Income Tax Severed Letters - 2003-05-23

Miscellaneous

2003 2001-011123A30 - Foreign affiliate reorg; Deemed Active Income

Unedited CRA Tags
95(2)(a) 56(2) 85.1(3)

Principal Issues: Whether (i) Subsection 85.1(3) applies to disposition of shares held by Pubco to FA1 ("Settled Property"); (ii) pursuant to a trust established by a Deed of Settlement of the Settled Property, that trust as established will, except for purposes of subsections 104(1), 104(1.1) and subparagraphs (b)(v) and (k) of the definition of "disposition" in subsection 248(1) of the Income Tax Act (the "Act"), not be a trust for purposes of the Act; (iii) provided XXXXXXXXXX is a partnership at law, income derived by FA1 and FA2 from amounts paid or payable to XXXXXXXXXX by Opco in accordance with the Profit Transfer Agreement will be included in computing active business income of FA1 and FA2 pursuant to clause 95(2)(a)(ii)(B); (iv) income derived by Lenderco from interest paid or payable by XXXXXXXXXX under the XXXXXXXXXX Loan will be included in computing income from active business and in computing the exempt earnings of Lenderco to the extent that such interest would be deductible in the year or a subsequent year in computing the amounts that would be prescribed to be the earnings (not a loss) from an active business of XXXXXXXXXX other than an active business carried on in Canada if XXXXXXXXXX were a foreign affiliate of Pubco; (v) GAAR will apply to proposed transactions.

Position: (i) Yes; (ii) Yes; (iii) Yes; (iv) Yes; (v) No.

Reasons: (i) conditions in subsection 85.1(3) satisfied; (ii) provided Pubco acts as agent for FA1 with respect to all dealings with all of the Trust Property, as set out in the Deed of Settlement; (iii) the Opco payment to XXXXXXXXXX under the Profit Transfer Agreement would be income from property as it is derived from shares held in Opco; consequently, clause 95(2)(a)(ii)(B) can apply to re-characterize this income from property and include it in computing the exempt earnings of FA1 and FA2 pursuant to clause (d)(ii)(E) of that definition in subsection 5907(1) of the Regulations, to the extent the amounts paid or payable by Opco to XXXXXXXXXX under the Profit Transfer Agreement can be considered deductible in the year or a subsequent taxation year in computing the amounts prescribed to be the exempt earnings or exempt loss from an active business of Opco other than an active business carried on in Canada; (iv) because if XXXXXXXXXX were a foreign affiliate of Pubco, Canco would have a qualifying interest in XXXXXXXXXX and its income would be re-characterized under subparagraph 95(2)(a)(ii) so that the payment to Lenderco would be deductible in computing such income; (v) no avoidance transaction.

Ruling

2003 Ruling 2001-011123A - Foreign affiliate reorg; Deemed Active Income

Unedited CRA Tags
95(2)(a) 56(2) 85.1(3)

Principal Issues: Whether (i) Subsection 85.1(3) applies to disposition of shares held by Pubco to FA1 ("Settled Property"); (ii) pursuant to a trust established by a Deed of Settlement of the Settled Property, that trust as established will, except for purposes of subsections 104(1), 104(1.1) and subparagraphs (b)(v) and (k) of the definition of "disposition" in subsection 248(1) of the Income Tax Act (the "Act"), not be a trust for purposes of the Act; (iii) provided XXXXXXXXXX is a partnership at law, income derived by FA1 and FA2 from amounts paid or payable to XXXXXXXXXX by Opco in accordance with the Profit Transfer Agreement will be included in computing active business income of FA1 and FA2 pursuant to clause 95(2)(a)(ii)(B); (iv) income derived by Lenderco from interest paid or payable by XXXXXXXXXX under the XXXXXXXXXX Loan will be included in computing income from active business and in computing the exempt earnings of Lenderco to the extent that such interest would be deductible in the year or a subsequent year in computing the amounts that would be prescribed to be the earnings (not a loss) from an active business of XXXXXXXXXX other than an active business carried on in Canada if XXXXXXXXXX were a foreign affiliate of Pubco; (v) GAAR will apply to proposed transactions.

