Income Tax Severed Letters - 2001-07-06

Principal Issues: Various questions relating to employee trusts, stock options, and qualified small business corporation shares

Position: General comments provided

Reasons: The Act

Principal Issues:
Whether 74.4(2) applies when the regular attribution rules in 74.1(2) already apply.

Position:
Question of fact whether one of the main purpose test is met.

Reasons:
The reduction of capital gains tax on a disposition may constitute a reduction of income for the purposes of the main purpose test in subsection 74.4(2) of the Act

Principal Issues: An adult brother ("Individual A") and his adult sister ("Individual B") live in the same residence along with some other relatives. Individual B is the natural mother of a child (the "Child"). Clarification has been requested with respect to the requirements of paragraphs 252(1)(b) and (d), and whether the Child can be considered the "child" of Individual A for purposes of the Act.

Position: General comments provided on paragraphs 252(1)(b) and (d), and it does not appear that the Child can be the "child" of Individual A pursuant to these provisions.

Reasons: Limited facts provided; however, given that the Child lives with her natural mother (Individual B), and given the mother's financial situation, it is unlikely that the Child can be said to be a child of Individual A under the above note provisions. In our view, the fact that Individual A expends funds in respect of the maintenance of the residence and takes the Child to school, is not sufficient to fall within these provisions. We also note that there appears to be other relatives in the household and it is unclear as to what their role is in the above situation.

Principal Issues: Questions on disposition of CCPC shares acquired on the exercise of a stock option and the exchange of shares under subsection 7(1.5).

Position: Explained operation of the law.

Reasons: Explanation of law requested.

Principal Issues: How are costs incurred for clearing, leveling and/or draining land for a golf course treated for tax purposes.

Position: Question of fact, generally qualify for inclusion in Class 17 of Schedule II of the Regulations.

Reasons:
The test laid out in the Mont-Sutton case will determine the appropriate tax treatment. Where the criteria in Mont-Sutton are satisfied, the costs incurred for greens, tees and fairways will qualify as "surface construction" within paragraph (c) of Class 17 in Schedule II of the Regulations.

Principal Issues: Are financial institutions required to obtain written documentation where a common-law relationship breaks down before proceeding with the various tax-deferred transfers that are permitted under the Income Tax Act (e.g. transfer of an RRSP under 146(16)(b))?

Position: Positions expressed in CCRA publications such as paragraph 5 of IT-528 (dated February 21, 1997) will be now extended to common-law partners unless that position has been changed by a later CCRA publication.

Reasons: Effective for the 2001 taxation year, common-law partners will generally have the same status under the Income Tax Act as spouses (i.e. married individuals).

Principal Issues: Can a stock dividend be a "taxable dividend" for the purposes of subsection 130.1(1) and hence, be deducted in computing a MIC's income? If a MIC increases its paid-up capital resulting in a deemed dividend under subsection 84(1), is the deemed dividend a dividend for the purposes of subsection 130.1(1) and deductible in computing the MIC's income?

Position: Yes to both questions.

Reasons: A stock dividend is a taxable dividend for the purposes of subsection 130.1(1) where it satisfies the definition "taxable dividend" in subsection 89(1) of the Act. MICs are subject to subsection 84(1). Therefore, a dividend deemed to be paid under that subsection is a dividend for the purposes of subsection 130.1(1) and deductible if the provisions of subsection 130.1(1) are otherwise satisfied.

Principales Questions:
Est-ce que les frais de souscription à des services internet ainsi que les frais de location d'un modem, encourus pour avoir accès à des données d'information financières sur l'évolution des marchés pour aider un contribuable à gérer ses placements, sont déductibles en vertu de l'alinéa 20(1)bb)?

Position Adoptée:
Non.

Position Adoptée:
Question de fait. Commentaires généraux

Principal Issues: whether retiring allowance

Position: question of fact

Reasons: 248(1) definition

Principal Issues: Restrictions applicable to a transfer of severance pay under paragraph 60(j.1) of the Income Tax Act.

