Income Tax Severed Letters - 1999-03-05

Miscellaneous

1 March 1999 e9833675.txt - FARM LAND AS QUALIFIED FARM PROPERTY

Unedited CRA Tags
110.6 70(9) 73(3)

Principal Issues: is land qualified farm property and can it be rolled per 73(3) &70(9) in different situations

Position: depends on situation

Reasons: legislation

1 March 1999 e9833045.txt - RESP, CSB'S IN NAME OF SUBSCRIBER

Unedited CRA Tags
146.1(1)

Principal Issues: Can an RESP hold Canada Savings Bonds that are issued in the name of the subscriber?

Position: No.

Reasons: Investments held by an RESP must be in the name of the RESP.

1 March 1999 e9833225.txt - RRIF, SUCCESSOR ANNUITANT, RENOUNCE

Unedited CRA Tags
146.3(1)

Principal Issues: Can a RRIF successor annuitant renounce his or her rights under the RRIF so that RRIF property is taxed in the hands of the original RRIF annuitant on death?

Position: No.

Reasons: There is no provision in the Act to allow for the renunciation of RRIF rights under the contract by a successor annuitant.

26 February 1999 e9902585.txt - SHARE OF FAMILY FARM CORPORATION

Unedited CRA Tags
110.6(1) 70(10)

Principal Issues:

26 February 1999 e9901495.txt - QUALIFIED SMALL BUSINESS CORPORATION SHARES

Unedited CRA Tags
110.6(1)

Principal Issues: Whether a building under construction is an active business asset for purposes of the test in the definition of “qualifying small business corporation share” in subsection 110.6(1) of the Act.

Position: Depends on the facts of the case. However, Question 18 of the 1990 Canadian Tax Foundation - Revenue Canada Roundtable contemplated a situation where a corporation purchased vacant land, obtained necessary zoning and planning clearances and in due course built head office premises on the land and then occupied the building. The question was whether the land and building would be considered to have been used in an active business from the date of acquisition of the land to the date of occupancy of the building. The Department is of the opinion that where land is acquired and a building is constructed for use in an active business that will be expanding or relocating to the new facility, and the new facility is in fact used in the active business within a reasonable period time after completion and not for any other purpose, the land and building in question will be considered to have been used in an active business from the date of acquisition of the land to the date of occupancy.

Reasons: If necessary for the financial survival of the corporation and used more than 50% in an active business.
XXXXXXXXXX G. Moore
990149
February 26, 1999

25 February 1999 e9900025.txt - ACQUISITION OF CONTROL - 50:50 GROUP OF SH

Unedited CRA Tags
111(5) 256(7)

Principal Issues: Whether a person or group of persons
has acquired control of a corporation when a shareholder in
a 50:50 group of owners sells his or her shares to another
person who then becomes part of a new group of 50:50 owners.

Position: Likely yes.

Reasons: We are of the view that it is appropriate to
presume that a group of 50:50 shareholders controls a
corporation. In order to rebut this presumption of control
by a group, it would be necessary to show that no one is
controlling the corporation and that the decision-making
process in the corporation is effectively deadlocked.

19 February 1999 e9901795.txt - EDUCATION TAX CREDIT

Unedited CRA Tags
118.6

Principal Issues: (a) The wording set out in new proposed subsection 118.6(2) of the Income Tax Act states “and, in respect of a designated educational institution described in subparagraph (a)(ii) of the definition “designated educational institution” in subsection (1), the individual is enrolled in the program to obtain skills for, or improve the individual’s skills in, an occupation”. How does this requirement relate to the preparation of Form T2202 where the institution does not know whether it is satisfied?
(b) Paragraph (b) of B within the formula set out in proposed subsection 118.6(2) states that “$60 is multiplied by the number of months in the year ... each of which is a month during which the individual is enrolled at a designated education institution in a specified educational program that provides that each student in the program spend not less than 12 hours in the month in the program.” Does a part of a month only qualify if the 12 hour test is met?

Position: (a) It is our view that the educational institution is not required to certify that the above requirement has been met. Rather, it is the student who will be required to make the required certification on Form T2202.
(b) Yes

Reasons: (a) The position is consistent with comments in file 921732
(b) The wording supports the position on the basis that “month” is defined in subsection 35(1) of the Interpretation Act to mean a calendar month. In addition, it has been indicated to us in a telephone conversation (Eisner/Dubrule) that the position is correct from a tax policy standpoint

19 February 1999 e9833385.txt - AUTOMOTIVE TECHNICIAN TOOL ALLOWANCE

Unedited CRA Tags
6(1)(a)

Principal Issues: Is a tool allowance subject to withholding taxes, CPP, and EI premiums.

Position: Yes.

Reasons: It is a taxable benefit per paragraph 6(1)(a) and subject to withholding tax per 153(1). It is also subject to CPP and EI premiums per their respective Acts.

17 February 1999 e9902095.txt - ADJUSTED COST BASE OF NOTE

Unedited CRA Tags
73(1) 70(6) 74.5(1) 74.2(1) 70(5)

Principal Issues:

1) Non-arm’s length transfer of CCPC shares from husband to wife pursuant to subsection 73(1) in return for a demand, secured interest-free note having a face amount equal to the FMV of the shares or alternatively, some lesser amount. What is the ACB of the note?
2) Upon the husband’s death, his shares are transferred to a spousal trust pursuant to subsection 70(6) in exchange for a demand secured interest-free note having a face amount that is less than the FMV of the shares. What is the ACB of the note?

Position:

We will not comment on the determination of an ACB of a note since it is a question of fact.

