Income Tax Severed Letters - 2000-03-03

Principal Issues: Whether the Debt Forgiveness Rules can apply on the Winding-up of a corporation under subsection 88(2).

Position: General Comments.

Reasons: Question of fact and not enough information provided.

Principal Issues: Flow through of non-capital losses after an acquisition of control - wholesale business and retail business of that same product merged.

Position: Question of fact but generally the wholesale business of product A is a same or similar to the retail business of product A.

Reasons: The law.

Principal Issues: In the situation where an estate does not itself have de facto control over a corporation, but the corporation is controlled by the related group consisting of the trustees of the estate, whether the estate would be affiliated with the corporation?

Position: No.

Reasons: None of the trustees of the estate is affiliated with another.

Principal Issues: Stock option exercised by non-resident.

Position: Benefit is attributable to employment in year option granted.

Reasons: Law. Numerous previous files.

Principal Issues: Where a farmer with respect to the development of farmland that he or she intends to sell, subdivides and then proceeds to develop the land, will the land be considered to have been converted to inventory when (i) application was made to the relevant authority for approval of a plan to subdivide the land or (ii) the owner commences or causes the commencement of improvements to the land?

Position: When application was made to the relevant authority for approval of a plan to subdivide the land.

Reasons: The intention to convert the land to inventory at that time is consistent with comments in 930206 and 942718

Principal Issues: Whether a foreign tax credit is available to the taxpayer who is an individual in respect of U.S. tax paid by him on his share of income earned by a U.S. limited liability company

Position: Yes where the taxpayer is an individual and to the extent that the foreign tax has not been reduced by the application of subsections 20(11) of the Act.
The claim for the subsection 20(12) deduction would also have impact on the foreign tax credit.

Reasons: The U.S. tax is a non-business income tax for purposes of subsection 126(7) of the Act
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XXXXXXXXXX 990077
S. Leung
Attention: XXXXXXXXXX

Principal Issues: whether reimbursement of stock option costs constitutes a benefit conferred on a shareholder

Position: question of fact

Reasons: depends on circumstances

Principal Issues:
1) Where a U.S. employer transfers an amount from a plan or arrangement that constitutes an employee benefit plan for purposes of the Act to a former employee's IRA and the former employee is now a resident of Canada, will the amount transferred have to be included in the former employee's income?
2) Will the full amount eventually received from the IRA be taxable?

Position: 1) Yes 2) Yes

Reasons:
1)The amount is being paid to the IRA on the former employee's behalf. 2)The full amount is included under the Act.

Principal Issues: Subparagraph 60(o)(ii) of the Income Tax Act (the "Act") allows a taxpayer to deduct fees or expenses incurred in preparing, instituting or prosecuting an appeal in respect of a decision of the Canada Employment Insurance Commission (the "Commission"). Under section 90 of the Employment Insurance Act (the "EI Act"), certain issues, including the issue of insurability, can be referred to the CCRA for a ruling by an employee, an employer, or the Canada Employment Insurance Commission (the "Commission"). Under the EI Act (e.g., section 91 of the EI Act) the ruling can be appealed. In connection with an appeal in respect of a ruling, comments on page 16 (Line 9809 - legal and Accounting fees) of the Farming Income guide state that "If you paid accounting and legal fees to file an appeal against an assessment or decision under the Act, ... the EI Act ..., do not deduct them here. Deduct these fees on line 232 of your income tax return." Do these comments mean that a taxpayer can administratively deduct legal fees in respect of the appeal on the basis that the ruling is a decision?

Position: No. However, it is our general position that the employer could deduct the legal expenses under paragraph 18(1)(a) of the Act.

Reasons: The ruling issued under the EI Act is not considered to be a decision of the Commission under the EI Act. A decision of the Commission is referred to in other provisions of the EI Act. In the case of paragraph 18(1)(a) of the Act in respect of the employer, paragraph 2 of IT-99R5 indicates that legal fees incurred in connection with normal activities necessary to the earning of income from a business are generally deductible under paragraph 18(1)(a) of the Act.

Principal Issues: Can a partnership pay a retiring allowance to a retiring partner who used to be an employee?

Position: Question of fact.

Reasons: Generally admission to partnership is reward for previous service but there may be limited situations where a payment may be considered a retiring allowance in recognition of the partner's previous service as an employee.

