Income Tax Severed Letters - 2002-05-24

Principal Issues: Interpretation of paragraph (a) of the definition of "specified investment business" in subsection 125(7) of the Income Tax Act .

Position: The exclusion in paragraph (a) does not require a corporation to employ more than 5 full time employees from the beginning of the year to the end, but rather requires the corporation to employ more than 5 full time employees throughout the period in which there is a business.

Reasons: Wording of the Act permits such an interpretation.

Principal Issues: Whether land owned by the taxpayer constitutes "qualified farm property"?

Position: Perhaps

Reasons: We have not been provided with enough detail to make such a determination. Only general comments have been provided.

Principal Issues:
Where a foreign affiliate, that is incorporated in Barbados and is an international business company under the Barbados International Business Companies Act ("IBCA"), is liable to tax in Barbados on its worldwide income under the Barbados Income Tax Act and IBCA, whether the foreign affiliate would satisfy the conditions in paragraph 5907(11.2)(c) of the Income Tax Regulations ("Regulations")?

Position:
Yes.

Reasons:
The foreign affiliate would be a resident of Barbados for the purposes of the Barbados Treaty but for paragraph 3 of Article XXX of the Barbados Treaty (which provides that the Barbados Treaty does not apply to the foreign affiliate).

Principal Issues: Can amount be transferred out of a RRIF on a tax-deferred basis to an infirm adult child of the annuitant of the RRIF on the death of the annuitant?

Position: The amount may be transferred on a tax-deferred basis to an RRSP, a RRIF or an annuity under which the child is the annuitant, if the amount is a "designated benefit" as that term is defined in the Act.

Reasons: The Act provides for tax-deferred transfers of amounts between registered plans for the benefit of dependent children in certain circumstances. An infirm adult child must be financially dependent on the annuitant at the time of death to qualify for the tax-deferred transfer.

Position: Referred to Finance.

REASON: N/A

Principal Issues: Whether the income on amounts paid under a settlement reached on behalf of children under 21 years in respect of loss of consortium, society and companionship arising from the death of a parent are payments for a "mental injury" within the meaning of paragraph 81(1)(g.1)?

Position: No.

Reasons: While the relevant statute that provides for recovery for "the reasonable value of the services, consortium, companionship, comfort, instruction, guidance, counsel, training, and support", it precludes recovery for "damages for grief and bereavement by reason of the death".

Principal Issues:
Tax treatment of amounts received to operators of open custody homes.

Position TAKEN:
General information provided.

Reasons:
Question of fact.

Principal Issues: The t/p suffered a heart attack while vacationing in XXXXXXXXXX . Do various unreimbursed expenses incurred qualify as medical expenses?

Position: yes to ambulance costs and amounts paid to doctor and hospital for medical services; probably no to travel/transportation exp.; rental of medical equipment may qualify (details not provided); no to telephone exp.

Reasons: travel/transportation exp. probably denied because it is likely that comparable medical services were available closer to the locality at which the t/p was dwelling

Principal Issues: In circumstances where a limited partnership takes out a mortgage on its real property, would a limited partner who is the annuitant of the RRSP be considered to be the mortgagor for purposes of paragraph 4900(1)(j) of the Regulations

Position: The determination of the issue is a factual one and can only be determined in the context of an advance income tax ruling.

Reasons: In an ordinary partnership the partner would be considered the mortgagor for purposes of paragraph 4900(1)(j) and the taxpayer would have to demonstrate to us that the limited partner should be treated differently.

Principales Questions:
Est-ce que, dans la situation donnée, la récupération d'amortissement réalisée par Immeubleco est un revenu d'entreprise exploitée activement ?

Position Adoptée:
oui

Principal Issues: Can a distribution of common shares with rights attached to them come within the meaning of a distribution that consists solely of common shares for purposes of section 86.1 of the Act?

Position: No. We are willing to look into this issue in more depth if we receive a live file to review, however.

Reasons: We generally take the position that a share right is a property distinct from the share. So if the share right is created before the distribution such that the right is distributed along with the share, we do not see how it can be said that the distribution consists "solely" of common shares. The situation may be slightly different for rollover provisions other than s. 86.1; the wording of such provisions may allow us more flexibility with respect to share rights as non-share consideration. Again, we need to see a "live" file before we change our basic position.

Principal Issues: Where U.S. Treasury Regulation §1.1502-76(b)(1)(ii) applies, for purposes of computing the exempt surplus of a foreign affiliate, does the "taxation year of the subject affiliate in which it last became a foreign affiliate" mean the year ending on the day of the acquisition, or the year commencing on the day subsequent to the acquisition?

Position: The year commencing on the day subsequent to the acquisition, plus any transactions from the previous day after the acquisition

Reasons: Only the earnings and loss of the foreign affiliate subsequent to the acquisition is considered in the computation of exempt surplus.

Principal Issues:
A taxpayer disposes of his/her interest in a life insurance policy in a non-arm's length private sale in 1999 without advising the insurer. The insurer is advised only in 2002. Should the insurer report the income on the T5 pursuant to subsection 217(2) of the Regulations for the 1999 or 2002 taxation year?

Position: For the 1999 taxation year

Reasons:
Subsection 217(2) of the Regulations deals with an amount that is required to be included in computing the income of a taxpayer pursuant to paragraph 56(1)(j) which applies with respect to the taxation year in which the disposition occurred. The relevant time for determining the adjusted cost basis and value of the policy is the date of the disposition.

Principal Issues: Whether the XXXXXXXXXX qualifies as a "prescribed prize" pursuant to section 7700 of the Income Tax Regulations

Position: Question of fact, but likely not.

Reasons: Cannot be described as a prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public.

Principal Issues: Has property subject to a deemed disposition under paragraph 128.1(1)(b) of the Income Tax Act been "subsequently disposed of" for purposes of subsection 220(4.5)?

Position: Yes

Reasons: No basis in subsection 220(4.5) for excluding deemed dispositions

Principal Issues: What impact does location of storage of personal belongings have on residence determination?

Position: This is a minor tie, and unlikely to "make or break" any residence determination, whether for national or provincial residence purposes.

Reasons: This kind of tie is only significant when taken together with other residential ties. Generally, we'd look at where the most significant residential ties were to determine provincial residence. Usually, a person leaving Canada on a work assignment will be resident for provincial tax purposes in the province that they left from.

Principal Issues: Whether main purpose of a non-profit society is to provide sporting facilities for its members for the purposes of subsection 149(5).

Position: Question of fact

Reasons: Would need to examine by-laws and review activities to make this determination.