Income Tax Severed Letters - 2000-05-26

Principal Issues: availability of film tax credits

Position: limited to certain corporations

Reasons: 125.4 and 125.5

Principal Issues: Is the amount of the withdrawal under the Lifelong learning Plan before or after any costs incurred by the RRSP in cashing-in investments in order to make the payment under LLP?

Position: After.

Reasons: The eligible amount received by the annuitant is restricted to a maximum and the fees paid by the RRSP in respect of its investments would not be considered received by the annuitant.

Principal Issues: When computing the total amount incurred by the corporation for the services of employees and other individuals for the purposes of clause 206(1.1)(d)(iii)(C) of the Act, can the employer include the employer CPP contributions and EI premiums paid in respect of the employee services?

Position: Yes.

Reasons: Employer costs incurred for its employees would include the payroll related expenses like CPP and EI.

Principal Issues:

1) Whether vacation time is included in the qualifying period for purposes of section 122.3.

2) Whether vacation pay can be considered as attributable to activities performed during the qualifying period.

Position:

1) Normal vacation taken after the commencement and prior to the completion of the foreign assignment would generally be included in the qualifying period.

2) Vacation pay that is reasonably attributable to vacation leave earned during the qualifying period would generally qualify.

Reasons:

Principal Issues:

Principal Issues: Can income paid out of a spousal RRSP be split between spouses for reporting purposes?

Position: No.

Reasons: The income is taxed in the annuitant's hands unless subsection 146(8.3) requires it to be included in contributor's income.

Principal Issues: General comments re: Interest Deductibility on Funds borrowed to settle debts related to a terminated business. Payment is made subsequent to the termination of the business.

Position: General Comments

Reasons: Subsection 20.1(2) will deem the amount to continue to be used for the purpose of earning income from the business.

Principal Issues: Whether the operator of a landfill site must file under the new contract reporting system pursuant to section 238 of the Income Tax Regulations.

Position: No.

Reasons: Although the landfill operator is involved in excavation, this activity cannot be described as the excavation "of all or any part of a building, structure, surface or sub-surface construction, or any similar property."

Principal Issues: In the context of deferred salary and wages, what is the interaction, if any, of constructive receipt and the "salary deferral arrangement" provisions?

Position: Where an SDA exists (i.e. there is a right to receive an amount and the purpose test is met), the deferred amount in respect thereof is taxed currently, and not upon receipt. The right to receive an amount under an SDA is interpreted very broadly. Where no SDA exists, an amount is generally only taxed on receipt unless the doctrine of constructive receipt applies.

Reasons: Our interpretation of the wording of the Act and our understanding of tax policy.

Principal Issues:

Principal Issues: Whether an employer may split a long-term disability plan into two plans - one for unionized staff and one for non-unionized staff. The non-unionized staff would pay XXXXXXXXXX % of the premium while the employer would pay XXXXXXXXXX % of the premium in the plan for unionized staff.

Position: If the Taxpayer can establish that the new plan is separate from the existing plan and that it is an employee-pay-all plan, any benefits received under this new plan will be received by employees tax-free while the benefits paid under the old plan would continue to be subject to tax in the employees' hands to the extent provided paragraph 6(1)(f) of the Act. However, where an employee is receiving benefits under the taxable plan at a time when the new employee-pay-all plan is instituted, the benefits he or she continues to receive, to the extent that they were provided for in the old plan, will remain of an income nature because they continue to flow from the old taxable plan.

Reasons: In order to determine the income tax consequences where an employer has two wage loss replacement plans, it is essential to determine whether there are, in fact, two plans. In this regard, it is our general view that two wage loss replacement plans would be regarded as being in existence provided that there is no cross subsidization between the two plans, and the level of benefits, premiums rates, qualifications for membership and other terms and conditions of each of the plans are not dependent upon the existence of the other plan. Additionally, the administration of the plans must indicate that each plan can be regarded as being separate from the other.

