Income Tax Severed Letters - 1998-11-13

Principal Issues: The income tax implications of various types of employer-paid educational/professional development leaves which are available to teachers. In particular, the effect, if any, that our new guidelines, which were announced in Technical News #13, have on these types of leaves.

Position: The salary received by teachers while on leave is taxable as employment income. Since educational costs are fully paid by the teachers, our new guidelines have no effect.

Reasons: An employee cannot convert taxable salary into non-taxable employer-paid educational costs. The full amount of salary remains taxable as employment income.

Principal Issues: Can amounts held in an RESP be transferred to an RRSP for the purpose of repaying amounts withdrawn under the home buyers plan?

Position: Yes, but the beneficial tax consequences of doing so are limited if the amount is an accumulated income payment as defined in the RESP provisions as Part X.5 tax will apply.

Reasons: The law was not drafted to provide this option.

Principal Issues: Can amounts held in an RESP be transferred to an RRSP for the purpose of repaying amounts withdrawn under the home buyers plan?

Position: Yes, but the beneficial tax consequences of doing so are limited if the amount is an accumulated income payment as defined in the RESP provisions as Part X.5 tax will apply.

Reasons: The law was not drafted to provide this option.

Principal Issues: To whom should a T4A slip be made out to when a commission agent assigns his commission to a corporation? If the agent has to report the income can he or she deduct the amounts that are paid to the corporation?

Position: The T4A slip should be made out to the commission agent. The commission agent is not entitled to an expense in respect of the amounts paid to the corporation.

Reasons: The person who has earned the income should be the recipient of the T4A. Subsection 209(1) of the Income Tax Regulations refers to “forward to each taxpayer to whom the return relates”. The amounts paid to the corporations are not expenses set out to earn income.

Principal Issues: Is the Part XI tax applied in respect of the foreign property held by each individual RRSP or to the aggregate property held by all of an individual’s RRSPs?

Position: Each individual RRSP is subjected to Part XI on its own property.

Reasons: The law clearly provides that each trust is subject to the foreign property limits.

Principal Issues: Whether income from a business in which the taxpayer owns, rents and manages i) approximately 10 fenced yard compounds outside for cold storage; ii) approximately 20 cold storage rooms within a building, and 3) approximately 4 heated garage or warehouse areas, would be considered “income of the corporation from an active business carried on in Canada” within the meaning of subsection 125(7).

Position: Question of fact; however, likely not.

Reasons: A business the principal purpose of which is to derive income from property (including income from rentals of real property), would be considered a “specified investment business” as defined in subsection 125(7) unless, inter alia, the corporation employs in the business throughout the year more than five full-time employees. Income from a source that is property, which includes income from a specified investment (subsection 129(4)), is not to be included in the computation of “income of the corporation for the year from an active business” by virtue of its definition in 125(7).

Principal Issues: Taxability of training benefits received by status Indians which are funded by HRDC.

Position: The taxation depends on the stream of funding as well as the connecting factors.

Reasons:

Principal Issues: An individual sustained an injury and is entitled to non-taxable benefits under a long-term disability (LTD) policy. If the periodic payments are made by the insurer in a manner that is similar to a structured settlement (paragraph 5 of IT-365R2), would the payments still be regarded as being non-taxable? (The query has been raised as a result of an excerpt in a publication)

Position: No. On the basis that the payments will not be made in accordance with written terms in the LTD policy, the payments will give rise to income in the hands of the individual to the extent provided for in respect of annuity contracts under the Income Tax Act.

Reasons: Paragraph 5 of IT-365R2 only applies in respect of payments made in respect of personal injury or death.

Principales Questions:
1. Est-ce que le nouveau paragraphe 152(1.4)de la Loi permet au ministre d'effectuer une détermination du revenu ou de la perte d'une société de personnes pour n'importe quelle année pour laquelle une déclaration de renseignements n'a pas été produite pour cette dernière ?

2. Est-ce que la production en retard des déclarations de renseignements relatives à une société de personnes pourrait donner lieu à la renonciation des intérêts et pénalités par le ministre au même titre que lors d'une divulgation volontaire ?

Position Adoptée:
1. Oui, le paragraphe 152(1.4) de la Loi permet une telle détermination, suite à une demande du ministre, en vertu du paragraphe 233(1) de la Loi, de produire la déclaration de renseignements concernant la société de personnes pour une années donnée.

