Income Tax Severed Letters - 2000-04-14

Principal Issues: Income tax treatment of amounts received out of settlement with employer in respect of lost wages and general damages.

Position: Special damages, such as those received for lost (unearned) wages or employee benefits, are taxable as employment income under subsection 5(1) or paragraph 6(1)(a) if the employee retains his or her employment or is reinstated, or as a retiring allowance under subparagraph 56(1)(a)(ii) if the employee loses his or her office or employment. When a loss of employment involves a human rights violation and is settled out of court, a reasonable amount in respect of general damages can be excluded from income.

Reasons: Based on position in paragraph 9 of IT-337R3.

Principal Issues: Would educational costs paid by a company for a shareholder/employee be a) deductible to the corporation and b) taxable to the individual?

Position: The answer depends on whether or not subsection 15(1) of the Act is applicable.

Reasons: In situations where subsection 15(1) of the Act applies, the corporation would not be entitled to a deduction and the cost of the training would be included in the individual's income pursuant to subsection 15(1). In situations where subsection 15(1) does not apply, the education costs will generally be deductible provided they are reasonable. The guidelines provides in Technical News #13 should be used to determine whether the individual would receive a taxable benefit pursuant to paragraph 6(1)(a) of the Act. The employer will have to determine the taxation of educational costs on a case by case basis.

Principal Issues:

Would there be a rollover of the negative adjusted cost base of a partnership interest acquired on amalgamation ?

Position:

The amalgamation, in and of itself, would not result in a realization of, or an income inclusion in respect of, any negative adjusted cost base of such predecessor corporation in respect of its interest in the partnership.

In the situation described, the grandfathering provisions of subsection 40(3.1) would no longer apply.

Reasons:

Principal Issues: Corporate continuance - qualification as a Canadian corporation

Position: Corporation continued into Canada after 1992 will qualify as a Canadian corporation

Reasons: Corporation will be deemed to be incorporated in and resident in Canada

Principal Issues: If spouses transfer their security portfolios (stocks and mutual funds) from individual ownership to joint tenants with rights of survivorship to reduce probate fees is there a deemed disposition and do the attribution rules apply ?

Position: YES 50% is disposed to the other spouse, and attribution rules may apply.

Reasons: 73(1) applies. Capital gains are deferred unless election is made to report proceeds of disposition.

Principal Issues: Should a reinsurer which has reinsured pre-1996 life insurance policies compute its policy reserves using the rules for pre-1996 life insurance policies?

Position: Yes

Reasons: The insurer uses the rules for the pre-1996 life insurance policies to compute its policy reserves. The reinsurer should use the same rules.

Principal Issues: 1. Employee, deduction of clothing, travel expenses
2. Self-employed, deduction of clothing, travel expenses

Position: 1. Employee cannot claim travel expenses from home to office nor clothing expenses.
2. Self-employed cannot claim travel expenses if home not base of business operations; cannot claim regular clothing expenses but can claim cca in respect of uniform (Class 12) and clothing and costumes (Class 8) of Schedule II of IT Regulations.

Reasons: 1. Considered personal and living expenses.
2. Considered personal and living expenses except for clothing that come under Class 12 and Class 8 of the IT Regulations.

Principal Issues: Are investment certificates issued by an incorporated charitable organization qualified investments for an RRSP?

Position: No.

Reasons: A debt of the corporation does not satisfy any of the investments described in the definition if "qualified investment" in subsection 146(1) of the Act or section 4900 of the Regulations.

Principal Issues: A company installs plumbing (including drains) and carries out related repair services. The issue is whether these activities are considered to be "construction" for the purposes of the definition of that term in section 238 of draft Income Tax Regulations.

Position: The activities fall within the definition of construction

Reasons: The definition of construction is very broad - it is defined to include, but is not limited to activities related to the erection, installation, alteration, modification, repair, improvement, demolition, dismantling, or removal of any part of a building, structure, surface or subsurface construction.

Principal Issues: Whether Covenant provided to municipality in exchange for right to subdivide is a gift.

Position: Provide details by way of ruling request. Concern raised.

Reasons: Proposed transaction. Meaning of gift.

Principal Issues: Whether the XXXXXXXXXX location qualifies as a remote work site for purposes of subsection 6(6) of the Act.

Position: Yes.

Reasons: The issue was examined in 1989 by the Source Deductions area, after extended discussions between the taxpayer and Mr. Wilson (source deductions) it was concluded that the location would meet the basic tests to qualify as a remote work site. The main reason for this decision was the complete lack of access to the location. There are no roads leading to the location.