Reasons:

16 February 1999 e9901435.txt - STATUS OF SUCCESSIVE TRUSTS

Unedited CRA Tags
108(1)

Principal Issues: Are successive trusts established
under the terms of a inter vivos trust testamentary trusts?

Position: No.

Reasons: They are not created by the deceased and
property will be contributed to them other than by the
deceased on or after the deceased's death and as a
consequence thereof.

16 February 1999 e9901615.txt - DEATH BENEFITS

Unedited CRA Tags
248(1) death benefit 56(1)(a)(iii) 248(1) retiring allowance

Principal Issues: An individual is the sole shareholder and officer of an investment company. Since he did not require additional funds over the years, he did not take any salary or other remuneration from the company. There is no obligation for the company to pay any retiring allowance. The individual dies and the company would like to pay a death benefit to his widow in recognition of his years of service as an officer. Does the fact that the company never paid any salary or remuneration to the officer affect the characterization of the payment to his widow? Would the amount the company pays to the widow be considered a death benefit?

Position: Question of fact whether the shareholder was also an employee of the company.

Reasons: See Q.13 of file # 5-2830 and IT-508R, Death Benefits.
Subsection 248(1) of the Act defines death benefits. In general, a death benefit means the total amount received by any taxpayer in a taxation year on or after the death of an employee in recognition of that employee's service in an office or employment less an amount of up to $10,000 and is included in the recipient's income under subparagraph 56(1)(a)(iii) of the Act. "Office" , as defined in subsection 248(1) of the Act means the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration and includes the position of a corporation director. "Officer" means a person holding such an office. "Employee" as defined in subsection 248(1) of the Act, includes an officer. The above-mentioned definition of "office" refers to the entitlement of an individual to a fixed or ascertainable stipend or remuneration but there is no requirement in that definition that the individual has to receive or has to be paid the stipend or remuneration. However, whether or not a deceased taxpayer was an employee of a particular company is a question of fact.

16 February 1999 e9902035.txt - SPOUSAL TAX CREDIT AND DEPENDANT TAX CREDIT

Unedited CRA Tags
118(1)(a) 118(1)(e) 251(2)(a)

Principal Issues:

The taxpayer and his wife are separated, but are still living under the same roof, since September 1997. The date was legally established during the summer of 1998 when the courts granted the taxpayer custody of their child. The taxpayer indicates that his wife is mentally ill and is essentially being supported by him but that he and his wife live separate lives otherwise. At present, explicit support payments have not been established. Throughout 1998, the taxpayer and his wife lived under the same roof except for the month of November, during which time she stayed at a shelter and the YMCA. His wife received emergency financial aid from Social Services at that time.

1) For purposes of paragraph 118(1)(a)( spousal tax credit ), is the taxpayer considered to be “living separate and apart” from his spouse?

2) If the taxpayer is not considered to be living separate and apart from his wife, can he claim his wife as an infirm dependant pursuant to paragraph 118(1)(e)?

Position:

1) Question of fact whether the taxpayer and his spouse are living separate and apart for purposes of paragraph 118(1)(a) of the Act. If he is living separate and apart from his wife, then he cannot claim her for the spousal tax credit.

2) No, assuming that the taxpayer is not considered to be living separate and apart form his wife, the taxpayer can’t claim his wife as an infirm dependant.

Reasons:
1) It is possible for spouses to live separate and apart while occupying the same residence. See jurisprudence below as well as criteria established in context of divorce law. It is a question of fact whether the taxpayer and his spouse are living separate and apart even though they are occupying the same residence.
2) Pursuant to the definition of “dependant” in subsection 118(6) of the Act, “dependant” does not include an infirm spouse.

15 February 1999 e9901237.txt - INVESTMENT INCOME OF INDIANS.

Unedited CRA Tags
81(1)(a)

Principal Issues: Whether interest received by an "Indian" living on a reserve from term deposits and savings accounts acquired from a financial institution located on a reserve is taxable.

Position: Yes.

Reasons: The income stream for most term deposits and savings accounts cannot be traced to the reserve with certaintly. Accordingly, it would be considered to be earned in the normal economic mainstream, and thus not considered personal property on a reserve.

12 February 1999 e9900755.txt - QUALIFIED INVESTMENTS FOR AN RRSP

Unedited CRA Tags
146(1) reg 4900

Principal Issues:
What are some qualified investments for an RRSP in certain situations?

Position:
Provided comments on shares that may be held in an RRSP.

Reasons:
Basic explanation of the law required.

10 February 1999 e9833685.txt - LESSEE PAID ADDITIONS TO SECTION 16.1 ASSET16.1

Principal Issues: How do you treat additions or alterations made by a lessee to a property which has been the subject of a sec. 16.1 election?

Position: As additions to the property - not leasehold improvements

Reasons: Lessee is deemed to have acquired the property.

10 February 1999 e9900035.txt - CHILD SUPPORT

Unedited CRA Tags
56(1)(b) 60(b)

Principal Issues:

A pre-May 1997 written agreement requires that a specified amount is required to be paid as child support. A post-April 1997 court order is issued which requires the payer to pay the same amount of child support to the recipient as required under the pre-May 1997 written agreement. The court order supersedes the written agreement. Is the court order considered to be a court order made after April 1997 with the result that it falls within the definition of “commencement day” in subsection 56.1(4) of the Act.

Position: Yes.

Reasons:

9 February 1999 e9833795.txt - ALLOWANCE PAID TO EMPLOYEE OF SCHOOL BOARD

Unedited CRA Tags
81(3)

Principal Issues: Do persons described at paragraph 81(3)(c) include persons appointed by a public school board as employees of the board but who are not members of the board.

Position: No.

