Income Tax Severed Letters - 2004-01-09

Principal Issues: The impact of the deeming provision in subsection 248(7) of the Act on the taxation of employment income. The taxpayer was entitled under a contract of employment to an annual residual payment for employment services that were performed under the contract. The employer mailed cheques to the taxpayer for the payments for a period of XXXXXXXXXX years. The taxpayer did not receive these cheques and later received a lump-sum amount from the employer in lieu of the cheques not received.

Position: Subsection 248(7) is not applicable in this situation. Subsection 5(1) of the Act applies to include the lump-sum payment in employment income in the taxation year in which it was received.

Reasons: In terms of determining a taxpayer's employment income under subsection 5(1) of the Act, paragraph 248(7)(a) would apply to include therein an amount that has been mailed in the taxation year but not received until the following taxation year. However, paragraph 248(7) of the Act would not apply to include an amount in a taxpayer's employment income where the facts clearly show that the taxpayer, or someone else for the taxpayer's benefit, never received the amount. In this situation, the taxpayer did not actually receive the cheques, nor did someone else receive them for the taxpayer's benefit.

Principal Issues: Whether a building that will be used in a sawmill operation is available for use.

Position: No.

Reasons: The earlier of one of the times enumerated in paragraphs (a) to (e) of subsection 13(28) of the Act has not yet occurred.

Principal Issues: In a given fact situation, an individual would dispose of a home used primarily for her personal use or enjoyment in favour of a corporation ultimately controlled by her sister ("X"), for fair market value consideration. A right of use or habitation would be granted in favour of the individual with respect to the portion of the home she uses for residential purposes. The rent generated by the reminder of the home after the sale would be the property of the corporation. Whether, in such situation, the value of some sort of benefit should be included in the income of one of the taxpayers involved.

Position: Based on the particular facts and circumstances surrounding the given fact situation, we are of the view that no amount should be included in computing the income of X, although some arguments may be made in support of the opposite view. However, a benefit should probably be included in the income of the sister under subsection 105(2) in the given situation. Pursuant to paragraph 248(3)(b), a right of use or habitation shall be deemed to be a trust, and property subject to such a right shall be deemed to have been transferred to the trust and to be held in trust. Although it is the CCRA's position that the use of trust property by a beneficiary of the trust constitutes a benefit for the purposes of subsection 105(1), in the case of personal-use property owned by a trust, the CCRA will generally not assess a benefit for the use of that property under subsection 105(1). However, a benefit in respect of the upkeep, maintenance, or taxes for such property may arise pursuant to subsection 105(2). Under paragraph 104(6)(b), there may be deducted in computing the income of the trust any amount included under subsection 105(2). Any portion of the outlays or expenses, effectively incurred by the corporation in respect of the portion of the home used by the individual for residential purposes that would not give rise to a benefit under subsection 105(2), would not be deductible pursuant to paragraph 18(1)(a).

Reasons: Wording of the Act.

Le 17 décembre 2003

Principal Issues: How would subsection 50(1) and paragraphs 69(1)(b) and 88(1)(b) of the Act apply in a given fact situation. Briefly, a parent corporation ("Parentco") would elect to have subsection 50(1) to apply in respect of the shares of one of its wholly-owned subsidiary ("Lossco") in XXXXXXXXXX . In XXXXXXXXXX , Parentco would dispose of its Lossco shares in favour of another wholly-owned subsidiary ("Profitco") for a nominal cash consideration. Some time after this transfer, Lossco would be wound-up into Profitco. Profitco would then use Lossco's non-capital losses in conformity with subsection 88(1.1).

Position: It should normally be very difficult to apply subsection 50(1) of the Act in a situation of the type described in this letter. Assuming that the taxpayer would rely on paragraph 50(1)(b)(iii), the conditions stated in subparagraphs 50(1)(b)(iii)(A) and (C) could be difficult to meet. On this point, the benefits that can be derived from the utilization of non-capital losses should generally be taken into consideration in assigning a value to the shares of a corporation. In a situation of the type described in the letter, if subsection 50(1) were not applicable, Parentco would sustain a loss on the transfer of the shares of "Lossco" in favour of "Profitco." However, such loss would generally be suspended pursuant to subsections 40(3.3) to 40(3.5). If subsection 50(1) were applicable in the given fact situation, the application of paragraph 69(1)(b) to the disposition by Parentco of its Lossco shares in favour of Profitco for a nominal cash consideration would result in a capital gain. The deemed disposition of Lossco shares on the winding-up of Lossco under paragraph 88(1)(b) would not result in any capital gain in the circumstances.

Reasons: Wording of the Act.

Le 16 décembre 2003