Income Tax Severed Letters - 2003-02-14


2003 Ruling 2002-0152353 - XXXXXXXXXX F/N Settlement-Trust

Unedited CRA Tags
104(6) 75(2) 149(1)(c)

Principal Issues: 1. Whether the First Nation will be exempt under 149(1)(c).
2. Whether the Settlement Monies will be taxable on receipt.
3. Whether a specific per capita distribution from the First Nation to its Members will be taxable.
4. (a) Whether income or loss from property acquired with monies settled in the trust by the First Nation will be deemed to be income of the First Nation pursuant to 75(2).
(b) Whether 75(2) will similarly apply with respect to funds contributed in future years by the First Nation to the Trust.
5. Whether any income of the trust that is not subject to 75(2) will be considered payable to the First Nation and thus deductible pursuant to 104(6).
6. Whether any distribution by the trust to the First Nation will be governed by 107(2).

Position: 1. Yes (as determined by W/S 045: Aboriginal and Non-Profit Section).
2. No (as determined by W/S 045).
3. No (as determined by W/S 045).
4. (a) Yes.
(b) Yes, but only with respect to funds that are contributed voluntarily.
5. Yes, but only with respect to income that does not have to be recontributed to the Trust.
6. Yes.

1. 2002-015576 consultation; consistent with other rulings (2000-0033283; 1999-0005513).
2. 2002-015576 consultation; consistent with other rulings (2000-0033283).
3. 2002-015576 consultation. The per capita distribution from the First Nation to its Members out of funds obtained by way of a capital distribution from the Trust will not constitute income from a source to the Members within the meaning of paragraph 3(a) of the Income Tax Act. (Also, paragraph 3(b) is not applicable.)
4 (a) The First Nation will be the settlor of the Trust, directing Canada to make payments to the Trust on behalf of the First Nation. The First Nation is the sole beneficiary and on the termination of the Trust, all of the Trust's property will be transferred to the First Nation.
(b) Pursuant to the Trust Agreement, all Revenues Realized in the Trust will be distributed each year to the First Nation, but the First Nation is under obligation to return, in the next year, sufficient funds to ensure a certain amount of capital in the Trust. That amount will be the total of the previous amount of capital plus a specified percentage of the Revenues Realized in the immediately preceding year. To the extent that the amount that would, but for 104(6), be the Trust's income is distributed and not required to be recontributed, we will consider 104(6) and (13) to apply. To the extent it has to be repaid, we consider the amount was never paid and never recontributed (following our 1985 CTF position on EBPs) - i.e. no 104(6) deduction for the Trust, no 104(13) income for the beneficiary and no further contribution of capital for purposes of 75(2). In making the determination as to which source of income is being recontributed in a year, we will consider that the source will first be income that was subject to subsection 75(2) in the Trust since such income could have been left in the Trust (rather than being distributed and recontributed) without causing the Trust to have income tax payable.

2002 Ruling 2002-0136333 - 32-Year rule family trust

Unedited CRA Tags
38, 39, 106, 107 75(2), 69(1), 246(1) 56(2), 105(1), 245(2)

Principal Issues: Implementation of various transactions (trust variations, trust to trust transfer, renouncement and surrendering of income and capital interests in the trusts, and distribution of trust properties to its beneficiaries) in order to distribute the trust properties prior to the 21-year deemed disposition date.

Position: The trust variations will not result in a resettlement of the trusts nor will they result in a disposition for the purposes of sections 106 and 107. The trust-to-trust transfer will not give rise to the application of subsection 75(2). Paragraphs 69(1)(b) and (c) will apply with respect to the trust-to-trust transfer. The beneficiaries who will renounce and surrender their trust interests will not be considered as having received any proceeds of disposition for the purposes of sections 38, 39, 106 or 107. Subsection 107(2) will apply with respect to the distribution of the trust properties to its beneficiaries. The transactions will not result in the trusts ceasing to be "personal trusts" within the meaning of subsection 248(1). Subsections 56(2), 105(1) and 246(1) will not be applied as a result of to the proposed transactions, in and by themselves. Subsection 245(2) will not apply with respect to the trust distributions to the Canadian resident beneficiaries other than the NSULCs. No ruling provided as to the application of subsection 245(2) with respect to the trust distributions to the NSULCs

Reasons: Similar to previous rulings.

2002 Ruling 2002-0161373 - CREDIT UNION SHARES

Unedited CRA Tags
137(4.1) 12(3) 12(4)

Principal Issues:
Whether the shares issued by the credit union are shares or debt obligations for purposes of the ITA including interest accrual rules.

