Income Tax Severed Letters - 2002-12-20


2002 Ruling 2002-0138973 - DEFERRED SHARE UNIT PLAN - DIRECTORS

Unedited CRA Tags
REG 6801(d)

Principal Issues: Will the creation of a deferred share unit plan result in an SDA?

Position: No.

Reasons: Requirements of Regulation 6801(d) are met.

2002 Ruling 2002-0154423 - Reinvestment and consolidation of units

Unedited CRA Tags
104(24) 248(1)

Principal Issues:

We are asked to rule on a proposed transaction where the Trustee would adopt a "plan of consolidation". Under this plan, immediately following a distribution and reinvestment in additional units of a Fund, the units are consolidated so that the number of units of the Class of the Fund held by a unitholder immediately after the distribution and reinvestment shall be equal to the number of units of that class of the Fund held by the unitholder immediately before such distribution.

The Rulings requested are:
1) Whether the automatic reinvestment of a distribution and consolidation will prevent the distribution to be payable as per 104(24) of the Income Tax Act (the "Act").
2) Whether the consolidation following a distribution will result in a disposition, or a partial disposition, of the units so consolidated.


1) No
2) No


2002 Ruling 2002-0158353 - Butterfly transaction-Papillon

Unedited CRA Tags
55(3)(b) 55(3.1), 55(2) 186(4), 191(a)

Principal Issues: Split-up butterfly transaction.

Position: Favourable rulings provided.

Reasons: Meets the requirements of the law.

2002 Ruling 2002-0158523 - Loss Utilization in a Related Group

Unedited CRA Tags
20(1)(c) 112(1) 56(2)

Principal Issues: Loss utilization in a related group of companies.

Position: The loss utilization is acceptable.

Reasons: In accordance with our revised policy on interest deductibility, it is no longer necessary for the dividend rate on the preferred shares to be greater than the interest rate on the loan (a so-called "positive" spread), as had been customary in our previous loss utilization rulings. In this ruling, there is a "zero" spread, that is, the dividend rate on the preferred shares is equal to the interest rate on the loan.

2002 Ruling 2002-0160913 - INTEREST

Unedited CRA Tags

Principal Issues:
Whether interest is deductible where acquisition debt is moved from Holdco to Opco

Position: yes

Reasons: ITA

2002 Ruling 2002-0163383 - Derivatives - Foreign property rules

Unedited CRA Tags
18.1, 206 245, 9

Principal Issues: Tax planning involving the use of bank deposits, swaps and hedging transactions in order to allow RSP funds to earn an investment return based on foreign properties while not holding such properties.

Position: The use of derivatives in respect of the returns on the Canadian bank deposit does not result in such bank deposit being considered foreign property for the purposes of the Act.

Reasons: Similar to ruling # E 2001-0079143 and E 2002-016141

2002 Ruling 2002-0177163 - Subsection 87(4) - S/H Rights Plan

Unedited CRA Tags

Principal Issues: Whether a right under a shareholder rights plan, obtained by the Target shareholders on a triangular amalgamation in connection with the acquisition of a common share of Parent, will constitute "consideration" other than a share for the purposes of subsection 87(4)

Position: No

Reasons: The rights will not be received as consideration by the Target shareholders in the context of the facts described in the ruling. The following facts were pertinent to reaching this conclusion: (a) the amalgamation agreement stipulates that the Target shareholders will only receive the shares of Parent and Amalco, (b) the parties will proceed with the amalgamation irrespective of whether the shareholder rights plan is in effect at the time of the amalgamation, (c) Parent may terminate the shareholder rights plan at any time in accordance with its terms, (d) the rights have little or no value, (e) it is unlikely that Securities regulators would permit the rights to be exercised, and (f) the rights may be redeemed by Parent at any time for nominal consideration. In summary, it is our view that the rights under the shareholder rights plan, if received by the Target shareholders, will not constitute consideration for the purposes of subsection 87(4) because, in this particular case, the rights are not something that were bargained for by the Target shareholders and Parent is not promising to provide them to the Target shareholders.