Principal Issues: Political Risk Insurance on Loans

Position: Not possible to take general position - case by case basis only

Reasons: fees for political risk loan insurance may qualify in some instances and not in others - depends on particular facts

Principales Questions:
Est-ce qu'un contribuable peut avoir droit à la déduction pour gains en capital (110.6(2.1)) lors de la vente d'actions d'une société dont le seul actif est un immeuble loué à une société liée qu'elle utilise dans une entreprise exploitée activement ?

Position Adoptée:
Oui, dans la mesure où les autres critères de la définition d'AAPE sont respectés.

Principal Issues: Can we provide a waiver to allow a taxpayer to contribute more to an RRSP than the taxpayer is entitled to under the Act?

Position: No.

Reasons: No provision in the Act allows us to provide this waiver of the over-contribution tax.

Principal Issues:
1. You have asked us if the corporation choose to submit its accounts for Canadian tax purposes with a fiscal period ending on December 31, will the inaugural fiscal period of the branch be considered May to December , thus requiring a proration of capital cost allowance, or instead be considered to be January to December, that coinciding with the fiscal period of the U.S. corporation for U.S. purposes ?

2. You have asked whether the fiscal period of a branch operation must necessarily coincide with the fiscal period of the U.S. Corporation for U.S. purposes.

Position:
1. As the U.S. corporation was in existence in January and provided that it has not filed a tax return in Canada for any previous taxation year, the corporation may select January as the start of its fiscal period. Our view is that the inaugural fiscal period of the U.S. corporation for Canadian tax purposes would be considered to be January to December if the corporation chooses that period and that the proration rule of capital cost allowance would not apply.

2. Under the provisions of subsection 249.1(1) of the Act, a non-resident corporation which commenced business operations in Canada through a branch is permitted to select a fiscal period for Canadian tax purposes different from that being used by the corporation for reporting purposes in a foreign jurisdiction.

Reasons:

Principal Issues: Will an amount received out of a pension plan by an estate twelve years after the death of an individual constitute pension income under paragraph 56(1)(a) of the Act to the estate?

Position: Yes.

Reasons: Pension amounts are taxed in the hands of the recipient, in this case the estate of the deceased.

Principales Questions:

Quel traitement fiscal devrait être accordé aux compensations pour la perte d'arbres reçues par les exploitants d'érablières suite à la tempête de verglas ?

Position Adoptée:

Principal Issues: whether 55(5)(e)(ii) applies

Position: yes

Reasons: meets wording of provision

Principal Issues:
1. Is a reduction in tuition fees given to children of non-employees of a School that provides religious and secular education , taxable under 56(1)(n) of the Act?
2.Is the reduction taxable to the student, parent of the student or in some cases the related employee?
3.Is it appropriate to include an amount as a charitable donation?

Principal Issues: Would shares held by an employee that are subjected to 7(1.1) of the Act be eligible for the 110(1)(d.1) deduction where the shares are purchased for cancellation by the employer corporation?

Position: Yes.

Reasons: Where all of the conditions of 110(1)(d.1) are satisfied, the fact that shares are purchased for cancellation will not result in the employee losing the 110(1)(d.1) deduction.

Principal Issues:
1) Can the payment of a lump sum payment out of a foreign pension plan be rolled to an RRSP
2) The recipient received a salary continuance payment after becoming a resident of Canada, will this affect the amount he can roll to the RRSP

Position:
1) Question of fact, explained provisions in EBP, 56(1)(a)(i) and 60(j) rules
2) Yes it will affect the amount. The amount of pension payment for this period of time would be considered a payment from an EBP

Reasons:
1) Would depend on facts of situation and determination of what period of time the payment relates to. ie was the recipient a non-resident and a pension payment and whether the criteria in 60(j) are met.
2) Salary continuance is considered employment income and received while recipient was a resident of Canada

Principal Issues: Where an employee on leave under a deferred salary leave plan decides to accept a buyout offer, how will the amounts deferred under the DSLP be taxed where the employee will not be returning to work in accordance with the DSLP?

Position: Deferred amounts taxed when conditions of the Plan ceased to be satisfied.

Reasons: Where the DSLP satisfied 6801(a) and subsequent events result in a condition of the DSLP not being satisfied, the deferred amounts will be taxed as income for the year in which the condition ceases to be satisfied.

Principal Issues:
Whether a capital gains dividend, received pursuant to subsections 131(1) and (8) by a shareholder of "prescribed labour-sponsored venture capital corporation", can be eligible for the "qualified small business corporation share" capital gains deduction, under subsection 110.6(2.1), in the shareholder's hands.

Principal Issues:
1. Difference in application of the ITA in Quebec and Ontario
2. Application of the GST

Position:
1. Yes
2.Guidelines set in Technical Information Bulletin B039R on how
GST/HST applies to purchases by Indians.