Principales Questions:
1. Est-ce que le nouveau paragraphe 152(1.4)de la Loi permet au ministre d'effectuer une détermination du revenu ou de la perte d'une société de personnes pour n'importe quelle année pour laquelle une déclaration de renseignements n'a pas été produite pour cette dernière ?

2. Est-ce que la production en retard des déclarations de renseignements relatives à une société de personnes pourrait donner lieu à la renonciation des intérêts et pénalités par le ministre au même titre que lors d'une divulgation volontaire ?

Position Adoptée:
1. Oui, le paragraphe 152(1.4) de la Loi permet une telle détermination, suite à une demande du ministre, en vertu du paragraphe 233(1) de la Loi, de produire la déclaration de renseignements concernant la société de personnes pour une années donnée.

Principales Questions:
Est-ce qu’un particulier qui transfère une bâtisse utilisée dans l’exploitation d’une entreprise en faveur d’une société qu’il contrôle pour un produit de disposition équivalant à la juste valeur marchande et qui réacquiert la bâtisse le même jour peut subir une perte finale ?

Position Adoptée:
Non, la perte finale se calculant à la fin d’une année d’imposition, le contribuable aurait toujours une bâtisse dans la catégorie à la fin de l’année et ne rencontrerait pas les conditions du paragraphe 20(16) de la Loi.

Principal Issues:

1. The enquiry concerns the valuation of an inter vivos gift of an equitable interest in a trust to a charity. The situation described is where the property transferred to the charitable remainder trust is jointly owned by a husband and wife, both the spouses have full income entitlement until the death of the first spouse and the surviving spouse has a fixed income entitlement which is less than full income.

2. What is the effect of an inter vivos gift of an equitable interest in a trust on the disbursement quota of the charity?

Position:

1. None.

2. It would be excluded from the calculation of the charity’s disbursement quota to the extent that the gift qualifies for the exclusion for ten year gifts provided in the definition of "disbursement quota" in subsection 149.1(1) of the Act.

Reasons:

Principal Issues: Does subparagraph 88(1)(c)(vi) deny a "bump" when Target transfers property to a new subsidiary, in return for shares, in advance of the acquisition and liquidation of Target by Purchaser.

Position: If cash sale and transferred property is capital, no. If shares received by vendor, maybe.

Reasons: See below.
5-982135
XXXXXXXXXX D.A. Palamar
(613) 957-2127
Attention: XXXXXXXXXX

Principal Issues: Foreign asset reporting in section 233.3 of the Act

Position: Section 233.3 of the Act will apply for the 1998 and subsequent taxation years if the ACB of the specified foreign property exceeds $100,000.

Reasons: all conditions satisfied in section 233.3 of the Act.

Position Adoptée:

Principal Issues: Whether reporting of retiring allowance payments is required by a payer who is not the employer.

Position: Yes.

Reasons: Wording of the Act.

Principal Issues: Porch repairs - Capitalize or Expenses?

Position: Question of fact- betterment or restored to original condition taking into account technological improvements thus situation appears to be expense.

Reasons: Position in IT 128

Position Adoptée:

Principal Issues: Can property be transferred from an RRSP to a RRIF or from a RRIF to a RRIF at its cost amount for purposes of section 206?

Position: No

Reasons: Position is well established and issue has been referred to the Department of Finance.

Principal Issues: Whether fees paid to a private school for a patient who suffers from Attention Deficit Hyperactivity Disorder (ADHD) qualify as a medical expense under paragraph 118.2(2)(e).

Position: Question of fact. However, based on the report of the doctor the fees likely do not qualify.

Reasons: ADHD may not always constitute a mental handicap since ADHD symptoms may vary from one patient to the next. Taxpayer must demonstrate that severity of disorder is such that it constitutes a mental disorder.

Principal Issues: Whether fees paid to a private school for a patient who suffers from Attention Deficit Hyperactivity Disorder (ADHD) qualify as a medical expense under paragraph 118.2(2)(e).

Position: Question of fact. However, based on the report of the doctor the fees likely do not qualify.

Reasons: ADHD may not always constitute a mental handicap since ADHD symptoms may vary from one patient to the next. Taxpayer must demonstrate that severity of disorder is such that it constitutes a mental disorder.

Principal Issues: Will the Department reconsider its position in respect of including employer paid group-RRSP fees as an employment benefit?