Technical Interpretation - External

10 January 2003 External T.I. 2002-0177815 - MEDICAL EXPENSE

Unedited CRA Tags

Principal Issues: Whether payments made to a place outside Canada that provides care and training for mentally handicapped individuals qualify as a medical expense.

Position: General comments provided.

Reasons: The determination is a question of fact.

10 January 2003 External T.I. 2002-0143315 F - FRAIS LEGAUX DEDUCTIBILITE

Unedited CRA Tags

Position Adoptée: Les frais légaux et le montant pour dommages payés ne sont déductibles ni dans le calcul du revenu de la conjointe ni dans celui du contribuable décédé. Ils pourraient toutefois être déductibles dans le calcul du revenu de la succession si ces dépenses ont été payées par la succession, s'il s'agit de dépenses courantes qui ont été engagées ou effectuées en vue de tirer un revenu d'entreprise et si ces dépenses résultent d'actes commis par l'entrepreneur alors qu'il exploitait son entreprise.

9 January 2003 External T.I. 2003-0181155 - German Social Security

Unedited CRA Tags
Art. 18

Principal Issues: Whether social security received from Germany is taxable in Canada.

Position: Not until 2003 when subparagraph 3(c) of Article 18 of new German Treaty takes effect (see letter).

Reasons: Law

8 January 2003 External T.I. 2002-0173135 - INTEREST POSTAMBLE

Unedited CRA Tags

Principal Issues: whether amendment to debt obligation providing that additional interest is payable if debt exceeds EBITDA by 3:1 will be offside 212(1)(b)(vii)

Position: unclear, however amendment may result in new debt obligation

Reasons: relevant information not provided - should be advance income tax ruling request

8 January 2003 External T.I. 2002-0173665 - SMALL BUSINESS CORP

Unedited CRA Tags
248(1) 186(4) 186(7)

Principal Issues: Can two corporations which have no direct ownership in each other but are controlled by the same person be considered connected corporations for purposes of the definition of "small business corporation" as that term is defined in subsection 248(1) of the Act?

Position: Yes

Reasons: Subsection 186(7), which is generally applicable on and after March 16, 2001, provides that, for greater certainty, where a provision of the Act or the regulations indicates that the term "connected" has the meaning assigned by subsection 186(4), one must take into account the extended meaning of that term as provided in subsection 186(2) unless the provision expressly provides otherwise.

8 January 2003 External T.I. 2002-0174385 - INTEREST; JOINT VENTURE

Unedited CRA Tags

Principal Issues: whether 212(1)(b)(vii) exemption applies on interest payable by Canadian company that purchases property (subject to more than 5 year mortgage) from joint venturers, one of whom is non-resident

Position: no

Reasons: not evident that Canadian company is not obligated to pay non-resident more than 25% within 5 years

7 January 2003 External T.I. 2002-0151375 - TRANSFERS OF NON-QUALIFIED INVESTMENTS

Unedited CRA Tags
146(10) 146(7)

Principal Issues:
When a non-qualified investment is held in an RRSP or RRIF and subject to PartXI.1 tax will the property continue to be subject to this tax when the property is transferred to another RRSP or RRIF.

No, there will be an income inclusion in the annuitant's income equal to the fair market value of the property pursuant to 146(10) or 146.3(7) of the Act.

When the property is transferred to another RRSP or RRIF the transferee trust is considered to have acquired the property. As such the transferee trust has acquired property that is a non-qualified investment.

7 January 2003 External T.I. 2002-0177565 - RRSP PREMIUMS PAID WITH TERMINATION PYMT

Unedited CRA Tags
60(j.1) 146(5)

Principal Issues:
Is the determination of whether an amount received at termination is a retiring allowance relevant for determining deductibility under subsection 146(5) where the funds are subsequently used to make an RRSP contribution?