Position: (i) Yes; (ii) Yes; (iii) Yes; (iv) Yes; (v) No.

Reasons: (i) conditions in subsection 85.1(3) satisfied; (ii) provided Pubco acts as agent for FA1 with respect to all dealings with all of the Trust Property, as set out in the Deed of Settlement; (iii) the Opco payment to XXXXXXXXXX under the Profit Transfer Agreement would be income from property as it is derived from shares held in Opco; consequently, clause 95(2)(a)(ii)(B) can apply to re-characterize this income from property and include it in computing the exempt earnings of FA1 and FA2 pursuant to clause (d)(ii)(E) of that definition in subsection 5907(1) of the Regulations, to the extent the amounts paid or payable by Opco to XXXXXXXXXX under the Profit Transfer Agreement can be considered deductible in the year or a subsequent taxation year in computing the amounts prescribed to be the exempt earnings or exempt loss from an active business of Opco other than an active business carried on in Canada; (iv) because if XXXXXXXXXX were a foreign affiliate of Pubco, Canco would have a qualifying interest in XXXXXXXXXX and its income would be re-characterized under subparagraph 95(2)(a)(ii) so that the payment to Lenderco would be deductible in computing such income; (v) no avoidance transaction.

Technical Interpretation - External

22 May 2003 External T.I. 2003-0011805 - FORMER BUSINESS PROPERTY

Unedited CRA Tags
248(1)
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Former Business Property

Principal Issues: If a corporation that owns several apartment buildings is considered an "active business" and the rental income derived from the apartment buildings is considered "income of the corporation for the year from an active business", if one of these properties is disposed of, can it be considered a former business property for purposes of the replacement property rules?

Position: No

Reasons: As noted in Interpretation Bulletin IT-491, Former Business Property, "even though a property is used to earn qualified business income, it would be disqualified as a former business property if it was used in the taxation year in which it was disposed of principally for the purpose of producing rent". Further, as noted in Question 47 of the 1988 Canadian Tax Foundation Conference round table discussion, the definition of former business property "is very specific and is not connected to or affected by the provisions and definitions concerning active business and qualified small business corporation shares."

21 May 2003 External T.I. 2003-0008755 - QUALIFIED INVESTMENT DEBT OF CO-OP

Unedited CRA Tags
REG 4900(1)(h)

Principal Issues:
Will the fact that a Co-op member does business with the Co-op result in a benefit being granted to the member thereby disqualifying any bond, debenture, note or similar obligation of the Co-op from qualifying as a qualified investment for the member's RRSP?

Position: Question of fact

Reasons:
The benefit must arise as a result of the RRSP holding the promissory note. Provided the interest rate on a promissory note held in a member's RRSP is the same as that given to other members, and provided the same commercial terms apply to dealings with the co-op, we would probably conclude that no benefit arises.

21 May 2003 External T.I. 2003-0000455 - FLEX PLANS-USE OF EI PREMIUM REDUCTION

Unedited CRA Tags
6(1)(a)

Principal Issues: Whether EI premium reductions passed to employees ("savings") under an HRDC program could be incorporated into a flex plan

Position: Question of fact.

Reasons: It is necessary to review all of the facts in order to determine whether flex plan meets the requirements set out in IT-529.

20 May 2003 External T.I. 2001-0100025 - PRIVATE HEALTH SERVICES PLAN

Unedited CRA Tags
20.01

Principal Issues: Application of subsection 20.01(2) if an individual waives or is denied coverage under a PHSP.

Position: Limit determined under paragraph 20.01(2)(b) or (d) will be nil

Reasons: Limit is based on the cost of equivalent coverage for the individual

15 May 2003 External T.I. 2003-0006265 - AMOUNT PAYABLE FOR SUBSTITUTED PROPERTY

Unedited CRA Tags
20(1)(c)(ii)

Principal Issues:
Whether, interest paid in the year or payable in respect of the year on debt assumed as partial or full consideration for an income source (the "first income source") will continue to be deductible where the first income source is disposed of, a new income source is acquired and the balance of the debt assumed is reflected in the cost of the new income source.

