Income Tax Severed Letters - 2005-09-09

Ruling

2005 Ruling 2005-0118591R3 - RRSP Damages

Unedited CRA Tags
146(5) 146(8) 204.2(1.2) 6

Principal Issues: Employee and her husband suffered investment losses in registered and non-registered accounts managed by employer, including a group retirement savings plan (GRSP) offered by the employer to its employees as a benefit of employment. In consideration for employee and husband agreeing to release the employer from their claims with respect to those losses, employer agrees to re-contribute an amount equal to the employer's previous contributions to the employee's GRSP, to a RRSP of which the employee is both contributor and annuitant.

Position: The payment to the employee's RRSP will not constitute a premium or a gift to the RRSP and will not result in income to the employee.

Reasons: The payment is a replenishment of funds in a registered account.

2005 Ruling 2005-0143711R3 - Loss utilization in a related group of companies.

Unedited CRA Tags
20(1)(c) 112(1) 56(2)

Principal Issues: Loss utilization in a related group of companies.

Position: The loss utilization is acceptable.

Reasons: Consistent with our position in previous rulings and with Department of Finance policy.

Technical Interpretation - External

6 September 2005 External T.I. 2005-0143071E5 - Class 43.1(d)(ii)

Unedited CRA Tags
Class 43.1 Class 17 Reg. 1219

Principal Issues: whether certain depreciable property related to a small-scale hydro-electric installation will meet the requirements of Class 43.1(d)(ii)

Position: provide general comments on the types of assets that will qualify

Reasons: as per legislation; NRCan' s file XXXXXXXXXX dated July 18, 2005 and NRCan's Class 43.1 Technical Guide

31 August 2005 External T.I. 2005-0114421E5 F - Frais de garde d'enfants

Unedited CRA Tags
63(1) 63(3)
Summary Under
Tax Topics - Income Tax Act - Section 63 - Subsection 63(3) - Child Care Expense
fees for breach of contract can qualify but not educational fees

Principales Questions: Est-ce que certains frais accessoires aux frais de garde d'enfants engagés par un contribuable sont déductibles dans le calcul du revenu de ce dernier?

Position Adoptée: Questions de fait. Certains frais sont déductibles sous l'article 63 de la Loi de l'impôt sur le revenu alors que d'autres ne le sont pas.

Raisons: Interprétation de la Loi de l'impôt sur le revenu.

24 August 2005 External T.I. 2005-0141491E5 - Travel and Automobile Allowance

Unedited CRA Tags
6(1)(b) 15(1) 18(1)(r)

Principal Issues: Whether reasonable travel and automobile allowances paid to an employee of a corporation are taxable income by virtue of the fact the employee is also a shareholder of the corporation.

Position: No

Reasons: ITA

Technical Interpretation - Internal

31 August 2005 Internal T.I. 2005-0134831I7 F - Capital Gains Exemption Strip

Unedited CRA Tags
84.1(1) 84.1(2) 245(2)
Summary Under
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) - Paragraph 84.1(1)(a)
s. 84.1 did not apply to transferring crystallized preferred shares’ ACB to common shares under s. 40(3.6)(b), with those shares exchanged for high-PUC prefs of new Holdcos for cash redemption
Summary Under
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)
the use of s. 40(3.6)(b) for surplus-stripping purposes would be referred to the GAAR Committee
Summary Under
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.6)
individuals holding high-ACB/low-PUC prefs and low ACB/PUC common shares preserved that ACB under s. 40(3.6)(b) for surplus-stripping purposes on their prefs’ redemption