Position: They are shares for all purposes of the ITA.

The shares are equity shares under the XXXXXXXXXX Despite the fact that subsections 137(4.1) and (4.2) deems dividends paid on the shares to be interest, there is nothing in the ITA which changes their underlying nature as shares.

2002 Ruling 2002-0168463 - REIT with seconded employees

Unedited CRA Tags
108(2)(b) 15(1)

Principal Issues: 1. Is the operation of the parking lot or the making of loans to the development company undertakings that would disqualify the trust as a MFT under subsection 132(6)?
2. Are unsecured loans to a single purpose corporation and the development company property described in 108(2)(b)(iii)(D)?
3. Will the trust's liability (either the debt assumed or the joint and several, or solidary, liability for property held in undivided co-ownership) result in a prohibited undertaking for the purpose of 108(2) and 132(6)?
4. Will 75(2) apply to the sub-trust by reason of the genuine loan of cash by the beneficiary?
5. Will 75(2) apply to attribute income from the single purpose trust to the settlor, the sub-trust and will 107(2) apply whenever the single purpose trust distributes the property to the sub-trust?
6. Will the interest paid in the year or payable in respect of the year on the sub-trust Loan be deductible by sub-trust pursuant to the provisions of paragraph 20(1)(c) of the Act?
7. Will the single purpose trust and sub-trust be personal trusts within the meaning of subsection 248(1)?
8. Will the interest-bearing loan to the single purpose trust constitute foreign property?
9. Does 15(1) or 246(1) apply as a result of the employee service agreement for services to be provided in respect of property wholly-owned by the trust?

Position: 1. No. 2. Yes 3. No 4. No 5. 75(2) applies but 107(4.1) doesn't apply to the distribution of the property to the person from whom the property was received 6. Yes to the extent that the single purpose trust continues to use the funds for the purpose of earning income from property and the sub-trust continues to be the sole beneficiary of the single purpose trust and provided that the amount is not in excess of a reasonable amount 7. Yes 8. No 9. No.

Reasons: 1. Parking lot issue considered in previous ruling 2001-0075693.
2. What is common to the terms "bonds, debentures, mortgages, notes and other similar obligations" in 108(2)(b)(iii)(D) is indebtedness, a legal obligation and written evidence of that fact whereas the level of security of each term is variable.
3. It is not the liability but the actions that give rise to the liability that could constitute an undertaking other than those described in 108(2)(b)(ii) or 132(6).
4. Q.8 at 1991 CTF roundtable
5. Although 75(2) applies when the settlor is a capital beneficiary of the trust, 107(4.1) does not apply if the property, or property substituted for it, is distributed to that settlor.
6. The sub-trust is the sole beneficiary of the single purpose trust which will hold the income earning property and there is no power of appointment to add additional beneficiaries. As such the requisite linking has been established.
7. Neither are unit trusts and no one acquired an interest in either for consideration, taking 108(7) into consideration.
8. A debt is not an interest in a trust for the purpose of (i) of the def'n of foreign property in 206(1). However, the sub-trust's beneficial interest in the single purpose trust is foreign property.
9. As stated in paragraph 5 of IT-432R2, 15(1) does not apply where the transaction is a bona fide business transaction. Various external texts on secondments, particularly in the area of Transfer Pricing (e.g., BNA Transfer Pricing Reports vol 10#16, 10#20) suggest that no mark up is required on a true secondment arrangement. While secondments are generally of a temporary nature and do not normally involve split duties, there could be valid business reasons for a long-term, split-duty arrangement. In this case, it is clear that direction and control of the employee will rest with the trust as the secondee for duties related to the management of the properties wholly owned by the trust and that the employee services agreement was negotiated based on business factors and not on the fact that the trust is the sole shareholder of the management company. Based on jurisprudence such as ABC Steel Buildings Ltd. v. MNR (74 DTC 1124), Detchon (96 DTC 2032) and Youngman (90 DTC 6322), for the purpose of 15(1), the shareholder does not realize a benefit simply because the management corporation does not realize a profit on the secondment agreement.

2002 Ruling 2002-0168603 - XXXXXXXXXX

Unedited CRA Tags
84(2) 84(4.1)

Principal Issues: Reduction of PUC by a public corporation. Whether the reduction occurs in the course of a reorganization of its business.

Position: Yes.

Reasons: The law.

Technical Interpretation - External

12 February 2003 External T.I. 2002-0174255 - Patented Mining Claims

Unedited CRA Tags

Principal Issues: Whether a patented mining claim is considered a Canadian Resource Property. Determine what is included in the cost for valuation purposes.

