Income Tax Severed Letters - 1998-12-11

Principal Issues:

Taxation of interest income earned by status Indians.

Position:

General comments provided, interest not exempt unless it can be shown that it was generated on reserve.

Reasons:

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Judy Gaw
Incentive Award Program
Treasury Board of Canada 5-982989
Ottawa, Ontario Karen Power, CA
K1A 0R5

December 3, 1998

Dear Ms. Gaw:

Re: Taxation of Employee Awards

Principales Questions:

Est-ce qu’une société qui exploite une entreprise agricole et qui traite avec une société liée et associée peut adopter la méthode de comptabilité de caisse même si l’autre société utilise la méthode de comptabilité d’exercice?

Position Adoptée:

Principal Issues: draft legislation re: housing loss & relocation

Position: bridge financing now a benefit; carrying cost of old residence can still be paid be employer

Reasons: new legislation

Principal Issues: Whether a distribution by a union to its members is taxable. The union is involved in an amalgamation. Should the net worth per member of members of one union be greater than that of members of the other union, the particular union will distribute the excess net worth to its members prior to the amalgamation.

Position: We would first have to consider whether any part of the distribution is simply a reimbursement of current-year fees. Union members receiving amounts out of such a distribution would have taxable capital gains as a result of the distribution.

Reasons: A reimbursement of current-year fees would simply reduce an employee’s deductible amount under subparagraph 8(1)(i)(iv). Otherwise, we consider the distribution of funds in the situation to represent proceeds of disposition of the recipients’ rights in the particular union. We are also of the view that each such right has an adjusted cost base of zero.

Principal Issues: effective date of new provisions re: benefits from housing loans

Position: pre: Feb. 24/98, are not caught; post Feb. 23/98, in 2001 if move before Oct. 98, otherwise caught immediately.

Reasons: Coming into force provisions.

Principal Issues:

Whether the death benefit of a status Indian is exempt from tax.

Position:

Yes if the pension benefit was exempt and if the beneficiary is also a status Indian.

Reasons:

Position Adoptée:

Principal Issues:
Whether conditions in subsection 14(7) of the Act are satisfied such that subsection 14(6) of the Act applies to a disposition of eligible capital property.
Whether subsection 14(3) of the Act applies to the replacement property when it is acquired from a non-arm's length person.

Position:
Question of fact whether conditions in subsection 14(7) of the Act are satisfied in any given situation. Subsection 14(3) of the Act applies.

Reasons:
Must satisfy the "similar use" test in paragraph 14(7)(a.1) of the Act and the "same or similar business" test in paragraph 14(7)(b) of the Act.
Subsection 14(3) of the Act applies to the acquisition of a replacement property by a corporation from a controlling shareholder.

Principal Issues:
1. Can a trust qualify as a pre-1972 spousal trust even if a non-interest bearing loan has been made to a beneficiary other than the spouse?
2. Can a trust qualify as a pre-1972 spousal trust if the trustee has discretionary power in allocating income among the spouse and other beneficiaries, provided that in fact no income was allocated to a beneficiary other than the spouse?

Position:
1. No.
2. No.

Reasons:
1, The non-interest bearing loan to one of the other beneficiaries would be seen as capital of the trust being “used”’ by a person other than the spouse.
2. The trustee has full discretionary power in allocating income among the spouse and settlor’s children, and thus the spouse is not “entitled” to the income of the trust.

Principal Issues:
Whether a spousal trust can be an annuitant.

Position:
No.

Reasons:
Definition of "annuitant" does not include a spousal trust.

Principal Issues:

Whether death benefits of a status indian are exempt.

Position:

Yes if pension benefit was exempt and if beneficiary is also a status Indian.

Reasons:

Principal Issues:
1. Whether property distributed from a trust to a parent or other guardian of a minor beneficiary of the trust will be considered to be held by the parent or guardian in a new trust?
2. If so, will 104(5.8) apply, such that the new trust will not be able to avoid the impending deemed disposition pursuant to subsection 104(4)?

