Income Tax Severed Letters - 2003-11-14

Miscellaneous

2003 Income Tax Severed Letter 2003-0021451 - INNOVATIVE INSTRUMENT

Unedited CRA Tags
20(1)(c) 104(7.1) 104(6)(b)

Principal Issues:
Supplemental to Ruling 2003-001447-minor changes in wording

Position: N/A

Reasons: N/A

Ruling

2003 Ruling 2003-0013493 - PATRONAGE DIVIDENDS MEMBERS AS AGENTS

Unedited CRA Tags
135(1) 135(4)

Principal Issues:
1. Whether members of a cooperative are acting as agents of the cooperative when acquiring goods from a supplier.
2. Whether the supplier, another cooperative, is entitled to claim a deduction for patronage dividends paid to the cooperative.

Position:
1. It is a question of law whether the documentation is effective in establishing an agency relationship.
2. Yes, subject to the limitation in subsection 135(2) and provided the requirements of section 135 are otherwise met.

Reasons:
1. Provided that the members are acting as agents of the cooperative on the initial sale of goods from the supplier to the cooperative, the members are customers of the cooperative when the goods are resold to the members.
2. Our ruling is given on the proviso that the members are acting as agents of the cooperative with the result that the cooperative acquires the goods from the supplier.

2003 Ruling 2003-0022603 - excess contributions

Unedited CRA Tags
6(1)(A)

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

2003 Ruling 2003-0028303 F - Butterfly Transaction-Papillon

Unedited CRA Tags
55(3)(b) 55(3.1) 55(2)

Principal Issues: Split-up butterfly transaction.

Position: Favourable rulings provided.

Reasons: Meets the requirements of the law.

Ministerial Correspondence

7 November 2003 Ministerial Correspondence 2003-0046624 - REASONABLENESS SHAREHOLDER REMUNERATION

Unedited CRA Tags
67

Principal Issues: Whether remuneration paid out of the proceeds generated from a major sale of business assets is beyond the scope of the policy on when, for purposes of section 67 of the Income Tax Act, shareholder/manager remuneration will be considered reasonable.

Position: Generally, yes. We will, however, consider situations on an advance income tax ruling basis.

Reasons: The income generated from a major sale of business assets is not earned during the normal course of business operations, but rather is an indication of the cessation of business operations.

Technical Interpretation - External

12 November 2003 External T.I. 2003-0020565 - CONTRIBUTION OF SHORT CALL OPTION

Unedited CRA Tags
146(4)(b) 146.1(2.1)(c) 146.3(3)(c)

Principal Issues:
Can a taxpayer contribute a short position in a call option which they write to a deferred plan?

Position:
It may result in the plan being considered to be carrying on a business. If held by an RESP, it may be revocable; if held by an RRSP or RRIF, will may result in the plan being liable for tax on its taxable income for any year in which it is carrying on a business.

Reasons: The law is clear if an RESP, RRSP or RRIF is carrying on a business.

10 November 2003 External T.I. 2003-0034395 - TRANSFER - MEANING OF VESTED

Unedited CRA Tags
60(j.1)

Principal Issues:
What is our interpretation of "vested" for purposes of clause 60(j.1)(ii)(B) of the Act?

Position:
Contributions to a plan have vested in a retiree when the retiring allowance is paid if the retiree at the time the retiring allowance is paid is entitled to either a pension or a lump sum amount from the plan, which includes the employer's contributions.

Reasons: Position reflected in paragraph 22(e) of IT-337R4.

7 November 2003 External T.I. 2003-0006675 - Deemed ACB under 84.1(2)(a.1)

Unedited CRA Tags
84.1(2)(a.1)

Principal Issues: Determination of adjusted cost base of shares of a Canadian corporation for s. 84.1 purposes.

Position: Where shares of the corporation were held on December 31, 1971 by a party that does not deal at arm's length with a person and, through an unbroken chain of non-arm's length transactions, the shares were vested in the person, the adjusted cost base of those shares for s. 84.1 purposes will be reduced by the amount determined under s. 84.1(2)(a.1).

Reasons: The wording of the provisions of the Act as well as the Income Tax Application Rules. Also accords with our previous positions in IT-199 "Identical Properties Acquired in Non-Arm's Length Transactions" and paragraph 7 of IT-132R2 "Capital Property Owned on December 31, 1971 - Non-Arm's Length Transactions".

