Income Tax Severed Letters - 2001-04-13

Principal Issues: Whether payments made by a funeral home to employees of a church, and turned over to the church, constitutes employment income to the employees

Position: Question of fact. It is probably employment income unless it can be established that the employees received the amounts as agents of the church, for services performed by the church.

Reasons: Subsection 5(1) includes in employment income salaries, wages and gratuities received by employee in the year. Factual determination is required as to whether the employee receives the amounts, or whether he collects amounts as agent for the Church.

Principal Issues: Whether subsection 56(2) of the Act will be applied as a consequence of Newco only having to pay $1 for the preferred share issued by Opco 1 that will have a fair market value well in excess of that amount?

Position: Question of fact - but it appears that subsection 15(1) will apply in this particular situation. Also subsection 55(2) may apply to the deemed dividends.

Reasons: The law.

Principal Issues: Whether the cost of property taxes and gravel can be added to the adjusted cost base (ACB) of land that was inherited from a spouse.

Position: Depends on whether land is inventory or a capital property.

Reasons: No provision to allow such costs to be included in ACB of capital property.

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

Position: Yes.

Reasons: The Act provides for the transfer of property between plans with the same annuitant but the combined plan becomes a spousal plan.

Principal Issues: Whether payment received by a taxpayer from XXXXXXXXXX as an out of court settlement on a claim for long term disability payments from a disability insurance plan in which the taxpayer's former employer had made a contribution.

Position: Payment is taxable.

Reasons: Our position that such an amount is taxable pursuant to paragraph 6(1)(a) or (f) of the Income Tax Act is well known and was recently affirmed by the Tax Court of Canada in the case of Catherine Dumas v. Her Majesty the Queen, 2000 DTC 2603.

Principal Issues:
Whether interest paid on student loans that are renegotiated with financial institutions, other than through the process of Consolidation, would qualify for the tax credit in respect of interest on student loans contained in section 118.62.

Principal Issues:
Tax treatment under paragraph 81(1)(h) of the Act of payments under a specific program.

Position TAKEN:
Question of fact. Exempt if all conditions in paragraph 81(1)(h) are met.

Reasons:
Consistent with CCRA policy for years after 1997.

Principal Issues: Whether reimbursement by former employer of taxes paid on salary is taxable?

Position: yes

Reasons: Wording of subsection 6(3) of the Act, e9828408

Principal Issues:
Where a donation is made by an alter ego trust to a registered charity subsequent to the creator's death, should the donation be treated as a gift which would entitle the trust to claim a tax credit pursuant to subsection 118.1(3) or should it be treated as an allocation of income which may result in a deduction pursuant to subsection 104(6)?

Position:
Question of fact.

Reasons:
Provided that the terms of the trust agreement empower the trustees to make gifts and that the trustees exercise that power, subsection 118.1(3) would apply. Otherwise, if the charity is an income beneficiary and income is allocated to the charity, subsection 104(6) would apply and the deduction thereunder would be restricted as set out therein to exclude among other things deemed gains pursuant to subsection 104(4).

Principal Issues: 1) Is the 7(1)(a) benefit computed based on the date the option is exercised? 2) Can the stock option benefit be reduced because of the subsequent reduction in fmv of the shares?

Position: 1) No. 2) No.

Reasons: 1) The benefit is computed based on the date the share is acquired by the employee. 2) There is no provision providing for the reduction.

Principal Issues: Whether farm land meets definition of Qualified Farm Property if individual is not actively involved on a regular and continuous basis in farming business at time of sale.

Position: Question of Fact. It is not necessary that this test be met at time of sale, but rather for any 24 month period while the individual owned the property.

Reasons: Wording in clause (a)(vi)(A) of definition of QFP in 110.6(1). Consistent with other opinions.

Principal Issues: The income tax treatment in the situation where the employer pays for the cost of the plan premiums on behalf of the employee.

Position: Question of fact.

Reasons: To determine whether an employee-pay-all plan exists, one must look at the actual wording of a particular plan to determine whether the plan, as a term of either the policy with the plan carrier, the employment contract or some other document, places upon the employees the legal obligation to pay 100% of the premiums (although the employer may still be responsible for remitting the employees' premiums as collected from gross salary withholdings). If such an obligation exists, the plan will be considered an employee-pay-all plan provided such an arrangement was in place at the time contributions to the plan were made.

Principal Issues: Whether donation receipts may be issued to volunteers for expenses incurred on behalf of a charity.

Position: Where charity has reimbursed a volunteer for expenses and the volunteer later chooses to give the charity some or all of the reimbursement funds, there may be a gift for which a donation receipt may be issued. However, where a charity has a standard policy of reimbursing volunteers by way of issuing a donation receipt for the amount of the expense claims, it is our view that there has been no gift to the charity for which a donation receipt may be issued

Reasons: For there to be a gift for which a donation receipt may be issued, there must be a voluntary transfer of property from the donor to the charity, without any expectation of return or benefit to the donor or a person designated by the donor. Where the charity has a policy that it will reimburse volunteers by issuing donation receipts for the amount of the expenses, it would seem that there has been no voluntary transfer of property to the charity.

Principal Issues: 1. Application of section 51. 2. Amount paid on the redemption.

Position: 1. Yes. 2. No amount paid where 51(1) applies.

Reasons: 1. Wording of provision. 2. Amount paid on redemption where shares are issued is generally equal to the paid-up capital of those shares. Previous position is that an open-end mutual fund corporation does not have paid-up capital. Thus, no amount paid.

Principal Issues:
Is a corporation, all the shares of which are owned equally by four trusts and with each trust having the same corporate trustee, an affiliated person vis a vis each trust for the purposes of subsection 40(3.6) after the redemption of some or all of the shares held by only one trust?

Position: Yes.

Reasons:
Affiliated by virtue of subparagraph 251.1(1)(b)(i) and paragraph 251.1(4)(a). See for example, specific rules in subsections 256(4) and 256(5) of the Act that were required to prevent two or more corporations from being associated where they are otherwise controlled by the same trustee/executor. There is no similar relief in the affiliated person rules.

Principal Issues:
Whether an individual earning rental income would qualify to file a return of income for the June 15th filing deadline?

Position: The June 15th filing deadline is for individuals who carried on a business in the year.

Reasons: Where rental income is characterized as business income, the June 15th deadline would apply.

Principal Issues: Whether the fact that the Taxpayer's annual contribution to a health and welfare trust would exceed what is required to fund current year benefits, i.e., contributions may be in respect of future benefits also, would disqualify the trust as a health and welfare trust and thus jeopardize the tax exempt status of the benefits paid to employees.

Position: It is our position that employer contributions to a health and welfare trust which exceed the amount necessary to provide current year coverage will be denied pursuant to subsection 18(9) of the Income Tax Act. However, it is our view that the fact that excessive contributions have been made will generally not, in and of itself, result in the disqualification of a trust as a health and welfare trust, if the contributions are based on an actuarial determination of the amounts necessary to fund future health and welfare benefits.

Reasons: Administrative position.

Principal Issues: Proposed subsection 7(1.31) allows a taxpayer to specifically identify the shares that were acquired under a stock option as being the shares sold by the taxpayer when they are disposed of within 30 days of their acquisition and the taxpayer has elected to utilize the specific identification method. Will we administratively allow a taxpayer to elect to use the specific identification provision in extenuating circumstances where the 30 day condition can't be satisfied?

Position: No.

Reasons: The proposed 30 day condition is clear.

Principal Issues: How are in-trust accounts for minors taxed

Position: Depends on the facts

Reasons: If the three certainties are present, tax as trust. Attribution under subsection 74.1(2), subject to subsection 74.3(1), may apply with respect to income. Under section 74.2 taxable capital gains are not subject to attribution. Subsection 75(2) could apply with respect to income (or losses) or taxable capital gains (or allowable capital losses).

Principales Questions: Application des conventions fiscales auxquelles le Canada est parti à l'égard des lois fiscales provinciales.

Position Adoptée: Aucune.

Principal Issues: Does a recycling business involving 3 different procedures a qualified activity for the manufacturing and processing deduction?

Position: General comments but it appears that at least 2 of the three procedures qualify

Reasons: Meaning of "Processing"

Principales Questions: Un résident américain peut-il être assujetti à l'impôt canadien sur un gain réalisé suite à une disposition de biens canadiens imposables constitués d'actions reçues lors d'une fusion, visée par le paragraphe 87(1) de la Loi de l'impôt sur le revenu (la " Loi "), en échange d'actions qui ont fait l'objet d'une disposition réputée en vertu de l'alinéa 128.1(4)b) de la Loi lorsque ce contribuable a cessé de résider au Canada?

Position Adoptée: Oui

Principal Issues:
1. Can subsection 7(1.5) apply to an exchange of shares where the proceeds includes a right (usually a "Put") that has a nominal value?
2. Can the value of the right be ignored when determining if the conditions of subsection 7(1.5) have been met?

Position:
1 Only if the right is an integral term of the share such that it does not constitute a receipt of anything other than a share.
2. No.

Reasons:
Subsection 7(1.5) requirements as currently written are specific and must be met. The October 2000 budget requested input on possible changes to the rules for share for share exchanges but did not otherwise propose any changes.

Principal Issues:
Can an amount paid out of a particular retirement or pension arrangement be transferred to an RRSP?

Position:
No firm answer can be provided.

Reasons:
The request indicates that the employer did not make any contributions under the arrangement. If this is correct it would not be a pension plan. The plan is also not a Foreign Retirement Arrangement. Accordingly, there is no provision under the Act that will allow a deduction and thereby permit a tax deferred transfer of an amount from the arrangement to an RRSP.

Principal Issues: whether Millenium Prize awarded by National Gallery of Canada Foundation is a prescribed prize

Position: yes -

Reasons: prize will be recognized by the general public; is awarded for meritorious achievements in the arts; no indication the prize is provided as compensation for the services of the artists

Principal Issues:
1. Do payments under an early retirement program qualify as payments of a retiring allowance?
2. If the answer to 1. is yes, can the years of employment with previous employers be counted in determining the amount that may be transferred to an RRSP?

Position:
1. Yes.
2. Yes, if the allowance is paid by the current employer and the service with the former employer is recognized in the calculation of pension benefits.

Reasons:
1. They are being paid because of the employees termination or retirement.
2. Service with a former employer is recognized if any of that service is recognized in the calculation of pension benefits. Only payments by an employer may be transferred.