Income Tax Severed Letters - 2010-11-26

Principal Issues: Based on a hypothetical situation, which two companies are required to file the agreement under subsection 78(1)(b) and what is the correct withholding tax rate on the deemed interest paid to the non-resident company? In addition, is withholding tax payable when the interest is actually paid to another non-resident company that is fiscally transparent in the U.S.?

Position: The agreement is required to be filed with the same person that the expense was incurred. As a result, in this situation the withholding tax rate is 4 per cent for the 2009 year and the subsequent actual payment to the fiscally transparent entity is not subject to withholding tax.

Reasons: Paragraph 78(1)(b) requires the agreement to be made between the taxpayer and that person referred to in subsection 78(1), or the same person that the non-arm's length transaction occurred. Since the debtor is a U.S. resident corporation, paragraph 1 of Article XI of the Canada-U.S. Tax Convention reduces the withholding tax rate on the interest. The actual payment to the U.S. fiscally transparent entity is considered to be a repayment of a loan and is not subject to withholding tax.

Principal Issues: The time limit within which a taxpayer can request a reassessment of a prior year's return through a paragraph 128.1(8)(c) election

Position: The reassessment needs to be made before the day that is three years after the end of the normal subsection 152(3.1) reassessment period.

Reasons: The combined wording of paragraph 152(4)(b) and subsection 152(6).

Principal Issues: Whether a Canadian resident corporation ("Canco") would receive the same tax relief in Canada for a charitable donation made to a U.S. charity as it would have received had it donated to a Canadian registered charity.

Position: General comments given.

Reasons: If the U.S. charity is exempt under section 501(c)(3) of the U.S. Internal Revenue Code, then in accordance with paragraph 7 of Article XXI of the current Canada-U.S. Tax Convention, Canco may claim a deduction for the eligible amount of the gift to the U.S. charity, not to exceed 75 per cent of Canco's income from U.S. sources.

Principal Issues: Will the shareholder advances to the wholly owned company qualify as business investment losses.

Position: General comments provided.

Reasons: Question of fact..

Principal Issues: Whether a corporation would have de facto control over another corporation in a particular situation.

Position: General comments provided only.

Reasons: It is always a question of fact whether or not a person or a group of persons can be said to have any direct or indirect influence that, if exercised, would result in control in fact of a corporation.

Principal Issues: 1. is the tax paid by an individual deductible & if so, where on the T1

Position: 1. if not reimbursed - the tax is deductible- form T1229 part III to line 224 on the T1 return.

Reasons: 1. 18(1)(a) & 18(1)(m)

Principal Issues: Can a taxpayer claim a political contribution tax credit for a political contribution made to a provincial political party that is in a province other than the taxpayer's province of residence on December 31?

Position: In this particular case, no.

Reasons: In this case, the eligibility criteria pursuant to the tax acts of the provinces in question and the eligibility criteria pursuant to subsection 127(3) of the Income Tax Act (Canada) are not met.