Income Tax Severed Letters - 2001-08-31

Principal Issues: An individual owns a house situated on land XXXXXXXXXX . As a result of XXXXXXXXXX , the land was subjected to pollution. As the XXXXXXXXXX company has offered to purchase the property, we have been asked about capital gains.

Position: As the available information was very limited, we were not able to provide any specific comments. However, we did send a copy of Interpretation Bulletin IT-120R5 as well as some other publications.

Reasons: See Principal Issues and Reasons

Principal Issues: An organization has raised a tax policy issue concerning the definition of "specified investment business" in subsection 125(7) of the Income Tax Act. The organization has been advised to contact the Department of Finance.

Position: See Principal Issues

Reasons: See Principal Issues

Principal Issues: Whether tools can be deducted as an employment expense under section 8 of the income Tax Act.

Position: No

Reasons: There is no employment expense provision that allows such an expense.

Principal Issues:
If an employer pays the PST on an insurance premium paid by an employee for a wage loss replacement plan:

(1) Is the PST a taxable benefit?
(2) Are benefits paid out of the plan taxable income of the employee?

Position:
Question of fact; depends on who has the contractual obligation to pay the premiums.

Reasons:
Paragraph 6(1)(f) and IT-428

Principal Issues: Indian employment income exemption

Position: Not exempt

Reasons: Duties off reserve; employer not resident on reserve

Principal Issues:
The application of subsection 15(2) for a non-resident shareholder of a Canadian corporation to indebtedness, otherwise subject to the application of 15(2) if not repaid within one year after the end of the corporation's taxation year, where the indebtedness is transferred from the Canadian corporation to its wholly owned non-resident subsidiary prior to one year after the end of the Canadian corporation's taxation year.

(1) Does the subsection 15(2.2) exclusion for indebtedness between two non-residents apply?
(2) Does the subsection 15(2.6) exclusion for a repayment of indebtedness within one year after the taxation year of the lender apply?
(3) Would GAAR apply?

Position:
(1) No.
(2) No.
(3) Yes.

Reasons:
Subsection 15(2), (2.2), (2.6) and section 245.

Principal Issues: Can a pension benefit from the U.K. be transferred to Canada on a tax-deferred basis?

Position: Yes.

Reasons: Subparagraph 60(j)(i).

Principal Issues:
Can property of an unmatured RRSP be transferred to an RRSP under which the spouse or common-law partner ("CLP") of the transferor is the annuitant?

Position:
Not unless they are living separate and the transfer is made under decree, order, judgment or written separation agreement in settlement of rights arising out of, or on breakdown of their marriage of common-law partnership.

Reasons:
Subsection 146(16) governs the transfer of property from an unmatured RRSP. Paragraph 146(16)(a) provides for a transfer to an RRSP under which the annuitant is also the annuitant under the transferor plan. Paragraph 146(16)(b) provides for a transfer to the RRSP of a spouse or CLP or former spouse or CLP, but only under the conditions outlined above (breakdown of marriage or common-law partnership).

Principal Issues:

1. Is proposed retiring allowance reasonable and deductible?
2. Would tax withholding be required if transferred to RRSP?
3. Can retiring allowance be paid to spouse, the Secretary/Treasurer?

Position:

1. Questions of fact.
2. Not on amount transferred directly as per 60(j.1).
3. Question of fact.

Reasons:

Principal Issues: The issue is whether an individual "ordinarily inhabited" a housing unit (a cottage) for the purposes of the definition of "principal residence" in section 54 of the Income Tax Act.

Position: General comments were provided.

Reasons: The review of fact situations fall with in the purview of Tax Services Offices.

Principal Issues:
Are free travel vouchers provided to clients of a broker as an incentive when they transfer an RRSP to the broker prohibited under 146(2)(c.4) of the Act?

Position:
Yes.

Reasons:
If such an incentive is linked to the issue or existence of an RRSP, it is prohibited even if it is available to other customers.

Principal Issues: Will a partial transfer of property after 1999 from an RRSP to a RRIF be made at the fair market value of the property or at its cost amount?

Position: The transfer can be made at fair market value or at cost amount, depending upon the circumstances of the transfer.

Reasons: Where a partial transfer does not result in the RRSP ceasing to exist, the transfer will be a qualifying disposition as opposed to a disposition for purposes of the Act. Under subsection 107.4(3) of the Act, the transferor's proceeds of disposition will be at cost amount unless the transferor elects an amount between cost amount and the fair market value. The transferee's cost under 107.4(3) will be the cost amount of the property to the transferor immediately before the disposition, unless the transferee elects the cost to be at fair market value.

Principal Issues: Can the spouse or common-law partner of a deceased RRSP annuitant rollover the plan benefits received to defer tax?

Position: Yes.

Reasons: Paragraph 60(l) provides rollover options for situations involving death of the plan annuitant before and after maturity of the plan.

Principal Issues: If a minor grandchild receives a pension benefit as a result of the death of his grandparent, can the amount be transferred to an annuity for the grandchild?

Position: Yes

Reasons: Paragraph 60(l) provides for a deduction to the grandchild where a certain type of annuity is purchased by him or on his behalf.

Principal Issues:
1. Will subsection 207.6(2) of the Act apply where a retirement compensation arrangement acquires an interest in a life insurance policy?
2. 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:
1. No.
2. No.

Reasons:
1. The wording in subsection 207.6(2) of the Act is very clear. It applies where an employer acquires an interest in a life insurance policy in order to fund certain payments that are to be provided to an employee in certain circumstances.
2. A life insurance policy owned by an RCA trust is not a policy that is at that time a retirement compensation arrangement.

Principal Issues:
Tax treatment of income received from a United Sates 401(k) plan.

Position TAKEN:
Withdrawal of contributions is not taxable. Withdrawal of income earned by the plan and of contributions made by US employer is taxable. CCRA will accept a reasonable allocation by the taxpayer between taxable and non-taxable portions.

Reasons:
There are no provisions in the Act allowing for the deduction of contributions to 401(k) plans. Generally, the full amount of pension receipts is taxable less any amount that represents the withdrawal of the non-deductible contributions.

Principal Issues:
1. Must forfeited amounts be allocated at the end of the year?
2. Can forfeited amounts be allocated to former employees?
3. Where an employee is terminated, not vested, and rehired in the same year, can the employee claim the deduction under subsection 144(9)?

Position:
1. No.
2. No, unless the allocations to former employees are the allocation of amounts that were vested and payable to them as a consequence of their termination.
3. Yes.

Reasons:
1. The Act requires forfeitures to be allocated in each year, it does not specify when in the year forfeitures are to be allocated.
2. The provisions of 144(1) require amounts allocated under subparagraphs (i) through (v) to be allocated in each year to employees.
3. Subsection 144(9) does not permit recognition of the forfeiture in the year of termination and rehire, but the forfeiture may be recognized under 144(9) when the employee subsequently ceases to be a beneficiary under the plan.

Principal Issues: Will the Mandatory Provident Fund Scheme Ordinance established as of December 1, 2000 in Hong Kong qualify as a pension for purposes of the Act?

Position: Yes.

Reasons: Based on a review of the plan's documents, the Mandatory Provident Fund Scheme Ordinance would qualify as a pension for purposes of the Act.