15 May 2003 External T.I. 2002-0168445 F - frais de location-voiture

Unedited CRA Tags
67.3(B)
Summary Under
Tax Topics - Income Tax Act - Section 67.3 - Paragraph 67.3(d)
“manufacturer's list price" references "manufacturer's suggested retail price," and does not include federal and provincial sales tax

Principales Questions:
Est-ce que l'expression " prix courant de la voiture conseillé par le fabricant " utilisée à l'élément C de la formule prévue à l'alinéa 67.3b) de la Loi doit inclure les taxes de vente fédérale et provinciale applicables ?

Pourquoi la formule prévue à l'alinéa 67.3b) de la Loi utilise un facteur de multiplication de 0,85 à son dénominateur ?

Position Adoptée:
Non

15 May 2003 External T.I. 2003-0009745 - personal use of a vehicle

Unedited CRA Tags
6(1)(A) 6(1)(E) 6(2)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

PRINCIPAL ISSUE:

XXXXXXXXXX

Position TAKEN:

Yes.

Reasons:

If the primary purpose of a trip is personal in nature, then it is treated as such for tax purposes regardless of any employment activity that may take place during the course of the trip.

15 May 2003 External T.I. 2003-0011615 - AMORTIZATION PRESENT VALUE BASIS

Unedited CRA Tags
18(9.1)
Summary Under
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9.1)
straight-line v. present value method

Principal Issues:
Is deemed interest under 18(9.1) in a1992 ruling that is amortized under the straight-line method to XXXXXXXXXX now able to be amortized on a present value basis beginning in XXXXXXXXXX ?

14 May 2003 External T.I. 2003-0001915 - ALLOWANCE PAID TO TRANSPORT

Unedited CRA Tags
6(1)(b)(vii) 8(1)(a)

Principal Issues: Whether an allowance computed as a percentage of a transport employee's gross income would be non-taxable pursuant to subparagraph 6(1)(b)(vii); whether away-from-home expenses based on percentage of allowance would be deductible

Position: Question of fact; not acceptable method for computing away-from-home expenses. Claim must be computed in manner outlined in IC 73-21R7, and must be reduced by amount of tax-free allowance received in respect of such expenses.

Reasons: Allowance must be reasonable. Employer must show that there is a relation between the employee's gross income and the employment-related travel expenses incurred, and that the percentage used approximates the expenses incurred; Consistent with prior opinions

14 May 2003 External T.I. 2003-0014775 - ADMINSTRATOR - TEACHER

Unedited CRA Tags
8(1)(c)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues

Does a full-time administrator in a bible college with teaching duties qualify for the 8(1)(c) deduction?

Position TAKEN

Yes, provided the employee meets the status test and his full-time qualifying function require 35 hours or more.

14 May 2003 External T.I. 2003-0015625 F - Convertible Debenture - Safe Income

Unedited CRA Tags
55
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c)
holder of convertible debenture could be attributed safe income respecting the common shares into which it subsequently converted

Principal Issues: Whether safe income on hand earned by a corporation after the issue of a convertible debenture can be attributed to common shares issued in exchange for the debenture.

Position: Question of fact but in the particular situation described in the letter safe income on hand earned after the issue of the convertible debenture could be attributed to the common shares issued in exchange for the debenture.

Reasons: N/A

13 May 2003 External T.I. 2003-0000825 - INTEREST DEDUCTIBILITY

Unedited CRA Tags
20(1)(c)
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c)
MFT ROC distributions reduce deductible interest on unit purchase loan

Principal Issues:

6 May 2003 External T.I. 2003-0014145 - Part XIII Fee for letter of credit

Unedited CRA Tags
214(15)(b)
Summary Under
Tax Topics - Income Tax Act - Section 214 - Subsection 214(15)

Principal Issues: Whether a fee for a letter of credit is consideration for agreement to lend money or make money available.

