Income Tax Severed Letters - 2005-02-25

Ruling

2005 Ruling 2004-0094531R3 - Paragraph 149(1)(c) ruling.

Unedited CRA Tags
149(1)(c)

Principal Issues: Whether paragraph 149(1)(c) will apply to exempt the business income earned by a First Nation from its limited partnership interest.

Position: Yes.

Reasons: The First Nation can be considered a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c).

2004 Ruling 2003-0017891R3 - N/R withholding tax/ pools of mortgages

Unedited CRA Tags
212(1)(b)(ii)(C)

Principal Issues: Whether withholding tax applies on interest paid to a non-resident on a Canadian Mortgage insured against default by Insurer?

Position: Favorable ruling given.

Reasons: For an insurance fee, Insurer guarantees the timely payment of principal and interest on a Canadian Mortgage. The Insurer has a guarantee provided by the Minister of Finance (the "Government Guarantee"). XXXXXXXXXX the Government Guarantee satisfies the requirement in clause 212(1)(b)(ii)(C).

Technical Interpretation - External

25 February 2005 External T.I. 2005-0112171E5 - Clearly Marked Emergency-Response Vehicles

Unedited CRA Tags
248(1) 6(1)(a)

Principal Issues: Whether a taxable benefit results in respect of the personal use of an employer-provided motor vehicle that is not considered an automobile because it is a clearly marked emergency-response vehicle by virtue of paragraph (b.1) of the definition of automobile in subsection 248(1) of the Act?

Position: If there is personal use, yes.

Reasons: Notwithstanding the fact that such an employer-provided motor vehicle may not be an automobile, a taxable benefit in respect of the personal use of such a vehicle may result.

22 February 2005 External T.I. 2004-0098191E5 - Gifting Arrangements

Unedited CRA Tags
237.1

Principal Issues: Is the definition "gifting arrangement" within the meaning of the definition in subsection 237.1(1) limited to situations in which a property is acquired under an agreement and, in the same agreement, the property is to be given to a charity?

Position: No.

Reasons: The meaning of "arrangement" is broad and does not require the existence of an agreement.

22 February 2005 External T.I. 2005-0112331E5 - CCA - Printer

Unedited CRA Tags
20(1)(a) Class 10 Class 45 Regulation 1104(2)

Principal Issues: To determine the CCA class for a printer purchased after March 22, 2004.

Position: A printer can be considered data processing equipment that is ancillary to general-purpose electronic data processing equipment pursuant to the proposed amendments in the Income Tax Regulations. The printer, if acquired after March 22, 2004 and not acquired before 2005 in respect of which an election is made under subsection 1101(5q) of the Regulations, will be included in the new Class 45 with a 45% CCA rate.

Reasons: Class 10(f), Class 45, Proposed Amendments

22 February 2005 External T.I. 2004-0109381E5 - Prepaid lease and election under 16.1

Unedited CRA Tags
16.1(1)(e)

Principal Issues: Is the prepaid portion a blended payment in respect of the year for the purposes of paragraph 16.1(1)(e) of the Act?

Position: No, only the portion of the payment that is in respect of the year.

Reasons: Subsection18 (9) applies, notwithstanding any other provision of the Act.

22 February 2005 External T.I. 2004-0097361E5 - Infirm Dependant

Unedited CRA Tags
118(1) 118.3

Principal Issues: To determine if the taxpayer is eligible for an income tax reduction under the Ontario Income Tax Act for an infirm dependant.

Position: Yes.

Reasons: The taxpayer is eligible for an income tax reduction under the Ontario Income Tax Act for an infirm dependant if an amount is claimed pursuant to subsection 118.3(2) of the Federal Income Tax Act and subsection 4(3.1) of the Ontario Income Tax Act.

21 February 2005 External T.I. 2004-0108011E5 - Partnership 97(2)

Unedited CRA Tags
97(2)

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

Position: No. It is possible for the transferor to transfer the shares to a partnership (via 97(2)) without having immediate tax implications. However, the gain, loss, or recapture is only deferred until such time as the partnership actually disposes of the shares or the partner disposes of his partnership interest.

Reasons: Legislation.

17 February 2005 External T.I. 2004-0103901E5 - Deductibility of interest

Unedited CRA Tags
9 67.6 Section 7309 of the Income Tax Regulations

Principal Issues:
1. Whether interest paid because of late or incomplete payment of GST and QST is deductible.
2. Whether interest paid under any of paragraphs 280(1)b), 280(1.1)(b) and 280(2.1)(b) of the Excise Tax Act is deductible.
3. Whether interest on penalties imposed under the Quebec Sales Tax Act is deductible.

Position:
1. Generally, yes.
2. Generally, yes.
3. Generally, yes.

Reasons:
1. The interest element of a sales tax assessment or reassessment is deductible provided the related sales tax amount arises in the course of income from business or property.
2. The interest paid under any of paragraphs 280(1)(b), 280(1.1)(b) and 280(2.1)(b) of the Excise Tax Act is deductible provided the related GST/HST arises in the course of income from business or property.
3. Interest on penalties imposed under the Quebec Sales Tax Act is deductible provided the related QST arises in the course of income from business or property.

17 February 2005 External T.I. 2004-0104331E5 F - Indemnisation et autres paiements

Unedited CRA Tags
5(1) 6 56(1)a)(ii)
Summary Under
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)
portions of settlement payment that compensated for lost vacation credits and reimbursed for psychotherapy and medication costs were taxable under s. 5(1)

Principales Questions: Quel traitement fiscal doit être accordé aux sommes suivantes reçues par la Contribuable dans le cadre d'un règlement avec son employeur :
allocation pour perte de crédits de congés annuels.
remboursement de frais de psychothérapie et de médicaments qui ne sont pas couverts par le régime de soins de santé de l'employeur.
indemnisation pour préjudice moral selon l'alinéa 53(2)e) de la Loi canadienne sur les droits de la personne.

Position Adoptée:
imposable.
imposable.
non imposable.

Raisons:
Revenu d'emploi - paragraphe 5(1) ou de l'article 6 de la Loi.
Revenu d'emploi - paragraphe 5(1) ou de l'article 6 de la Loi.
dommages-intérêts généraux reçus par suite d'une violation des droits de la personne pouvant être considérés comme étant sans rapport avec la perte de l'emploi-IT-337R4 paragraphe 12.

17 February 2005 External T.I. 2004-0104731E5 - Disability Income Insurance

Unedited CRA Tags
18(1)(a) 18(1)(h)
Summary Under
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose
Summary Under
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h)
Summary Under
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business
Summary Under
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement

Principal Issues: To determine the tax implications for a self-employed individual with respect to a disability insurance policy offered through a professional association. The policy will provide the individual with a monthly benefit in the case of a loss of income due to sickness or injury.

Position: Where the self-employed individual on his/her own behalf the premiums are not deductible against the professional income of the individual and the benefits received are not included in income.

Reasons: ITA 9, 18(1)(a), 18(1)(h), 6(1)(a), 6(1)(f), 56(2)

17 February 2005 External T.I. 2004-0091811E5 F - Exemption pour résidence principale

Unedited CRA Tags
54
Summary Under
Tax Topics - Income Tax Act - Section 54 - Principal Residence
separate municipal addresses not determinative that basement occupied by son and ground floor occupied by mother were two housing units
Summary Under
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (a)
where residence held by son and mother in equal co-ownership is 2 units each occupied separately, each could technically access the exemption for only a ¼ interest

Principales Questions: 1. Est-ce que la résidence appartenant à M. A respecte les conditions de la définition de " résidence principale " prévue à l'article 54 de la Loi si, depuis l'acquisition de cette résidence en 1996 par M. A, celui-ci habite le sous-sol de la résidence et sa mère, Mme B, habite le rez-de-chaussée, soit la moitié de la superficie habitable de la résidence sans payer de loyer à son fils ?
2. Quelle serait notre opinion dans une situation semblable à la précédente à l'exception du fait que la résidence a été achetée en indivision soit, 50 % par M. A et 50 % par Mme B ?
3. Quelle serait notre opinion à l'égard de chacune des deux situations précédentes lorsque la résidence a deux numéros civiques, un pour le sous-sol et un autre pour le rez-de-chaussée ?

Position Adoptée: 1. Si, selon les faits, il est déterminé que la résidence de M. A n'a qu'une unité de logement, M. A peut considérer la totalité de la superficie de sa résidence aux fins de la détermination de l'exemption pour résidence principale.
2. Si, selon les faits, il est déterminé que la résidence de M. A et de Mme B n'a qu'une unité de logement, M. A peut considérer sa part indivise dans la résidence aux fins de la détermination de l'exemption pour résidence principale. Il en est de même pour Mme B.
3. Si, selon les faits, il est déterminé que la résidence a deux unités de logement distinctes, M. A ne peut considérer que l'unité qu'il habite aux fins de l'exemption pour résidence principale dans le cas où il est l'unique propriétaire de la résidence et, généralement, seulement sa part indivise dans l'unité qu'il habite dans le cas où la résidence est la propriété conjointe de M. A et Mme B.

Raisons: 1. M. A est le propriétaire d'une résidence qu'il a normalement habitée malgré le fait que Mme B en habite une partie.
2. M. A est propriétaire d'un bien détenu conjointement avec Mme B et vice-versa.
3. M. A détient deux unités de logement et en a normalement habité une seule. Il ne peut réclamer l'exemption pour résidence principale que sur une unité de logement et non les deux à la fois. M. A est le propriétaire d'une part indivise de chacun des logements et il n'habite normalement qu'un seul de ces logements.

XXXXXXXXXX 2004-009181
Lucie Vermette, CGA
Le 17 février 2005

Conference

8 October 2004 APFF Roundtable Q. 9, 2004-0086761C6 F - CCCP - options held by non-residents

Unedited CRA Tags
125(7) 251(5)(b) 256(1.4)(a)

Principal Issues: See below

Position: See below

Reasons: See below

8 October 2004 APFF Roundtable Q. 10, 2004-0086771C6 F - Surplus Stripping

Unedited CRA Tags
84.1 245(2) 84(3)

Principal Issues: An individual ("Mr. X") owns 100 % of the shares of OPCO. A freeze is carried out at OPCO's level. In the process, Mr. X disposes of his OPCO common shares in consideration for preferred shares of OPCO. A key employee of OPCO incorporates "EMPLOYEECO" and subcribes for 100 common shares for a nominal amount in cash. Mr. X and EMPLOYEECO then subscribe for 85 % and 15% respectively of OPCO common shares, for nominal amounts in cash. Mr. X then disposes of 15 % of his OPCO preferred shares in favour of EMPLOYEECO, in consideration for a promissory note. Mr. X claims a capital gains deduction in respect of the gain realized on the sale of the OPCO preferred shares. Funds used to pay the purchase price of the OPCO preferred shares come from OPCO's surpluses.

Position: After the proposed transactions, Mr. X continues to own a significant interest in OPCO, both in votes and value. In fact, Mr. X continues to control OPCO. EMPLOYEECO may be viewed as merely accommodating Mr. X since EMPLOYEECO does not appear to have any independent interest in acquiring the preferred shares of OPCO. CRA would consider applying section 84.1. Under this provision, EMPLOYEECO would be deemed to have paid a dividend to Mr. X. Alternatively, subsection 245(2) may apply to redetermine the tax consequences and to recharacterize the proceeds received by Mr. X as a taxable dividend. The scenarios described appear to involve surplus stripping that would be contrary to the scheme of the Act. The scheme of the Act calls for the treatment of distributions to shareholders of corporate property as income, irrespective of the form of such distributions.

Reasons: Wording of the Act and previous positions.

8 October 2004 APFF Roundtable Q. 11, 2004-0086781C6 F - Large Corporations - Collection Powers

Unedited CRA Tags
225.1(7) 225.1(8) 181.5(1.1) 165(1.11)

Principal Issues: The taxable capital of a Canadian-controlled private corporation, determined for the purpose of Part I.3, is less than $10 million. In a particular taxation year, the corporation claims a small business deduction. Initially, the corporation's business limit for such year is not reduced by subsection 125(5.1) of the Act. However, following an audit, the CRA adds an amount to the taxable capital of the corporation and reassesses the corporation accordingly. The addition made by the CRA increases the taxable capital of the corporation over the capital deduction available under section 181.5 of the Act. This has the effect of reducing the corporation's business limit under subsection 125(5.1) of the Act. The taxpayer objects to the reassessment, without complying with subsection 165(1.11) of the Act. Whether, in such a situation, the Minister may take actions to collect the amounts established pursuant to paragraphs 225.1(7)(a) and (b) of the Act.

Position: For the taxation years preceding 2004, in a situation like the given situation, the Minister may take actions to collect amounts described in paragraphs 225.1(7)(a) and (b) of the Act. For 2004 and later taxation years, the amendments made by the 2003 Federal Budget with respect to the capital deduction must be considered. The capital deduction was increased from $10 million to $50 million. However, the Budget indicates: "The federal capital tax rules are relevant in determining the application of a number of other provisions that impose special requirements or limitations on larger corporations. To ensure that those provisions continue to operate appropriately, the reduction under subsection 125(5.1) of the Act of the "business limit" of larger Canadian-controlled private corporations, and the definition "large corporation" in subsection 225.1(8), will continue to apply as if there were no change to the current federal capital tax rate and capital deduction." Subsection 181.5(1) was amended and subsection 181.5(1.1) was added in that regard. Consequently, it appears that, for 2004 and later taxation years, the intent of the legislator is to subject a corporation like the corporation in the given situation to the obligation of serving a notice of objection which complies with the requirements in subsection 165(1.11), and to allow the minister to take actions to collect amounts established pursuant to paragraphs 225.1(7)(a) and (b).

Reasons: Wording of the Act.

8 October 2004 APFF Roundtable Q. 15, 2004-0086821C6 F - Interaction of 84(3) and 69(1)(b)

Unedited CRA Tags
84(3) 69(1)(b)
Summary Under
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b)
redemption by sub of parent shares

Principal Issues: See below

Position: See below

Reasons: See below

8 October 2004 APFF Roundtable Q. 21, 2004-0086891C6 F - Discretionary trust and associated corporations

Unedited CRA Tags
108(1) 248(25) 256(1.2)(f)

Principal Issues: See below

Position: See below

Reasons: See below

Technical Interpretation - Internal

22 February 2005 Internal T.I. 2004-0103311I7 - Extended cab used for hauling 5th wheel trailers

Unedited CRA Tags
248(1) definition of automobile

Principal Issues: A one-ton extended cab truck is used in a business of hauling 5th wheel trailers from factories in the United States to recreational vehicle (RV) dealerships in Canada. Where the truck does not haul a trailer to the factory (herein referred to as the "dead head trips"), how does the use test (herein referred to as the "use test") in subparagraph (e)(ii) of the definition of automobile in subsection 248(1) apply to the dead head trips?

Position: The total distance of the dead head trips should be added to the distance travelled in delivering the RVs from the factories to the dealerships in determining to what extent the truck was used, in the taxation year it was acquired, in transporting goods or equipment.

Reasons: As explained in paragraph 1 of IT-521R, Motor Vehicle Expenses Claimed By Self-Employed Individuals, generally, the "use test" is based on the distance travelled by a vehicle for its stated purpose. The distance the truck travels for the dead head trips, from a business location in Canada to a factory in the United States in order to deliver an RV from that factory to the Canadian dealerships, would form part of the use test in subparagraph (e)(ii) of the definition of automobile for the purpose of determining whether the truck was used all or substantially all for the transportation of goods or equipment.

21 February 2005 Internal T.I. 2005-0114991I7 - Contract Termination Payment

Unedited CRA Tags
9 14(1)

Principal Issues: The taxable status of payments received in respect of the termination of a business contract to supply XXXXXXXXXX .

Position: Question of fact.

Reasons: The lion's share of the payments will be included in business income or reduce expenses since they relate to current revenue or expense items. A portion of the payment may be an eligible capital amount for purposes of determining the taxpayer's income inclusion under subsection 14(1) of the Act where it can be shown that the cancellation of the contract destroyed or materially crippled the whole structure of the profit-making apparatus of the taxpayer's business.

24 December 2004 Internal T.I. 2004-0090011I7 - Commencement Day

Unedited CRA Tags
56.1(4)

Principal Issues: Whether a pre-May 1997 order has a "commencement day" under ss. 56.1(4) where a subsequent agreement adds a provision for the termination of the child support obligation.

Position: No.

Reasons: The provisions of the subsequent agreement dealing with the termination of the obligation to pay child support are in effect conditional upon a further order or agreement establishing that a particular child has ceased to be "dependent" on the wife or a "child of the marriage" as defined in the Divorce Act of Canada.