Reasons: Paragraph 81(3)(c) states that the person must be a member of the board. The relevant School Act must be examined for an explanation of how someone becomes a member of the board.

5 February 1999 e9902497.txt - STUMPAGE CHARGES INCLUDED IN INVENTORY COSTS

Unedited CRA Tags
9 10 20(1)(a) 1100(1)(e) 12(1)(r)

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.

Ruling

30 November 1997 Ruling 982725A - DEBT OBLIGATION - FOREIGN PROPERTY

Unedited CRA Tags
206(1) 245(2)
secured notes of trust not an interest in trust

Principal Issues: Minor changes to facts and proposed transactions. (Principal issue - would GAAR be applied where a trust is used to issue notes? (Debt of a trust is not listed as “foreign property” under subsection 206(1))).

Position: No change to rulings.

Reasons: Changes do not affect nature of the transaction. The transaction is to be undertaken for bona fide purposes other than to obtain a tax benefit; thus it is not an avoidance transaction.

30 November 1997 Ruling 9812433 - UNFUNDED SUPP PENSION PLAN

Unedited CRA Tags
207.5

Principal Issues: Supplementary pension for employees with high earnings not an RCA?

Position: Not an RCA

Reasons: No funding and no trust set up.

30 November 1997 Ruling 9813073 - BUTTERFLY

Unedited CRA Tags
55

Principal Issues: No new issues.

Position:

Reasons:

30 November 1997 Ruling 9813283 - BUTTERFLY

Unedited CRA Tags
55

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
XXXXXXXXXX 							981328
XXXXXXXXXX 

Attention:XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

30 November 1997 Ruling 9819763 - CRYSTALLIZATION OF SAFE INCOME ON HAND

Unedited CRA Tags
53(1)(b) 55(2) 88(1)(d)

Principal Issues: Whether property acquired on wind-up is ineligible property.

Position: No

Reasons: See issue sheet.

30 November 1997 Ruling 9821773 - BUTTERFLY

Unedited CRA Tags
55

Principal Issues: Is "commited cash" business property?

Position: Yes.

Reasons: Position supported by Finance in spin-off butterfly situations.

30 November 1997 Ruling 9823103 - MORTGAGE BOND, QUALIFIED INVESTMENT

Unedited CRA Tags
4900(4)

Principal Issues:

Will an investment in an arm’s length mortgage bond be a qualified investment under subsection 4900(4) of the Regulations?

Position: Yes.

Reasons:

30 November 1997 Ruling 9728233 - 21-YEAR DEEMED DISPOSITION RULE

Unedited CRA Tags
104(4) 106(2) 107(2) 107(5) 245(2)

Principal Issues:

1) Are the income beneficiaries considered to have disposed of their income interests in the trust as a consequence of the proposed amendments to the trust agreement resulting in an income inclusion under subsection 106(2)?
2) Can subsection 107(2) be utilized on the distribution of the trust property to the capital beneficiaries?
3) Will subsection 245(2) apply to the proposed transactions?

Position: 1) Yes 2) Yes and No 3) No

Reasons:

30 November 1996 Ruling 9715773 - DEFERRED SHARE UNITS, DIRECTORS FEES

Unedited CRA Tags
6801(d)

Principal Issues:

Will the payment of director's fees in the form of deferred share units constitute an SDA?

Position: No

Reasons:

30 November 1996 Ruling 9726633 - PAYMENT TO TRANSFER ACCUMULATED PROFITS

Unedited CRA Tags
55

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
XXXXXXXXXX 972663
XXXXXXXXXX

Attention: XXXXXXXXXX

Dear Sir:

Subject: XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

Technical Interpretation - External

3 March 1999 External T.I. 9904405 - TUITION - DISTANCE EDUCATION

Unedited CRA Tags
118.5(1)(b)

Principal Issues:

2 March 1999 External T.I. 9829925 - DEFINITION OF GROSS REVENUE

Unedited CRA Tags
reg 1100(15)

Principal Issues: Does the definition of "gross revenue" in 248(1) include amounts received as prepaid lease payments and accounted for as deferred or unearned revenue when considering if the taxpayer is exempt from the CCA restrictions in reg. 1100(15 and (16)?

Position: No

Reasons: Gross revenue for an accrual taxpayer should only include amounts included in income under section 9.

1 March 1999 External T.I. 9829665 - PENSION INCOME RECEIVED FROM GERMANY

Unedited CRA Tags
56(1)(a) 248(1)death benefit

Principal Issues: Taxation of pension income received from Germany

Position: Provided a general explanation of the relevant provisions of the Act and the treaty.

Reasons: Required basic material on topic.

1 March 1999 External T.I. 9833675 - FARM LAND AS QUALIFIED FARM PROPERTY

Unedited CRA Tags
110.6 70(9) 73(3)

Principal Issues: is land qualified farm property and can it be rolled per 73(3) &70(9) in different situations

Position: depends on situation

Reasons: legislation

1 March 1999 External T.I. 9833045 - RESP, CSB'S IN NAME OF SUBSCRIBER

Unedited CRA Tags
146.1(1)

Principal Issues: Can an RESP hold Canada Savings Bonds that are issued in the name of the subscriber?

Position: No.

Reasons: Investments held by an RESP must be in the name of the RESP.

26 February 1999 External T.I. 9902585 - SHARE OF FAMILY FARM CORPORATION

Unedited CRA Tags
110.6(1) 70(10)

Principal Issues:

26 February 1999 External T.I. 9901495 - QUALIFIED SMALL BUSINESS CORPORATION SHARES

Unedited CRA Tags
110.6(1)

Principal Issues: Whether a building under construction is an active business asset for purposes of the test in the definition of “qualifying small business corporation share” in subsection 110.6(1) of the Act.