7 November 2003 External T.I. 2003-0046815 - TAXABLE BENEFITS

Unedited CRA Tags
6(1)(a)

Principal Issues:
Whether the reimbursement of certain costs incurred by a public office holder will result in a taxable benefit that is included in computing income under paragraph 6(1)(a) of the Act.

Position: Question of fact.

Reasons: Depending on the facts, a reimbursement of costs incurred by a public office holder may result in an income inclusion pursuant to paragraph 6(1)(a) of the Act.

6 November 2003 External T.I. 2003-0039525 F - Canadian Renewable & Conservation Expenses

Unedited CRA Tags
Reg 1219(1) Reg. 1219(2) 66.1(6) "CRCE"
Summary Under
Tax Topics - Income Tax Regulations - Regulation 1219 - Subsection 1219(1)
CCA is not an outlay or expense, and cannot qualify as CRCE
Words and Phrases
expense incurred
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(a)
CCA is not an expense incurred
Summary Under
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 43.1 - Paragraph (d) - Subparagraph (d)(viii)
computers used in operating landfill biogas site might be Class 10 property, and applications software would be Class 43.1 or Class 12 property/ below-surface pipes would not qualify
Summary Under
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 12 - Paragraph 12(o)
applications software used by computers for operation of biogas landfill site would be Class 43.1 or Class 12 property

Principal Issues: Various questions with respect to Canadian renewable and conservation expense ("CRCE") and Class 43.1. Q. 1: Whether capital cost allowance ("CCA") would constitute CRCE. Q. 2: Whether some kind of assistance would be available with respect to a prototype. Q. 3: Whether expenses constitute CRCE in a situation where a person other than the taxpayer is the owner of property used in the project and described in class 43.1.

Position: Answer to Q. 1: No, because CCA is not "an expense incurred by the taxpayer." Answer to Q. 2: First determine if expenses related to a prototype would be in respect of scientific research and experimental development, since such expenses are carved out from CRCE treatment under Reg. 1219(2)(b)(vii). Answer to Q. 3: No; the taxpayer must be the owner of property described in class 43.1.

Reasons: Wording of the Act and the Regulations.

6 November 2003 External T.I. 2003-0041355 F - Subsections 110.(19) and 85(1)

Unedited CRA Tags
110.6(19) 110.6(21) 85(1)
Summary Under
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1)
s. 85(1) rollover for stepped-up s. 110.6(19) ACB

Principal Issues:
In the particular situation described in the letter, whether subsection 85(1) applies.

Position: Yes.

Reasons: Question of fact.

5 November 2003 External T.I. 2003-0045085 F - Section 159-Payments on Behalf of Others159(2)

Unedited CRA Tags
159(3) 248(1)"Legal Representative"
Summary Under
Tax Topics - Income Tax Act - Section 159 - Subsection 159(2)
trustee in bankruptcy must be acting in that capacity for that exception to apply

Principal Issues: Whether the exemption in subsection 159(2) and 159(3) with respect to a trustee in bankruptcy is available only to a person who acts in his or her capacity as trustee in bankruptcy, in relation to the distribution of property of a particular taxpayer.

Position: Yes.

Reasons: Wording of the Act.

5 November 2003 External T.I. 2003-0037485 - TIME PARTNERSHIP CEASES TO EXIST

Unedited CRA Tags
98(1)

Principal Issues: At what time does the partnership cease to exist?

Position: The partnership is deemed, for purposes of the Act, not to have ceased to exist until such time as all the partnership property has been distributed to the persons entitled by law to receive it.

Reasons: Wording of the Act.

5 November 2003 External T.I. 2003-0039005 - TERMINATION AND RE-EMPLOYEMENT

Unedited CRA Tags
248(1) 60(j.1)

Position: Question of fact.
REASON: Provided general comments

5 November 2003 External T.I. 2003-0029455 - TAXATION OF PENSION SHORTFALL PAYMENT

Unedited CRA Tags
56(1)(a)(i) 248 147.3

Principal Issues:
Can an individual's former employer deposit an amount, representing the current value of his remaining entitlement under a registered pension plan ("RPP"), into his registered retirement savings plan ("RRSP")?

Position:
The amount will be a taxable benefit under 56(1)(a)(i). However, direct transfer of an amount directly from the RPP to the RRSP pursuant to subsection 147.3(4), subject to the prescribed amount rules, will be possible.