Position: No.

Any source of funds may be used to make a contribution to RRSP for purposes of the deduction under subsection 146(5).

7 January 2003 External T.I. 2002-0173245 F - REMBOURSEMENT DEPENSES ET ALLOCATIONS

Unedited CRA Tags

Principales Questions:
? Est-ce qu'il y a un avantage imposable en vertu de l'alinéa 6(1)a) de la Loi dans la situation où l'Employeur rembourse des dépenses à ses employés lorsque ceux-ci sont tenus, de par la politique interne de l'Employeur, d'encourir des frais, dans le cadre des services de consultation, pour offrir une collation aux membres XXXXXXXXXX affiliés lors d'une réunion à laquelle les employés participent avec les membres XXXXXXXXXX ?

7 January 2003 External T.I. 2002-0133675 - Cash Call Provisions & Contingent Rts

Unedited CRA Tags
251(5)(b) 256(1.4)

Principal Issues: Whether paragraph 251(5)(b) and/or subsection 256(1.4) applies to rights under cash call provisions of shareholders' agreement in particular situation?

Position: Yes

Reasons: The rights are contingent rights

7 January 2003 External T.I. 2002-0159065 - SWAP AGREEMENT FOREIGN PROPERTY

Unedited CRA Tags

Principal Issues:
1. Are swap agreements with foreign counterparties foreign property?
2. If so, does the "cost amount" for purposes of Part XI include the collateral amount posted from time to time?

1. Yes.
2. No.

1. The swap agreement is an intangible property situated outside of Canada.
2. The collateral is security only and payment thereof is conditional on default of the original agreement.

7 January 2003 External T.I. 2002-0174295 - EMPLOYMENT EXPENSES

Unedited CRA Tags

Principal Issues: Is the cost of special clothing worn by employees in the performance of their duties deductible under subparagraph 8(1)(i)(iii) of the Act?

Position: No.

Reasons: Longstanding position of the Canada Customs and Revenue Agency and has generally been supported by the courts.

6 January 2003 External T.I. 2002-0176935 - TAX CREDIT FOR POLITICAL CONTRIBUTIONS

Unedited CRA Tags

Principal Issues: Is a credit available for both federal and provincial political contributions?

Position: General information provided.

Reasons: ITA provides federal credit for federal political contributions.

6 January 2003 External T.I. 2002-0173405 F - Capital Dividend Account

Unedited CRA Tags
89(1) 38

Principal Issues: Computation of a corporation's capital dividend account in some given fact situations.

Position: General comments

Reasons: Wording of the Act.

3 January 2003 External T.I. 2002-0141745 F - Terminaison d'une Fiducie testamentaire

Unedited CRA Tags

Principales Questions: Est-ce qu'une fiducie testamentaire prend fin lorsque ses biens deviennent liquides? Est-ce qu'une telle fiducie a une durée de vie maximum?

Position Adoptée: Non, seulement lors de la distribution finale de ses biens. Non

3 January 2003 External T.I. 2002-0143965 - Shareholder Benefit on First Share Issue

Unedited CRA Tags
15(1) 246(1)

Principal Issues: Whether there is a benefit conferred when a corporation's first share is issued for a nominal price after the corporation has carried on business and has accumulated value.

Position: Yes.

Reasons: The law. The value of a share is significantly derived from the value of the net assets of the corporation. Subject to an appropriate rectification order of a Court, the payment of a nominal amount for a share that has, at the time of payment, more than nominal value results in a benefit being conferred on the person purchasing the share.

31 December 2002 External T.I. 2002-0163545 - construction deferred revenue

Unedited CRA Tags

Principal Issues:
1. In light of recent court decisions, are amounts reflected in "deferred revenue" of a corporation using the percentage completion or completed contract methods of accounting for long-term construction contracts, that have been billed but not received, included in computing capital under subsection 181.2(3)?
2. Can we break down amounts reported on the balance sheet of a corporation, into its components to extract the amount of any items to be included in capital that may be reflected in the balance sheet amount?
3. If the answer to (2) is affirmative, does it matter whether the balance sheet amount is on the asset or liability side of the balance sheet?
4. Are Holdbacks Receivable included in computing capital under subsection 181.2(3)?