Position: Depends on the nature of the arrangement under which the letter of credit is issued.

Reasons: Circumstances would dictate whether subsection 214(15) can apply.

24 April 2003 External T.I. 2003-0012935 - Netherlands AOW Taxable after 1994

Unedited CRA Tags
56(1)(a) Canada-Netherlands Treaty Article 18

Principal Issues: Correction to document 2002-013578, which stated that "until 1993", AOW was exempt from taxation in Canada.

Position: Should say "until 1994", AOW was exempt from taxation in Canada.

Reasons: The Coming-Into-Force provisions of the 1993 Protocol.

24 April 2003 External T.I. 2003-0008845 - Excluded property, characterization

Unedited CRA Tags
95(1) 95(2)

Principal Issues: whether excluded property retains its character as such when the ownership thereof is held for only an instant by a foreign affiliate during a reorganization

Position: yes

Reasons: active business carried on continuously even though the assets are held only momentarily, follows reasoning in Hickman

Technical Interpretation - Internal

21 May 2003 Internal T.I. 2003-0016297 - SPLIT-RECEIPTING TUITION FEES

Unedited CRA Tags
248(30)

Principal Issues: Under the proposed gifting legislation, can a tax receipt be issued when parents pay an amount for the right for their children to attend a private school?

Position: Provided general comments only.

Reasons: Unable to provide definitive comments due to insufficient information.

21 May 2003 Internal T.I. 2003-0009897 F - COUT DES ACTIONS

Unedited CRA Tags
112(5.2) 142.5(2)(B)
Summary Under
Tax Topics - Income Tax Act - Section 112 - Subsection 112(5.2) - Variable B
“cost” in B refers to the original cost (computed without reference to s. 142.5(2)(b))

Principal question:

Pour les fins du calcul du redressement pour dividendes prévu au paragraphe 112(5.2) de la Loi, une institution financière doit-elle tenir compte du calcul prévu à l'alinéa 142.5(2)b) de la Lsxsoi lors de la détermination du coût de l'action?

Position Adoptée: Non.

15 May 2003 Internal T.I. 2003-0010237 F - COUT EN MAIN-D'OEUVRE

Unedited CRA Tags
125.1
Summary Under
Tax Topics - Income Tax Regulations - Regulation 5202 - Salaries and Wages
“salaries and wages” do not include tips
Words and Phrases
salaries and wages

Principales Questions:
Est-ce que les pourboires reçus de différentes sources par les serveurs d'un restaurant doivent être inclus dans le " coût en main-d'œuvre " aux fins du calcul des " bénéfices de fabrication et transformation au Canada " d'une société ?

Position Adoptée:
Non

15 May 2003 Internal T.I. 2003-0014167 - RRSP LSVCC SHARES T4 REPORTING

Unedited CRA Tags
146(8)

Principal Issues:
Where an RRSP disposes of a share of a LSVCC to distribute property to its annuitant and the disposition is subjected to taxes under Part XII.5, will the net amount (after the taxes under Part XII.5) distributed by the RRSP to the annuitant have to be reported on a T4RSP?

Position: Yes.

Reasons:
Under subsection 146(8) of the Act, the amount received by the annuitant has to be reported as a benefit received out of or under the RRSP. Since the RRSP is subject to Part XII.5 taxes, the taxes are not received as a benefit by the annuitant so it can't be reported on the T4RSP.

14 May 2003 Internal T.I. 2003-0181477 F - DEDUCTIBILITE DES INTERETS

Unedited CRA Tags
20(1)(c)
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c)
deductible interest is reduced by amortization of premium arising from loan’s deliberate issuance at above-market interest rate
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i)
taxpayer discretion re attributing use of commingled funds does not apply where tracing is possible

Principales Questions:
1. Les positions présentées lors du congrès de 2002 de l'APFF sur le retraçage et la mise à part de l'argent permettent-elles au contribuable de choisir la méthode qu'il préfère?
2. La position énoncée sur une créance émise à prime lorsque le contribuable fixe intentionnellement le taux d'intérêt à un taux supérieur de celui du marché est-elle justifiée en raison de l'arrêt Shell?

