Income Tax Severed Letters - 1999-03-05

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.

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

Principal Issues:

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.

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.

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:

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

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.

Principal Issues: General questions on 1998 RESP amendments

Position: Provided general replies.

Reasons: General explanation of recent legislative changes was needed

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.

Principal Issues:

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:

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.

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

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.

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.

Principal Issues: whether amalgamation results in acquisition of control

Position: yes

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

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 »)

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: