Income Tax Severed Letters - 1999-05-14

Principal Issues: Whether social security contribution paid to the French government is treated as income or profits tax creditable in Canada?

Position: Yes if it is mandatory.

Reasons: Is is similar to FICA or German social security contribution and we stated previously that social security contribution which is mandatory and is similar to those noted above is creditable.

Principal Issues: Whether income exempt under paragraph 81(1)(a) of the Act and section 87 of the Indian Act to a status Indian should form part of income for the purposes of the spousal amount or equivalent-to-spouse amount.

Position: Income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not to be included in income when calculating the spousal deduction pursuant to paragraph 118(1)(a) of the Act.

It is a question of fact as to whether an individual is wholly dependent on another for support in a particular case, and it is possible in certain circumstances that a person might be considered wholly dependent notwithstanding that he or she had income. Where the exempt income is significant and received steadily throughout the year, an argument could be made in support of the position that an individual in receipt of paragraph 81(1)(a) exempt income is not wholly dependent on another individual for support.

Reasons: Income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not to be included in income when calculating the spousal deduction pursuant to paragraph 118(1)(a) of the Act. The Income Tax Act is generally specific when the intention is to include income that is exempt pursuant to paragraph 81(1)(a) of the Act in a particular calculation. For example, "earned income" in subsection 63(3) of the Act includes "...all amounts that are included, or that would, but for paragraph 81(1)(a), be included..." and the definition of "compensation" in subsection 147.1(1) of the Act includes the phrase "...or that would be required (to be included in the employee's income) but for paragraph 81(1)(a) of the Act as it applies with respect to the Indian Act." In our view, in the absence of a specific provision which includes paragraph 81(1)(a) exempt income in an income calculation in the Income Tax Act, such income should not be included in the calculation.

Principal Issues:
Whether an application to vary an order is a new order for the purposes of deductible/taxable payments and commencement date.

Principal Issues:
1. Do items which an insurer identifies in a note to its financial statements prepared for OSFI as "appropriated" retained earnings constitute reserves?
2. Do appropriations of retained earnings or surplus remain as part of the retained earnings or surplus?
3. Do appropriations of retained earnings or surplus form part of Canadian reserve liabilities and total reserve liabilities?

Position:
1. No. Even if it could be substantiated that for accounting purposes these items could constitute reserves they constitute retained earnings or surplus.
2. Yes.
3. No.

Reasons:
1. There are no restrictions on the distribution of retained earnings or surplus by OSFI. OSFI does not consider these items to be appropriations of retained earnings or surplus nor to be reserves. Even if such amounts were considered to constitute reserves they remain part of retained earnings.
2. They retain their legal character of retained earnings or surplus.
3. They are not reserves for OSFI purposes and therefore are not CRL or TRL as defined in subsection 2405(3) of the Income Tax Regulations.

Principal Issues: 1:is province a person 2:is provincial crown corp a person

Position: 1: yes; 2:yes

Reasons: 1: previous position and references to Her Majesty as a person; 2: in definition

Principal Issues:
(1) Do the fees paid by students for food supplies used in courses for the chef program qualify as ancillary tuition fees pursuant to subsection 118.5(3) of the Income Tax Act ?
(2) Does any part of the payments (deposit and periodic lease payments) made by a student under the mandatory textbook leasing program of XXXXXXXXXX qualify as ancillary tuition fee pursuant to subsection 118.5(3) of the Act?
(3) Is the entrance scholarship, which XXXXXXXXXX awards a student out of its operating funds and directly applies against the student’s liability for tuition fees, to be treated as income of the student pursuant to paragraph 56(1)(n) of the Act or as a reduction of the student’s tuition fees?

Position:
(1) Yes
(2) Depends.
(3) The entrance scholarship constitutes paragraph 56(n) income and does not reduce the tuition fees.

Reasons:
(1) Supplies consumed in the chef program would qualify as ancillary tuition fees. None of the exceptions in the subsection 118.5(3) of the Act are applicable.
(2) If the student keeps the books and forfeits the deposit, neither the deposit nor the periodic lease payments qualify as ancillary tuition fees because such amounts are in respect of property to be acquired by the student (subparagraph 118.5(3)(c)(ii)). However, if the student returns the books and gets a refund of the deposit, the lease payments qualify as ancillary tuition fees; although in this situation it could be argued that the lease payments are not ancillary tuition fees because they can be considered as being in respect of services not ordinarily provided at educational institutions in Canada that offer courses at a post-secondary school level, it is felt that, with informal support from the Department of Finance, this exception in subparagraph 118.5(3)(c)(iii) is not meant to apply to books which are, generally speaking, an integral part of the instruction and education process.
(3) As indicated in paragraph 17 of IT-516R2, tuition fees can include fees paid out of prizes, scholarships, fellowships and bursaries. The entrance scholarship is to be included in income, pursuant to paragraph 56(1)(n) of the Act, as explained in IT-75R3.

Principal Issues:
1. How are upfront fees to be treated for Part I.3 tax when Taxpayer amortizes them into income for accounting but they are included in income in year of receipt for income tax purposes?
2. Are unamortized premiums, which are amortized into income for accounting purposes but are included as income in the year of receipt for income tax purposes, an advance or are they an “other surplus” for purposes of subparagraph 181.3(3)(a)(ii)?
3. Does an adjustment to the residual value of a XXXXXXXXXX represents a depreciation charge for accounting purposes?
4. How are deferred subvention payments to be treated by Taxpayer for purposes of Part I.3?
5. Are advance payments on leasing contracts advances for purposes of Part I.3 or “other surplus” for purposes of subparagraph 181.3(3)(a)(ii)?
6. Are customers’ rental security deposits advances for purposes of Part I.3?
7. Are cash-down payments surplus for purposes of Part I.3?

Position:
1. The upfront fees constitute surplus for purposes of subparagraph 181.3(3)(a)(ii).
2. The unamortized premiums are not advances but constitute surplus.
3. The adjustment constitutes a “reserve” for purposes of subparagraph 181.3(3)(a)(iii).
4. Included in capital.
5. They constitute advances. They may constitute a reserve as well.
6. Yes.
7. Yes.

Reasons:
1. The upfront fees are legally earned. They do not constitute advances.
2. They do not constitute advances. The unamortized premiums are legally earned.
3. Taxpayer has not provided authority or basis under generally accepted accounting principles for characterizing this adjustment as depreciation.
4. On the assumption that the income is legally earned in year 1 the deferred subvention payments would constitute surplus and therefore be included in capital under 181.3(3)(a)(ii).
5. The payments are unearned. No amount to be included in the capital of Taxpayer to the extent a reserve of an equivalent amount has been deducted in computing income under Part I.
6. They will have to be refunded to the customers at the end of the lease.
7. They have the legal nature of earned income.