Income Tax Severed Letters - 2004-01-02

Principal Issues:
Will employment income paid to status Indians working at a hospital near a reserve be tax-exempt?

Position: No

Reasons:
Application of the Guidelines - employment income would not be exempt in this situation. Furthermore, extenuating circumstances do not create additional connecting factors that would be significant enough to merit an exemption.

Principales Questions:
Application de l'article 7001 du Règlement à une situation particulière.

Principal Issues:
Whether an agreement between an automobile dealership and an individual is a lease or a sale

Principal Issues: Whether the shares owned by a taxpayer are considered to be "qualified small business corporation shares"?

Position: Question of fact, general comments provided.

Reasons: Question of fact, insufficient facts provided.

Principal Issues: Does the collection and deposit of rental cheques by a parent on behalf of a trust owning rental property result in the income earned in the trust being "split income"?

Position: While it is question of fact whether the parent is carrying on a business, in the situation described it is unlikely that the income earned in the trust would be "split income".

Reasons: The collection and deposit of rent cheques does not, in and of itself, result in a parent carrying on a business.

Principales Questions:
Lors du calcul du montant cumulatif des immobilisations admissibles, est-ce que la fraction de la dépense en capital admissible, calculée à l'élément A de ce compte, sera réduite par le résultat de la nouvelle formule proposée par le ministère des Finances dans les propositions législatives du 20 décembre 2002?

Position Adoptée:
Dans la situation soumise, l'élément A.1 de la nouvelle formule réduirait la fraction de 3/4 de la dépense en capital admissible, et ce, même après la vente des actions du détenteur de l'immobilisation admissible à une personne sans lien de dépendance avec le vendeur.

Principal Issues:
Must a life insurance company issue a T5 slip in respect of an annuity contract issued by the life insurer and owned by a property and casualty insurer who acquired the contract to create a structured settlement?

Position:
Yes, a T5 must be prepared with respect to income accruing pursuant to subsection 12.2(1) of the Act and to be included in computing the income of the property and casualty insurer.

Reasons: Subsection 201(5) of the Income Tax Regulations.

Principal Issues:
Ramifications to disbursement quota of private foundation if it expends a "10 year" gift prior to end of 10 year period with donor's consent.

Position: Charity cannot expend property prior to 10-year period.

Reasons: A charity may not expend property in violation of the terms of a trust.

Principal Issues:
Can an alter ego trust claim a tax credit under subsection 118.1(3) when it distributes property to a charity in respect of the charity's capital interest, after the death of the income beneficiary?

Position:
No, unless the trustees may reasonably be viewed to have discretion, under the terms of the trust, whether or not to distribute property to the charity.

Reasons:
If the charity receives property in satisfaction of its interest in the trust, the distribution of property is not a gift. However, the charity's interest in the trust may have been a gift. If the donor did not receive a tax credit when the trust was created because the charity's interest could not be valued (e.g., because of the income beneficiary's right to encroach), the donor's tax return for that year and for the following five taxation years could be amended once the gift can reasonably be valued provided the relevant taxation years are still open. If the charity receives property as a consequence of the trustee exercising discretion to distribute property to it, the distribution of property is gift.

Principal Issues:
Will a critical illness policy be a sickness policy for purposes of the Act if the premiums are paid over a shorter time period than the related coverage?

Position:
The funding of the policy is not determinative, in and of itself, of the policy's character for purposes of the Act.

Reasons:
The characterization of a critical illness policy for purposes of the Act will depend upon all the terms and conditions of the contract and the applicable insurance legislation.

Principal Issues: What are the tax implications under subsection 19(1) of the Income Tax Act when a newspaper ceases to be a "Canadian newspaper"?

Position: There is twelve-month "grace period" in which a newspaper that was previously considered a Canadian newspaper will continue to be considered so for purposes of subsection 19(1) of the Act. Once the twelve-month grace period expires, otherwise deductible advertising expenses incurred for advertisements directed at the Canadian market that are placed in such a newspaper, will be prohibited by virtue of subsection 19(1) of the Act.

Reasons: Section 19 of the Act.

Principal Issues:
1. Can paragraph 67.1(2)(f) apply to a special event that is also attended by clients?
2. Does the answer change if there are more clients than employees in attendance?
3. What is an acceptable method of allocating the costs?

Position TAKEN:
1. Yes.
2. Question of fact.
3. General information provided.

Reasons:
1. Wording of paragraph 67.1(2)(f) does not restrict special events to employees-only events.
2. Question of fact.
3. Question of fact.