Position: Depends on the facts of the case. However, Question 18 of the 1990 Canadian Tax Foundation - Revenue Canada Roundtable contemplated a situation where a corporation purchased vacant land, obtained necessary zoning and planning clearances and in due course built head office premises on the land and then occupied the building. The question was whether the land and building would be considered to have been used in an active business from the date of acquisition of the land to the date of occupancy of the building. The Department is of the opinion that where land is acquired and a building is constructed for use in an active business that will be expanding or relocating to the new facility, and the new facility is in fact used in the active business within a reasonable period time after completion and not for any other purpose, the land and building in question will be considered to have been used in an active business from the date of acquisition of the land to the date of occupancy.

Reasons: If necessary for the financial survival of the corporation and used more than 50% in an active business.
XXXXXXXXXX G. Moore
990149
February 26, 1999

26 February 1999 External T.I. 9830105 - BLIND TRUSTS

Unedited CRA Tags
54 107.4(1) 248(1) 75(2)

Principal Issues: Is there a disposition of property on its transfer to a blind trust?

Position: There is no disposition if there is no change in beneficial ownership and the conditions in draft subsection 107.4(1) are met.

Reasons: Law and policy.

26 February 1999 External T.I. 9827755 - 104(4), 107(2) & NON-RESIDENT TRUSTS

Unedited CRA Tags
104(4) 107(2)

Principal Issues: Application of 104(4) to a non-resident trust.

Position: Does not have application in certain cases.

Reasons: See file 941969 and the draft legislation released on December 23, 1998.

25 February 1999 External T.I. 9900025 - ACQUISITION OF CONTROL - 50:50 GROUP OF SH

Unedited CRA Tags
111(5) 256(7)

Principal Issues: Whether a person or group of persons
has acquired control of a corporation when a shareholder in
a 50:50 group of owners sells his or her shares to another
person who then becomes part of a new group of 50:50 owners.

Position: Likely yes.

Reasons: We are of the view that it is appropriate to
presume that a group of 50:50 shareholders controls a
corporation. In order to rebut this presumption of control
by a group, it would be necessary to show that no one is
controlling the corporation and that the decision-making
process in the corporation is effectively deadlocked.

25 February 1999 External T.I. 9818875 - RETIRING ALLOWANCE TO RPP - REPORTING

Unedited CRA Tags
60(j.1)

Principal Issues: Reporting of a retiring allowance that is transferred to an RPP which exceeds the eligible amount under 60(j.1)(iii)(A). Tax treatment of the non-eligible portion of retiring allowance.

Position: Report as payment of retiring allowance on T4A-1998 box 27.

Reasons: Per payroll deductions guide and regulations.

24 February 1999 External T.I. 9904175 - RRSP - MORTGAGE

Unedited CRA Tags
4900(4)

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.

PRINCIPAL ISSUE:

Whether mortgages secured by principal residences are qualified investments if the annuitant deal at arm’s length with the mortgagors..

Position TAKEN:

Yes if the residences are situated in Canada.

REASON FOR POSITION TAKEN:

23 February 1999 External T.I. 9832225 - AMALGAMATION, IT-474R

Unedited CRA Tags
87(1), 87(4)

Principal Issues: Does position in paragraph 40 of IT-474R apply where numerous share classes of a predecessor are converted into numerous share classes of the amalgamated corporation?

Position: Yes

Reasons: No basis to restrict position to only 2 classes.

19 February 1999 External T.I. 9833385 - AUTOMOTIVE TECHNICIAN TOOL ALLOWANCE

Unedited CRA Tags
6(1)(a)

Principal Issues: Is a tool allowance subject to withholding taxes, CPP, and EI premiums.

Position: Yes.

Reasons: It is a taxable benefit per paragraph 6(1)(a) and subject to withholding tax per 153(1). It is also subject to CPP and EI premiums per their respective Acts.

19 February 1999 External T.I. 9901795 - EDUCATION TAX CREDIT

Unedited CRA Tags
118.6

Principal Issues: (a) The wording set out in new proposed subsection 118.6(2) of the Income Tax Act states “and, in respect of a designated educational institution described in subparagraph (a)(ii) of the definition “designated educational institution” in subsection (1), the individual is enrolled in the program to obtain skills for, or improve the individual’s skills in, an occupation”. How does this requirement relate to the preparation of Form T2202 where the institution does not know whether it is satisfied?
(b) Paragraph (b) of B within the formula set out in proposed subsection 118.6(2) states that “$60 is multiplied by the number of months in the year ... each of which is a month during which the individual is enrolled at a designated education institution in a specified educational program that provides that each student in the program spend not less than 12 hours in the month in the program.” Does a part of a month only qualify if the 12 hour test is met?

Position: (a) It is our view that the educational institution is not required to certify that the above requirement has been met. Rather, it is the student who will be required to make the required certification on Form T2202.
(b) Yes

Reasons: (a) The position is consistent with comments in file 921732
(b) The wording supports the position on the basis that “month” is defined in subsection 35(1) of the Interpretation Act to mean a calendar month. In addition, it has been indicated to us in a telephone conversation (Eisner/Dubrule) that the position is correct from a tax policy standpoint

18 February 1999 External T.I. 9817165 - SEGREGATED FUND-FORM OF GUARANTEE

Unedited CRA Tags
138.1

Principal Issues:
The income tax treatment to the insurer and to the policyholder of a form of guarantee which is provided by the insurer with respect to a segregated fund policy.

