requirements for amounts paid by Canadian employer to US employee

Position: Depends on whether services are rendered in Canada or in the US

Reasons: If all services are rendered in the US, no withholdings are required. If services are rendered in Canada, withholdings are required, but may be waived by the TSO if treaty exempt.

Principal Issues: Does a plan that covers both the proprietor and his employees and is administered by a third party who agrees to reimburse for actual medical expenses , plus an administration fee, a PHSP

Position: YES

Reasons: The required elements of insurance exists however whether the plan qualifies as a PHSP is a question of fact.

Principal Issues: Must a US corporation file a corporate tax return simply because its mind and management is in Canada?

Position: Yes

Reasons: If a non-resident corporation carries on business in Canada, the legislation requires a corporate tax return even if no tax is payable by reason of a tax convention.