Income Tax Severed Letters - 2003-07-25

Technical Interpretation - External

22 July 2003 External T.I. 2003-0011795 - Sale of Trees

Unedited CRA Tags
12(1)(g)

Principal Issues: Does the sale of trees result in a capital gain or income for tax purposes?

Position: Question of fact.

Reasons: Can only be determined when all of the facts are known.

22 July 2003 External T.I. 2003-00117950 - Sale of Trees

Unedited CRA Tags
12(1)(g)

Principal Issues: Does the sale of trees result in a capital gain or income for tax purposes?

Position: Question of fact.

Reasons: Can only be determined when all of the facts are known.

21 July 2003 External T.I. 2003-0020535 - MANUFACTURING AND PROCESSING - SR+EP

Unedited CRA Tags
125.1 248(1) 5202

Principal Issues:
1. Whether SR&ED activities are eligible for the M&P deduction.
2. Whether eligible for M&P if only activity is SR&ED.

Position:
1. Yes - included in determining "cost of M&P capital" and "cost of M&P labour".
2. No.

Reasons:
1. Paragraph (c) of definition of "qualified activities"
2. If only SR&ED, there would be no commercial production per paragraph (i) of SR&ED definition - therefore no manufacturing or processing of goods for sale or lease for purposes of M&P profits as defined in 125.1(3).

21 July 2003 External T.I. 2003-00205350 - MANUFACTURING AND PROCESSING - SR+EP

Unedited CRA Tags
125.1 248(1) 5202

Principal Issues:
1. Whether SR&ED activities are eligible for the M&P deduction.
2. Whether eligible for M&P if only activity is SR&ED.

Position:
1. Yes - included in determining "cost of M&P capital" and "cost of M&P labour".
2. No.

Reasons:
1. Paragraph (c) of definition of "qualified activities"
2. If only SR&ED, there would be no commercial production per paragraph (i) of SR&ED definition - therefore no manufacturing or processing of goods for sale or lease for purposes of M&P profits as defined in 125.1(3).

18 July 2003 External T.I. 2003-0013745 - Flow-Through Shares and GAAR

Unedited CRA Tags
245(2) Reg. 6202.1

Principal Issues: Whether the general anti-avoidance rule ("GAAR") would apply in a situation involving the issuance of shares, intended to be flow-through shares, where the subscription agreement provides that a third-party public corporation will subsequently make an offer to purchase the shares at fair market value with individual investors then seeking to claim a deduction under subsection 110.6(2.1) in respect of any capital gain.

Position: Whether or not GAAR will apply in a particular situation must be determined based upon all of the facts relevant to that situation. The fact that the transactions involve the benefits of two incentive provisions would not, in and by itself, result in the application of GAAR to the transactions unless the results are so inconsistent with the general scheme of the Act that they cannot have been within the contemplation of Parliament. However, it would also be a question of fact whether such a share would be a "prescribed share" and therefore precluded from qualification as a flow-through share.

Reasons: Nature of the determination.

18 July 2003 External T.I. 2003-00137450 - Flow-Through Shares and GAAR

Unedited CRA Tags
245(2) Reg. 6202.1

Principal Issues: Whether the general anti-avoidance rule ("GAAR") would apply in a situation involving the issuance of shares, intended to be flow-through shares, where the subscription agreement provides that a third-party public corporation will subsequently make an offer to purchase the shares at fair market value with individual investors then seeking to claim a deduction under subsection 110.6(2.1) in respect of any capital gain.

Position: Whether or not GAAR will apply in a particular situation must be determined based upon all of the facts relevant to that situation. The fact that the transactions involve the benefits of two incentive provisions would not, in and by itself, result in the application of GAAR to the transactions unless the results are so inconsistent with the general scheme of the Act that they cannot have been within the contemplation of Parliament. However, it would also be a question of fact whether such a share would be a "prescribed share" and therefore precluded from qualification as a flow-through share.

Reasons: Nature of the determination.