1. Generally no
2. Yes
3. No
4. No

1. Recent court cases have clarified that such amounts do not constitute reserves for purposes of Part I.3. However, to the extent amounts have been received under the contracts, such amounts are advances and are included in computing capital under paragraph 181.2(3)(c).
2. The court held in PCL that it was appropriate to examine the components of an amount on the balance sheet to determine whether the balance sheet amount reflects amounts that are included in capital, such as advances.
3. The concept of looking to components of a balance sheet balance to determine the amount of any components reflected in the balance sheet amount, that are included in capital applies equally to debit balances and credit balances.
4. There is nothing in subsection 181.2(3)(c) that would require Holdbacks Receivable to be included in the computation of capital.

30 December 2002 External T.I. 2002-0180025 - MINIMUM PAYMENT FROM A RRIF

Unedited CRA Tags
146.3(1) 146(2)(6.3) 146(2)(6.4)

Principal Issues:
When does a minimum amount have to commence to be paid from a RRIF?

In the calendar year following the year in which the RRIF is entered into.

Reasons: The definition of RIF in 146.3(1) of the Act is clear.

24 December 2002 External T.I. 2002-0172875 - LIFE INSURANCE POLICY GIFT OF PREMIUMS

Unedited CRA Tags

Principal Issues:
1. An individual wishes to pay the premiums on a life insurance policy which will be owned by a charity. Is it necessary for the charity to be designated as an irrevocable beneficiary of the policy in order for the premiums paid to qualify as a charitable gift?
2. Is the individual entitled to a charitable donations tax credit in respect of a portion of the premiums paid on a policy owned by a qualified donee where the individual's estate is named as one of the beneficiaries under the policy?

1. No.
2. Possibly, however this determination can only be made after reviewing the facts of the specific case.

1. Pursuant to IT-244R3, where an individual absolutely assigns a life insurance policy to a qualified donee and makes the qualified donee the registered beneficiary of the policy, the individual may claim a charitable donations tax credit for the donation. If the individual continues to pay the premiums on the policy, each payment will also qualify as a charitable gift.
2. Question of fact.

23 December 2002 External T.I. 2001-0096585 - Balance due day of Rights or Things return

Unedited CRA Tags
70(2) 161(1)

Principal Issues: The application of subsection 161(1) to a rights or things return filed under subsection 70(2).

Position: Subsection 161(1) will apply after the day that is the taxpayers "balance due day" as defined in subsection 248(1). In this situation, the balance-due day will be April 30, 2002.

Reasons: The application of the law.

20 December 2002 External T.I. 2002-0164735 F - PRODUIT DE DISPOSITION ACHALANDAGE

Unedited CRA Tags
14(5) 14(1) 12(1)(G)

Principales Questions:

Différentes mises en situation impliquant la vente par un pharmacien de son officine afin de déterminer le produit de disposition de l'achalandage qu'il " est devenu ou peut devenir en droit de recevoir " aux fins de l'alinéa a) de l'élément E du montant cumulatif des immobilisations admissibles au paragraphe 14(5) de la Loi. Le montant que le pharmacien peut devenir en droit de recevoir est fonction d'un montant établi par ordonnance multiplié par le nombre d'ordonnances vendues au cours d'une période de douze mois.

