Income Tax Severed Letters - 2000-05-12

Principal Issues: General Information re: Security Lending Arrangements

Position: General Information Provided

Reasons: N/A

Principal Issues: With respect to a particular discretionary family non-resident trust where the contributor has recently immigrated to Canada:
1. Does 75(2) apply and if so, is there a 5 year exemption from tax for the immigrant?
2. To the extent that 94(1)(c) applies, what income is taxable in the trust?
3. To the extent that the trust provides for capital encroachment, will distributions in the 5-year period be considered capital such that any distribution is excluded from the beneficiary's income?
4. What are the tax implications to the trust when the contributor becomes resident in Canada (and when the trust becomes resident in Canada)?
5. What are the tax implications to the trust when the immigrant-contributor dies?
6. What are the tax implications if the trust is wound up?

Position: 1. Based on the information contained in the trust agreement submitted with the request in which it is established that the contributor is a capital beneficiary and has the right to appoint additional beneficiaries, 75(2) applies; since a resident of Canada is taxable on his or her world-wide income (subject to the modifications in 114 for the year in which the person become or ceased to be resident in Canada), there is no exemption for income earned by a non-resident trust which is attributed to the contributor under 75(2).
2. 94(1)(c)(i) sets out the income which is taxable under this provision and includes any taxable capital gain arising from the deemed disposition of properties (other than excluded properties) under section 104(4).
3. When a beneficiary is both an income beneficiary and a capital beneficiary, distributions by the trust (other than proceeds of disposition of a beneficiary's interest in the trust) will generally be considered to be a distribution of income and included in income under 104(13) to the extent of the trust's income for that year unless the amount is established to be a distribution of capital from a personal trust. This involves a finding of fact.
4. While there are no immediate tax consequences to a trust when the contributor becomes resident in Canada, the trust will be deemed to be resident in Canada when the conditions in 94(1)(a) and (b) are met; at that time, section 94(1)(c) will deem the trust to be resident in Canada for the whole year (even though the contributor may have been resident in Canada for less than 60 months for some portion of that year) and section 128.1(1) will apply to create a deemed disposition of all property held by the trust (other than TCP) before January 1st of that year such that any taxable capital gains or allowable capital losses accrued on property other than TCP prior to that date will not be included in the trust's income.
5. Attribution under 75(2) or 74.3(1) does not apply to the period following the contributor's death; however section 94(1)(c) will continue to apply unless the contributor was not resident in Canada in any of the 18 months preceding his or her death.
6. When 75(2) has applied to attribute the trust's income to a contributor, subsection 107(4.1) will generally apply to the distribution of any trust property to beneficiaries other than the contributor. Where the conditions in subsection 94(1) are met, the trust will still be deemed to be resident in Canada for the purpose of 94(1)(c) even if the trust is wound up and\or assets sold prior to the end of the 60-month period.

Reasons: 1. The application of 75(2) is not dependant on whether or not the trust would otherwise be taxable on the income so attributed (i.e. whether the trust is resident or not) and an immigrant to Canada is fully taxable on his or her world-wide income earned from the date of becoming resident in Canada.
2., 3 & 6. See comments under Position.
4. Because of the 60-month exemption, the trust has no change in residence at the time that the contributor becomes resident in Canada; however the trust does become resident in Canada on January 1 of the year in which the conditions in 94(1)(a) and (b) are met such that a deemed disposition under 128.1(1) occurs before the trust becomes resident in Canada.
5. Attribution only applies for the period throughout which the individual to whom the income is attributed is alive and resident in Canada; the criteria in 94(1)(b)(i)(A)(II) will continue to be met unless the individual had ceased to be resident in Canada more than 18 months prior to his or her death.

Principales Questions:

Est-ce que les frais juridiques engagés par Madame relativement à une requête présentée par Monsieur afin de faire réduire le montant de la pension alimentaire payable en vertu d'un jugement sont déductibles en vertu de l'alinéa 18(1)a) de la Loi si le jugement rendu suite à cette requête prévoit que Monsieur et Madame doivent maintenant verser une pension alimentaire directement à l'enfant ?

Position Adoptée:

Principal Issues: Whether business income earned by Native lobster fishers is exempt from taxation by virtue of the Indian Act.

Position: Generally no.

Reasons: Based on the Williams case, one must look at the connecting factors. In a fishing business, where the fishing takes place is a connecting factor of major importance. Generally the fishing takes place off reserve. If all of the fishing is done off reserve, in our view, the fishing business income earned by a status Indian, would be more connected to a location off reserve than to a location on reserve and, consequently, would generally not be exempt from taxation

Principal Issues:
Whether taxpayer in specific fact situation qualifies for the subsection 81(3) exemption?

Position: No.

Reasons:
Taxpayer was appointed and not elected and the Regional Health Authority is not considered a "similar body" for purposes of subsection 81(3).

Principal Issues: A pre-May 1997 Marriage Contract indicates that two individuals are contemplating living separate and apart from each other in the future. The Marriage Contract provides that in the event the parties separate, the payer will pay his spouse child support and spousal support beginning on the first day of the month following their separation. The taxpayers subsequently separated but there was no written separation agreement between the parties after they separated. A post-April 1997 Corollary Relief Judgment (hereafter referred to as the "court order") states that the Marriage Contract as it relates to custody, access, spousal support and child support is declared void and that the payer is required to pay his spouse child support and spousal support commencing XXXXXXXXXX .

Does the 1997 court order provide that the Marriage Contract is void retroactively such that the recipient is not required to include in her income any child support and spousal support received pursuant to the Marriage Contract?

Position: No

Reasons: Based on the wording of the 1997 court order, it does not apply retroactively to eliminate the requirement under the Marriage Contract that child support and spousal support were payable for the XXXXXXXXXX years.