17 July 2003 External T.I. 2003-0020695 - Distribution from Trust

Unedited CRA Tags
212(1)(c) 212(11)
Year 2 distribution derived from Year 1 capital dividend subject to withholding

Principal Issues: Whether the distribution out of capital of a trust resident in Canada to a non-resident beneficiary will be subject to Part XIII withholding tax.

Position: Yes.

Reasons: In the generalized scenario, it is reasonable to conclude that the distribution from the trust to its beneficiary was derived from the capital dividend received by the trust in the previous year.

17 July 2003 External T.I. 2003-0003125 - Professional Divers - UK Resident

Unedited CRA Tags
255 Art. 27A(UK Treaty)

Principal Issues: Whether remuneration of a UK professional diver working in an area which is included as a part of Canada under section 255 of the Income Tax Act (the "Act") is taxable in Canada?

Position: Yes.

Reasons: Interpretation of the provisions of the Act and Articles 3, 15 and 27A of the Canada-United Kingdom Income Tax Convention ("UK Convention").

17 July 2003 External T.I. 2003-00031250 - Professional Divers - UK Resident

Unedited CRA Tags
255 Art. 27A(UK Treaty)

Principal Issues: Whether remuneration of a UK professional diver working in an area which is included as a part of Canada under section 255 of the Income Tax Act (the "Act") is taxable in Canada?

Position: Yes.

Reasons: Interpretation of the provisions of the Act and Articles 3, 15 and 27A of the Canada-United Kingdom Income Tax Convention ("UK Convention").

17 July 2003 External T.I. 2003-00206950 - Distribution from Trust

Unedited CRA Tags
212(1)(c) 212(11)

Principal Issues: Whether the distribution out of capital of a trust resident in Canada to a non-resident beneficiary will be subject to Part XIII withholding tax.

Position: Yes.

Reasons: In the generalized scenario, it is reasonable to conclude that the distribution from the trust to its beneficiary was derived from the capital dividend received by the trust in the previous year.

17 July 2003 External T.I. 2003-0019235 - Tainted Spousal Trust

Unedited CRA Tags
70(6)

Principal Issues: With respect to a testamentary trust that otherwise qualifies as a spousal trust in subsection 70(6), will the ability of the trustee to lend funds (or to provide any other form of financial assistance) to a person other than the spouse taint the trust?

Position: Yes, unless commercial terms are complied with.

Reasons: The issue is whether the trustee is able to make funds available to anyone other than the spouse, whereas the definition of pre-1972 spousal trust considers whether anyone other than the spouse actually received or obtained the use of trust income or capital.
However, as stated in paragraph 16 of IT-305R4, the renting of real estate at market value or the lending of money on commercial terms will generally not be considered to result in someone receiving or otherwise obtaining the use of trust property.

17 July 2003 External T.I. 2003-00192350 - Tainted Spousal Trust

Unedited CRA Tags
70(6)

Principal Issues: With respect to a testamentary trust that otherwise qualifies as a spousal trust in subsection 70(6), will the ability of the trustee to lend funds (or to provide any other form of financial assistance) to a person other than the spouse taint the trust?

Position: Yes, unless commercial terms are complied with.

Reasons: The issue is whether the trustee is able to make funds available to anyone other than the spouse, whereas the definition of pre-1972 spousal trust considers whether anyone other than the spouse actually received or obtained the use of trust income or capital.
However, as stated in paragraph 16 of IT-305R4, the renting of real estate at market value or the lending of money on commercial terms will generally not be considered to result in someone receiving or otherwise obtaining the use of trust property.

15 July 2003 External T.I. 2003-0019495 - CLASS 16(G)

Unedited CRA Tags
20(1)(A) 1100(1)

Principal Issues: Whether for purposes of classifying a truck in Class 16 of Schedule II of the Income Tax Regulations (the Regulations), it has to be used in a business that hauls freight on a for hire basis on behalf of third parties.