14 May 2003 Internal T.I. 2003-0010177 - LEGAL FEES

Unedited CRA Tags
18(1)(a) 60(5)

Principal Issues:
Are legal fees incurred by a taxpayer to defend himself in connection with a prosecution under section 239 (income not reported) deductible?

Position:
The legal fees are not deductible.

Reasons:
The taxpayer did not incur the legal fees for the purpose of gaining or producing income from a business or property. The legal fees are not related to the defence of practices which arise in the normal course of the taxpayer's income-earning activities. Furthermore, paragraph 60(o) does not apply.

14 May 2003 Internal T.I. 2003-0013467 - EDUCATION ASSISTANCE PAID TO INDIAN

Unedited CRA Tags
56(1)(n) 81(1)(a)

Principal Issues:
Are tuition amounts paid to or on behalf of a status Indian by INAC taxable?

Position: Question of Fact

Reasons:
The amounts are not automatically tax exempt. If the payment of tuition is pursuant to a treaty obligation of the Crown, then 90(1) of the Indian Act deems the amount to be situated on a reserve and it will be exempt under subsection 81(1) of the Act. In the absence of a treaty, the connecting factors test from Williams must be met in order to apply section 87 of the Indian Act and subsection 81(1) of the Act.

14 May 2003 Internal T.I. 2003-0014907 - PRINCIPAL RESIDENCE

Unedited CRA Tags
45(2) 54 128.1

Principal Issues: Will the principal residence exemption provided under paragraph 40(2)(b) of the Act be available to a recent immigrant to Canada with respect to a home owned in Korea?

Position: The principal residence exemption may be available in certain situations.

Reasons: Where the taxpayer begins to lease out his Korean home after becoming resident in Canada, it is our view that the change in use rules contained in subsection 45(1) of the Act would apply. Where subparagraph 45(1)(a)(i) of the Act would otherwise apply, the taxpayer would be entitled to make a subsection 45(2) election. The definition of "principal residence" in section 54 of the Act provides in paragraphs (b) and (d) that a property can qualify as a taxpayer's principal residence for up to four taxation years during which a subsection 45(2) election remains in force, even if the housing unit is not ordinarily inhabited during those years by the taxpayer, the taxpayer's spouse or common-law partner, or former spouse or common-law partner or a child of the taxpayer.

13 May 2003 Internal T.I. 2003-0001787 F - CHOIX-IMPACT SUR FNACC

Unedited CRA Tags
110.6(19) 13(7)e.1) 13(7)e)(iii)
Summary Under
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e.1)
notwithstanding Finance’s intent, s. 104(19) election resulted in subsequent recapture
Summary Under
Tax Topics - Statutory Interpretation - Ordinary Meaning
clearly expressed legislative text to be followed, even though contrary to more favourable Finance intent

Principale Question:

Lorsqu'un choix a été exercé en 1994 en vertu du paragraphe 110.6(19) de la Loi à l'égard d'un bien amortissable pour une valeur supérieure à 11/10 de sa juste valeur marchande, est-il possible que la réduction du coût de ce bien en vertu de la division 110.6(19)a)(ii)(C) occasionne, au moment de sa disposition à un tiers, de la récupération à inclure au revenu de l'individu plutôt qu'un gain en capital plus important?

Position Adoptée:
Oui, dans ce cas-ci.

13 May 2003 Internal T.I. 2003-0002167 F - TRAVAIL TEMPORAIRE

Unedited CRA Tags
6(6)
Summary Under
Tax Topics - Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(a) - Subparagraph 6(6)(a)(i)
test of work of a temporary nature not met where appointment as a director could be readily renewed through re-election

Principales Questions: Est-ce que le contrat d'une durée de XXXXXXXXXX ans, renouvelable, représente un travail de nature temporaire au sens du sous-alinéa 6(6)a)(i) de la Loi ?