Income Tax Severed Letters - 2003-03-21


2003 2002-0179811 - Loss Utilization

Unedited CRA Tags
55(3)(a) 112(1)

Principal Issues: Loss utilization.

Position: Favourable rulings.

Reasons: No new issues - within the law and tax policy.

Ministerial Correspondence

3 March 2003 Ministerial Correspondence 2003-0183764 - OPTION BENEFIT VALUE REDUCTION

Unedited CRA Tags
7(1) 47

Principal Issues:
1 Follow-up letter on review of option value decrease issue. (See Ministerial Correspondence 2002-014424 et al)
2. Related question on order of sale of identical shares.

1. Indicated it is still under review by Finance.
2. Explained ordering provisions.

1. Issue is still under review.
2. To clarify law.

Technical Interpretation - External

21 March 2003 External T.I. 2002-0180005 - UNIT FOR UNIT EXCHANGE

Unedited CRA Tags

Principal Issues: Whether an election under subsection 97(2) of the Income Tax Act would be available in respect of the exchange of limited partnership units for general partnership units of the same partnership.

Position: Depends on whether there is a disposition of the limited partnership units to the partnership.

Reasons: Question of fact and of law.

21 March 2003 External T.I. 2002-0173045 - TRANSFER OF DISABILITY TAX CREDIT

Unedited CRA Tags

Principal Issues: Whether a parent can continue to claim the disability tax credit transferred from a child under 18 where the child lives away during the week with a caregiver who receives a special allowance under the Children's Special Allowances Act.

Position: The credit may be transferred if the child is dependent on the parent for support - which is a question of fact in each case.

Reasons: Although the child may be dependent on the caregiver, the child may also be dependent on the parent.

20 March 2003 External T.I. 2003-0181605 - SHAREHOLDER LOANS INTEREST EXPENSE

Unedited CRA Tags

Principal Issues:
Is Interest deductible when borrowing to loan to the corporation by way of shareholder loan?

19 March 2003 External T.I. 2003-0000995 - Application of Subparagraph 84.1(2)(a.1)(ii)

Unedited CRA Tags

Principal Issues: Income tax consequences of certain transactions including the application of subparagraph 84.1(2)(a.1)(ii).

Position: Limited comments.

Reasons: This request should be re-submitted as a ruling request or directed to the TSO.

19 March 2003 External T.I. 2002-0118695 - Meaning of "acquired control"

Unedited CRA Tags
88(1)(c)(vi) 88(1)(c) 88(1)(d)

Principal Issues: 1. Meaning of "acquired control" and "last acquired control" or "control...last acquired " for the purposes of paragraphs 88(1)(c) and (d). 2. Is a particular transaction or event included in a series of transactions or events that includes the winding-up of the subsidiary.

Position: 1. Each term has its own meaning. 2. Question of fact.

Reasons: The law.

19 March 2003 External T.I. 2002-0151015 F - ALLOCATION DU COUT EN CAPITAL

Unedited CRA Tags
13(5) 13(7) Categoie 16

Principales Questions:
Une voiture de location à court terme classée dans la catégorie 16 lors de son acquisition, peut-elle faire l'objet d'une reclassification (catégorie 10, par exemple) en vertu du paragraphe 13(5) de la Loi si elle est dorénavant louée pour une période à long terme?

Position Adoptée:

19 March 2003 External T.I. 2002-0171825 F - DEDUCTION POUR INSOLVABILITE LIQUIDATION

Unedited CRA Tags

Position Adoptée: Non

18 March 2003 External T.I. 2002-0151445 - FAIRNESS OPINION

Unedited CRA Tags

Principal Issues : Is a fairness opinion deductible under 20(1)(e)

Position: NO .

Reasons: 20(1)(e) applies to expenses directly related to an issue of shares.

18 March 2003 External T.I. 2003-0000175 - DONATION OF REWARD POINTS

Unedited CRA Tags

Principal Issues:
Can air travel reward points be the subject of a gift to a registered charity?