Position: Generally, paragraph (g) of Class 16 applies to large trucks and tractors that are primarily used by taxpayers involved in the trucking sector for hauling freight. However, there may be situations where a taxpayer is in another type of business that hauls its own freight and the truck or tractor would qualify for Class 16 treatment.

Reasons: Paragraph (g) was added to Class 16 in response to concerns from taxpayers in the trucking sector that the CCA rates on large trucks and tractors used in freight hauling were too low. In a situation where a taxpayer's business hauls its own freight, a reasonable interpretation of paragraph (g) of Class 16 is that the taxpayer is in a "business that includes hauling freight", provided the hauling of its own freight is integral to the business of the taxpayer (e.g. where a manufacturer transports its products to market), and the truck or tractor is the type primarily used by taxpayers involved in the trucking sector for hauling freight. If the other conditions outlined in paragraph (g) are met, the truck or tractor would qualify for Class 16 treatment.

15 July 2003 External T.I. 2003-00194950 - CLASS 16(G)

Unedited CRA Tags
20(1)(A) 1100(1)

Principal Issues: Whether for purposes of classifying a truck in Class 16 of Schedule II of the Income Tax Regulations (the Regulations), it has to be used in a business that hauls freight on a for hire basis on behalf of third parties.

Position: Generally, paragraph (g) of Class 16 applies to large trucks and tractors that are primarily used by taxpayers involved in the trucking sector for hauling freight. However, there may be situations where a taxpayer is in another type of business that hauls its own freight and the truck or tractor would qualify for Class 16 treatment.

Reasons: Paragraph (g) was added to Class 16 in response to concerns from taxpayers in the trucking sector that the CCA rates on large trucks and tractors used in freight hauling were too low. In a situation where a taxpayer's business hauls its own freight, a reasonable interpretation of paragraph (g) of Class 16 is that the taxpayer is in a "business that includes hauling freight", provided the hauling of its own freight is integral to the business of the taxpayer (e.g. where a manufacturer transports its products to market), and the truck or tractor is the type primarily used by taxpayers involved in the trucking sector for hauling freight. If the other conditions outlined in paragraph (g) are met, the truck or tractor would qualify for Class 16 treatment.

14 July 2003 External T.I. 2003-0019225 - REPLACEMENT PROPERTY

Unedited CRA Tags
44(5) 248(1)

Principal Issues: (a) Is it possible for a property to be considered a replacement property if it is in a geographic location which is different from that of the former property? (b) Does the replacement property have to be located in Canada if the former property was located in Canada? (c) Can the replacement property rules apply when two or more properties replace a single property?

Position: (a) Yes; (b) Yes; (c) Yes.

Reasons: (a) Paragraph 15 IT-259R3; (b) Paragraph 44(5)(c); (c) Paragraph 28 IT-259R3.

14 July 2003 External T.I. 2003-00192250 - REPLACEMENT PROPERTY

Unedited CRA Tags
44(5) 248(1)

Principal Issues: (a) Is it possible for a property to be considered a replacement property if it is in a geographic location which is different from that of the former property? (b) Does the replacement property have to be located in Canada if the former property was located in Canada? (c) Can the replacement property rules apply when two or more properties replace a single property?

Position: (a) Yes; (b) Yes; (c) Yes.

Reasons: (a) Paragraph 15 IT-259R3; (b) Paragraph 44(5)(c); (c) Paragraph 28 IT-259R3.

11 July 2003 External T.I. 2003-0181695 - LCT AND PARTNERSHIP EARNINGS

Unedited CRA Tags
181

Principal Issues:
How are partnership earnings to be treated in determining the capital of a corporate partner for purposes of Part I.3 tax?

Position:
Partnership earnings for fiscal period of partnership ended in corporate partner's taxation year are included in the corporate partner's capital based on the partner's allocation of partnership income. Stub period earnings are only included in the corporate partner's capital to the extent the partner has received a distribution of the stub period earnings.

Reasons:
Generally the capital of a corporate partner is determined with reference to the fiscal year end of the partnership.

11 July 2003 External T.I. 2003-01816950 - LCT AND PARTNERSHIP EARNINGS

Unedited CRA Tags
181

Principal Issues:
How are partnership earnings to be treated in determining the capital of a corporate partner for purposes of Part I.3 tax?

Position:
Partnership earnings for fiscal period of partnership ended in corporate partner's taxation year are included in the corporate partner's capital based on the partner's allocation of partnership income. Stub period earnings are only included in the corporate partner's capital to the extent the partner has received a distribution of the stub period earnings.

Reasons:
Generally the capital of a corporate partner is determined with reference to the fiscal year end of the partnership.

10 July 2003 External T.I. 2003-0007895 - Dividend received by foreign affiliate

Unedited CRA Tags
95(1) 5907(1)

Principal Issues: I) Whether a dividend paid by one foreign affiliate to another is foreign accrual property income ("FAPI")?
II) Whether a dividend paid by one foreign affiliate of an individual to a second foreign affiliate is included in the second foreign affiliate's exempt surplus?

Position: I) No.
II) No.

Reasons: I) The definition of FAPI excludes dividends paid from one foreign affiliate to another.
II) The definition of "exempt surplus" does not apply in respect of an individual.

10 July 2003 External T.I. 2003-00078950 - Dividend received by foreign affiliate

Unedited CRA Tags
95(1) 5907(1)

Principal Issues: I) Whether a dividend paid by one foreign affiliate to another is foreign accrual property income ("FAPI")?
II) Whether a dividend paid by one foreign affiliate of an individual to a second foreign affiliate is included in the second foreign affiliate's exempt surplus?

Position: I) No.
II) No.

Reasons: I) The definition of FAPI excludes dividends paid from one foreign affiliate to another.
II) The definition of "exempt surplus" does not apply in respect of an individual.

9 July 2003 External T.I. 2003-0183675 F - VENTE D'UNE LISTE DE CLIENTS

Unedited CRA Tags
12(1)G) 14

Position Adoptée:
Commentaires généraux sur l'application de l'alinéa 12(1)g) et de l'article 14 de la Loi.

9 July 2003 External T.I. 2003-01836750 F - VENTE D'UNE LISTE DE CLIENTS

Unedited CRA Tags
12(1)G) 14

Position Adoptée:
Commentaires généraux sur l'application de l'alinéa 12(1)g) et de l'article 14 de la Loi.

8 July 2003 External T.I. 2003-0182555 - PARTNERSHIPS

Unedited CRA Tags
142.2 96

Principal Issues:
Is a partnership a "taxpayer" for the purposes of sections 142.2 to 142.7 of the Act (the "mark-to-market rules")?

Position: Yes.

Reasons: The scheme of the mark-to-market rules.

8 July 2003 External T.I. 2003-01825550 - PARTNERSHIPS

Unedited CRA Tags
142.2 96

Principal Issues:
Is a partnership a "taxpayer" for the purposes of sections 142.2 to 142.7 of the Act (the "mark-to-market rules")?

Position: Yes.

Reasons: The scheme of the mark-to-market rules.

Technical Interpretation - Internal

15 July 2003 Internal T.I. 2003-00231770 F - DATE D'EXECUTION

Unedited CRA Tags
56.1(4)

Principales Questions:
Est-ce que la clause prévue à l'ordonnance rencontre les conditions du sous-alinéa b)(iv) de la définition de " date d'exécution " au paragraphe 56.1(4) de la Loi ?

Position Adoptée:
Oui

15 July 2003 Internal T.I. 2003-0023177 F - DATE D'EXECUTION

Unedited CRA Tags
56.1(4)

Principales Questions:
Est-ce que la clause prévue à l'ordonnance rencontre les conditions du sous-alinéa b)(iv) de la définition de " date d'exécution " au paragraphe 56.1(4) de la Loi ?