Position: The patented mining claim is a Canadian Resource Property. The purchase price of the claim is added to the Canadian Development Expense Pool.

Reasons: Definition of Canadian Resource Property in subsection 66(15) of the ACT. Definition of Canadian Development Expense in subsection 66.2(5) of the ACT.

11 February 2003 External T.I. 2002-0168595 - LIFE ESTATES

Unedited CRA Tags

Principal Issues: Whether section 43.1 applies to the transfer of property from a sole owner to herself and another person as joint tenants.

Position: General comments.

Reasons: Not enough information provided with request.

11 February 2003 External T.I. 2002-0170755 - GUIDING AND OUTFITTING LICENSES

Unedited CRA Tags
14 13(1) 20(16)

Principal Issues:
Treatment of proceeds of sale / transfer of guiding and outfitting licenses.

General information provided.

Insufficient information.

6 February 2003 External T.I. 2002-0177105 - SUPERFICIAL LOSS V. CHILD

Unedited CRA Tags
54 74.2 75.1

Principal Issues: If a parent transfers shares to his or her child in order to trigger an accrued capital loss on the shares, does the superficial loss rule apply to the parent's capital loss and is any future capital gains realized by the child attributed to the parent?

Position: Superficial loss does not apply. Capital gains realized by the child are not attributed to the parent, except in circumstances involving ITA 75.1

Reasons: A superficial loss may arise if "affiliated persons" are involved; however, a parent and child are not affiliated under ITA 251.1. Under ITA 74.2, capital gains are not attributed from a child to the parent; however, attribution of capital gains realized by a child not of age 18 may occur in respect of certain farm-related properties if ITA 75.1 applies.

4 February 2003 External T.I. 2002-0129655 - Spousal Trust

Unedited CRA Tags

Principal Issues: Whether the income earned by a spousal trust would be accumulated for the benefit of the spouse that to be received by the spouse after being taxed in the trust's hands?

Position: Generally No.

Reasons: Wording of the Act.

4 February 2003 External T.I. 2002-015298D - Eligible Funeral Arrangement

Unedited CRA Tags

Principal Issues: Who has authority to hold contributions to an Eligible Funeral Arrangement in an account.

Position: Refer to the terms of the Arrangement or to provincial legislation.

Reasons: Paragraph 20 of IT-531.

XXXXXXXXXX 2002-015298
Yves Moreno

February 4, 2003


Re: Eligible Funeral Arrangements

This is in reply to your letter of July 15, 2002, in which you ask if the XXXXXXXXXX can hold funds from an eligible funeral arrangement as defined in section 148.1 of the Income Tax Act (the "Act") and, if so, which sections of the Act give authority to hold such funds. Should our conclusion be that the XXXXXXXXXX has authority to hold funds from an eligible funeral arrangement, you also asked in our telephone conversation of October 28, 2002, if it is required to issue any T5 slips.

Your request appears to relate to a proposed transaction and, accordingly, should be the subject of a request for an advance income tax ruling submitted in accordance with the guidelines set out in Information Circular 70-6R5 Advance Income Tax Rulings dated May 17, 2002. Consequently, while we are unable to comment on your specific situation, we can offer the following general comments.

Section 148.1 of the Act provides that the person who establishes and maintains the eligible funeral arrangement (the "EFA") must be a person licensed or authorized under the laws of a province to provide funeral or cemetery services (the "qualifying person"). It also provides that there must be one or more custodians. If there is only one custodian, the custodian and the person who establishes and maintains an EFA can be the same person.

The only requirement provided in the Act with respect to the management of the EFA is that it must be maintained by the qualifying person. As mentioned in paragraph 20 of Interpretation Bulletin IT-531, Eligible Funeral Arrangements, dated January 29, 1999, applicable provincial legislation determines how the contributions are to be held:

20. When a qualifying person (e.g., a funeral director or cemetery operator) receives contributions under an EFA, the contributions may be required by the applicable provincial legislation or by the terms of the arrangement itself

(a) to be held in a trust governed by the arrangement (the trust would be a separate person for income tax purposes and the trustee of the trust would be a custodian under the arrangement - see 4 above); or

4 February 2003 External T.I. 2002-0178045 - WITHHOLDING CLERGY

Unedited CRA Tags
8(1)(c) 153.1(1)

Principal Issues:
Are reductions in withholding in respect of the clergy deduction required to be approved by the CCRA?
YES, except if the benefit is accommodations provided by the employer.
Form T1213 requirements and subsection 153(1.1) of the Act.