Principal Issues:
1.Has the 1999 adverse decision by the FCTD in the Shilling case resulted in any change to the Indian Act Exemption for Employment Income Guidelines?
2.If affairs are arranged to reflect the situation in Shilling, what happens if employers do not withhold tax and the employees do not follow the Guidelines?

Position:
1. No changes to the Guidelines.
2. Interest charges and penalties may be assessed.

Reasons:
1.Since the judgement in Shilling has been appealed by CCRA, no changes will be made to the Guidelines until the issues are resolved by the courts.
2.Interest charges and penalties may be applicable if the obligations are not respected. Employees who fail to file, file late or fail to include all income taxable may be assessed or reassessed and may be liable to interest and penalties. Employees that file in accordance with the Guidelines, may file objections to protect themselves if the outcome of the appeal of the Shilling case is favourable to them.

Principales Questions:

1. Est-ce que les intérêts d'obligations ou d'hypothèques et les dividendes d'actions de capital social sont inclus dans le calcul des recettes brutes en vertu du paragraphe 402(5) du Règlement s'ils sont des biens utilisés relativement à la principale activité commerciale de la société ?

2. Est-ce que la société exerce une seule activité ?

Position Adoptée:

Principal Issues: Whether an "Ultramatic Bed" is a hospital bed for the purposes of paragraph 118.2(2)(m) of the Income Tax Act (the "Act") and Regulation 5700 (h)

Position: No

Reasons: A hospital bed is considered to refer to the type of bed normally found in and used by patients in a hospital.

Principal Issues:
1) The tax implications of a term insurance rider of $XXXXXXXXXX , naming the sole shareholder's spouse and daughter as beneficiaries, on a corporate-owned last-to-die life insurance policy insuring the lives of the shareholder and the shareholder's wife, in which the corporation would be the beneficiary.
2) Whether a taxpayer can have two spouses for tax purposes.
3) The tax implications where a corporation assigns its universal life insurance policy as security for a loan to be taken out by the shareholder

Position:
1) It would depend on the actual insurance contract. However, it is likely a taxable shareholder benefit.
2) Yes.
3) Shareholder benefit.

Reasons:
1) Based on the facts.
2) According to the extended meaning of "spouse" in subsection 252(4) of the Act, a spouse of a taxpayer includes a person of the opposite sex who has been cohabiting in a conjugal relationship with the taxpayer for at least 12 months or who is a parent of a child of whom the taxpayer is also a parent. Accordingly, if a taxpayer is not divorced from a spouse to whom he or she was legally married, and the taxpayer is now living with another person, he or she may have two spouses for income tax purposes,
3) Position taken in Question 41 of the 1991 Revenue Canada Round Table.

Principal Issues: Whether awards are income from employment under 5(1) or as research grants under 56(1)(o).

Position: The awards are income from employment.

Reasons: In our previous opinion regarding these awards given in our letter of December 20, 1999 we said the awards were employment income. Since then, the Centre changed the wording of the award agreements but the changes do not substantively alter the nature of the employer/employee relationship between the Centre and the awardees. Our comments in our previous letter still apply. International section will reply regarding the taxation of non-resident recipients.

Principales Questions:

Est-ce que le paragraphe 13(5.1) s'applique lors de la fusion d'une société-mère qui détient un immeuble et une filiale qui détient une tenure à bail dans cet immeuble ?

Position Adoptée:

Principal Issues: Interest on funds borrowed to purchase a "Prescribed Annuity Contract"

Position: No

Reasons: PAC is not subject to the accrual rules in 12.2 - therefore, interest expense is denied by 12.2(1)(b)

Principal Issues: Does subsection 80.4(1.1) apply in an employer requested move?

Position: It depends.

Reasons: It is a determination of fact whether, given a particular set of circumstances, it would be reasonable to conclude that the loan or debt from a third party lender would not have been received or incurred but for the individual's office or employment, such that the deeming provision of subsection 80.4(1.1) would be applicable. The determination would take into account the degree of involvement of the individual's employer, such as whether the employer provides documentation to the lender to support the employee's loan application, guarantees the principal and/or interest, and pays the interest subsidy to the lender.

Principal Issues: Capital loss re unpaid loans in specific fact situation..

Position: Pursuant to subparagraph 40(2)(g)(ii) of the Act loss is nil.

Reasons: Loans were non interest bearing and no adequate consideration received.

Principales Questions : déterminer si des frais payés pour suivre le cours de XXXXXXXXXX sont admissibles pour les fins du crédit d'impôt pour frais de scolarité.

Position Adoptée : aucune détermination possible; résumé de la politique de l'Agence.