Position:
1. The provisions of section 138.1 will apply to the policyholder regardless of the fact that the "guarantee" payment is paid to the policyholder via the segregated fund trust or paid directly to a beneficiary of the policyholder.
2. The insurer would not be entitled to claim a deduction where it transfers funds with respect to the "guarantee" into the segregated fund trust.
3. Where the insurer pays the "guarantee" directly to the policyholder or to a beneficiary of the policyholder then we are of the view that the insurer would be entitled to claiming a deduction for income tax purposes with respect to the "guarantee" payment.

Reasons:
1. The provisions of paragraph 138.1(1)(j) provide for this treatment to the policyholder.
2. The provisions of the Act do not provide any basis for a deduction to the insurer in respect of the assets transferred to the segregated fund trust.
3. Where the insurer makes the "guarantee" payment directly then section 9 of the Act should apply.

18 February 1999 External T.I. 9829815 - INCOME INCLUSION FROM RESP RECEIPTS

Unedited CRA Tags
146.1(7)

Principal Issues: What portion of a payment out of an RESP will be taxable where it also includes a refund of contributed capital.

Position: A reasonable allocation by the plan promoter is accepted

Reasons: IC 93-3-paragraph 61

18 February 1999 External T.I. 9817325 - 1998 RESP AMENDMENTS

Unedited CRA Tags
146.1

Principal Issues: General questions on 1998 RESP amendments

Position: Provided general replies.

Reasons: General explanation of recent legislative changes was needed

17 February 1999 External T.I. 9831345 - RESP LIFETIME LIMIT, OVERCONTRIBUTIONS

Unedited CRA Tags
204.9(1)

Principal Issues: Will the withdrawal of an RESP overcontribution reduce the RESP lifetime limit?

Position: No

Reasons: There is no provision allowing for the reinstatement of the amount, whether the overcontribution is in error or not.

17 February 1999 External T.I. 9818815 - LIVING TRUST IN THE U.S.

Unedited CRA Tags
115(1)(b) 116 54(c) - disposition

Principal Issues:
1. Whether a transfer of shares of a private corporation incorporated in Canada by non-resident individuals to a living trust resident in the U.S. would constitute a full FMV disposition for Canadian tax purposes?
2. Will section 116 apply to the disposition of the shares?

Position:
1. Yes
2. Yes.

Reasons:
1. Consistent with the Department's position in Technical News # 7 on revocable living trusts. The legislative proposals on trusts of December 23, 1998 do not affect our position.
2. Yes. The transfer to the trust constitutes a disposition of a TCP to be reported to the Department under section 116. Although the 1998 budget introduced the new concept of "treaty-protected property" in amended 248(1) of the Act for the purpose of paragraph 115(1)(b) of the Act, it does not impact on section 116. Form T2062 required to be filed whether or not any gain from the disposition of the shares may be subject to an exemption under a tax treaty between Canada and another country.

17 February 1999 External T.I. 9832795 - TUITION - DISTANCE EDUCATION

Unedited CRA Tags
118.5 118.6

Principal Issues:

17 February 1999 External T.I. 9902095 - ADJUSTED COST BASE OF NOTE

Unedited CRA Tags
73(1) 70(6) 74.5(1) 74.2(1) 70(5)

Principal Issues:

1) Non-arm’s length transfer of CCPC shares from husband to wife pursuant to subsection 73(1) in return for a demand, secured interest-free note having a face amount equal to the FMV of the shares or alternatively, some lesser amount. What is the ACB of the note?
2) Upon the husband’s death, his shares are transferred to a spousal trust pursuant to subsection 70(6) in exchange for a demand secured interest-free note having a face amount that is less than the FMV of the shares. What is the ACB of the note?

Position:

We will not comment on the determination of an ACB of a note since it is a question of fact.

Reasons:

16 February 1999 External T.I. 9901435 - STATUS OF SUCCESSIVE TRUSTS

Unedited CRA Tags
108(1)

Principal Issues: Are successive trusts established
under the terms of a inter vivos trust testamentary trusts?

Position: No.

Reasons: They are not created by the deceased and
property will be contributed to them other than by the
deceased on or after the deceased's death and as a
consequence thereof.

16 February 1999 External T.I. 9901615 - DEATH BENEFITS

Unedited CRA Tags
248(1) death benefit 56(1)(a)(iii) 248(1) retiring allowance

Principal Issues: An individual is the sole shareholder and officer of an investment company. Since he did not require additional funds over the years, he did not take any salary or other remuneration from the company. There is no obligation for the company to pay any retiring allowance. The individual dies and the company would like to pay a death benefit to his widow in recognition of his years of service as an officer. Does the fact that the company never paid any salary or remuneration to the officer affect the characterization of the payment to his widow? Would the amount the company pays to the widow be considered a death benefit?

Position: Question of fact whether the shareholder was also an employee of the company.

Reasons: See Q.13 of file # 5-2830 and IT-508R, Death Benefits.
Subsection 248(1) of the Act defines death benefits. In general, a death benefit means the total amount received by any taxpayer in a taxation year on or after the death of an employee in recognition of that employee's service in an office or employment less an amount of up to $10,000 and is included in the recipient's income under subparagraph 56(1)(a)(iii) of the Act. "Office" , as defined in subsection 248(1) of the Act means the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration and includes the position of a corporation director. "Officer" means a person holding such an office. "Employee" as defined in subsection 248(1) of the Act, includes an officer. The above-mentioned definition of "office" refers to the entitlement of an individual to a fixed or ascertainable stipend or remuneration but there is no requirement in that definition that the individual has to receive or has to be paid the stipend or remuneration. However, whether or not a deceased taxpayer was an employee of a particular company is a question of fact.

