Income Tax Severed Letters - 2004-07-16

Principal Issues: Under U.S. tax rules, it is the beneficiary and not the trust(ee) who pays the tax on income derived from U.S. real property held by a foreign simple trust. Is the beneficiary entitled to a foreign tax credit in respect of the foreign taxes paid on the property income?

Position: As the beneficiary is not entitled to a deduction under 20(11) in respect of the U.S. taxes paid in respect of the real property located in the U.S., the full amount of the taxes will qualify as non-business-income tax, provided that none of (c.1) to (i) of the def'n of non-business-income tax in 126(7) apply.

Reasons: The 104(22) designation does not apply for the purpose of 20(11) such that the beneficiary does not have any foreign source income for the purpose of 20(11). In addition, income from real property is excluded from the application of subsection 20(11).

Principal Issues: Does a lessee who acquires a XXXXXXXXXX % interest in a business on a yearly basis over a XXXXXXXXXX year-period with no buy-out at the end acquire the property at the beginning of the lease?

Position: Question of fact

Reasons: ITTN #21-- Wording of the Agreement

Principal Issues: Whether "the construction of a building, road, dam, bridge or similar structure" as described in paragraph 1 of IT-92R2 can be considered to include the construction of electrical power substations and transmission lines.

Position: Question of fact.

Reasons: The construction of electrical power substations and transmission lines would not likely fall within the scope of the administrative position in IT-92R2, on the basis that they are not structures which are similar to a building, road, dam or bridge.

Principal Issues: whether amount to be included in income of prospector should be 50% of the proceeds received on the sale of the shares.

Position: no

Reasons: among other things, such treatment assumes that any gain on the sale of the shares will be a capital gain which is not necessarily the case

Principal Issues: Can a corporation resident in Canada deduct the salaries and other expenses of employees whose primary duties are to lobby the government?

Position: Question of fact. Provided the expenses are paid and incurred to make a representation relating to a business carried on by the taxpayer.

Reasons: 20(1)(cc) of the Act

Principal Issues: Whether the condition stated in IT-169 to file a letter attached to the return can be substituted where a rollover form is filed. Whether, in circumstances where no rollover form is required, the condition to file a letter attached to the return is mandatory.

Position: The condition to file a letter attached to the return, as stated in IT-169, can be substituted. Administratively, the CRA does accept a rollover form such as T2057, T2058 or T2059, filed with a "yes" answer to the question concerning the existence of a price adjustment clause, as sufficient notice. However, a price adjustment clause does not automatically amend a section 85 election. In order to give effect to a price adjustment clause, the parties will have to file an amended election under subsection 85(7.1) and pay the penalty under subsection 85(8). CRA's position on that point is the same with respect to an election under subsection 97(2). Consequently, the parties will have to file an amended election under subsection 96(5.1) and pay the penalty under subsection 96(6). Finally, in circumstances where no form is required (e.g., section 86 or 51 of the Act), the CRA has stated that simply not notifying the CRA does not prevent Interpretation Bulletin IT-169 from being applied if all of the other conditions are met.

Reasons: Previous positions.

Principal Issues: 1.What are the tax consequences of an estate resident in Canada with non-resident beneficiaries?
2. What are the tax consequences of an non-resident estate with beneficiaries resident in Canada?

Position: 1. Generally, Part XIII tax on distributions of income.
2. The change in executors will result in a deemed disposition but the trust will likely not be deemed resident in Canada under existing 94(1)(c) or proposed 94(3) as the deceased was never resident in Canada. However, proposed 94.1 may apply.

Reasons: See general comments in letter.