Reward points are property that may be the subject of a gift to a registered charity. If reward points are transferred to the charity, it is the fair market value of the reward points themselves, at the time the points are transferred to the charity, that must be used in determining the amount of the donation tax credit. If the points are redeemed to acquire property and the acquired property is transferred to the charity, the property that is the subject of the gift will be the acquired property and it is the fair market value of the acquired property at the time it is transferred to the charity that is relevant to the determination of the donation tax credit. Taxpayer also referred to new draft guidelines on split receipting as they may or may not be relevant depending on the taxpayer's specific situation.

A gift for purposes of the donation tax credit requires there to be a voluntary transfer of property. Property is broadly defined for purposes of the Act and would include reward points such as Airmiles points, and therefore, if voluntarily transferred to a charity could be the subject of a gift. The donation tax credit must be based on the fair market value of the property donated, at the time the property is gifted to the charity.

17 March 2003 External T.I. 2003-0183635 - Canadian Citizen Returning to Canada

Unedited CRA Tags

Principal Issues: Tax implications for Canadian citizen non-resident returning to Canada after 10 years abroad.

Position: Question of fact. Contact ITSO.

Reasons: n/a

14 March 2003 External T.I. 2003-0001385 F - Capital Dividend Account

Unedited CRA Tags
89(1) 111(1.1)

Principal Issues: Whether the definition of capital dividend account in 89(1) contains an adjustment similar to the adjustment in 111(1.1) for net capital loss?

Position: No

Reasons: The definition of capital dividend account does not contain such adjustment.

14 March 2003 External T.I. 2003-0002465 F - Usu-droit privé franc.- nu- prop. Canadien

Unedited CRA Tags
45(1) 45(2) 13(7)(b)

Principal Issues: Additional questions with respect to technical interpretation no. 2001-010944. In the given fact situation, a taxpayer acquired, pursuant to a will, bare owner rights ("droits de nue-propriété") with respect to a rental property situated in France (the usufruct being established under French law) for the purposes of the Act. The rental income generated by the rental property belongs to the mother of the taxpayer, being the usufructuary. 1) Whether the costs of major repairs incurred by the taxpayer with respect to the rental property can be added to the cost to the said taxpayer of such property. 2) Whether paragraph 45(1)(a) of the Act could apply at the time of the death of the mother of the taxpayer.

Position: 1) Yes.
2) Yes. If, at the time of the death of her mother, the taxpayer commences to use the rental property for the purpose of gaining or producing income, paragraph 45(1)(a) would apply. A capital gain may then arise, depending on the circumstances. However, the taxpayer could make an election under subsection 45(2) of the Act in her return of income for the year of the change in use in order to avoid the deemed disposition that would otherwise result under paragraph 45(1)(a). However, capital cost allowance with respect to the rental property may not be claimed while a subsection 45(2) election is in force because the taxpayer would be deemed under such provision not to have begun to use the rental property for the purpose of gaining or producing income.

Reasons: Wording of the Act.

14 March 2003 External T.I. 2003-0000495 - DEDUCTING RPP PAST SERVICE CONTRIBUTIONS

Unedited CRA Tags

Principal Issues: Are past service RPP contributions for pre-1990 service deductible by the taxpayer?

Position: Yes, within the parameters of subsection 147.2(4).

Reasons: General information provided.

13 March 2003 External T.I. 2003-000009B F - UNE BANDE SANS RESERVE

Unedited CRA Tags

Position Adoptée: Aucune

12 March 2003 External T.I. 2003-0003705 - DSLP-NOT RETURNING TO WORK

Unedited CRA Tags

Principal Issues:
What is the result if an employee does not return to work following a period of leave under a DSLP?

Deferred amounts must be included in income at the point where all conditions of 6801(a) are not met.

Reasons: General discussion.

11 March 2003 External T.I. 2002-0176825 - Options and Rights

Unedited CRA Tags
256(1.4)(a) 256(1.4)(b) 256(1)

Principal Issues: In a given fact situation, where a clause in a shareholders agreement (SA) provides that Holdco must automatically and irrevocably offer to sell its shares of Opco to the other shareholder of Opco if the sole shareholder of Holdco sells his shares of Holdco, whether: (1) 256(1.4)(a) could apply if the clause in the SA provides that the other Opco shareholder (i) must acquire the Holdco shares or (ii) can either accept or reject the offer ? (2) the opinion in document E 9805705 in effect adds circumstances in which 256(1.4)(b) does not apply to those listed in the provision and in parg 37 of IT 64R4, and, (3) Whether this opinion applies in the present situation by analogy such that 256(1.4)(a) does not apply ?

