Income Tax Severed Letters - 2002-10-11

Principal Issues: Whether, in a particular situation, subsection 55(2) of the Act would apply to the dividends received by corporations and paid on "discretionary dividend shares."

Position: Subsection 55(2) of the Act could apply to such dividends, depending on the facts and circumstances surrounding the particular situation.

Reasons: The allocation of safe income on hand between different classes of shares cannot be made without knowing all the facts and circumstances surrounding a particular situation, especially when "discretionary dividend shares" are issued and outstanding. For example, such allocation would require, among other things, the consideration of all of the terms and conditions attached to the various classes of shares, an analysis of the terms of a unanimous shareholder agreement, if any, and an analysis of the applicable corporate law. In general, safe income on hand of a corporation is attributable to a particular share of a corporation in accordance with the "holding period" of the share and its entitlement to participate in the income of the corporation. Consequently, the "discretionary dividend shares" should not participate in the safe income on hand generated by OPCO prior to the issuance of the said "discretionary dividend shares." Furthermore and having regard only to the terms and conditions attached to the "discretionary dividend shares" (i.e. the right of such shares to dividends being subject to the discretion of the board of directors and such shares not being entitled to share in the distribution of the property or assets of OPCO in the event of the winding-up or dissolution), it is possible that all of the safe income on hand generated by OPCO for the period commencing on the issuance of the "discretionary dividend shares" and before the safe income determination time for the series would be allocated to the common shares. It is also possible that the payment of dividends on the said "discretionary dividend shares" would not result in a significant reduction in the portion of the capital gain that, but for the dividends, would have been realized on a disposition at fair market value of the "discretionary dividend shares." However, such dividends would reduce the capital gain that could be realized on the common shares and would reduce the safe income on hand attributable to the said common shares. Finally, the CCRA would consider, among other things, the possible application of subsection 15(1), 69(1) or 245(2) in such a scenario.

Principal Issues: (1) Whether 84.1 or 84(3) would apply to arm's length employees who sell their shares to a purchaser corporation incorporated for the purpose of the purchase? (2) Would such employees be denied the capital gain exemption in respect of the sale of their shares? (3) Would the GAAR apply?

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

Reasons: Provided that the purchaser corporation is not acting as an agent for the corporation whose shares are the shares being sold and provided the employee deals at arm's length with the corporations, the employee should be entitled to a capital gain on the sale of the shares to the purchaser corporation.
XXXXXXXXXX 2002-014677

Principal Issues: Whether the relocation outside Canada for work-related purposes of taxpayers who remain factual residents of Canada can be considered an eligible relocation in light of the requirements in par. (b) of the definition in ss. 248(1) to "ordinarily reside" at the new location outside Canada.

Position: Yes.

Reasons: A taxpayer may have more than one residence for tax purposes. A taxpayer may ordinarily reside in a residence outside Canada without having severed all his or her residential ties with Canada.

Principales Questions:
Des particuliers qui contrôlent une société transfèrent des immobilisations en faveur de la société. La société revend ces biens immédiatement après leur acquisition. Est-ce que les biens demeurent des immobilisations pour la société?

Position Adoptée:
Le transfert des biens, qui sont des immobilisations pour les particuliers qui contrôlent la société à laquelle ils les transfèrent, suivi de leur vente rapide n'aurait pas, en lui-même, comme résultat de modifier la nature des biens pour la société. Ces biens demeureraient des immobilisations pour cette société et le gain réalisé par la société, lors de la vente de ces biens, serait un gain en capital.

Principal Issues:
What is CCRA's position concerning an employee participating in a DSLP who becomes disabled and cannot return to work after the employees' leave of absence?

Position:
At the time it is definitely determined that an employee will not be returning to work, due to a disability, any deferred amounts not previously paid out of the plan, e.g., during the leave of absence, must be paid to the employee and included in the employee's income at that time.

Reasons: Our position, reflected in previous documents.

Principal Issues: Whether royalty payment based on the number of copies of software distributed or the income earned therefrom is a "royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work" within the meaning of subparagraph 212(1)(d)(vi) of the Act and is therefore exempt from Part XIII withholding tax otherwise payable under paragraph 212(1)(d) of the Income Tax Act.

Position: Yes, depending on facts of each case.

Reasons: Wording of subparagraph 212(1)(d)(vi);
facts on hand.

Principales Questions:
Un boni versé à un employé peut-il être visé par la politique des cadeaux ou récompenses énoncée dans la publication Nouvelles Techniques no 22?

Position Adoptée:
Non.

