Income Tax Severed Letters - 2016-11-30

Principal Issues: 1. What is the status of the CRA's administrative position with respect to the filing of T4A slips for professional services rendered to a corporation? 2. Would it be possible for the CRA to administratively exempt payers from filing T4A slips for services rendered when the payee remits to them an invoice with a valid tax number?

Position: 1. Same as the previous position, keeping in mind that some exceptions are provided. 2. No.

Reasons: No changes are deemed necessary.

PRINCIPALES QUESTIONS

À l'aide d'un exemple, on demande principalement à l'ARC:

1-Quelle est l’interprétation de l’ARC lorsqu'un contribuable vend un immeuble alors qu’un changement s’est produit au cours d’une année précédente au niveau des logements occupés par le contribuable et son enfant sans qu’il n’en résulte un changement de l’utilisation totale du bien à titre locatif et personnel?

2-Est-ce que le contribuable dans cette situation devra produire un formulaire T2091 dans l’année de la vente de l'immeuble pour chacun des logements admissibles au cours de la période de détention totale de l'immeuble?

3-Quel sera le gain en capital admissible à l’exemption pour résidence principale sur chacun des logements?

Using an example, CRA is mainly asked:

1-What is the CRA’s interpretation when a taxpayer sells a building when a change has occurred during a previous year regarding the housing occupation by the taxpayer and his child without changing the total renting and personal use of the property?

2-Will the taxpayer in this situation have to produce a form T2091 in the year of the sale of the building for each eligible housing unit during the period of total detention of the property?

3-What will be the capital gain eligible to the principal residence exemption on each housing unit?

POSITION ADOPTÉE

1-Il n’y a pas de changement d’usage de l’immeuble aux fins de l’alinéa 45(1)c) lorsque le rapport entre l’usage que le contribuable fait habituellement de l’immeuble en vue de gagner un revenu et l’usage habituel de l’immeuble à une autre fin n’a pas changé dans cette année.

2-Lorsque plusieurs logements d’un immeuble peuvent faire l’objet d’une désignation de résidence principale pour différentes années, le contribuable doit produire dans l’année de la vente de l’immeuble un formulaire T2091 pour chacun des logements de l’immeuble faisant l’objet de la désignation.

3- Commentaires généraux.

1-There is no change in use of the building for the purposes of the paragraph 45(1)(c) when the proportion between the use that the taxpayer usually does of the building to gain income and the use for some other purpose did not change in this year.

2-Where several housing units of a building can be designated as principal residence for various years, the taxpayer has to produce in the year of the sale of the building a form T2091 for each housing unit being designated.

3-General comments.

Principal Issues: Whether the exception in paragraph (k) of the definition of salary deferral arrangement would be applicable in the situation described?

Position: No.

Reasons: The plan provides that the bonus is paid in the fourth calendar year following the taxation year in which the services are rendered by the employee.

Principales Questions: Does clause (c)(ii)(A) of the definition of "total charitable gifts" in subsection 118.1(1) apply to a graduated rate estate ("GRE")?

Position Adoptée: Yes

Raisons: A GRE or a former GRE is a trust

Principales Questions: Est-ce que la position énoncée au paragraphe 22 du bulletin d’interprétation IT-268R4 s’applique à une personne qui est un actionnaire sans être un employé? / Does the CRA position in paragraph 22 of Interpretation Bulletin IT-268R4 apply to a person who is a shareholder but not an employee?

Position Adoptée: Non / No

Raisons: L’ARC n’est pas prête à étendre la position de ce bulletin d’interprétation à d’autres situations. Lorsque l’actionnaire n’est pas employé de la société, l’ARC est d’avis que la résidence sert à l’actionnaire et non à l’exploitation de l’entreprise. / The CRA is not ready to expand the position taken in this interpretation bulletin to other situations. Where the shareholder is not an employee of the corporation, the CRA is of the view that the residence is used by the shareholder and not for the business operation.

Principales Questions: L’actif comptabilisé comme une immobilisation issue d’un contrat de location peut-il être considéré comme un élément d’actif utilisé dans l’exploitation active d’une entreprise aux fins des définitions d’« action admissible de petite entreprise » («AAPE ») au paragraphe 110.6(1) et de « société exploitant une petite entreprise » («SEPE ») au paragraphe 248(1)? / Is the asset recorded as a capital property as a result of a lease of an asset considered used principally in an active business carried on in Canada for the purpose of the definitions of « qualified small business corporation share » (« QSBCS ») in subsection 110.6(1) and of « small business corporation » (« SBC ») in subsection 248(1)?