Position: 1) As per the limits under paragraph 60(j.1).

Reasons: 1) Limits provided under paragraph 60(j.1).

Principal Issues:
Why must the total amount earned and received upon maturity of a 3 year equity-indexed GIC be reported in full in the taxation year in which the GIC matured and not apportioned over the three year term of the GIC?

Principal Issues: Whether a foreign exchange gain realised upon maturity of Ontario strip bonds denominated in US currency can be deferred until the funds are converted into Canadian dollars.

Position: The foreign exchange gain cannot be deferred until the funds are converted into Canadian dollars. It must be calculated upon maturity of the bonds.

Reasons: Subsection 39(2) of the Income Tax Act and paragraph 13 of Interpretation Bulletin IT-95R.

Principal Issues: whether expenses are medical expenses

Position: -question of fact

Reasons: 118.2(2)

Principal Issues: Whether the decision of the Federal Court of Appeal in Lerric Investment Corp. changes our assessing practices with respect to the determination of whether a corporation carrying on a business as a member of a joint venture employs more than 5 full-time employees for the purposes of the definition of "specified investment business" in subsection 125(7) of the Act.

Position: Yes.

Reasons: The Court's decision cannot be distinguished based on the facts of the case. It clearly rejected the allocation method described in IT-73R5 with respect to a corporation carrying on a business as a member of a joint venture. The administrative practice suggesting an allocation of employees of a joint venture is therefore no longer appropriate. Unless the corporation, as employer, has a direct relationship with the specified employee, it cannot be considered to have employed the employee.

Position Adoptée: Commentaires généraux quant au traitement fiscal de sommes reçues à titre de dommages-intérêts..

Principales Questions: Les paragraphes 74(1) et (2) de la Loi s'appliquent-ils à l'égard d'actions acquises avant le 23 mai 1985?

Position Adoptée: Oui

Principal Issues:
1) Whether converting a society registered under the B.C. Society Act to a company under the B.C. Company Act would result in a deemed disposition of its property?
2) Whether conversion would result in tax consequences to the members of the Society?

Position: Depends on particular facts

Reasons: Wording of paragraph 149(1)(l) of the Act.

Principal Issues: Will a non-qualified investment which was deemed by new draft paragraph 4900(1)(s) of the Regulations to be a qualified investment, be considered to be acquired by a deferred plan on
January 1, 2002 if held beyond the deeming period which ends on December 31, 2001?

Position: No.

Reasons: Factual acquisition must have occurred before September, 2000 for draft Regulation 4900(1)(s) to apply and the law does not deem an acquisition to occur at the later date.

Principales Questions: Quel est le coût des actions dans la situation présentée?

Position Adoptée: Coût correspond au capital déclaré des actions.

Principal Issues: Determination of average cost of XXXXXXXXXX shares acquired over a long period of time

Position: ACB of shares to be determined on the basis of the costs incurred by an individual to acquire the shares, there is no provision in the Act for establishing an arbitrary amount.

Reasons: Acb has meaning conferred by the Act and generally would be cost of property plus sec 53 adjustments

Principal Issues: Can refundable RCA tax be accessed to pay benefits under an RCA?

Position: Not until a distribution is made from the RCA, or if the RCA makes a valid election under subsection 207.5(2).

Reasons: No other mechanism under the legislation.

Principal Issues: Would an employee who obtained coverage under a policy subsequent to the date of demutualization be an "individual for whose benefit insurance coverage was provided under the policy" pursuant to subparagraph 139.1(16)(b)(iii) of the Act?

Position: Yes, as there is no point in time specified in subparagraph 139.1(16)(b)(iii) of the Act. However, the other requirements of subsection 139.1(16) of the Act including paragraph 139.1(16)(c) of the Act must be met.

Reasons: As above

Principal Issues: Is a corporation's non interest-bearing debt included in its "outstanding debts to specified non-residents" for the year?

