Income Tax Severed Letters - 2012-12-24

Conference

5 October 2012 Roundtable, 2012-0454191C6 F - Policy on Facts in a Ruling Request

CRA is not confined by requested rulings and submitted facts, where it has concerns

Principal Issues: (1) Does the Income Tax Rulings Directorate (“ITRD”) have a policy regarding the facts to be submitted in an advance income tax ruling request (“Ruling Request”) and, if it does, what is it? (2) Does the ITRD have a policy regarding questioning the facts submitted with a Ruling Request? (3) How does the IRTD resolve disagreements with the taxpayer (or its representative) on the scope and interpretation of documents and sections of the Act? (4) What is the ITRD’s policy on the turnaround time to complete a Ruling Request?

Position Adoptée: (1) and (2) Yes. (3) and (4) See answers in Reasons below.

Raisons: (1) We expect that the facts submitted with a Ruling Request, as required in Information Circular 70-6R5 under paragraph 16 e), h) and i), are complete and accurate in order to give the rulings and provide the certainty sought by the taxpayer regarding the tax consequences of its proposed transactions.

5 October 2012 Roundtable, 2012-0451291C6 F - Subsection 85(1) and UMIR Marketplace Rules

CRA Tags
85(1)
s. 85(1) not available where shares transferred to holding company through the exchange

Principal Issues: An individual would like to transfer shares of the capital stock of a corporation to another corporation that is not 100 % owned by the individual ("Holdco"). However, the Universal Market Integrity Rules (UMIR) require these trades to be executed on a marketplace. Whether subsection 85(1) would apply in such a situation.

Position Adoptée: No.

Raisons: The conditions required by subsection 85(1) are not met. In the situation described, two distinct transactions occur. Firstly, an order from the individual for the sale of shares of a corporation on a marketplace is negotiated at a price established by the trading system of the marketplace and executed. Secondly, an order from Holdco for the purchase of shares of the same corporation is negotiated at a price established by the trading system of the marketplace and executed. In such a case, among other things, the individual does not dispose of an eligible property "to" a taxable Canadian corporation.

5 October 2012 Roundtable, 2012-0453941C6 F - Principal residence owned by a trust-exemption

CRA Tags
54 "principal residence", 40(2)(b)
status based on s. 248(25) application and actual habitation
renunciation by specified beneficiaries immediately before sale would not affect para. (f) exclusion

Summary under General Concepts - Effective Date.

Principal Issues: A residence is owned by a personal trust. Three sets of assumptions are described with respect to the beneficiaries of the trust and with respect to the person inhabiting the house.

1) The first issue concerns the determination of the persons who are the specified beneficiaries for the purposes of the designation provided for in paragraph (c.1) of the definition of principal residence in section 54.

2) The second issue concerns the impact of the designation (that is made by a personal trust) of a residence as a principal residence on the possibility by a specified beneficiary to claim the principal residence exemption with respect to his own residence.

3) The third issue is whether a renunciation by specified beneficiaries to their capital or income rights under the trust (that would be done immediately before the sale of the residence by the personal trust) would allow them to claim their own principal residence exemption.

Position Adoptée: 1) A specified beneficiary is described in subparagraph (c.1)(ii) of the definition of principal residence in section 54. Without the review of the trust deed in a particular situation and without the complete information on the persons who may inhabit the residence owned by the trust rent-free, no definitive conclusion can be reached with respect to the specified beneficiaries. Subsection 248(25) provides an inclusive definition of "beneficially interested".

2) Where a trust designates its residence as a principal residence for a particular year (assuming that the conditions to do so are met in that particular year), that residence will be deemed to have been property designated by each specified beneficiary of the trust for the calendar year ending in the particular year and the specified beneficiaries of the trust will not be allowed to designate another residence in that calendar year.

3) The renunciation would have to be legally valid. However, if the renunciation takes effect immediately before the sale of the residence by the personal trust, that renunciation would not allow a specified beneficiary to designate another residence in the previous calendar years assuming that the personal trust has designated a residence for those previous years. In our view, to make a designation with respect to a particular year, the conditions of the designation have to be met in that particular year.

Raisons: In compliance with the provisions of the Act.

5 October 2012 Roundtable, 2012-0453161C6 F - RRIF, prohibited investment, minimum amount

CRA Tags
207.05(4), 146.3(1)
payout of transitional prohibited investment benefit may be taken into account as satisfying the minimum amount

Principal Issues: Whether the "transitional prohibited investment benefit" amount that is withdrawn from a registered retirement income fund (RRIF) can be taken into consideration for the carrier obligation to pay the minimum amount?

Position Adoptée: Yes

Raisons: Legislative analysis. The amount is paid by the carrier to the annuitant.

5 October 2012 APFF Roundtable, 2012-0454171C6 F - Taxable Pref. Shares and Short-Term Pref. Shares

CRA Tags
248(1) "taxable preferred share", 248 "short term preferred share"
para. (f) tests applied at time of payment and receipt of dividend

Principal Issues: Whether a share of the capital stock of a corporation would qualify as a taxable preferred share or short-term preferred share in the particular situation?

Position Adoptée: General comments provided.

Raisons: Question of fact

5 October 2012 APFF Roundtable, 2012-0453891C6 F - Price Adjustment Clause

CRA Tags
75(2)
operation of freeze price adjustment clause depends on share actually being adjusted and can apply for s. 75(2) purposes
price adjustment clause that is implemented potentially can prevent s. 75(2) application to estate freeze

Summary under General Concepts - Effective Date.

Principal Issues: An estate freeze has been implemented. A taxpayer has exchanged his common shares of the capital stock of a corporation for preferred shares of the capital stock of that same corporation. The price agreed upon and the value of the preferred shares received by the taxpayer were subject to a Price Adjustment Clause. The new common shares of the capital stock of the corporation were issued to a discretionary trust. In determining if there is a transfer by the taxpayer to the trust in the context of the application of the provisions of subsection 75(2) to a taxpayer, whether it is still possible to adjust the price and the value of the preferred shares received by the taxpayer pursuant to the Price Adjustment Clause.

Position Adoptée: The CRA will review each case to determine the validity of the Price Adjustment Clause. The criteria used to determine the validity of the Price Adjustment Clause in the context of the application of subsection 75(2) are the usual criteria used for other purposes of the Act. Provided that (i) the Price Adjustment clause is valid, (ii) it is still possible to adjust the price of the common shares agreed upon, the value of the preferred shares received and the consideration given for the preferred shares redeemed or sold and (iii) the terms of the clause have effectively been implemented, the CRA will take that Price Adjustment clause into account when considering whether the conditions to apply subsection 75(2) are met. It is not necessary to specify that the clause will apply for the purposes of subsection 75(2).

Raisons: Previous position. In file 2010-0366301I7, the CRA did not accept to apply the Price Adjustment Clause not because of a change in our position but because the taxpayers did not implement the terms of the clause.