Position Adoptée: Non / No

Raisons: Tout montant comptabilisé selon les NCECF ou les IFRS comme un actif issu d’un contrat de location ne représente que des écritures comptables aux fins des états financiers. Ces écritures comptables ne sont pas un actif aux fins des définitions d’AAPE au paragraphe 110.6(1) et de SEPE au paragraphe 248(1). Toutefois, l’ARC est d’avis que les droits dans un contrat de location constituent un actif aux fins des définitions d’AAPE et de SEPE. /Any amount recorded under the Accounting standards for private enterprises (« ASPE ») or the International Financial Reporting Standards (« IFRS ») as a lease represents only accounting entries for financial statements purposes. Such accounting entries are not an asset for the purpose of the definition of SBC in subsection 110.6(1) and QSBCS in subsection 248(1). However, the CRA is of the opinion that the rights under the lease are an asset for the purpose of the definitions of SBC and QSBCS.

PRINCIPAL ISSUES: In a situation, Opco may issue three classes of shares that are voting, participating equally in the distribution of the corporation's property in the process of dissolution and having a right to discretionary dividends. Class A common shares would be issued by Opco to Holdco A eight years after the other classes of common shares were issued. The safe income on hand at the time of the issuance of the Class A common shares would be equal to $70,000. The additional safe income on hand of Opco for the period that ends before the discretionary dividend would be paid on Class A common shares would be $20,000. A discretionary dividend of $35,000 would be paid on Class A common shares. What would be the safe income on hand that would contribute to the capital gain on Class A common shares computed pursuant to the assumptions of paragraph 55(2.1)(c)? If Opco is wound-up and dissolved immediately after the discretionary dividends, how would be allocated the safe income on hand of Opco?

POSITION: In the particular situation, if the hypothetical capital gain on Class A common shares held by Holdco A, computed pursuant to the assumptions of paragraph 55(2.1)(c) is more than $20,000, safe income on hand of $20,000 would be considered to contribute to the hypothetical capital gain on Class A common shares, that is the safe income accumulated by Opco since Holdco A holds the Class A common shares.

In the particular situation described below, if a winding-up and dissolution of Opco follows the discretionary dividend on Class A common shares and Opco has no additional safe income on hand, the safe income on hand that would contribute to the hypothetical capital gain on the Class B common shares would be equal to $35,000 and the safe income on hand that would contribute to the hypothetical capital gain on the Class C common shares would be equal to $35,000. There would be no safe income on hand that would contribute to the hypothetical capital gain on the Class A common shares.

REASONS: Wording of that Act and previous positions with respect to the holding period.

PRINCIPAL ISSUES: An individual would receive a preferred share of the capital stock of Opco having a value of $1 at the time of its issuance in payment of a stock dividend of $1 paid on the common shares in that capital stock he held. The preferred share would be transferred to a holding corporation. A discretionary dividend equal to the safe income of Opco would be paid on the preferred share after the transfer of the share to the holding corporation. Whether subsection 55(2) would apply with respect to the discretionary dividend paid on the preferred share.

POSITION: At the time of the stock dividend, there would be no transfer of safe income from the common shares to the preferred share because the stock dividend would be $1. There would be no transfer of safe income at the time of the transfer of the preferred share to the holding corporation because no safe income would have accumulated on the preferred share before the transfer. According to the facts of the particular situation, there would be no safe income accumulated in Opco since the holding corporation holds the preferred share. Therefore, there would be no safe income on hand that would contribute to a capital gain on the preferred share computed using the assumptions of paragraph 55(2.1)(c). Subsection 55(2) would apply if all the other conditions are met. The answer would be the same if, instead of the payment of the discretionary dividend, it was an increase of the PUC of the preferred share.

REASONS: Wording of the Act. Previous positions with respect to the accumulation of safe income beginning when the holding period of the share starts.

Principal Issues: 1. Does the CRA consider that a deferred gain resulting from the application of subsection 261(10) can be realized in the year ending immediately before an acquisition of control if an election pursuant to paragraph 111(4)(e) is made with respect to a pre-transition debt? 2. If so, do subsections 40(10)/(11) apply with respect to the pre-transition debt such that the same gain is not realized again when the debt is repaid?

Position: 1. No. 2. No.