Position:
1. Question of fact and law.
2. It is our view that a trust (other than an excluded trust as per ¶(f) or (g) of the definition of “trust”) in which there is only one beneficiary (e.g. the minor) and that beneficiary’s interest in the trust is vested indefeasibly, the conditions of paragraph (g) of the definition of “trust” in subsection 108(1) will be met, in which case 104(4) will not apply to the (new) trust even though 104(5.8) could otherwise apply.

Reasons:
1. A new trust could be created intentionally. Nevertheless, in other situations, whether or not the holding of property by a parent or guardian on behalf of a minor constitutes a trust is a legal question the answer to which may depend on provincial legislation as well as the facts of a particular case.
2. Background: In order to avoid the (in many cases) impending 21-year deemed disposition rule for trusts pursuant to 104(4), a trust may decide to distribute its assets to the beneficiaries. However, where the beneficiary is a minor, the distribution may be made to a parent or guardian of the minor due to the fact that minors do not have the capacity to enter into legally binding contracts.
If the parent or guardian is considered to hold the distributed trust property in (a new) trust for the minor, 104(5.8) would generally apply to the new trust, in which case the impending deemed disposition rule will not be avoided. However, 104(4) will not apply if the new trust is excluded from the definition of “trust” in 108(1); i.e., by virtue of paragraph (g), which excludes certain trusts where all interests in the trust have vested indefeasibly and no interest in which may become effective in the future. Where there is only one beneficiary (e.g. the minor) and that beneficiary’s interest in the trust is vested indefeasibly, there is no other interest in the trust which must be determined prior to the minor’s interest becoming effective, and thus the conditions of paragraph (g) will be met.

Principal Issues:
Whether and how could LSVCC shares increase the foreign property limit of a trust governed by an RRSP.

Position:
Based on the current wording of the Act and Regulations, it is our opinion that, generally, an otherwise eligible corporation that is described in both sections 6700 and 6701 of the Regulations (for example a RLSVCC) qualifies as an eligible corporation for the purpose of the small business amount definition in subsection 206(1), even if it is a trader or dealer or a money-lender.

Reasons:
Section 5100 of the Regulations defines an “eligible corporation”. This definition includes an LSVCC provided it is prescribed under Regulation 6700, but in paragraph (c) excludes a corporation that is a taxpayer described in subsection 39(5). The Department of Finance, in its July 1997 Technical Notes for amendments made to subsection 39(5), has expressed its intention to make a parallel change to paragraph (c) to exclude mutual fund corporations from the application of that paragraph. Based on the Department of Finance’s expressed intention as to how this legislation is designed to function, we have chosen to interpret the existing wording of paragraph (c) as referring to subsection 39(5) as a whole, including its preamble, thereby excluding mutual fund corporations from the paragraph (c) exception.

Principal Issues: Tax consequences on death of holding an interest in joint tenancy or an interest as tenants in common.

Position: Deemed disposition under subsection 70(5).

Reasons: The provision of subsection 70(5) will deemed the interest in the property to be disposed of at fair market value under both tenancy arrangements.

Principal Issues: Taxation of employee awards.

Position: General Comments Provided

Reasons: General comments provided.

Principales Questions:
Une allocation de retraite peut-elle être versée en plusieurs versements?

Position Adoptée:
Oui, si c'est une option offerte par l'employeur à l'employé avant son départ dans le cadre d'une entente, d’un programme d’incitation à la retraite ou selon les modalités d'un contrat d'emploi ou d’une convention collective.

Principal Issues:

Taxation of IRAs and similar properties received by a Canadian beneficiary from the estate of a non resident.

Position:

We have asked the writer to obtain additional information. Amounts appear to be fully taxable on receipt by the Canadian beneficiary. However additional information on taxation of such receipts in the U.S.A. may be of importance in the determination of the issue.

Reasons:

Principal Issues: dissolution of NPO

Position: no comment - should be a ruling request

Reasons: