Income Tax Severed Letters - 2001-10-26

Principal Issues: Does a hot tub qualify as an eligible medical expense?

Position: No

Reasons: not described in regulation 5700

Principal Issues: Whether the "Modified Partnership" basis described in IC 73-13 would permit an investment club to transfer its assets to its members and then wind up its affairs on a tax deferred rollover basis through the initial use of subsection 98(3).

Position: No.

Reasons: Such a scenario appears to fall beyond the intent and purpose of the "modified partnership" basis described in paragraphs 5 and 8 of the Circular.

Principal Issues: Does a light therapy device qualify as an eligible medical expense?

Position: No

Reasons: not described in regulation 5700

Principal Issues: What is meant by the term "social services" in the SR&ED definition in 248(1) of the Income Tax Act?

Position: not defined in the Act - dictionary definition and some examples provided

Reasons: definition

Principales Questions: Conséquences fiscales découlant du décès d'un enfant mineur bénéficiaire d'une rente visée à la division 60(l)(ii)(B) de la Loi de l'impôt sur le revenu acquise par lui ou par une fiducie.

Position Adoptée: La valeur de la rente ou de son droit au revenu dans la fiducie, selon le cas, doit être incluse dans le calcul de son revenu.

Position: The shares of the MFC are "specified foreign property".

Position Adoptée:
Oui.

Principal Issues:
What is the correct treatment under the Income Tax Act for the GST/HST differential under the "Quick Method" of accounting where registrants collect tax at 7% or 15% and remit a lower amount without claiming input tax credits on current expenses and inventory?

Position:
The amount is taxable.

Reasons:
The difference between the GST/HST collectible or collected on taxable supplies and the amount of net tax remitted, in accordance with the "Quick Method," constitutes income subject to tax under section 9 of the Income Tax Act; since this difference is to be retained by the registrant in lieu of claiming input tax credits for the GST/HST payable or paid on current expenses and inventory.

Principal Issues: Will the reserve that has to be included in income per ITA 34.2(5) have to be included in "adjusted income" for the purposes of the refundable medical supplement calculation?

Position: yes

Reasons: 34.2(5) states the amount must be included in income (the section 3 income) and there is no noted exception for the 34.2(5) reserve

XXXXXXXXXX 2001-009714
Shaun Harkin, CMA
November 6, 2001

Principal Issues: Tax treatment of a partial surrender of universal life insurance policy with a policy loan.

Position: A policy loan results in a disposition of an interest in the policy and the amount of the policy loan in excess of the adjusted cost basis of the entire policy is included in income. On a partial surrender of the policy, element A of the calculation of proceeds of disposition in 148(9) refers to the cash surrender value of the taxpayer's entire interest in the policy, not the partial interest surrendered, and the taxpayer would be required to include an amount equal to the cash surrender value of the entire policy less any outstanding policy loans into income.

Reasons: Legislation

Principal Issues: Whether Cco can avail itself of the bump under paragraph 88(1)(d) in respect of shares owned by Aco?

Position: Shares are likely eligible for the "bump".

Reasons: Provided that the shares of Bco are capital property and are not "ineligible property" as defined in subparagraphs 88(1)(c)(iii) through (vi).

Principal Issues: Does the transfer of shares from an Employee Share Purchase Plan to an RRSP constitute a sale for purposes of T5008 reporting under Regulation 230(2)?

Position: No.

Reasons: This position is confirmed in 94-110 Handbook on Securities Transactions.

Principal Issues: 1. Does subsection 107(2) apply to a specific scenario?107(2)

Position: 1. Yes

Reasons: 1. provided election under 107(2.001), 107(2.002) or 107(4) to 107(5) is not applicable; 107(2) will apply as amts are being paid out of original trust in satisfaction of beneficiaries (new trusts) capital interests

Principal Issues: We were asked to rule that certain dispositions in XXXXXXXXXX would dispositions of eligible capital property.

Position: Cannot rule. Provided general comments.

Reasons: The transactions upon which we were asked to rule are already completed. Provided general comments only, an audit of the XXXXXXXXXX property transfers from the Partnership to the Corporation is required to confirm whether the Corporation or the Partnership has beneficial ownership of certain properties at the time of their disposition to an arm's length purchaser.

Principales Questions:
1. Est-ce que les sommes versées aux prêtres par un fonds du diocèse constitué principalement de dons provenant de quêtes spéciales et de dons des prêtres sont imposables?
2. Est-ce que les sommes versées aux prêtres par le fonds d'appoint du diocèse constitué de revenus du diocèse dans le but de bonifier le régime de retraite sont imposables?
3. Est-ce que les montants versés par les prêtres et affectés à ce fonds d'entraide sont des dons de bienfaisance aux fins du paragraphe 118.1(3) de la Loi?

Position Adoptée:
1. Selon les renseignements reçus, les sommes versées aux prêtres ne sont pas des sommes versées afin de bonifier le régime de retraite. Il se pourrait que certaines de ces sommes soient des prestations d'assistance sociale ajoutées au revenu net conformément à l'alinéa 56(1)u) et déduites dans le calcul du revenu imposable par l'alinéa 110(1)f). Le Bureau des services fiscaux a conclu qu'il ne s'agissait pas d'avantages imposables aux fins du revenu d'emploi.
2. Les sommes provenant du fonds d'appoint ainsi que du fonds dans le but de bonifier le régime de retraite du prêtre seraient des prestations de retraite ou de pension incluses au revenu par l'alinéa 56(1)a) de la Loi.
3. Aucune

Principales Questions:
1. Est-ce que l'indemnité versée à titre de temps de transport, à un employé de l'industrie de la construction qui se déplace vers un chantier éloigné, est imposable ?
2. Est-ce que cette indemnité fait partie de la rémunération assurable aux fins de la Loi sur l'assurance-emploi ?
3. Est-ce que le temps calculé selon la convention aux fins de cette indemnité de temps de transport fait partie des heures assurables aux fins de cette même loi ?

Position Adoptée:
1. Oui, elle serait imposable à titre de revenu provenant d'une charge ou d'un emploi.
2. L'indemnité de temps de transport serait incluse dans la rémunération assurable.
3. Par contre, aux fins de la détermination des heures d'emploi assurable, nous sommes d'avis qu'aucune heure n'est effectivement travaillée ou réputée avoir été travaillée lorsqu'en contrepartie du temps de transport effectué pour se rendre au travail avant et/ou après la journée normale de travail prévue par convention collective, une indemnité de temps de transport fixe ou calculée selon le taux horaire de salaire est versée à un employé (autres que frigoristes).

Principal Issues:
1. Where employee's salary increases during the plan year, can the employer give the employee cash in lieu of additional flex credits during the year, and include the amount in the employee's income.
2. Can the employer calculate the flex credits bases on estimated salary at the beginning of the plan year, as opposed to salary levels when the flex credits are allocated?
3. Can employer award flex credits based, in part, on employee performance?
4. Can the employer calculate the flex credits as a percentage of total compensation including fringe benefits?
5. Can the employer set total compensation levels, with a certain percentage being flex credits, so that flex credits would automatically increase as total compensation increases?
6. Can a flex plan have only two options with one being cash and the other being a health spending account?

Position:
1. The plan would not be affected by the payment of cash to the employees.
2. As long as flex credits are notional, allocated prior to the plan year, and the benefits are selected prior to the plan year, calculation of the benefits based on a reasonable estimate of compensation would probably not, by itself, affect the plan's status. We would need to consider the plan in its entirety.
3. Entire plan must be reviewed in order to determine consequences.
4. Same as 2
5. Where salary levels increase during the year, additional flex credits cannot normally be allocated during the plan year unless the increase in salary was due to a change in employment status. However, all the facts must be reviewed in order to make definitive comments.
6. Can only be determined after reviewing all of the facts.

Reasons:
1. Since the amount received is included in income, it would not cause the plan to fall outside the guidelines in IT-529.
2 & 4. IT-529 does not set out a formula for calculating the allocation of benefits. If the conditions set our in the bulletin are satisfied, and the calculation of the number of flex credits is based on a reasonable estimate of compensation, the plan would likely not fall outside the IT-529 guidelines.
3. Flex credits must be notional, credits must be allocated prior to the plan year, and benefits must be selected before the beginning of the plan year. Credits can vary from year to year, but, in this case, all the facts must be considered to determine if the plan falls within the guidelines of IT-529.
5. Question of fact.
6. The plan may meet the conditions set our in IT-529 but more information is required.

Position:
Taxpayer should withhold or obtain a Treaty-Based Waiver.

Principal Issues:
CCA classification of racing boats. Boats were manufactured in the United States. The taxpayer's representative has asked that the boats be included in Class 16.

Position TAKEN:
Class 7. Not eligible for accelerated CCA under regulation 1100(1)(v).

Reasons:
Class 7 includes, among other things, a vessel and furniture, fittings or other equipment attached to the vessel.

Principal Issues:
Subparagraph 212(1)(b)(vii) and events of default description