Income Tax Severed Letters - 1998-06-12

Principal Issues:

1. Do subsections 74.1(1) and 74.2(1) apply where a spouse is designated as an irrevocable beneficiary of an annuity contract?

2. Does subsection 75(2) apply in a particular situation?

Position:

1. Subsection 74.2(1) would not apply assuming that there is no part of the life insurance policy acquired in respect of which a policyholder is deemed by paragraph 138.1(1)(e) to have an interest in a related segregated fund trust. As for the application of subsection 74.1(1), no position taken.

2. Where no trust exists, no. Where a trust exists, no position taken.

Reasons:

Principal Issues:
Whether expense for renting an office/suite in other cities in lieu of travelling expenses and hotel costs for sale representatives would be deductible. Expenses would be accommodation/office costs, including parking, meals, etc.

Position:
Rent and parking expenses would be deductible to the extent they are reasonable and relate exclusively to the business. Furniture purchased to furnish the office/suite is a capital expenditure on which capital cost allowance may be claimed. Meals would be deductible as provided for by section 67.1, provided they are for business purposes.

Reasons:
On the basis of Ozvegy v. MNR, 78 DTC 1772, there would be no difference between paying an hotel accommodation and rent for an apartment used for business purposes. With respect to parking and meals, the expense is deductible if it is incurred to earn income - paragraph 18(1)(a) of the Act. Additional restrictions apply to meals under section 67.1. Finally, the cost of the furniture is a capital expenditure and cannot be deducted by virtue of paragraph 18(1)(b) of the Act. However, capital cost allowance may be claimed under paragraph 20(1)(a) of the Act.

Principal Issues:

Up-front payment under a timeshare agreement and other rental expenses.

Position:

1) The cost of the timeshare may be a deductible expense in the year incurred or when the services/goods/asset to which it relates are consumed;

2) interest on monies borrowed to purchase the timeshare may be a deductible expense.

Reasons:

Principal Issues:

Whether GAAR applies to a transaction under which a taxpayer acquires shares of a non-resident corporation that invests in a Canadian resident mutual fund and the taxpayer gives the shares to his grand-daughter.

Position:

Sections 94.1 and 74.1 could require the taxpayer to report deemed income on the shares of the non-resident corporation. In such case, GAAR would have no application.

Reasons:

Principal Issues:

Reasonableness of bonuses paid to shareholders / employees

Position:

As stated in question 42 of the 1981 Round Table (as clarified in Insights into the 1991 Revenue Canada Round Table Discussion), the Department will not challenge the reasonableness of salaries or bonuses paid to a principal shareholder who is active in the corporation’s business and the corporation has either established 1) a practice of distributing profits to such employee/shareholder in this manner, or 2) a policy of declaring bonuses to shareholders to remunerate them for the profits the corporation has earned that in fact are attributable to special know-how or skills of the shareholder.

The position does not extend to remuneration paid to spouses or other family members of the principal shareholder or to principal shareholders that are non-residents.

Reasons:

Principal Issues: Personal Use of Employer Provided Vehicles

Position: Personal use taxable, benefit is calculated per 6(1)(a) and Regulation 7306 unless vehicle is an ‘automobile,’ where benefit is calculated under 6(1)(e) and 6(1)(k)

Reasons: Type of benefit calculation required dependent on vehicle and it’s use.

Principal Issues: Whether equivalent to spouse exemption can be shared.

Position: Only one person can claim the exemption on his or her tax return.

Reasons: clear wording of 118(4)(b) ITA.

Principal Issues:

(1) The tax consequences of changes to the amount of flex credits awarded to an employee where the flex credits are awarded on the basis of an employee’s salary, which changes during the year.
(2) Interpretation of paragraph 8 of IT-529. In particular, the value of allocated credits constructively received by an employee and whether all employees of the plan or only the particular employee is affected.
(3) The tax consequences of a change in a flex plan from credit carry-forward to medical expense carry-forward and vice versa.
(4) The interpretation of paragraph 7 of IT-529. In particular, whether the requirement (that nothing of value be forfeited by the employee to obtain flex credits if flex credits are considered to have no value) will apply where an employee benefit plan is cancelled in favour of a flexible benefit plan.

Position:

(1) In some cases the increased flex credits will have no effect on the plan. In other cases, the particular employee will be considered to have constructively received employment income equal to the value of the allocated credits, or, alternatively, the entire plan may be considered an employee benefit plan.
(2) The value of the allocated credits is just that, the value of the credits, not the value of the benefits paid to the employee. Constructive receipt applies to all employees.
(3) A one-time change may be acceptable. A plan that allows changes from year to year will likely not qualify as a PHSP.
(4) No comments given.

Reasons:

Principal Issues:

whether prejudgment & post-judgment interest on wrongful dismissal awards is taxable

Position:

prejudgment interest may be excluded from income but post-judgment interest is taxable under 12(1)(c) - no withholding required on either

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.

XXXXXXXXXX 973084
B. Kerr
Attention: XXXXXXXXXX

April 27, 1998

Dear Sirs:

Re: Cost of Apple Trees

This is in response to your letter of November 11, 1997, concerning the deductibility of the cost of planting apple trees.

Principal Issues:

Indian Act Tax Exemption for employment income: where the Cree School Board contracts with a college to provide support services for Cree students, is the college’s employee exempt on this employment income?

Position: no

Reasons:

Principal Issues:

Principal Issues:

Est-ce que le rachat des actions privilégiées fait partie de la même serie de transaction que la vente des actions ordinaires dans 2 situations?

Position:

Oui pour la première situation. Pas en mesure de nous prononcer sur la deuxième situation.

Reasons: