Income Tax Technical News, No. 41, 23 December 2009 Under "Definition of 'Tax Shelter' - Subsection 237.1(1)

"The Maege Decisions ... do not represent a departure from the requirement that statements or representations be made in connection with the property when applying the tax shelter rule; rather they adopt a broad view of this requirement, especially when sophisticated investors are involved."

"Eligible Dividend Designation - Subsection 89(14)": A taxable dividend, designated as an eligible dividend under s. 89(14) that is paid to a Canadian resident trust will maintain its character when distributed by that trust to its Canadian resident beneficiaries under s. 104(19).

Under the "more than five full-time employees test", CRA accepts that the test is met when a corporation has five full-time employees plus one or more part-time employees.

"Meaning of Business": Discussion of determination as to whether gambling is a business.

Where the full amount of the dividend paid by a CCPC is designated as an eligible dividend but a portion of the dividend is received by a non-resident, that portion will not meet all of the essential conditions for being an eligible dividend for purposes of the GRIP definition and, therefore, will not reduce the GRIP.

"Eligible Dividend Designation - Subsection 89(14)".

If a particular premium on a convertible debt obligation represented participating debt interest, all interest on the obligation would be participating debt interest under an initial analysis of the CRA.

The amount considered to be repaid on the conversion of a convertible debenture generally will be the stated capital of the shares issued.

If a particular premium on a convertible debt obligation represented participating debt interest, all interest on the obligation would be participating debt interest under an initial analysis of the CRA.

Assume that USco carries on an active business in the United States (other than an investment business). USco owns all of the shares of Canco, a corporation resident in Canada, which carries on an active business in Canada that is parallel to USco's active business. The active business carried on by USco in the United States is substantial in relation to the active business carried on by Canco.

1) Canco distributes a portion of its after-tax income from its active business to USco in the form of dividends on its shares

Since USco and Canco carry on parallel business activities and the dividends are paid out of the after-tax earnings from Canco's business, we would consider the dividends received by USco to be derived in connection with USco's active business.

2) USco sells the shares of Canco and realizes a taxable capital gain

Since the value of the Canco shares (and thus the taxable capital gain) is derived from an active business in Canada that is parallel to the active business carried on by USco in the United States, we would consider the taxable capital gain on the disposition of the shares of Canco to be derived in connection with USco's active business.

"The sole fact that the fair market value of the shares issued on conversion exceeds the issue price of the convertible debt obligation is not, per se, determinative, where the issuer must repay the obligation for an amount equal to the issue price."