Reasons:
The amount paid is clearly tied to a benefit under the RPP. The employer/administrator has conceded that the original RPP payout to the individual was miscalculated. This clear link suggests that the amount is more appropriately characterized as a 56(1)(a)(i) pension/superannuation amount than as "damages."

5 November 2003 External T.I. 2003-0041635 - EMPLOYER PAID EDUCATION COSTS

Unedited CRA Tags
6(1)(a)

Principal Issues: Taxable status of the reimbursement by the employer for the cost of a parachuting course taken by the employee to upgrade his qualifications for employment purposes.

Position: Non-taxable.

Reasons: Course is taken for maintenance or upgrading of employer-related skills

4 November 2003 External T.I. 2003-0035475 - EMPLOYER PAID LEGAL FEES

Unedited CRA Tags
6(1)(a) 15(1) 18(1)(a)

Principal Issues: Taxable status of various costs, including legal fees, paid by an employer on behalf of an individual who is employed as a pharmacist and required to appear before a disciplinary committee of the provincial pharmacist order.

Position: Question of fact.

Reasons: Depends on whether the costs incurred relate to an action of the employee carried out during the normal course of performing the duties of employment, and whether the benefit was received in the individual's capacity as an employee or shareholder.

4 November 2003 External T.I. 2003-0044045 - MEDICAL EXPENSES INCURRED OUTSIDE CANADA

Unedited CRA Tags
118.2(2)

Principal Issues:
Whether the costs of cancer treatments available only in the USA qualify as medical expenses under subsection 118.2(2) of the Act.

Position:
The expenses would qualify if paid to a medical practitioner or to a public or licensed private hospital. Also certain travel expenses may qualify if the conditions in paragraphs 118.2(2)(g) or (h) are met

Reasons:
Definition of medical expense in ss. 118.2(2)

30 October 2003 External T.I. 2003-0045515 - Foreign Tax Credit

Unedited CRA Tags
126(2) 126(7) 18(1)(a)

Principal Issues: Whether a portion of a minimum tax can be eligible for a foreign tax credit.

Position: No

Reasons: There is no portion of the minimum tax that is based on net income and therefore no portion of the minimum tax is an "income or profits tax".

30 October 2003 External T.I. 2003-0037075 F - Associated Corporation and 129(6)

Unedited CRA Tags
256(2) 129(6) 125
Summary Under
Tax Topics - Income Tax Act - Section 256 - Subsection 256(2)
corporations associated through s. 256(2) continued as associated for s. 129(6) purposes where the 3rd corporation filed s. 256(2) election not to be associated with either

Principal Issues:
Whether corporations associated through a third corporations under 256(2) continue to be so associated for the purposes of subsection 129(6) of the Act where the third corporation files the election not to be associated with either of the other two corporations pursuant to subsection 256(2) ?

Position:
Yes.

Reasons:
Pursuant to subsection 256(2) of the Act, the election is only relevant for the purposes of section 125 of the Act.

Technical Interpretation - Internal

12 November 2003 Internal T.I. 2003-0032907 - RRSP AND SUBSECTION 73(1) OF THE ACT73(1)

Unedited CRA Tags
73(1.01) 146(1)

Position: No, subsection 73(1) is not applicable.
REASON: Wording of the Act

5 November 2003 Internal T.I. 2003-0036737 F - BOURSES D'ETUDES

Unedited CRA Tags
56(3)
Summary Under
Tax Topics - Income Tax Act - Section 56 - Subsection 56(3)
$3,000 exemption unavailable where education tax credit not available in the same taxation year

Position Adoptée: Non

5 November 2003 Internal T.I. 2003-0043277 F - Benefit-Use of Automobiles

Unedited CRA Tags
15(1) 15(5) 246(1)
Summary Under
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) - Paragraph 246(1)(a)
s. 246(1)(a) application re mother’s use of a car of Opco controlled by her son’s Holdco to her rather than son turned on whether her minority Holdco had significant influence over Opco
Summary Under
Tax Topics - Income Tax Act - Section 15 - Subsection 15(5)
application of s. 15(5) to shareholder’s use of company automobile
Summary Under
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1)
automobiles in car dealer inventory used for employee’s personal use remained in inventory, cf. if converted primarily to personal use of shareholder (which would not be a disposition)
Summary Under
Tax Topics - Income Tax Act - Section 9 - Computation of Profit
conversion of automobile in car inventory to personal use of CEO would not entail its deemed disposition nor would the conversion of car inventory to personal use of shareholders

Principal Issues: What would be the main tax consequences for "OPCO" and its shareholders where, in a particular fact situation, automobiles owned by OPCO would be used primarily for the personal use and enjoyment of certain individuals (one being a direct shareholder of OPCO, another being an indirect shareholder that controls OPCO and the others being persons related to the indirect shareholder that controls OPCO).