Position Adoptée:
Oui

14 July 2003 Internal T.I. 2003-00166770 F - BONIS A PAYER ET BENEFICES MARGINAUX

Unedited CRA Tags
18(1)(A) 18(1)(E)

Principales Questions:
Est-ce que les bonis, les vacances accumulées à l'égard des bonis et les contributions patronales afférentes à ces bonis sont déductibles dans l'année d'imposition pour laquelle ils sont comptabilisés?

Position Adoptée:
Dans la présente situation, il y aurait une obligation légale de payer les bonis, les vacances accumulées et les contributions patronales à la fin de l'année d'imposition. Si les bonis sont raisonnables et si le paragraphe 78(4) de la Loi ne s'applique pas, les bonis sont déductibles. Les vacances accumulées et les contributions patronales sont aussi déductibles.

14 July 2003 Internal T.I. 2003-0016677 F - BONIS A PAYER ET BENEFICES MARGINAUX

Unedited CRA Tags
18(1)(A) 18(1)(E)

Principales Questions:
Est-ce que les bonis, les vacances accumulées à l'égard des bonis et les contributions patronales afférentes à ces bonis sont déductibles dans l'année d'imposition pour laquelle ils sont comptabilisés?

Position Adoptée:
Dans la présente situation, il y aurait une obligation légale de payer les bonis, les vacances accumulées et les contributions patronales à la fin de l'année d'imposition. Si les bonis sont raisonnables et si le paragraphe 78(4) de la Loi ne s'applique pas, les bonis sont déductibles. Les vacances accumulées et les contributions patronales sont aussi déductibles.

2 July 2003 Internal T.I. 2003-00030870 - Article XXIX B (U.S. Treaty)

Unedited CRA Tags
Article XXIX B

Principal Issues: (i) Whether B.C. foreign tax credit is available in respect of U.S. estate tax? (ii) What portion of the Canadian tax otherwise payable is deductible for U.S. estate tax purposes in computing taxable estate? (iii) Whether subsection 152(4)(b)(iii) applies in a situation where the taxpayer reported his share of the income from a subchapter S corporation and claimed a FTC before the income was distributed to him?

Position: (i) No. (ii) That portion of the Canadian tax otherwise payable (after foreign tax credit) that was not creditable by the U.S. for U.S. estate tax purposes. (iii) No.

Reasons: (i) No provision in the Canada-United States Income Tax Convention, the Income Tax Act (Canada) or the Income Tax Act of B.C. provides that a provincial foreign tax credit should be granted in respect of U.S. estate tax. (ii) IRS's position. (iii) Problems with the meaning of the term "transaction", the fact whether the taxpayer was dealing at arm's length with the subchapter S corporation, and the interpretation of the term "as a consequence of" in subparagraph 152(4)(b)(iii) of the Income Tax Act.

2 July 2003 Internal T.I. 2003-0003087 - Article XXIX B (U.S. Treaty)

Unedited CRA Tags
Article XXIX B

Principal Issues: (i) Whether B.C. foreign tax credit is available in respect of U.S. estate tax? (ii) What portion of the Canadian tax otherwise payable is deductible for U.S. estate tax purposes in computing taxable estate? (iii) Whether subsection 152(4)(b)(iii) applies in a situation where the taxpayer reported his share of the income from a subchapter S corporation and claimed a FTC before the income was distributed to him?

Position: (i) No. (ii) That portion of the Canadian tax otherwise payable (after foreign tax credit) that was not creditable by the U.S. for U.S. estate tax purposes. (iii) No.

Reasons: (i) No provision in the Canada-United States Income Tax Convention, the Income Tax Act (Canada) or the Income Tax Act of B.C. provides that a provincial foreign tax credit should be granted in respect of U.S. estate tax. (ii) IRS's position. (iii) Problems with the meaning of the term "transaction", the fact whether the taxpayer was dealing at arm's length with the subchapter S corporation, and the interpretation of the term "as a consequence of" in subparagraph 152(4)(b)(iii) of the Income Tax Act.