Income Tax Severed Letters - 2004-01-16

Ruling

2003 Ruling 2003-0006723 - LIMITED PARTNERSHIP

Unedited CRA Tags
98(2) 118.1(10)

Principal Issues: A limited partnership has been established to finance the purchase and reproduction of artwork. The partnership proposes to dissolve no later than XXXXXXXXXX . Unsold artwork will either be gifted by the partnership to institutions or public authorities designated under the Cultural Property Export and Import Act or distributed to limited partners or to the general partner prior to the dissolution of the partnership. The former members of the partnership will have an option to donate the artwork they receive to institutions or public authorities designated under the Cultural Property Export and Import Act. The partnership requested rulings on the following issues: 1) the deductibility of the administrative and marketing costs incurred by the partnership for presales of the artwork; and 2) the determination of the fair market value of any artwork donated by the partnership or the limited partners.
POSITION: 1) The expenses will be deductible in computing the income of the partnership provided such expenses and are not restricted by sections 18 or 67 of the Act; and 2) subsection 118.1(10) of the Act deems the fair market value of the artwork gifted to be the value as determined by the Canadian Cultural Property Export Review Board. The ruling is conditional on the gift meeting the criteria set out in the Cultural Property Export and Import Act.

Reasons: 1) The expenses will be incurred for the purpose of earning income; and 2) subsection 118.1(10) of the Act applies.

2003 Ruling 2003-0031823 - Transfer of a Business by a Shareholder

Unedited CRA Tags
256(7) 56(4) 245(2)

Principal Issues: Whether there is an acquisition of control of Aco.

Position: No.

Reasons: XCO will own XXXXXXXXXX % of the voting shares of Aco and will not have de-jure control.

2003 Ruling 2003-0033363 - PARTNERSHIP WIND-UP

Unedited CRA Tags
98(3)
Summary Under
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3)
transfer of undivided interests in cash, WIP and goodwill followed by partition of goodwill
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(21)
partition of goodwill following s. 98(3) wind-up of professional partnership

Principal Issues: 1)Whether a professional corporation, which provides XXXXXXXXXX services to another corporation, will be carrying on a personal services business.
2) Can assets be partitioned following dissolution of the partnership?

Position: 1)No - specified shareholder of the professional corporation would not, but for the existence of the company, be considered to be an employee.
2) Yes- subsections 98(3) and 248(21) apply provided partition is legally effective-see 2000-0058523

Reasons: Same as - 2002-016997; 2002-0133063; 2001-0102663; see also 2002-0152593, 2001-0080983, 2000-0058523, E9915403, E9608083

2003 Ruling 2003-0033453 - INTEREST DEDUCTIBILITY QUALIFIED CORPORATION

Unedited CRA Tags
20(1)(c) 125.4(1)

Principal Issues: Loss consolidations of Sistercos

Position: Similar to previous loss consolidations

Reasons: ITA

2003 Ruling 2003-0041913 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.

2003 Ruling 2003-0042283 - TUITION OTHER EDUCATION

Unedited CRA Tags
118.5(1)

Principal Issues:
Can a taxpayer claim the tuition tax credit for an AQ courses taken from the Board of Education.

Position: Yes.

Reasons:
The Board of Education qualifies as "other educational institution" -
The AQ course is at the post secondary school level.
Students can claim the tuition tax credit.

XXXXXXXXXX 2003-004228

XXXXXXXXXX , 2003

Technical Interpretation - External

14 January 2004 External T.I. 2003-0038755 - SUBPARAGRAPH 40(2)(g)(ii)

Unedited CRA Tags
40(2)(g)(ii) 40(3.3)

Principal Issues: Whether subparagraph 40(2)(g)(ii) would deny a capital loss, where a shareholder has loaned funds to a corporation interest free?

Position: Question of Fact

Reasons: Based on the Byram decision, where a clear nexus between the shareholder and the corporation's dividend income can be demonstrated, subparagraph 40(2)(g)(ii) should not be applied to deny the capital loss.

12 January 2004 External T.I. 2003-0027445 - INTEREST MARGIN ACCOUNT

Unedited CRA Tags
20(1)(c)

Principal Issues: Whether interest paid on margin account is deductible

Position: Depends on the use of the money

Reasons: ITA

12 January 2004 External T.I. 2003-0051065 - EMPLOYEE SALES INCENTIVE

Unedited CRA Tags
6(1)(a)

Principal Issues: What is the CCRA's policy regarding the taxable status of sales incentive trips?

Position: Question of fact. The position is outlined in paragraphs 10 to 13 of IT-470R.

Reasons: The position is outlined in paragraphs 10 to 13 of IT-470R.