Reasons:
1. Two tax returns to file in Quebec, only one in Ontario. Difference in the tax base for provincial taxes as calculation of provincial taxes in all provinces except Quebec is based on federal taxes.
2. Bulletin mentions that goods acquired on reserve by Indians are relieved of GST/HST. Mentions when goods acquired off reserve are relieved of GST/HST. Also indicates when service acquired by an Indian is relieved of GST/HST.

Principal Issues:
1. Where an employer receives a conversion benefit in respect of a group insurance policy and uses it to give its insured employees a premium holiday, will draft subsection 139.1(15) apply to deem the payment not to be an employer contribution for the purposes of paragraph 6(1)(f) and regulations made under subsection 6(4)?

2. If the employer earns interest on the investment of the conversion benefit and uses the interest to give the insured employees a premium holiday, will the provisions of draft subsection 139.1(15) apply to deem the payment not to be an employer contribution?

3. Does the premium holiday constitute a taxable benefit to the insured employees?

Position:
1. Yes, provided that all the conditions set out in draft subsection 139.1(15) are met.

2. No. It is our view that draft subsection 139.1(15) allows the employer to contribute an amount up to the value of the conversion benefit. Since interest earned by the employer does not constitute part of the conversion benefit, draft subsection 139.1(15) will not apply.

3. No, provided that the group insurance plan is one of the exceptions set out in subparagraph 6(1)(a)(i).

Reasons:
1. Wording of subsection 139.1(15).

2. Wording and intent of subsection 139.1(15).

3. Paragraph 6(1)(a).

Principal Issues:
a) Whether our policy in 9216695 continues to be our current position? In that document, we said that stock options must vest while a corporation is a CCPC in order to get subsection 7(1.1) treatment?
b) What constitutes a "fundamental change in the terms of an option agreement", which will trigger a disposition of rights under 7(1)(b)?

Position:
a) No
b) Question of fact and applicable contract law

Reasons:
a) Our position was reversed in document 9728505. Subsection 7(1.1) requires that the corporation be a CCPC at the time that the agreement to issue shares was entered into. The satisfaction of all conditions of the agreement may not be required in order to receive subsection 7(1.1) treatment.
b) Fundamental change can only be confirmed after review of the applicable law, the documents and surrounding facts.

Principal Issues: Can a taxpayer combine his or her regular RRSP with his or her spousal RRSP?

Position: Yes but the combined plan becomes a spousal plan.

Reasons: The Act provides for the transfer of property between plans with the same annuitant.

Principal Issues:
1. Whether transfer of remainder interest in principal residence to a registered charitable foundation, subject to an agreement, would qualify for a charitable donation tax credit.
2. Whether the transfer of a remainder interest in a stock portfolio to a registered charitable foundation would qualify for a charitable donation tax credit.

Position:
1. Yes, based on the facts provided.
2. Depends upon whether the trust agreement is such that the remainder interest in the portfolio vests in the Foundation and whether the fair market value of the residual interest in the trust holding the portfolio of shares can be reasonably determined at the time of vesting.

Reasons:
1. Agreement does not require the donee to undertake any action that are not part of its objects, does not significantly limit the flexibility to the Foundation to do with the property as it wishes (once it takes possession of the property), and does not result in benefits accruing to the donor or persons not at arm's length with the donor.
2. Gift takes place when property vests in the Foundation and if fair market value cannot be determined, no donation receipt can be issued since receipt must show fair market value of gift.

Principal Issues:?
An individual wants to know why his pension income is tax free?

Position:
Based on the limited facts provided it appears the pension is tax -free because of certain pre-1946 provisions of the Income War Tax Act which were carried over to the current Act.

Reasons:
Section 57 carries over an elective provision from the Income War Tax Act which exempts certain pension receipts from taxation.

Principal Issues: SR&ED joint projects involving Canadian and foreign participants - will ITC be available to the Canadian T/P for its SR&ED activities carried on in Canada even though the joint project was primarily directed from outside Canada, or majority of project's expenditure incurred outside Canada.

Position: Yes.

Reasons: Expenditures are qualified expenditures made by Canadian T/P on SR&ED carried on in Canada.

Principal Issues: Corporation transfers depreciable property to an affiliated corp. Any loss is denied pursuant to 13(21.2). Can the loss be triggered when the corps are no longer affiliated?

Position: Yes

Reasons: When affiliation ends that is sufficient to invoke the triggering event, and no disposition is required by the original transferee.