Position: (1) Yes in both cases. (2) Not relevant. (3) No.

Reasons: (1) The clause in the SA is a form of "buy-sell" agreement under which both parties clearly have either a right or an obligation to buy or sell. (2) and (3) Document
E 9805705 dealt with the application of 256(1.4)(b) therefore the opinion in the document is not relevant in the given situation since it involves the application of 256(1.4)(a).

11 March 2003 External T.I. 2002-0179095 F - Issuance-Discretionary Shares non-Consid.

Unedited CRA Tags
15(1) 69(1) 56(2)

Principal Issues: Whether, in a particular situation where "discretionary dividend shares" would be issued for nominal consideration, subsection 15(1), 69(1) or 56(2) would apply.

Position: Subsection 15(1) or paragraph 69(1)(b) could apply, depending on the facts and circumstances surrounding the particular situation.

Reasons: Subsection 15(1) may apply where shares are issued by a corporation for consideration that is less than the fair market value of the said shares. Subsection 15(1) may apply as a result of a transaction even though the overall economic position of a taxpayer or his or her net wealth has not changed. The issuance of shares for consideration that is less than their fair market value could also result in a disposition of property by a taxpayer and such taxpayer could be deemed to have received a consideration equal to the fair market value of the property under paragraph 69(1)(b). Absent a sham, subterfuge or an artificial transaction and provided that proper consideration was given for the shares when issued, subsection 56(2) does not generally apply to dividend income since, until a dividend is declared, the profits belong to the corporation as retained earnings. PORTCO would be subject to Part IV tax under subparagraph 186(4)(a) in respect of the dividends received from OPCO, unless it would be established that OPCO is connected with PORTCO. Finally, the potential application of subsections 55(2) and 245(2) should be considered in any particular situation.

11 March 2003 External T.I. 2003-0184055 - SPOUSAL RRSP STATUS FOLLOWING DEATH

Unedited CRA Tags
146(1) 146(8.3) 146(8.7)

Principal Issues:
Can the "spousal" designation of an RRSP be removed after the death of the contributor spouse?

Position: Yes

Attribution rule doesn't apply in the year of death per 146(8.7) and no attribution can occur in subsequent years, so RRSP carrier can delete spousal RRSP status..

11 March 2003 External T.I. 2002-0163405 - CONSERVATION INTERESTS

Unedited CRA Tags
118.1(1) 110.1(1)(d)

Principal Issues:
Are conservation interests made pursuant to the Manitoba Conservation Agreements Act (MCCA) ecological gifts within the meaning "total ecological gifts" in subsection 118.1(1) and paragraph 110.1(1)(d)?

General comments. Whether or not the creation of a conservation interest pursuant to the MCCA results in an ecological gift will depend upon the terms and conditions of the agreement.

The MCCA permits conservation interests to be created either in perpetuity or for a specified term. In our view, a conservation interest would not be a gift of land unless the interest is perpetual. However, the potential for the interest to be extinguished in future will not negate a gift if the extinguishment will not be within the grantor's control.

10 March 2003 External T.I. 2003-0003175 - INDIAN EMPLOYMENT INCOME EXEMPTION

Unedited CRA Tags

Principal Issues: Will a status Indian's employment income be tax exempt?

Position: Question of fact.

Reasons: General information provided.

4 March 2003 External T.I. 2003-0001655 - Overseas employment tax credit

Unedited CRA Tags

Principal Issues: Whether taxpayer qualifies for the overseas employment tax credit if advised to return to Canada by the Canadian embassy before the more than six consecutive month requirement is satisfied XXXXXXXXXX .

Position: No. However, a remission request could be considered.

Reasons: Extraordinary circumstances prevented the satisfaction of the requirements of the overseas employment tax credit.

20 February 2003 External T.I. 2002-0143605 - Deductions-US Citizens resident in Canada

Unedited CRA Tags
20(12) 126(1) 20(11)
no 20(12) deduction when Art. XXIV, para. 5 applies

Principal Issues: (i) Interaction of Articles XI and XXIV of the Canada-U.S. Income Tax Convention (1980) (the "Tax Convention"). Can a subsection 20(12) deduction be taken on withholding in excess of 10% and less than 15% by the United States on property income?
(ii) Calculation of income from a particular country for purposes of s.126 of the Income Tax Act.
(iii) Meaning of "paid by the taxpayer for the year".

Position: (i) A subsection 20(12) deduction cannot be taken.
(ii) The foreign tax credit does not limit a taxpayer to claiming a credit equal to the Canadian tax otherwise payable on that particular source of income. Amounts deducted under subsection 20(12) reduce income from that particular country for section 126 purposes.
(iii) Where a foreign country uses a tax year other than a calendar year, the tax "paid by the taxpayer for the year" in the foreign jurisdiction is the taxes actually paid prorated on a calendar year basis.

Technical Interpretation - Internal

17 March 2003 Internal T.I. 2003-0004917 - nursing bursary program

Unedited CRA Tags
56(1)(n) 5(1)

Principal Issues: Whether payment under the New Brunswick Nursing Program constitute a bursary or employment income under section 5.5

Position: Bursary income under 56(1)(n)

Reasons: Nursing students may apply for the bursary half way through their education program. It is a government sponsored, government funded program that is clearly designed as a bursary program. While the students have to accept an employment contract from a hospital or nursing home, it could not be said that they are getting the funds by virtue of their office or employment, even if they get the money after they start to work. Further ss. 6(3) does not apply, since it is clearly a bursary program funded by the NB government and the employer is merely acting as a conduit. This may be contrasted with employer-funded programs that are not bona fides bursary programs, but disguised signing bonuses.

14 March 2003 Internal T.I. 2003-0182977 F - 40(3.5)(c)

Unedited CRA Tags
40(3.5)(c) 40(3.3)(c) 40(3.4)

Principal Issues:
Whether a capital loss is deemed to be nil under 40(3.4)(a) in the following situation:
1. A public corporation ("Parentco") owns XXXXXXXXXX % of the issued and outstanding shares of another public corporation ("Subco").
2. The remaining XXXXXXXXXX % of the issued and outstanding shares of Subco are held by the public.
3. The fair market value of the Subco shares held by Parentco is less than is adjusted cost base.
4. The following series of transactions were undertaken in order to make Subco become "private":
a. Step 1: Parentco incorporated a new corporation ("Newco").
b. Step 2: Parentco transferred its Subco shares to Newco at FMV and realized a $XXXXXXXXXX capital loss. Newco issued preferred shares to Parentco as sole consideration for this transfer.
c. Step 3: Within 30 days of the disposition of the Subco shares by Parentco, Subco and Newco merged ("Mergerco"). On the merger, shares of its capital stock were issued by Parentco to the public (Triangular amalgamation under subsection 87(9)).

Position: Parentco's capital loss is denied by subsection 40(3.4) of the act.

Reasons: The Subco shares (i.e., the "substituted property") were still own by a person affiliated with Parentco at the end of the period referred to in paragraph 40(3.3)(c) since paragraph 40(3.5)(c) applies to deem Mergerco to own the Subco shares (until such time that Parentco and Mergerco cease to be affiliated). In the context of 40(3.3), (3.4) and (3.5), the term "apply to" under 40(3.5)(c) means "relate to", its synonym. The context being that:

10 March 2003 Internal T.I. 2002-0172187 F - DEDUCTIBILITE DES INTERET

Unedited CRA Tags
20(1)c) 18(9.1) 20(1)f)

Principales Questions: 1) Le contribuable peut-il déduire les intérêts sur un prêt participatif relatif à l'émission de débentures? 2) Les dispositions du paragraphe 18(9.1) de la Loi s'appliqueront-elles au paiement d'intérêts complémentaires relatifs au remboursement des débentures?

Position Adoptée: 1) Oui, si les conditions de la position émise dans les Nouvelles techniques no.16 et réitérée en 2002 lors du Congrès de l'APFF sont rencontrées; 2) Non.

6 March 2003 Internal T.I. 2002-0178357 - Subsection 17(1)17(1)

Principal Issues: Whether a nil rate of interest is a reasonable rate for the purposes of subsection 17(1) of the Income Tax Act in the circumstances described in the memo.

Position: No.

Reasons: No arm's length person would lend money at a nil interest rate in the circumstances.