Income Tax Severed Letters - 2004-11-12

Principal Issues: 1. Can funds held in trust be structured and
2. Can proceeds from a life insurance policy be structured?

Position: 1. Yes 2. No

Reasons: Paragraph 5 of IT-365R2

Principales Questions: Demande de confirmation du traitement fiscal

Position Adoptée: Voir ci-dessous.

Raisons: Voir ci-dessous

Principal Issues: In the given situation, where a corporate taxpayer's (Opco) tax instalments pursuant to 157(1) for January and February 2004 are late, the March 2004 instalment becomes due on March 31st (the 3 instalments together is referred to below as Opco's liability), and the reassessment on March 30, 2004 of its T2- 2002 gives rise to an overpayment pursuant to 164(7) of an amount in excess of Opco's liability, (1) whether the CRA will apply the overpayment to Opco's liability? (2) if Opco makes the request, whether the CRA will accept the amount representing the amount of the overpayment in excess of Opco's liability as prepaid instalments? (3) for the purpose of computing interest charges on the late instalments pursuant to the contra interest (offset interest) method under 161(2.2), will the contra credit interest computation start date under 161(2.2)(b) be the first day of year 2004 or the date that is 30 days after filing the T2-2002? and (4) whether any interest is payable to Opco on its overpayment for the year 2002 under 164(3)?

Position: (1) and (2) Yes. (3) Neither, the contra credit interest computation start date under 161(2.2)(b) is the date of the day immediately following the day the instalment prepayment is made which, in the given situation, would be the day after the overpayment was assessed.
(4) No.

Reasons: (1) and (2) The law and CRA's practice (3) 161(2.2)(b) provides that the contra credit interest is the interest computed under 164(3), applied making the presumptions under 161(2.2)(b)(i) to (iv). In this context, 164(3) applies to the refund created by the application of the presumption under 161(2.2)(b)(i) in respect of the taxation year 2004 (not the refund of the overpayment related to a prior year, such as in this case, the refund in respect of the year 2002). 161(2.2) and 164(3) each provide a different period for the computation of interest. But, the presumption under 161(2.2)(b)(iv) in effect sets the interest computation period start date under 161(2.2) as the start date for the application of 164(3) i.e. the first day of the year. However, the contra credit interest computation start date is the first day of the year only if the instalment prepayment is made before begins the instalment year to which it is to be applied. Otherwise, the contra credit interest computation start date corresponds to the date of the day immediately after the day the instalment prepayment is made. (4) The interest computation period begins and ends on the same day (March 30, 2004) pursuant to 164(3)(d) and 164(5)(j)(k)(l)

Principal Issues: Can the repayment of a severance amount be deducted from income in the year of repayment?

Position: Question of Fact.

Reasons: Where the amount received by the taxpayer meets the definition of "retiring allowance" in subsection 248(1) of the Act and is included in income by virtue of 56(1)(a)(ii) of the Act, the amount of any repayment is deductible under subparagraph 60(n)(iii) of the Act.

Principal Issues: Would the proposed partnership structure and transaction be suitable to accomplish capital gains tax deferral?

Position: No response was given since it appears to be a factual situation involving a partnership. Since the transaction involves the sharing of income through a partnership with minor children and a partial estate freeze we cautioned about possible application of section 103 of the Act.

Reasons: This is a proposed transaction and we are being asked to confirm the tax consequences outside of a ruling request.

Principal Issues: Whether sale of property situated in Scotland exempted from tax in Canada where Scottish tax laws do not tax the gain on disposition?

Position: No.

Reasons: Pursuant to subsections 40(1) and 39(1), a capital gain from the disposition of property would arise in the circumstances described; nothing in the Canada-United Kingdom Income Tax Convention to prevent Canada from taxing the gain under the Income Tax Act.

XXXXXXXXXX 2004-009898
S. Chua
November 2, 2004

Principales Questions: Une fiducie peut-elle déduire un montant à titre de provision pour somme payable aux bénéficiaires?

Position Adoptée: Non.

Raisons: Voir ci-dessous

Principal Issues: Whether individual employed by Ontario Securities Commission ("OSC") on secondment to UK Financial Services Authority falls within paragraph (a) or (b) of Article 18(1) of the Canada-UK Income Tax Convention (the "Treaty").

Position: Neither paragraph (a) or (b) of Article 18(1) would apply.

Reasons: Mr. X did not render services to the OSC during the time he was in the UK. In any case, the OSC is not a "political subdivision" or "local authority" for purposes of the Treaty. Accordingly, the words in paragraph (a) of Article 18(1) would not be met. As Mr. X was a resident of Canada for purposes of the Treaty, paragraph (b) of Article 18(1) would not apply.

2004-006582
XXXXXXXXXX S. Chua
613 957-2115
October 27, 2004

Principal Issues: 1) Application of 60(j.1) in determining how much of a retiring allowance can be transferred to the employee's RRSP.
2) How to correct an error where the Employer understated the amount of retiring allowance eligible for transfer to the employee's RRSP in a prior year and whether there is any administrative relief available to the employee who may wish to make a contribution to his RRSP equivalent to the amount of the understatement now that the statutory time limit to make the contribution has passed.

Position: 1) Paragraph 60(j.1) allows an individual to transfer portions of a retiring allowance to an RRSP on a tax-deferred basis. The amounts that can be transferred are equal to $2,000 for each year of employment with the payer of the retiring allowance before 1996 and an additional $1,500 for each year of employment before 1989 as long as no pension benefits from the employer have vested in the employee for those years. The number of years of employment need not be continuous. The years of service that may be counted are years of service with the employer or with a "person related to the employer".
2) Referred the administrative issues to Client Services Directorate.