Income Tax Severed Letters - 2003-03-14

Principal Issues: Whether social security pensions received from Hungary are taxable in Canada.

Position: No.

Reasons: Not taxable in Hungary, therefore not taxable in Canada- see subparagraph 4(c) of Article 18 of the Canada-Hungary Tax Convention.

Principal Issues:
Whether a taxpayer may claim a capital gains reserve pursuant to subparagraph 40(1)(a)(iii) of the Act when the proceeds of disposition have been transferred to a third party?

Position: No

Reasons:
No portion of the proceeds of disposition would be considered payable after the transfer.

2003-000129
XXXXXXXXXX Karen Power, CA
(613) 957-8953
March 7, 2003

Principal Issues: Whether gifts of food (e.g. a restaurant gift certificate), beverages (e.g. a private labelled bottle of wine) or entertainment (e.g. a book) are subject to the 50% rule in subsection 67.1(1) of the Act.

Position: Yes

Reasons: Subsection 67.1(1) applies for all purposes of the Act. Subsection 67.1(1) of the Act applies to an amount regardless of the taxpayer's classification of it as "advertising and promotion" or the fact that a taxpayer has not personally consumed the food and beverages or enjoyed the entertainment. In this respect, subsection 67.1(1) of the Act only requires that the amount in question be paid or payable in respect of the human consumption of food or beverages or enjoyment of entertainment.

Principal Issues: Tax treatment of transaction costs incurred by Purchaser in respect of aborted share or asset acquisition

Position: Generally, the transaction costs incurred by Purchaser would be regarded as capital expenditures; it would be a question of fact whether these expenses would constitute eligible capital expenditures

Reasons: The law

Principal Issues: Whether break-up fee paid to terminate a merger agreement is: (1) deductible in computing business income, or (2) an eligible capital expenditure

Position: Question of fact, but generally no

Reasons: A break-up fee paid will normally be a capital expenditure and will not likely be made or incurred for the purpose of earning income

Principal Issues: (1) Whether amalgamation expenses incurred by Pubco1 and Pubco2 will constitute eligible capital expenditures, and (2) whether the cost of issuing shares incurred by Amalco will be deductible under paragraph 20(1)(e)

Position: (1) Question of fact, and (2) generally yes, provided the shares of Amalco are "issued"

Reasons: The law

Principal Issues:
Are expenses paid to an investment banker as part of an issuance of shares to the shareholders of Targetco incurred in the course of the issuance of the shares?

Position: Generally NO, .

Reasons: Preamble to 20 and Wording of 20(1)(e) and IT- 341R3.

Principal Issues: whether 80.03(2) (and the reference to paragraph 53(2)(g.1) therein) is applied on a share by share basis

Position: yes

Reasons: (a) subsection 80.03(2): "a particular capital property...that is a share"
(b) paragraph 80.03(2)(a) : "deducted under paragraph 53(2)(g.1) in computing the ACB to the transferor of the particular property immediately before that time"

Principal Issues:
Will a corporation XXXXXXXXXX be an agent of the Crown for purposes of receiving gifts and issuing receipts? The enabling statute indicates the corporation is an agent of the government for all purposes.

Position:
General comments only. A corporation will be viewed as an agent if it is acting within its authority.

Reasons: See decision of Federal Court of Appeal in Nova Scotia Power Inc.

Principal Issues: Is a certificate of compliance required in respect of a distribution of capital to a non-resident beneficiary from a trust resident in Canada?

Position: Yes

Reasons: A capital interest in a trust resident in Canada is TCP (except an interest in a MFT not described in (j) of the def'n of TCP). Any payment out of a trust after 1999 (other than the distribution of income or a capital dividend or a payment from a unit trust where the number of units held by the beneficiary is not reduced as a result of such payment) that can reasonably be considered to have been made because of the capital interest will result in a disposition of all or part of the beneficiary's capital interest in that trust. Thus, a distribution of capital to a non-resident beneficiary will normally result in the disposition of TCP by that non-resident beneficiary.