Position Adoptée:

18 December 2002 External T.I. 2002-0156515 - LEASING PROPERTY EXCEPTIONS

Unedited CRA Tags
REG 1100(16)

Principal Issues: Whether exemption in 1100(16)(a)(ii) can apply

Depends on whether one business or more than one business (IT206R criteria)

If more than one business, the business that is the principal business must satisfy the 90% gross revenue test (IT371)

12 December 2002 External T.I. 2001-0100755 F - Impact of LCB on Dr and Part IV

Unedited CRA Tags
129(1) 186(1) 152

Principal Issues: In a given fact situation involving the carry back of a loss (1) Whether the carry back, which would reduce taxable income to nil, would cause the T/P to lose the dividend refund (DR) for the year to which the loss was applied? (2) Whether the T/P would have to repay the DR for the year and pay interest on the cancelled DR that was applied to the T/P's taxes payable for the year pursuant to 129(2)? (3) Whether the dividend recipient would be liable to pay the Part IV tax if the dividend payor loses the entitlement to the DR?

Position: (1) Yes. (2) Yes to both. (3) May or may not depending on the timing of the reassessment of the dividend payor's T2 return and the date by which the dividend recipient must pay the Part IV tax.

Reasons: (1) The loss would reduce the RDTOH at the end of the year to nil.
(2) Ss. 160.1(1) would apply since ss. 160.1(4) requires an amount applied to a liability of the T/P to the Receiver General to be treated for the purpose of s. 160.1 as if it had been refunded. (3) The dividend recipient would not be liable to pay the Part IV tax if the dividend payor's DR has been cancelled by reassessment before the latest date by which the dividend recipient would have had to pay the Part IV tax pursuant to ss 186(1). Otherwise, the dividend recipient would be technically required to pay the Part IV tax, which could be refunded to the dividend recipient upon request after the dividend payor's DR has been cancelled by reassessment.

12 December 2002 External T.I. 2002-0146175 F - Losses Incurred by a Taxpayer ect......

Unedited CRA Tags
20(1)(p) 50(1) 39(1)(c)

Principal Issues:
In the particular situation:
1) Whether a bad debt amount can be deducted by the taxpayer;
2) Whether a capital loss or an ABIL could be claimed on shares of the capital of a bankrupt cooperative corporation;
3) Whether a capital loss or an ABIL could be claimed on an amount paid under a guarantee.

1) Yes.
2) General comments.
3) General comments.

1) 20(1)(p) could apply as set out in paragraph 28 of It-442R.
2) If the cooperative corporation qualifies as small business corporation, the taxpayer could be entitled to deduct the loss incurred as an ABIL.
3) If the cooperative corporation qualifies as small business corporation and if the capital loss is not denied by the application of 40(2)(g)(ii), the taxpayer could claim the loss incurred as an ABIL.

Technical Interpretation - Internal

7 January 2003 Internal T.I. 2002-0168347 F - RETRAITE OU PENSION ALIMENTAIRE

Unedited CRA Tags
56(1)a) 56.1(4) 118(5)

Principales Questions:
Est-ce que les montants provenant du partage des revenus du fonds de pension constituent des montants versés à titre de pension alimentaire?

Position Adoptée:
Oui dans le cas de l'accord de séparation et non dans le cas du jugement de divorce.

2 January 2003 Internal T.I. 2002-0152627 - Non-Resident Health and Welfare Trust

Unedited CRA Tags
251(1) 15(1) 75(2)

Principal Issues:
1- Corporation and Trust are dealing at arm's length?
2- Shareholder's benefit for contributions by the Corporation to the Trust?
3- Could it be said that a plan will not qualify as an insurance plan if the premiums could revert to the Corporation?
4- What provisions that can be relied upon in denying the deductions of the contributions?
5- Can a penalty be levied?
6- Is it gaarable?
7- Attribution rules applicable?

1- No.
2- Maybe (we do not have a complete picture).
3- No.
4- It will depend on the plan under review.
5- Dealt verbally.
6- Not considered.
7- Yes.

1- Subsection 251(1) of the Income Tax Act (the "Act").
2- Subsection 15(1) of the Act.
3- Definition of "insurance" of the Insurance Act of Ontario.
4- Paragraph 18(1)(b) and subparagraph 18(9)(a)(iii) of the Act.
5- Dealt verbally.
6- In light of the above.
7- Subsection 75(2) of the Act.