Reasons: 1. Subsection 111(12), and therefore subsection 111(4), has no application with respect to the portion of the foreign exchange gain or loss on a pre-transition debt that is governed by subsection 261(10). 2. Subsections 40(10)/(11) don't apply to that portion given that subsection 111(12) does not apply.

Principal Issues: Does income that is attributed or allocated to another taxpayer, under certain specified provisions of the Act, need to be reimbursed to the taxpayer?

Position: No.

Reasons: These provisions neither require such a reimbursement nor do they provide rules that specify the treatment of such a reimbursement.

Principales Questions: 1) Will section 7 and subsection 7(1.1) apply to the issuance of shares when those shares are issued as a payment of a bonus granted in accordance with an employment contract that provides for such a bonus when certain conditions are met?
2) If the employment contract provides the employee with the choice to receive the bonus in cash or in shares and the employee chooses to receive the bonus in shares, will our answer be the same?
3) A CCPC has issued shares of a particular class of its capital stock to its employee as payment of a bonus. What would be the amount added to the PUC of the particular class of shares?

Position Adoptée: 1) Question of facts and law.
2) Yes.
3) Question of corporate law.

Raisons: 1) If an arrangement is fully discretionary, it will not be an agreement to issue shares for the purpose of section 7. To fall within the scope of section 7, an arrangement to issue or sell shares must be a legally binding agreement meaning that legal rights and enforceable obligations are created. This was confirmed in Transalta Corp. v. the Queen (2012 DTC 1106), where the Tax Court concluded that a discretionary arrangement was not an agreement for purposes of section 7.
2) The fact that the employee has the choice to receive the payment of the bonus in cash or in shares does not preclude the application of section 7 if the arrangement is a legally binding agreement to issue shares.
3) Paragraph 2 of IT 463R2: "Since subparagraph (b)(iii) of the definition of "paid-up capital" provides that the amount of the paid-up capital of a class of shares is initially determined without reference to the provisions of the Income Tax Act , the calculation is based on the relevant corporate law rather than tax law."

Principales Questions: Does the designated benefit eligible to be transferred to the surviving spouse's RRIF or RRSP under paragraph 60(l) have to be reduced by the RRIF minimum amount when the transfer occurs in a year that is different than the year of death?

Position Adoptée: Yes

Raisons: This is the result of the element C in the formula of the eligible amount in subsection 146.3(6.11).

Principal Issues: Que doivent faire les particuliers qui ont changé, il y a plusieurs années, l’usage d’un logement d’un duplex visé par un possible choix du paragraphe 45(3), en se basant sur l’ancienne position connue de l’ARC, et qui sont maintenant confrontés à la nouvelle position les empêchant de transmettre ledit choix du paragraphe 45(3)?

What do taxpayers who changed, several years ago, the use of an housing unit of a duplex, aimed by a possible choice of the subparagraph 45(3) according to the former CRA’s known position, have to do now that they are confronted with the new position preventing them from doing the aforementioned choice of the subparagraph 45(3)?

Position: L’ARC n’accepte plus le choix prévu au paragraphe 45(3) pour un changement d’usage visé par la position prise le 21 février 2012 lorsque ce changement a été fait après cette date.

Principal Issues: What is the meaning of "named" in the definition of QDT in subsection 122(3)?

Position: Ordinary meaning of the word named which is that the beneficiary of the testamentary trust is identified by his/her name in the instrument under which the trust is created.

Reasons: Textual, contextual, and purpose interpretation of paragraph 122(3)(b).

Principales Questions: 1) For the application of clause (c)(ii)(B) of the definition "total charitable gifts" in subsection 118.1(1), does an estate need to qualify as a GRE in the taxation year in which the gift is made or in the taxation year in which the eligible amount of the gift is deducted in computing the individual’s tax payable?
2) Based on proposed legislation released by the Department of Finance on January 15, 2016, can a former GRE that makes a gift more than 36 months after the death of an individual, but within 60 months after the individual’s death, claim the gift in the first three taxation years of the estate?

Position Adoptée: 1) In the taxation year in which the gift is made.
2) No.

Raisons: 1) Based on the wording of clause (c)(ii)(B) of the definition of "total charitable gifts" in subsection 118.1(1), the particular year is the year in which the gift is made.
2) A gift made by an estate that is not a GRE is only available to the estate in the taxation year in which the gift is made or in any of the next five taxation years from the year in which the gift is made (clause 118.1(1)(ii)(A)).