Principal Issues: Can two individuals who maintain separate residences be considered to be in a "conjugal relationship" for purposes of the Act.

Position: Question of Fact.

Reasons: There are many different components of a relationship which can be reviewed when determining whether two individuals are in a "conjugal relationship". Not all components must be present. The fact that two individuals maintain separate residences would not, in and by itself, preclude a finding that they are in a conjugal relationship for purposes of the Act.

Principal Issues: Whether, in a particular situation where corporations would own undivided interests in shares of public corporations and in an interest in a mutual fund trust following the dissolution of a partnership, it would be possible to partition such properties without attracting adverse tax consequences.

Position: Subsection 98(3) would require each partner to receive an undivided interest in each property distributed on the dissolution of the partnership, and would not permit a partner to receive a whole investment or a divided interest in such property on the distribution. If the particular situation would involve exchanges or transfers of rights or interests in the investments between the corporations, such exchanges or transfers would constitute a disposition for tax purposes.

The application of subsections 248(20) and (21) with respect to the shares would depend, among other things, on whether it would be legally possible to effect a partition of each share because each such share constitutes a separate property. If a corporation can legally issue fractional shares and if the partition of a share gives rise to the issuance of fractional shares, all of such fractional shares would be considered to represent the same property as the share being partitioned and each person would be considered to have a new interest in such a share. Consequently, subsection 248(21) may apply to the partition of a share in such circumstances. If subsection 248(21) does not apply, the partition of the share may not necessarily attract adverse tax consequences pursuant to subsection 248(20). In the circumstances, the Directorate is not prepared to provide an opinion on the possibility of partitioning a share without issuing fractional shares, but would be prepared to consider this question in the context of an Advance Income Tax Ruling.

With respect to the application of subsections 248(20) and (21), an interest in a trust constitutes one property, even if described by reference to units. Consequently, if it is legally possible to effect a partition of an interest in a trust owned by two or more persons and if each person's respective undivided interest in such an interest becomes a divided interest in the said interest, the Rulings Directorate would generally consider that subsection 248(21) may apply to such partition if the fair market value test in subsection 248(21) is met. If subsection 248(21) does not apply, the partition of an interest in a trust may not necessarily attract adverse tax consequences pursuant to subsection 248(20).

Potential application of GAAR would have to be considered depending on the situation.

Reasons: Wording of subsections 98(3), 248(20) and 248(21) of the Act. Past positions.

Principal Issues: (1) Does the Canada-US Income Tax Convention "fresh start" rule for gains apply to the disposition of real estate inventory? (2) Are non-resident executors of an estate required to obtain a 159(2) certificate when they propose to distribute real estate in Canada to the estate beneficiaries?

Position: (1) No (2) Yes

Reasons: (1) Real property to which Article XIII, paragraph 9 applies is limited to real property that represents a capital asset of the taxpayer. (2) Subsection 159(2) applies to all legal representatives, whether or not resident in Canada.

Principal Issues: Availability of Tuition Tax Credit and Education Tax Credit for apprenticeship fees

Position: Question of Fact

Reasons: Eligibility for the tax credits depends on the institution, the course and the individual. Inquiry too general.

Principal Issues:
1) Would a "premium rebate" be included in the income of a policyholder?
2) Could income from a life insurance policy be considered income from property for the purposes of paragraph 12(1)(x) of the Act.

Position:
1) Unable to answer.
2) Yes.

Reasons:
1) Insufficient information to enable a determination of the legal relationships among the parties to the arrangement and the legal relationships must be known before the tax implications can be determined.
2) "Property" is very broadly defined to include rights of any kind whatever and an insurance policy is essentially a bundle of rights set out under the insurance contract. Income from certain life insurance policies is required to be included in income under section 12.2 of the Act, which is found in Subdivision b - Income or Loss From a Business or Property, in Division B of Part I of the Act. If the rebate is received in the course of earning that income, paragraph 12(1)(x) of the Act could apply.

Principal Issues: Whether a corporation affiliated and owned by a University and carrying on activities that include SR&ED qualifies as an approved association

Position: Unable to confirm. General comments provided with respect to criteria and information required.

Reasons: Insufficient information provided by client.

Principal Issues:
Is a share that is listed on Tier 3 of the TSX Venture Exchange a qualified investment for an RRSP?

Position:
It is not qualified by virtue of the listing on Tier 3, however, it may qualify under another provision of the Act or Regulations.

Reasons:
Tier 3 is not a prescribed exchange pursuant to section 3200 of the Regulations.