Position: No change in position.

Reasons: Amount paid by an employer for the benefit of an employee is considered employment income.

Principal Issues: Whether an amount paid under an RCA is considered to be a distribution for purposes of withholding tax.

Position: Question of fact.

Reasons: Distribution must meet the terms of the agreement.

Principales Questions:
1. De quelle nature est le gain ou la perte généré par le vendeur lors d’une vente à découvert dans la situation où le vendeur détient déjà des titres identiques qui sont entiercées ?

2. À quel moment le vendeur doit-il constater le gain ou la perte résultant d’une vente à découvert.

Position Adoptée:
1. Habituellement le gain ou la perte sur la vente à découvert est au titre de revenu, toutefois dans la situation présente, ce pourrait être au titre du capital.

Principal Issues: General comments on taxation of income in a trust where the trust owns shares of a Canadian corporation

Position: General rules under section section 104 and attribution rules

Reasons: consistent with the Department's position on trusts

Principal Issues:
1. Are there standards that a trustee has to meet in determining whether shares qualify under 4900(6) or 4900(12)?
2. How to evaluate such shares.

Position:
1. No;
2. Refer to Valuations Sections of TSO.

Reasons:
1. Question of fact, no set standards;
2. Question of fact.

Principal Issues:
1. Whether the Department's revised position regarding the payment of RRSP or RRIF management fees is in force;
2. What are the tax consequences of swapping securities for cash with your RRSP.

Position:
1. Yes;
2. Disposition at the fair market value.

Reasons:
1. According to our position;
2. Wording of the Act.

Principales Questions:
1. De quelle nature est le gain ou la perte généré par le vendeur lors d’une vente à découvert dans la situation où le vendeur détient déjà des titres identiques qui sont entiercées ?

2. À quel moment le vendeur doit-il constater le gain ou la perte résultant d’une vente à découvert.

Position Adoptée:
1. Habituellement le gain ou la perte sur la vente à découvert est au titre de revenu, toutefois dans la situation présente, ce pourrait être au titre du capital.

Principal Issues: Whether status Indian employees of a corporation are exempt from income tax.

Position: Question of Fact. Do not appear to currently meet any of the guidelines.

Reasons: Less than 50% of the duties of employment are performed on reserve, the employees do not live on reserve, the employer does not appear to be resident on reserve and finally the employer does not appear to exclusively serve Indians who for the most part live on reserve.

Principal Issues: Would constructive receipt exist where an employee elects not receive property prior to the employee having the right to receive the property.

Position: Generally not.

Reasons: Question of fact but if no right to an amount then how could there be constructive receipt.

Principal Issues: Taxability of training benefits received by status Indians which are funded by HRDC.

Position: The taxation depends on the stream of funding as well as the connecting factors.

Reasons: Benefits funded under the EI Act will generally be taxable under 56(1)(r) of the Act. If the training takes place on reserve, the connecting factors may exempt the benefits from taxation pursuant to section 87 of the Indian Act.

Principal Issues: A corporation’s profit is attributable to an adventure in the nature of trade. Does the profit qualify for the small business deduction, assuming it otherwise qualifies..

Position: Yes

Reasons: See paragraph 3 of IT-73R5

Principal Issues: In an amalgamation, can acquisition of control be avoided pursuant to paragraph 256(7)(a) and (b) of the Act in three specific situations described in the letter.

Position: Specific to each fact situation.

Reasons: See description of fact situations in the technical interpretation.

Principal Issues: Whether the XXXXXXXXXX is exempt from tax.

Position: Perhaps.

Reasons: May qualify under 149(1)(c) or 149(1)(l). To qualify for tax exempt status under paragraph 149(1)(c) of the Act, the XXXXXXXXXX would have to be considered a public body performing a function of government. It is a question of fact whether or not the XXXXXXXXXX is a public body performing a function of government.
To qualify for tax exempt status under paragraph 149(1)(l) of the Act, an association must be both "organized and operated" exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. Such a determination cannot be made in advance of or during a particular year, but only after the filing of a return reporting the operations and claiming exemption for the year having ended.

Principal Issues: Whether drawdowns under a credit facility are eligible for withholding exemption on interest if credit facility is for a period in excess of 5 years.

Position: No

Reasons: Each drawdown is considered a separate obligation and each must be measured from date of draw to expiry date of facility