Principal Issues: Each of two brothers owns all of the issued and outstanding shares of the capital stock of a holding corporation ("Holdco 1 and "Holdco 2"). More specifically, each brother owns Holdco common shares and Holdco preferred shares. The preferred shares have a fair market value ("FMV") and an adjusted cost base ("ACB") of approximately $XXXXXXXXXX. The paid-up capital ("PUC") of these preferred shares is nominal. The high ACB is the result of a previous crystallisation of the capital gains deduction by the brothers. Each of Holdco 1 and Holdco 2 owns 50% of the issued and outstanding shares of an operating corporation ("Opco"). First, each of Holdco 1 and Holdco 2 would redeem its preferred shares owned by the brothers. As a result and pursuant to subsection 84(3), each of the brothers would be deemed to receive a dividend. This dividend would be a taxable dividend. As a result of the redemption of shares, each brother would also realize a loss that would be denied under paragraph 40(3.6)(a). The amount of such loss would be added to the ACB of the common shares of the capital stock of Holdco 1 and Holdco 2 held by the brothers under paragraph 40(3.6)(b). Each of the brothers would then dispose of the common shares of the capital stock of Holdco 1 or Holdco 2, as the case may be, in favour of another corporation ("NewHoldco 1" and "NewHoldco 2") in consideration for preferred shares having a FMV, ACB and PUC of $XXXXXXXXXX, and common shares of the capital stock of the NewHoldcos. Finally, each of NewHoldco 1 and NewHoldco 2 would redeem its preferred shares owned by the brothers for cash.

Position: Section 84.1 would technically not apply in this file. However, if a similar file was presented in the context of an income tax ruling request, such a file would be presented to the GAAR Committee, XXXXXXXXXX

Reasons: Wording of the Act.

31 August 2005 Internal T.I. 2004-0103051I7 - QFP 110.6(1)(a) and CGD 110.6(2)

Unedited CRA Tags
110.6(1)(a) 110.6(2)

Principal Issues: Break in continuous family ownership of property and taxpayer himself has never farmed the land but merely rented it out to sharecroppers for rental income - whether properties acquired before June 18, 1987 are qualified farm property as defined under 110.6(1)(a) for the purposes of capital gains exemption under 110.6(2).

Position: Yes. While the properties owned by the taxpayer would not qualify under 110.6(1)(a)(vi) because they fail the 2-year gross revenue test, the properties would satisfy the 5-year use test under (a)(vii) if they were each disposed of by the taxpayer today.

Reasons: The properties in question were acquired pre-1987 and formed part of the original XXXXXXXXXX acres that had been owned and farmed by the taxpayer's parent in each of the XXXXXXXXXX years from XXXXXXXXXX to XXXXXXXXXX . The apparent break in continuous family ownership would not be fatal in meeting the definition of QFP under 110.6(1)(a)(ii). Since each of the properties would meet the definition of qualified farm property under (a)(vii), the taxpayer would be entitled to a capital gains exemption on the disposition of these properties subject to the conditions and limitations set out in subsection 110.6(2).

26 August 2005 Internal T.I. 2005-0121871I7 F - Assurance-vie commissions reçues par une société

Unedited CRA Tags
9(1)
Summary Under
Tax Topics - Income Tax Act - Section 9 - Nature of Income
exemption for life insurance commissions on broker’s own life inapplicable where commission is assigned to his corporation carrying on the business

Principales Questions:
Un courtier est l'unique actionnaire d'une société oeuvrant dans le domaine des assurances. Le courtier acquiert une police d'assurance-vie dont il est le bénéficiaire et le titulaire. La commission reçue par la société, suite à l'acquisition de cette police d'assurance-vie par le courtier, doit-elle être ajoutée dans le calcul du revenu de la société?

Position Adoptée: Oui.

Raisons:
En assumant qu'il est légalement permis au courtier par contrat ou en vertu d'une loi d'attribuer ses commissions à sa société et que cette dernière exerce les activités dans le domaine des assurances, la commission reçue par la société doit être ajoutée au revenu de la société selon le paragraphe 9(1) de la Loi. En l'absence d'un trompe-l'œil, les rapports juridiques établis par le courtier et la société doivent être respectés en matière fiscale.