2 January 2003 Internal T.I. 2002-0162287 - Fixed base in Canada

Unedited CRA Tags

Principal Issues: Whether the taxpayer has or had a fixed base in Canada for the purposes of the Canada-U.S. Tax Convention.

Position: Taxpayer does not have a fixed base in Canada.

Reasons: No control over the premises; business cannot be linked to a specific location; no character of permanency; no agents having authority to contract in his name; limited access to the premises; and premises cannot be identified with the taxpayer's business.

23 December 2002 Internal T.I. 2002-0176087 F - LIMITE APPLICABLE TRANSFER DANS REER

Unedited CRA Tags
146.3(6) 146.3(5) 146.3(6.11)(b)

Position Adoptée:
Le total des montants inclus dans le calcul du revenu du rentier en raison de 146.3(5), (6) et (6.2) de la Loi.

23 December 2002 Internal T.I. 2002-0170207 - LUMP SUM WAGE PAYMENT

Unedited CRA Tags
103 153(1)

Principal Issues: Whether a lump sum payment received pursuant to an arbitration award is "remuneration" within the meaning thereof in subsection 100(1) of the Regulations.

Position: Yes.

Reasons: The lump sum payment is an accumulation of retroactive wage and salary increases which were awarded pursuant to arbitration.

20 December 2002 Internal T.I. 2002-0147967 - TAX IMPLICATIONS CONTRACT TERMINATION

Unedited CRA Tags
9(1) 6(1)(a) 38

Principal Issues: 1. Whether amounts received on the termination of a contract would constitute income or capital receipts. 2. Whether part of proceeds on termination of contract relating to a non-competition clause would be taxable to the recipient.

Position: 1. Amount would probably be considered capital in nature. 2. Amount would likely be taxed as employment income.

Reasons: 1. Courts have established that you must consider both the purpose and the effect of the payment. In this case the purpose is not entirely clear. However, the effect of the cancellation of the contract was to effectively end the profit making apparatus of the businesses carried on by the companies. 2. The non-competition clause is an essential element of the employment agreement signed by the chief shareholder of the company that provided services to the REIT.

20 December 2002 Internal T.I. 2002-0161767 - UK Inheritance tax and foreign tax credits

Unedited CRA Tags
126(1), 126(2) 20(11), 20(11) Cdauk A2(1)

Principal Issues: Does the Income Tax Act or the Canada - U.K. Convention provide relief to a resident of Canada who upon death pays inheritance tax to the U.K. based upon the fair market value of the resident's rental property situated in the U.K.?

Position: No.

Reasons: Subsections 126(1), 126(2) 20(11), and 20(12) do not provide relief because the foreign inheritance tax is not an income or profits tax.

19 December 2002 Internal T.I. 2002-0177317 - ACCRUAL NOTE

Unedited CRA Tags
REG 201(4) REG 7000

Principal Issues:
Information return reporting requirements for issuer of an accrual note.

11 December 2002 Internal T.I. 2002-0173007 F - Observation aux commentaires (OCDE)

Unedited CRA Tags

Principales Questions : Le retrait par le Canada de son observation aux Commentaires sur l'Article 12 du Modèle de convention fiscale de l'OCDE a-t-il une portée rétroactive?

Position Adoptée : Non.

28 November 2002 Internal T.I. 2002-0174427 - PARTNER STUB PERIOD EARNINGS PART 1.3

Unedited CRA Tags

Principal Issues:
Is it appropriate to determine the amount of a corporate partner's stub period undistributed earnings that should be excluded from the computation of the corporate partner's capital for purposes of Part I.3 of the Act, by simply taking the change in the partner's equity account during the stub period.

Position: No

While such an approach may give the correct adjustment amount, it will give an incorrect adjustment amount where the corporate partner has made contributions to the partnership during the stub period or has withdrawn non-stub period earnings during the stub period.