Income Tax Severed Letters - 2002-12-20

Principal Issues: Whether social security received from Germany is taxable in Canada.

Position: Not until 2003 when subparagraph 3(c) of Article 18 of new German Treaty takes effect (see letter).

Reasons: Law

Principal Issues: Can two corporations which have no direct ownership in each other but are controlled by the same person be considered connected corporations for purposes of the definition of "small business corporation" as that term is defined in subsection 248(1) of the Act?

Position: Yes

Reasons: Subsection 186(7), which is generally applicable on and after March 16, 2001, provides that, for greater certainty, where a provision of the Act or the regulations indicates that the term "connected" has the meaning assigned by subsection 186(4), one must take into account the extended meaning of that term as provided in subsection 186(2) unless the provision expressly provides otherwise.

Principal Issues:
When a non-qualified investment is held in an RRSP or RRIF and subject to PartXI.1 tax will the property continue to be subject to this tax when the property is transferred to another RRSP or RRIF.

Position:
No, there will be an income inclusion in the annuitant's income equal to the fair market value of the property pursuant to 146(10) or 146.3(7) of the Act.

Reasons:
When the property is transferred to another RRSP or RRIF the transferee trust is considered to have acquired the property. As such the transferee trust has acquired property that is a non-qualified investment.

Principales Questions:

• Est-ce qu'il y a un avantage imposable en vertu de l'alinéa 6(1)a) de la Loi dans la situation où l'Employeur rembourse des dépenses à ses employés lorsque ceux-ci sont tenus, de par la politique interne de l'Employeur, d'encourir des frais, dans le cadre des services de consultation, pour offrir une collation aux membres XXXXXXXXXX affiliés lors d'une réunion à laquelle les employés participent avec les membres XXXXXXXXXX ?
• Est-ce que les allocations versées par XXXXXXXXXX à ses membres dans le cadre de leur participation aux rencontres organisées par l'Employeur doivent être incluses dans le revenu des membres ?

PositionS ADOPTÉES:

• Il n'y a pas d'avantage imposable si le remboursement des dépenses encourues par les employés n'est pas fait à l'égard de dépenses personnelles des employés, si cela ne leur procure aucun avantage économique et que les dépenses encourues bénéficient principalement à l'employeur.
• Non, si le membre n'est pas à l'emploi XXXXXXXXXX et n'exploite pas une entreprise dans le cadre de laquelle il reçoit les allocations.

Raisons POUR POSITIONS ADOPTÉES:

• Il n'y a aucun avantage économique pour les employés puisque ces derniers se font simplement rembourser des frais qu'ils ont encourus pour des collations offertes aux membres dans le cadre de leur emploi.
• Pas de relation employeur/employé et si non reçu dans le cadre d'une entreprise, pas de source de revenus.

Principal Issues:
1. Are swap agreements with foreign counterparties foreign property?
2. If so, does the "cost amount" for purposes of Part XI include the collateral amount posted from time to time?

Position:
1. Yes.
2. No.

Reasons:
1. The swap agreement is an intangible property situated outside of Canada.
2. The collateral is security only and payment thereof is conditional on default of the original agreement.

Principal Issues: Is a credit available for both federal and provincial political contributions?

Position: General information provided.

Reasons: ITA provides federal credit for federal political contributions.

Principales Questions: Est-ce qu'une fiducie testamentaire prend fin lorsque ses biens deviennent liquides? Est-ce qu'une telle fiducie a une durée de vie maximum?

Position Adoptée: Non, seulement lors de la distribution finale de ses biens. Non

Principal Issues:
1. In light of recent court decisions, are amounts reflected in "deferred revenue" of a corporation using the percentage completion or completed contract methods of accounting for long-term construction contracts, that have been billed but not received, included in computing capital under subsection 181.2(3)?
2. Can we break down amounts reported on the balance sheet of a corporation, into its components to extract the amount of any items to be included in capital that may be reflected in the balance sheet amount?
3. If the answer to (2) is affirmative, does it matter whether the balance sheet amount is on the asset or liability side of the balance sheet?
4. Are Holdbacks Receivable included in computing capital under subsection 181.2(3)?

Position:
1. Generally no
2. Yes
3. No
4. No

Reasons:
1. Recent court cases have clarified that such amounts do not constitute reserves for purposes of Part I.3. However, to the extent amounts have been received under the contracts, such amounts are advances and are included in computing capital under paragraph 181.2(3)(c).
2. The court held in PCL that it was appropriate to examine the components of an amount on the balance sheet to determine whether the balance sheet amount reflects amounts that are included in capital, such as advances.
3. The concept of looking to components of a balance sheet balance to determine the amount of any components reflected in the balance sheet amount, that are included in capital applies equally to debit balances and credit balances.
4. There is nothing in subsection 181.2(3)(c) that would require Holdbacks Receivable to be included in the computation of capital.

Principal Issues:
1. An individual wishes to pay the premiums on a life insurance policy which will be owned by a charity. Is it necessary for the charity to be designated as an irrevocable beneficiary of the policy in order for the premiums paid to qualify as a charitable gift?
2. Is the individual entitled to a charitable donations tax credit in respect of a portion of the premiums paid on a policy owned by a qualified donee where the individual's estate is named as one of the beneficiaries under the policy?

Position:
1. No.
2. Possibly, however this determination can only be made after reviewing the facts of the specific case.

Reasons:
1. Pursuant to IT-244R3, where an individual absolutely assigns a life insurance policy to a qualified donee and makes the qualified donee the registered beneficiary of the policy, the individual may claim a charitable donations tax credit for the donation. If the individual continues to pay the premiums on the policy, each payment will also qualify as a charitable gift.
2. Question of fact.

Principales Questions:

Différentes mises en situation impliquant la vente par un pharmacien de son officine afin de déterminer le produit de disposition de l'achalandage qu'il " est devenu ou peut devenir en droit de recevoir " aux fins de l'alinéa a) de l'élément E du montant cumulatif des immobilisations admissibles au paragraphe 14(5) de la Loi. Le montant que le pharmacien peut devenir en droit de recevoir est fonction d'un montant établi par ordonnance multiplié par le nombre d'ordonnances vendues au cours d'une période de douze mois.

Position Adoptée:

Principal Issues: In a given fact situation involving the carry back of a loss (1) Whether the carry back, which would reduce taxable income to nil, would cause the T/P to lose the dividend refund (DR) for the year to which the loss was applied? (2) Whether the T/P would have to repay the DR for the year and pay interest on the cancelled DR that was applied to the T/P's taxes payable for the year pursuant to 129(2)? (3) Whether the dividend recipient would be liable to pay the Part IV tax if the dividend payor loses the entitlement to the DR?

Position: (1) Yes. (2) Yes to both. (3) May or may not depending on the timing of the reassessment of the dividend payor's T2 return and the date by which the dividend recipient must pay the Part IV tax.

Reasons: (1) The loss would reduce the RDTOH at the end of the year to nil.
(2) Ss. 160.1(1) would apply since ss. 160.1(4) requires an amount applied to a liability of the T/P to the Receiver General to be treated for the purpose of s. 160.1 as if it had been refunded. (3) The dividend recipient would not be liable to pay the Part IV tax if the dividend payor's DR has been cancelled by reassessment before the latest date by which the dividend recipient would have had to pay the Part IV tax pursuant to ss 186(1). Otherwise, the dividend recipient would be technically required to pay the Part IV tax, which could be refunded to the dividend recipient upon request after the dividend payor's DR has been cancelled by reassessment.