Position: No. However, it is a question of fact whether any particular debt is one on which an amount in respect of interest is paid or payable for the year.

Reasons: Paragraph 18(5)(a)(ii) of the definition "outstanding debts to specified non-residents".

Principal Issues: What is our general position on the impact of corporate-owned insurance on the calculation of a corporation's safe income on hand? Do the premiums paid reduce safe income on hand? Do increases in the policy's cash surrender value and any benefits received by the corporation under the particular insurance policy increase the corporation's safe income on hand?

Position: Premiums paid should reduce the safe income on hand to the extent that they have not already been deducted in computing the corporation's net income for tax purposes. Increases in the cash surrender value of a corporate-owned exempt insurance policy will not increase the safe income on hand. Benefits would not increase the amount of safe income or safe income on hand of the corporation unless the amount of such benefit is otherwise required to be included in the corporation's net income for income tax purposes.

Reasons: The law.

Principal Issues:
How should a particular employee stock bonus plan be treated for taxation purposes?

Position:
The questions relate to an actual proposal. We provided general information that is basic to the understanding of such plans.

Reasons:
A basic understanding of section 7 was required.

Principal Issues:
1. whether plan is PHSP if expenses of persons not listed in 118.292)(q)?
2. whether medical expense of person if person is entitled to be reimbursed by a health plan

Position:
1. no
2. no

Reasons:
1. 118.2(2)(q)
2. 118.2(3)(b)

Principal Issues: Whether a component of the calculation of deferred taxes under new CICA Handbook section 3465 can be excluded from the computation of capital under subsection 181.2(3).

Position: No. It is the entire amount of both the Future Income Tax Liability and the Future Income Tax Asset as shown on the balance sheet that are to be included in the computation of capital under paragraphs 181.2(3)(b) and (h). It is also the carrying value of all assets and other amounts including amounts added to the carrying value of the asset in relation to adjustments under the CICA Handbook section 3465 that should be used for computing amounts for capital tax purposes, including the investment allowance.

Reasons: The wording of the Act.

Principal Issues: Will an amount paid to an employee by a non-incorporated employer for vested sick leave credits qualify as a retiring allowance where the non-incorporated employer transfers its business to a corporation and the shares of the corporation are sold to an arm's length corporation on the same day and the new corporation is wound up on the same day?

Position: Yes.

Reasons: The non-incorporated employer is selling its business to an arm's length person and we have previously concluded that this constitutes a loss of office or employment.

Principal Issues:

Principal Issues: What criteria must be met relative to ownership and management structure of a CCPC before reasonableness of an owner manager bonus/salary would be challenged

Position: There are no specific criteria in place but the more complex the structure, the more likely that reasonableness would be challenged especially if there is an undue tax advantages. The key is whether the recipient has been active in the business and contributed to the CCPC's profits from which the salary is paid, in which case the reasonableness of the amount would not likely be challenged.

Reasons: The law is very general and essentially we are required to look at the facts in making a judgment on reasonableness of the amount of salary or wages in particular circumstances.

Principal Issues: Will the conversion of an established bonus compensation plan into a funded supplementary executive retirement plan result in the application of the salary deferral arrangement provisions or in the retirement compensation arrangement provisions?
POSITION TAKEN: Question of fact.

Reasons: We would have to review the facts related to each conversion before making a determination of which provisions of the Act would apply. See 2000-0024213, 9732101, 9529413, 9910423, 9824357, 9807000

CALU - Conference for Advanced Life Underwriting (2001)

CALU - Conference for Advanced Life Underwriting (2001)

Principal Issues: Will a life insurance policy owned by an RCA trust be exempted under paragraph (e) of the definition of taxable life insurance policy in subsection 211(1) of the Act?

Position TAKEN: No.

Reasons: A life insurance policy owned by an RCA trust is not a policy that is at that time a retirement compensation arrangement