3 February 2003 External T.I. 2002-0157725 - 104(18)

Unedited CRA Tags

Principal Issues: Whether ss. 104(18) ITA applies to allocate the income of a trust to its beneficiary where the trust accrues the income for the payment of post-secondary education and the residue is paid when the individual reaches XXXXXXXXXX years of age.

Position: 104(18) would apply.

Reasons: Wording of the Act.

30 January 2003 External T.I. 2003-0182545 - Collection of taxes from an estate

Unedited CRA Tags

Principal Issues: Does the payment of income tax on behalf of the deceased person take priority over the claim of any beneficiary of the estate?

Position: Yes.

Reasons: Executor or other person have control over the estate must post security or pay taxes before any distribution of property to a beneficiary.

29 January 2003 External T.I. 2002-0143685 - RRSP/RRIF and testamentary trusts

Unedited CRA Tags

Principal Issues: Whether a trust funded from the proceeds of an RRSP or RRIF available on the death of an individual would qualify as a "testamentary trust" within the meaning of subsection 108(1) of the Act.

Position: General comments

Reasons: Wording of the Act and previous positions.

28 January 2003 External T.I. 2002-0147405 F - Crédit d'impôt pour emploi à l'étranger

Unedited CRA Tags

Principales Questions: Précisions concernant l'application du paragraphe 122.3(1) de la Loi de l'impôt sur le revenu.

Position Adoptée: Commentaires généraux.

27 January 2003 External T.I. 2002-0169385 F - Un serveur et l'établissement stable

Unedited CRA Tags

Principales Questions : Est-ce qu'un serveur peut constituer un établissement stable au sens de la Convention entre le Gouvernement du Canada et le Conseil fédéral suisse en vue d'éviter les doubles impositions en matière d'impôts sur le revenu et sur la fortune?

Can a server be a permanent establisment under the Convention between the Government of Canada and the Swiss Federal Council for the Avoidance of Double Taxation With Respect to Taxes on Income and on Capital?

Position Adoptée : oui/yes.

23 January 2003 External T.I. 2002-0155535 - Stripping valve on rolled shares

Unedited CRA Tags

Principal Issues: Whether subsection 70(6) of the Act would apply to the transfer of shares of a corporation that is the beneficiary of a life insurance policy to a spouse where the life insurance proceeds are paid to the children of the deceased as part of the administration of the estate.

Position: We have referred this matter to the Ministry of Finance to assess whether this result runs against the tax policy of subsection 70(6) of the Act.

Reasons: N/A

23 January 2003 External T.I. 2002-0140925 - Stripping valve on rolled shares

Unedited CRA Tags

Principal Issues: Whether subsection 70(6) of the Act would apply to the transfer of shares of a corporation that is the beneficiary of a life insurance policy to a spousal trust where the life insurance proceeds are paid to a family trust as part of the administration of the estate.

Position: We have referred this matter to the Ministry of Finance to assess whether this result complies with the tax policy of subsection 70(6) of the Act.

22 January 2003 External T.I. 2002-0143935 - Aggregate Investment Income

Unedited CRA Tags
129 108(5)

Principal Issues: Which types of trust income are excluded from the computation of "aggregate investment income" as defined in ss. 129(4) of the Act.

Position: The income excluded from 129(4)(b)(iv) "aggregate investment income" is income that is property income only because of par. 108(5)(a) of the Act.

Reasons: Par. 108(5)(a) of the Act provides that income included under ss. 104(13) or (14) or s. 105 in computing the income for a taxation year of a beneficiary is deemed to be income from a property that is an interest in the trust and not from any other source. Sp. 129(4)(b)(iv) "aggregate investment income" provides that it includes "the corporation's income for the year from a source that is property, other than [...] income that, but for paragraph 108(5)(a), would not be income from a property".

21 January 2003 External T.I. 2002-0130065 - Subsection 164(6)164(6)

Principal Issues: Various issues on the application of subsection 164(6) of the Act.

Position: General comments provided.

Reasons: Question of fact and wording of the Act.

11 December 2002 External T.I. 2002-0146465 F - Article XVI Canada-E.U.

Unedited CRA Tags

Principales Questions: Voir Énoncé des principales questions

Position Adoptée: Voir Énoncé des principales questions

3 December 2002 External T.I. 2002-0174105 - Taxation Year of a foreign Affiliate

Unedited CRA Tags
S. 250.1(a) S. 249(4), S. 95(1) S. 249.1

Principal Issues: (1) Will CCRA confirm that section 250.1 does not cause subsection 249(4) to apply to the acquisition of control of foreign affiliates? (2) Does CCRA believe that any previous technical positions or assessing practices in respect of the determination of a foreign affiliate's taxation year are affected by the introduction of section 250.1?