Position: An amount would have to be included in the income of the individual owning shares directly in OPCO under subsections 15(1) and 15(5). The application of subsection 246(1) would have to be considered with respect to the automobiles used by the other individuals. With respect to the individual that ultimately controls OPCO, it would have to be determined if he received the benefit in his capacity as an employee, or in the capacity as indirect shareholder. The automobiles would constitute personal-use property and would not be included in OPCO's inventory. Consequently, OPCO could not, in computing its income, benefit from any deduction with respect to the cost of the automobiles. Subsection 10(1) would also not be applicable. Furthermore, paragraph 18(1)(a) would preclude OPCO from deducting any other amount in respect of the automobiles. There would be no deemed disposition under subsection 45(1) upon the conversion, if any, of the automobiles from inventory to capital property (personal-use property). If the individual that ultimately controls OPCO received the benefit in his capacity as an employee and if the automobile is not used primarily for his personal use or enjoyment, such automobile could be included in OPCO's inventory. Consequently, the cost of such automobile would remain pertinent for the computation of OPCO's income. Subsection 10(1) would also be applicable in respect of such automobile. In such circumstances and subject to paragraph 18(1)(a) and section 67, OPCO could possibly deduct some other amounts in respect of the said automobile.

Reasons: Wording of the Act.

Le 5 novembre 2003

5 November 2003 Internal T.I. 2003-0043297 - CONTRACT TERMINATION PAYMENT

Unedited CRA Tags
18(1)(a) 18(1)(b) 20(1)(b)

Principal Issues: Request to review the taxpayer's representations and to advise the TSO if such representations affect our view expressed in 2003-001100 that a contract termination payment was a capital expenditure.

Position: The characterization of the payment depends on what the taxpayer was trying to effect from a practical and business perspective.

Reasons: The tax treatment of the payment would normally be on income account if the contract were settled in the course of an ongoing business. However, if the payment were made to settle an obligation as a consequence of the termination of a business, such a payment would normally be considered to be a non-depreciable capital outlay that we would allow the taxpayer to treat as an eligible capital expenditure.

3 November 2003 Internal T.I. 2003-0044817 F - Copies of Electronic Documents

Unedited CRA Tags
231.5 231.1 231.2
Summary Under
Tax Topics - Income Tax Act - Section 231.5 - Subsection 231.5(1)
CCRA audit right to take electronic copies and to print out
Summary Under
Tax Topics - Income Tax Act - Section 231.1 - Subsection 231.1(1)
CCRA auditors may take electronic copies of taxpayer records

Principal Issues: Whether document no. F 9705627, which states that CCRA may make, or cause to be made electronic copies of a taxpayer's electronic documents, still represents CCRA's opinion.

Position: Yes.

Reasons: Wording of the Act.

Le 3 novembre 2003

24 October 2003 Internal T.I. 2003-0183447 - DEMUTUALIZATION EXPENSES

Unedited CRA Tags
20(1)(c) 20(1)(g) 138(2)

Principal Issues:
Deductibility of expenses incurred in the course of demutualization.

Position:
Some expenses deductible as share issue expenses - paragraph 20(1)(e) of the Act; some as eligible capital expenditures - paragraph 20(1)(b) of the Act. Expenses incurred to "convert" financial statements to US GAAP may be deductible under paragraph 20(1)(g) if other requirements of that paragraph are met. Expenses are deductible only to extent they were incurred with respect to business carried on in Canada - subsections 20(1) and 138(2).20(1)(e)

Reasons:
Expenses incurred for purpose of obtaining authority to issue shares not deductible under paragraph 20(1)(e). US GAAP conversion expenses were incurred for purposes of seeking new capital following demutualization and hence not share issue expenses related to demutualization. Demutualization is reorganization of worldwide capital; hence some expenses must reasonably be attributed to insurance businesses carried on outside of Canada i.e. are not deductible.