16 February 1999 External T.I. 9902035 - SPOUSAL TAX CREDIT AND DEPENDANT TAX CREDIT

Unedited CRA Tags
118(1)(a) 118(1)(e) 251(2)(a)

Principal Issues:

The taxpayer and his wife are separated, but are still living under the same roof, since September 1997. The date was legally established during the summer of 1998 when the courts granted the taxpayer custody of their child. The taxpayer indicates that his wife is mentally ill and is essentially being supported by him but that he and his wife live separate lives otherwise. At present, explicit support payments have not been established. Throughout 1998, the taxpayer and his wife lived under the same roof except for the month of November, during which time she stayed at a shelter and the YMCA. His wife received emergency financial aid from Social Services at that time.

1) For purposes of paragraph 118(1)(a)( spousal tax credit ), is the taxpayer considered to be “living separate and apart” from his spouse?

2) If the taxpayer is not considered to be living separate and apart from his wife, can he claim his wife as an infirm dependant pursuant to paragraph 118(1)(e)?

Position:

1) Question of fact whether the taxpayer and his spouse are living separate and apart for purposes of paragraph 118(1)(a) of the Act. If he is living separate and apart from his wife, then he cannot claim her for the spousal tax credit.

2) No, assuming that the taxpayer is not considered to be living separate and apart form his wife, the taxpayer can’t claim his wife as an infirm dependant.

Reasons:
1) It is possible for spouses to live separate and apart while occupying the same residence. See jurisprudence below as well as criteria established in context of divorce law. It is a question of fact whether the taxpayer and his spouse are living separate and apart even though they are occupying the same residence.
2) Pursuant to the definition of “dependant” in subsection 118(6) of the Act, “dependant” does not include an infirm spouse.

16 February 1999 External T.I. 9830975 - TEMPORARY BASE

Unedited CRA Tags
56(1)(0)

Principal Issues: Are meals and lodgings deductible as a research expense if a temporary base is established overseas?

Position: NO

Reasons: IT 75R3 and meqaning of sojourning

12 February 1999 External T.I. 9900755 - QUALIFIED INVESTMENTS FOR AN RRSP

Unedited CRA Tags
146(1) reg 4900

Principal Issues:
What are some qualified investments for an RRSP in certain situations?

Position:
Provided comments on shares that may be held in an RRSP.

Reasons:
Basic explanation of the law required.

10 February 1999 External T.I. 9833685 - LESSEE PAID ADDITIONS TO SECTION 16.1 ASSET16.1

Principal Issues: How do you treat additions or alterations made by a lessee to a property which has been the subject of a sec. 16.1 election?

Position: As additions to the property - not leasehold improvements

Reasons: Lessee is deemed to have acquired the property.

10 February 1999 External T.I. 9701605 - PROTECTIVE TRUSTS

Unedited CRA Tags
54

Principal Issues: Does the last criterion set out in Income Tax Technical News No 7 on protective trusts require the property to form part of the settlor's estate?

Position: Yes.

Reasons: The criterion was based on the conclusion that change in legal ownership without any change in beneficial ownership would require that the property form part of the settlor's estate. If it did not, there would be valuation issues re the interest of the settlor in the trust on death.

10 February 1999 External T.I. 9708685 - PROTECTIVE TRUSTS

Unedited CRA Tags
54

Principal Issues: Does the last criterion set out in Income Tax Technical News No 7 on protective trusts require the property to form part of the settlor's estate?

Position: Yes.

Reasons: The criterion was based on the conclusion that change in legal ownership without any change in beneficial ownership would require that the property form part of the settlor's estate. If it did not, there would be valuation issues re the interest of the settlor in the trust on death.

10 February 1999 External T.I. 9900035 - CHILD SUPPORT

Unedited CRA Tags
56(1)(b) 60(b)

Principal Issues:

A pre-May 1997 written agreement requires that a specified amount is required to be paid as child support. A post-April 1997 court order is issued which requires the payer to pay the same amount of child support to the recipient as required under the pre-May 1997 written agreement. The court order supersedes the written agreement. Is the court order considered to be a court order made after April 1997 with the result that it falls within the definition of “commencement day” in subsection 56.1(4) of the Act.

Position: Yes.

Reasons:

9 February 1999 External T.I. 9831755 - AMALGAMATION - ACQUISITION OF CONTROL

Unedited CRA Tags
256(7)(b)(ii)

Principal Issues: whether amalgamation results in acquisition of control

Position: yes

Reasons: exceptions in 256(7)(b)(ii) are not applicable

9 February 1999 External T.I. 9833795 - ALLOWANCE PAID TO EMPLOYEE OF SCHOOL BOARD

Unedited CRA Tags
81(3)

Principal Issues: Do persons described at paragraph 81(3)(c) include persons appointed by a public school board as employees of the board but who are not members of the board.

Position: No.

Reasons: Paragraph 81(3)(c) states that the person must be a member of the board. The relevant School Act must be examined for an explanation of how someone becomes a member of the board.

5 February 1999 External T.I. 9828995 F - 98(6)

Unedited CRA Tags
98(6)

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 5-982899

J. Desparois, M.Fisc.

À l'attention de XXXXXXXXXX

Le 5 février 1999

Mesdames, Messieurs,

Objet: Paragraphe 98(6) de la Loi de l’impôt sur le revenu (la « Loi »)

28 January 1999 External T.I. 9830825 - SUPERFICIAL LOSS - RRSP

Unedited CRA Tags
40(2)(g)(i)

Principal Issues:

25 January 1999 External T.I. 9828335 - RESP QUALIFIED INVESTMENTS

Unedited CRA Tags
4900(1)(g) 4900(1)(h)

Principal Issues:

Are there any restrictions on benefits that may be given by financial institutions with respect to the sale of RESPs other than those contained within certain of the provisions of 4900?