12 January 2004 External T.I. 2003-0032635 - INTEREST TAX ARREARS

Unedited CRA Tags
18(1)(t)

Principal Issues: Whether interest on tax arrears is deductible under the ITA

Position: No

Reasons:
SECTION: 18(1)(t)

12 January 2004 External T.I. 2003-0046145 - MEDICAL EXPENSES DEVICES

Unedited CRA Tags
118.2(2) 5700

Principal Issues:
1. Whether the cost of a special needs car seat for a disabled child would qualify as a medical expense.
2. Would a stroller for a special needs child qualify as a medical expense.

Position:
1. The Act allows certain devices as medical expenses and this particular equipment/car seat is not specifically listed.
2. Where it is reasonable to consider the stroller as a wheelchair -yes

Reasons:
1. A car seat is not included in list of devices in Regulation 5700. In particular not covered by 5700(m); although it is designed exclusively for use by, or for, an individual who is disabled it is not to allow the individual access to different areas of a building or to assist the individual in gaining access to a vehicle or to place the individual's wheelchair in or on a vehicle.
2. Wheelchairs are specifically allowed as medical expenses under 118.2(2)(i)

9 January 2004 External T.I. 2003-0047341E5 F - Coût indiqué - Biens étrangers

Unedited CRA Tags
206(2) 248(1)
Summary Under
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base
distribution of shares out of MFT and exchange for new MFT units would reset the ACB/ cost amount

Principales Questions:
Quel est le coût indiqué d'un bien aux fins de l'application du paragraphe 206(2) de la Loi lorsqu'une fiducie régie par un RPA transfère des biens en contrepartie d'autres biens?

Position Adoptée:
Le coût indiqué comprendra le coût d'acquisition des nouveaux biens soit la JVM dans la présente situation.
.RAISONS:
Application de la Loi
.
XXXXXXXXXX 2003-004734
L. J. Roy, CGA
Le 9 janvier 2004

9 January 2004 External T.I. 2003-0037425 - Application of Section 84.1

Unedited CRA Tags
84.1
Summary Under
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1)

Principal Issues: Whether section 84.1 applies to a particular situation involving the sale of a partnership interest?

Position: It could apply to deem a dividend to apply.
Alternatively, GAAR may apply .

Reasons: It would depend on whether the partnership ceased to exist.
Where one of the transactions is an avoidance transaction, GAAR may be applicable.

9 January 2004 External T.I. 2003-0049195 F - Winding Up or a Contractor Subco

Unedited CRA Tags
88(1) 20(1)(m) 12(1)(e)
Summary Under
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(e.1)
s. 88(1)(e.1) would permit parent to step into shoes of sub re s. 12(1)(a) inclusion and s. 20(1)(m) reserve
Summary Under
Tax Topics - Income Tax Act - Section 9 - Timing
exclusion of contract holdbacks and unapproved invoices from construction contractor’s income is unaffected on s. 88(1) wind-up and flows through to parent
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m)
deferred revenue of construction contractor would not be triggered on its s. 88(1) wind-up and parent would be put to claiming any available new s. 20(1)(m) reserve

Principal Issues: What are the tax consequences of the winding-up of Subco which is a contractor using the "progress method" of computing income on its holdbacks, work in progress, the amount of the unapproved billings and its deferred income?

Position: The amount of unapproved billings and the holdbacks are not included in Subco's income in the taxation year during which its assets are distributed to the parent on the winding-up. The amount of the work in progress is deductible in Subco's income in the taxation year during which its assets are distributed to the parent on the winding-up. The deferred income is included in Subco's income in the taxation year during which its assets are distributed to the parent on the winding-up and a 20(1)(m) provision can be claimed. All those Subco's tax accounts flow through to the parent.

Reasons: Previous positions.

8 January 2004 External T.I. 2003-0040575 F - Associated Corporations

Unedited CRA Tags
256(6) 256(3) 256(1.4)
Summary Under
Tax Topics - Income Tax Act - Section 256 - Subsection 256(6) - Paragraph 256(6)(a)
cessation of lender’s right to shares on occurrence of reasonably-expected event must be expressly stated in loan terms
Summary Under
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.4) - Paragraph 256(1.4)(a)
lender’s right to acquire 99% of shares in event of insolvency engaged s. 256(1.4)(a)
Summary Under
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.2) - Paragraph 256(1.2)(c)
rule in s. 256(1.2)(c) references de jure control, not de facto control

Principal Issues: Whether subsections 256(3) and 256(6) apply to a particular situation.

Position: No.

Reasons: In our view, in the particular situation, the terms of the convertible debt obligation issued by OPCO do not comply with the requirements of paragraphs 256(3)a) and 256(6)(a).