Principal Issues: Where borrowed funds are used by Corp 1 to acquire shares in a subsidiary (Corp 2) and such funds are subsequently loaned by Corp 2, at an interest rate in excess of the rate on original borrowing, to another corporation(Corp 3) to build a building, can it be said that the original borrowing is subject to subsections 18(3.1) and (3.2)?

Position: Yes.

Reasons: If Corp 2 is only single purpose corp it would be our position that funds have been used to indirectly assist the construction of the building and as such 18(3.2) and (3.1) would apply.

Principal Issues: whether 104(4)(a) deemed disposition and reacquisition of debt by trust prevent trust from continuing to claim capital gains reserve on property disposed of before the application of 104(4)(a)

Position: no

Reasons: debt is not deemed extinguished

Principales Questions:
Est-il possible, lors du transfert de quotas de lait en vertu d'un roulement prévu à l'article 85, de faire la distinction entre les quotas de lait dont le gain est admissible à la déduction pour gains en capital et les quotas de lait dont le gain n'est pas admissible à la déduction pour gains en capital ? En d'autres mots, est-il possible de choisir une somme convenue différente pour les deux catégories (admissible et non admissible) de quotas de lait ?

Position Adoptée:
Oui.

Principal Issues: What would be the deemed cost, if any, to a deceased taxpayer's estate of a Canadian resource property acquired from the deceased taxpayer?

Position: The cost would be nil.

Reasons: In a situation wherein a deceased taxpayer's estate which is a "personal trust" would acquire a "Canadian resource property" within the meaning of the expressions in subsection 248(1) of the Act and there would be no subsequent transfer nor distribution of the property to the taxpayer's spouse or a spousal trust, by virtue of paragraph 70(5.2)(a) of the Act, the taxpayer would be deemed to have, immediately before his/her death, disposed of the Canadian resource property and received proceeds of disposition therefor equal to its fair market value immediately before death. However, unlike the provisions such as subparagraphs 70(5.2)(b)(ii) and (d)(ii) and paragraph 70(5)(b) of the Act, in respect of resource property, land inventory and capital property, respectively, which deem a cost of certain amount to a deceased taxpayer's estate or to his/her spouse or spousal trust, as the case may be, for the property acquired from the deceased taxpayer, in the case at hand there would be no deemed cost to the estate under section 70 of the Act for the acquisition of the Canadian resource property by the estate from the deceased taxpayer. Furthermore, we also note that no one would have a cost in respect of the acquisition of the Canadian resource property under subsection 107(2), paragraph 69(1)(c) or any other provisions of the Act.

Principal Issues: Impact of a carryback of non-capital losses on the calculation of the Refundable Portion of Part I Tax in the carryback year.

Position: In the circumstances described, a reduction in taxable income in a prior year caused by a carryback of non-capital losses will reduce the Refundable Portion of Part I Tax component of RDTOH to nil by virtue of subparagraph 129(3)(a)(ii).

Reasons: The carryback of non-capital losses reduces taxable income in the prior year. Net income in the prior year is not affected. Since active business income is calculated by subtracting certain amounts from net income, active business income is not reduced when non-capital losses are carried back to the prior year. Therefore, in the circumstances of this case, the reduction of taxable income in the prior year results in a tax refund for the 1995 taxation year, and also eliminates the Refundable Portion of Part I Tax component of the taxpayer's RDTOH for the 1995 taxation year by virtue of subparagraph 129(3)(a)(ii). Eliminating the Refundable Portion of Part I Tax in 1995 results in an amount payable for the 1997 taxation year.

Principal Issues: A taxpayer has a mentally handicapped adult nephew that currently lives with the taxpayer's mother but he may eventually live with the taxpayer. If the taxpayer's RRSP is left to her nephew on her death, will the amount paid out of the RRSP qualify as a refund of premiums?

Position: Only if the nephew is financially dependent on the taxpayer at the time of her death and is her "child".

Reasons: The nephew would have to qualify as the taxpayer's child under the extended meaning of child in subsection 252(1) of the Act.