Position:

No, but the proposals are presently only in draft form and are subject to change by the Department of Finance

Reasons:

20 October 1998 External T.I. 9813415 - TRAILER FEE REBATE TO INVESTOR

Unedited CRA Tags
12(1)(x) 12(2.1)

Principal Issues:
Whether compensation (similar to commission) called a trailer fee to an investment manager for acquiring third party investment passed on to his investor clients whose investments are held in trust would be included in income pursuant to paragraph 12(1)(x) & subsection 12(2.1)?

Position:
Generally yes if received directly by investor.

Reasons:
Trust acquires investments and trust investors receive from the investment manager a portion of trailer fee received by the investment manager for selling these investments to them via the trust.

13 October 1998 External T.I. 9802885 - JOINT TENANCY

Unedited CRA Tags
54 70(5)

Principal Issues: Whether the transfer of title of wholly owned property to joint ownership constitutes a disposition when there is no change in beneficial ownership.

Position: No disposition.

Reasons: Paragraph (e) of the definition of the term disposition in subsection 54(1) of the Act makes it clear that a disposition will not occur as a result of any transfer of property by virtue of which there is a change in legal ownership without any change in beneficial ownership. It is not clear if in such a situation, probate fees upon the death of one of the joint owners would be eliminated.

Technical Interpretation - Internal

1 March 1999 Internal T.I. 9904707 - PAYMENTS FOR PERSONS WITH DISABILITIES

Unedited CRA Tags
56(1)(u) 56(1)(r) 12(1)(x) 56(1)(n) 118.2(3)(b)

Principal Issues:

Taxation of various types of payments made to disabled individuals or parents of disabled children under the Employability Assistance for People with Disabilities (EAPD) Program and the Family Support (FS) Program. Both programs are administered by the province of Prince Edward Island.

Position:

1) Payment for tuition and training costs is taxable under 56(1)(n)
2) Payment for wage subsidies is taxable as employment income under section 5
3) Assistance to self-employed individuals is taxable under 12(1)(x)
4) Other payments are not taxable

Reasons:

24 February 1999 Internal T.I. 9903997 - ADVANCES TO EMPLOYEES - IT-222R

Unedited CRA Tags
5(1)

Principal Issues:
Is the position in paragraph 9 of cancelled IT-222R still the
Department's position? Paragraph 9 of cancelled IT-222R indicates
that a payment or overpayment made by mistake to an employee or
officer who is not entitled to receive it (i.e., paid in error)
is not considered salary or wages of the officer or employee
receiving it, nor is it an advance to him or her. Therefore, it
is not included in his or her income for the year of receipt. In
the event that he or she is required to repay it in the same or
another year, no deduction from income is allowable with respect
to the repayments made (whether made by deduction from his or her
pay or in some other manner).

Position: Yes.

Reasons:
As indicated in the IT Directive, ITD-4, dated September 30,
1997, IT-222R was cancelled since most of the information it
contained was no longer relevant to most taxpayers (i.e., it
contained information about employee loans made before 1979). The
current version of IT-421, Benefits to Individuals, Corporations
and Shareholders from Loans or Debt, describes the law concerning
employee loans after 1978. Although the position in paragraph 9
of IT-222R regarding payments or overpayments made in error to an
employee or officer was not incorporated in another bulletin, it
is still the Department's position.

24 February 1999 Internal T.I. 9904597 - ADVANCES TO EMPLOYEES - IT-222R

Unedited CRA Tags
5(1)

Principal Issues: Is the position in paragraph 9 of cancelled IT-222R still the Department's position? Paragraph 9 of cancelled IT-222R indicates that a payment or overpayment made by mistake to an employee or officer who is not entitled to receive it (i.e., paid in error) is not considered salary or wages of the officer or employee receiving it, nor is it an advance to him or her. Therefore, it is not included in his or her income for the year of receipt. In the event that he or she is required to repay it in the same or another year, no deduction from income is allowable with respect to the repayments made (whether made by deduction from his or her pay or in some other manner).

Position: Yes.

Reasons:
As indicated in the IT Directive, ITD-4, dated September 30, 1997, IT-222R was cancelled since most of the information it contained was no longer relevant to most taxpayers (i.e., it contained information about employee loans made before 1979). The current version of IT-421, Benefits to Individuals, Corporations and Shareholders from Loans or Debt, describes the law concerning employee loans after 1978. Although the position in paragraph 9 of IT-222R regarding payments or overpayments made in error to an employee or officer was not incorporated in another bulletin, it is still the Department's position.

22 February 1999 Internal T.I. 982896A - SHARED TRAILER FEE- MUTUAL FUND TRUST

Unedited CRA Tags
12(1)(x) 12(2.1)

Principal Issues: Whether compensation(similar to commission) called a trailer fee to an investment manager for acquiring third party investment passed on to his investor clients whose investments are held in trust would be included in income pursuant to paragraph 12(1)(x) & subsection 12(2.1)?

Position: No. but in specific circumstances.

Reasons: Depending on the conditions placed on the amounts received by the investor the amounts may be considered to be “in respect of the cost of property and therefore subsection 12(2.1) may be applicable – however if the 3rd party manager is completely independent of the broker’s decision to rebate, subsection 12(2.1) should not be applicable.

15 February 1999 Internal T.I. 9901237 - INVESTMENT INCOME OF INDIANS.

Unedited CRA Tags
81(1)(a)

Principal Issues: Whether interest received by an "Indian" living on a reserve from term deposits and savings accounts acquired from a financial institution located on a reserve is taxable.

Position: Yes.

