Income Tax Severed Letters - 2004-01-09

Principal Issues: The impact of the deeming provision in subsection 248(7) of the Act on the taxation of employment income. The taxpayer was entitled under a contract of employment to an annual residual payment for employment services that were performed under the contract. The employer mailed cheques to the taxpayer for the payments for a period of XXXXXXXXXX years. The taxpayer did not receive these cheques and later received a lump-sum amount from the employer in lieu of the cheques not received.

Position: Subsection 248(7) is not applicable in this situation. Subsection 5(1) of the Act applies to include the lump-sum payment in employment income in the taxation year in which it was received.

Reasons: In terms of determining a taxpayer's employment income under subsection 5(1) of the Act, paragraph 248(7)(a) would apply to include therein an amount that has been mailed in the taxation year but not received until the following taxation year. However, paragraph 248(7) of the Act would not apply to include an amount in a taxpayer's employment income where the facts clearly show that the taxpayer, or someone else for the taxpayer's benefit, never received the amount. In this situation, the taxpayer did not actually receive the cheques, nor did someone else receive them for the taxpayer's benefit.

Principal Issues: Whether a building that will be used in a sawmill operation is available for use.

Position: No.

Reasons: The earlier of one of the times enumerated in paragraphs (a) to (e) of subsection 13(28) of the Act has not yet occurred.

Principal Issues: Whether subsection 15(1) or 84(2) of the Act should apply in a given fact situation where a corporation ("OPCO") would dispose of property to a person ("X") with whom OPCO would not be dealing at arm's length, for proceeds less than fair market value. At any relevant time, X would have been an employee and a director (vice-president) of OPCO.

Position: The value of the benefit conferred by OPCO on X should be included in the income of X under subsection 15(1), provided that such benefit would not be conferred on the winding-up, discontinuance or reorganization of OPCO's business (for example, if OPCO's business would have ceased some time before the transfer of assets in favour of X). In the given fact situation, X, and no other shareholder of OPCO, would receive property from OPCO pursuant to an agreement of purchase and sale. Consequently and based on the particular circumstances surrounding the given situation, subsection 84(2) would not be applicable. However, if subsection 15(1) is determined not to be applicable, subsection 246(1) would be applicable if it is possible to establish that OPCO would have conferred a benefit, either directly or indirectly, by any means whatever, on X, and if the amount of the benefit would be included in X's income if the said amount of the benefit was a payment made directly by OPCO to X. Such hypothetical payment would be included in computing X's income under subsection 6(1) in the circumstances. If subsection 246(1) were applicable, the benefit would be included in X's income. Paragraph 69(1)(b) would probably be applicable in the given fact situation to deem OPCO to have received proceeds of disposition equal to the fair market value of the property transferred. X may have had de facto control over OPCO. In that case, the application of subsections 13(21.2) and 40(3.4) would have to be considered. Subsection 13(21.1) could also be relevant in the given situation.

Reasons: Wording of the Act.

Principal Issues: How would subsection 50(1) and paragraphs 69(1)(b) and 88(1)(b) of the Act apply in a given fact situation. Briefly, a parent corporation ("Parentco") would elect to have subsection 50(1) to apply in respect of the shares of one of its wholly-owned subsidiary ("Lossco") in XXXXXXXXXX . In XXXXXXXXXX , Parentco would dispose of its Lossco shares in favour of another wholly-owned subsidiary ("Profitco") for a nominal cash consideration. Some time after this transfer, Lossco would be wound-up into Profitco. Profitco would then use Lossco's non-capital losses in conformity with subsection 88(1.1).

Position: It should normally be very difficult to apply subsection 50(1) of the Act in a situation of the type described in this letter. Assuming that the taxpayer would rely on paragraph 50(1)(b)(iii), the conditions stated in subparagraphs 50(1)(b)(iii)(A) and (C) could be difficult to meet. On this point, the benefits that can be derived from the utilization of non-capital losses should generally be taken into consideration in assigning a value to the shares of a corporation. In a situation of the type described in the letter, if subsection 50(1) were not applicable, Parentco would sustain a loss on the transfer of the shares of "Lossco" in favour of "Profitco." However, such loss would generally be suspended pursuant to subsections 40(3.3) to 40(3.5). If subsection 50(1) were applicable in the given fact situation, the application of paragraph 69(1)(b) to the disposition by Parentco of its Lossco shares in favour of Profitco for a nominal cash consideration would result in a capital gain. The deemed disposition of Lossco shares on the winding-up of Lossco under paragraph 88(1)(b) would not result in any capital gain in the circumstances.

Reasons: Wording of the Act.

Le 16 décembre 2003