Position: (1) Confirmed. (2) While the taxation year of a foreign affiliate has to be determined based on the circumstances of each case, our general position is that taxation year of a foreign affiliate for purposes of computing the foreign affiliate's foreign accrual property income and surplus accounts should be determined generally in accordance with the taxation year that the foreign affiliate uses for purposes of tax reporting in the country in which the affiliate is resident. We do not believe that this general position is affected by paragraph 250.1(a).

Reasons: The "unless the context requires otherwise" exception in paragraph 250.1(a) applies.

Technical Interpretation - Internal

13 February 2003 Internal T.I. 2002-0151597 - Limited Partner's Resource Pools

Unedited CRA Tags
66.1 66.2 66.8

Principal Issues: Individual in a limited partnership and what happens to his resource pools when he sells his partnership unit.

Position: ITA 66.1, 66.2, 66.8
1) Resource pools can be used after the disposition of the limited partnership unit if not previously deducted.

Reasons: 1) Resource expenses incurred by a partnership reduce the limited partner's adjusted cost base.

6 February 2003 Internal T.I. 2003-0000797 - EXEMPT INSURANCE LOANS RCA

Unedited CRA Tags
207.5(1) 12.2(1)

Principal Issues:
1. Is accrued income accumulated under an exempt insurance policy held in an RCA taxable.
2. Can an RCA secure loans with its holdings?

1. Not generally
2. There are no restrictions but there could be concerns.

1. Application of law on exempt policies applies for RCA purposes
2. The use of property to secure a debt may mean the RCA funds are not being used to secure anticipated benefits to employees.

30 January 2003 Internal T.I. 2002-0157307 F - Article 86.1 et fractions d'action

Unedited CRA Tags

Principales Questions: Est-ce que le paiement en espèces d'une fraction d'action se qualifie comme " distribution admissible " pour les fins de l'article 86.1 de la Loi de l'impôt sur le revenu?

Position Adoptée: Oui dans la mesure où uniquement des actions sont distribuées par la société qui effectue la distribution et que le paiement en espèces ne provient pas de cette dernière.

30 January 2003 Internal T.I. 2002-0163437 - CDN PROPERTY SEGREGATED FUNDS

Unedited CRA Tags
138.1 2(3) 115(1)(b)

Principal Issues:
Whether an interest in a related segregated fund trust is taxable Canadian property and treaty-protected property.

1. Where the policy is a life insurance policy in Canada as defined in subsection 138(12), the interest in the related segregated fund trust is taxable Canadian property.
2. Where the policy is not a life insurance policy in Canada, the interest in the related segregated fund trust is taxable Canadian property if the policy is issued by an insurer resident in Canada.
3. Whether a particular interest is treaty-protected depends upon the particular circumstances of the taxpayer.

1. The definition "taxable Canadian property" in subsection 248(1) of the Act includes a life insurance policy in Canada for the purposes of section 2 of the Act.
2. An interest in a segregated fund policy is deemed to be an interest in an inter vivos trust ("related segregated fund trust") for the purposes of Part XIII and Part I of the Act. This interest is analogous to a capital interest in a trust for these purposes.
3. An interest in a related segregated fund trust is capital property. Therefore, it may qualify for treaty-protection under the Canada-US treaty. Whether or not the treaty applies depends upon the facts, such as the taxpayer's residence history.

28 January 2003 Internal T.I. 2002-0175927 F - Choix de 107(2.001)

Unedited CRA Tags

Principales Questions: Déterminer si le choix prévu au paragraphe 107(2.001) de la Loi de l'impôt sur le revenu peut être effectué tardivement.

Position Adoptée: Non.

23 January 2003 Internal T.I. 2002-0133410 - Cost of Property Inherited

Unedited CRA Tags
70(5)(b) 69(1)(c)

Principal Issues: Follow-up to our letter in file 2000-004416 and revisiting our position explained in that letter.

Position: The cost of a property acquired by a non-resident estate, as a consequence of the death of a non-resident individual would be determined in accordance with paragraph 70(5)(b) of the Act, absent an election under 107(2.002) of the Act.

Reasons: To determine the cost of a property acquired by a beneficiary that is subject to taxation in Canada, the deceased would be considered to be a taxpayer.

23 January 2003 Internal T.I. 2003-0183797 - Capital Div Account - MFC & MFT Distrib.

Unedited CRA Tags

Principal Issues: Clarity of summary to 2000-0036585

Position: Amend summary

Reasons: For greater certainty