Reasons: The income stream for most term deposits and savings accounts cannot be traced to the reserve with certaintly. Accordingly, it would be considered to be earned in the normal economic mainstream, and thus not considered personal property on a reserve.

5 February 1999 Internal T.I. 9902497 - STUMPAGE CHARGES INCLUDED IN INVENTORY COSTS

Unedited CRA Tags
9 10 20(1)(a) 1100(1)(e) 12(1)(r)

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.

3 February 1999 Internal T.I. 9810656 - U.S. ROTH IRA, EDUCATION IRA (4125-U5-100-21)

Unedited CRA Tags
Art 21 Art 10 art 11

Principal Issues: Whether the following new U.S. tax exempt savings plans qualify for the exemption in paragraph 2(a) of Article XXI of the Canada-U.S. Treaty.
1. Roth IRAs; 2. Education IRAs; 3. Medical Savings Plans.

Position: 1. yes; 2. no; 3. no.

Reasons: 1. The Roth IRA is considered to be a retirement plan or arrangement.
2 & 3. The Education IRAs and MSAs are not operated exclusively to provide retirement benefits.

28 January 1999 Internal T.I. E9902047 - DISPOSITION OF CLASS 13 LEASEHOLD INTEREST

Unedited CRA Tags
13 class 13

Principal Issues: lack of recapture when a leasehold interest is sold for more than its capital cost

Position: current tax treatment is within tax policy

Reasons: the case under audit reflects a significant deferral

28 January 1999 Internal T.I. 9902047 - DISPOSITION OF CLASS 13 LEASEHOLD INTEREST

Unedited CRA Tags
13 class 13

Principal Issues: lack of recapture when a leasehold interest is sold for more than its capital cost

Position: current tax treatment is within tax policy

Reasons: the case under audit reflects a significant deferral

27 January 1999 Internal T.I. 9833717 - STOP-LOSS RULES - DIVIDENDS

Unedited CRA Tags
112(3) 112(4) 112(5.2)

Principal Issues:

APPLICATION OF 112 STOP LOSS RULES WHERE THE CHARACTER OF SHARES HELD BY A FINANCIAL INSTITUTION CHANGES FROM MARK-TO-MARKET PROPERTY TO CAPITAL PROPERTY OR INVENTORY & VICE VERSA

Position:

PROVISIONS APPEAR TO PROVIDE FOR CORRECT CALCULATION OF AMOUNTS (248(28) WILL NEED TO BE APPLIED IN SOME CASES) BUT THE CHARACTER OF THE GAIN OR LOSS WILL NOT ALWAYS BE APPROPRIATE

Reasons:

27 January 1999 Internal T.I. E9833717 - STOP-LOSS RULES - DIVIDENDS

Unedited CRA Tags
112(3) 112(4) 112(5.2)

Principal Issues:

APPLICATION OF 112 STOP LOSS RULES WHERE THE CHARACTER OF SHARES HELD BY A FINANCIAL INSTITUTION CHANGES FROM MARK-TO-MARKET PROPERTY TO CAPITAL PROPERTY OR INVENTORY & VICE VERSA

Position:

PROVISIONS APPEAR TO PROVIDE FOR CORRECT CALCULATION OF AMOUNTS (248(28) WILL NEED TO BE APPLIED IN SOME CASES) BUT THE CHARACTER OF THE GAIN OR LOSS WILL NOT ALWAYS BE APPROPRIATE

Reasons:

26 January 1999 Internal T.I. 9816927 - TAXATION OF HRDC'S OPPORTUNITIES FUND

Unedited CRA Tags
56(1)(n) 12(1)(X) 56(1)(R)

Principal Issues:

Taxation of the following payments made to disabled individuals from HRDC's Opportunities Fund.
a) Tuition
b) Wage Subsidies
c) Assistance to self-employed individuals
d) Other payments

Position:

a) taxable under 56(1)(n)
b) taxable as employment income under section 5
c) taxable under 12(1)(x)
d) non taxable

Reasons:

26 October 1998 Internal T.I. 9803947 - REDEMPTION OF SHARES

Unedited CRA Tags
84(3) 142.5(1)
deemed dividend on M2M shaes reduced by deemed dividend

Principal Issues:

1. Whether subsection 84(3) or 142.5(1) takes precedence on a
redemption of shares held by a financial institution as mark-to-
market property.
2. If subsection 84(3) takes precedence, are the proceeds of
disposition reduced by the amount of the deemed dividend for the
purposes of subsection 142.5(1)?
3. If the answer to (2) is yes, can the financial institution
claim a loss created as a result of the reduced proceeds of
disposition?
4. If the financial institution reports the full redemption
amount as proceeds of disposition for the purposes of subsection
142.5(1) and applies subsection 248(28) to offset the deemed
dividend under subsection 84(3), can the financial institution
still claim a deduction under subsection 112(1) in respect of the
deemed dividend?

Position:

1. The legislation does not clearly provide that subsection
142.5(1) takes precedence over subsection 84(3) or vice versa.
However, in light of tax policy considerations, it is now our
view that subsection 84(3) should take precedence over subsection
142.5(1).
2. Yes. Given our current position that subsection 84(3)
should take precedence, it is our view that subsection 248(28)
would apply to reduce the proceeds by the amount of the deemed
dividend.
3. To the extent that a loss results on the redemption because
the cost of the share is greater than the reduced proceeds, it
would appear that a loss may be claimed by the financial
institution, subject to the stop-loss rule in subsection
112(5.2).
4. No. It is our view that where subsection 248(28) applies to
reduce a deemed dividend under subsection 84(3) in the
circumstances described, subsection 248(28) would also apply to
reduce the deduction under subsection 112(1).

Reasons: See above comments.