6 January 2004 External T.I. 2003-0052261E5 - Subparagraph 256(1.2)(f)(ii)

Unedited CRA Tags
256(1.2)(f)(ii)
Summary Under
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.2) - Paragraph 256(1.2)(f) - Subparagraph 256(1.2)(f)(ii)
numerical cap on trustee’s discretion does not stop full operation of s. 256(1.2)(f)(ii)

Principal Issues: Whether the shares of a corporation owned by a discretionary trust are deemed to be owned by a beneficiary under subparagraph 256(1.2)(f)(ii).

Position: Yes.

Reasons: The law. An amendment to the Act would be required to find otherwise.

6 January 2004 External T.I. 2003-0053525E5 - Residence Determination - Immigration Status

Unedited CRA Tags
2

Principal Issues: Would an individual be resident for tax purposes if his only ties to Canada were: (1) Canadian employer plus permanent residence under Immigration Act or (2) Canadian employer plus permanent residence under Immigration Act plus one child at university in Canada?

Position: (1) Probably not. (2) Maybe.

Reasons: Insufficient ties to Canada. Immigration status not determinative.

30 December 2003 External T.I. 2003-0053135 - INDIAN EMPLOYMENT ADJACENT TO RESERVE

Unedited CRA Tags
81(1)(a)

Principal Issues: Will employment income paid to status Indians working for an electrician business in XXXXXXXXXX be tax-exempt? Will the owner/operator be taxable on his business income?

Position: The employees might be tax-exempt under Guideline 1, Guideline 3 or the Proration Rule - a question of fact. The business income may be tax exempt depending upon where the electrical services are performed.

Reasons: Application of the Guidelines - employment income may be exempt in this situation. However, unlike the XXXXXXXXXX situation, extenuating circumstances do not create additional connecting factors that would be significant enough to merit an exemption. With respect to the business income - Southwind will apply.

Technical Interpretation - Internal

9 January 2004 Internal T.I. 2003-0031601I7 F - Air Miles :employés/employeurs

Unedited CRA Tags
15(1) 6(1)(a) 69(4) 69(1)b)
Summary Under
Tax Topics - Income Tax Act - Section 69 - Subsection 69(4)
s. 69(4) applicable where corporation acquires property with its Air Miles and distributes the property to a shareholder (but not in the case of an arm’s length employee)
Summary Under
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)
business air miles assumed to be used before personal air miles

Principales Questions:
Lorsqu'une société a acquis un bien pour un actionnaire ou un employé avec ses points Air Miles accumulés, la société devrait-elle ajouter dans ses revenus un montant représentant la valeur du bien lorsque ce dernier est attribué gratuitement à l'actionnaire ou à l'employé?
Lorsqu'un actionnaire ou un employé utilise sa carte de crédit à la fois pour les fins d'affaires de la société (dépenses pour lesquelles il est remboursé) et pour ses fins personnelles, s'il acquiert des biens pour des fins personnelles en utilisant des points Air Miles, doit-on considérer que l'actionnaire ou l'employé utilise d'abord les points Air Miles d'affaires ou les points Air Miles personnels?

Position Adoptée:
Oui, si attribué à l'actionnaire. Non, si attribué à un employé.
Points Air Miles personnels

Raisons:
Application de l'alinéa 69(1)b) ou du paragraphe 69(4) de la Loi dans certaines circonstances. La société est réputée avoir disposé du bien pour un montant égal à sa juste valeur marchande.
Nous présumons qu'il utilisera en premier lieu les points Air Miles personnels et par la suite les points Air Miles d'affaires.

7 January 2004 Internal T.I. 2003-0038217 F - gain en capital / résidence principale

Unedited CRA Tags
40(2)b) 45(1)c) 54
Summary Under
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit
rental of second floor of house to son at cost was not a business
Summary Under
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c)
no partial change of use of residence where rental operation was not a business, or the business was ancillary

Principales Questions: Est-ce que l'exemption pour résidence principale s'applique à la totalité de la résidence d'un contribuable qui d'une part, en a utilisé une partie pour affaires et, d'autre part, en a loué une partie à son fils ?

Position Adoptée: Oui

Raisons: Nouvelles techniques N° 25, rubrique " Expectative raisonnable de profit ", les paragraphes 30 à 32 du Bulletin d'interprétation IT-120R6 et la définition de résidence principale à l'article 54.

7 January 2004 Internal T.I. 2003-0046717 F - MODIFICATION DE PBR INSCRIT SUR T664

Unedited CRA Tags
110.6(19) 110.6(27)
Summary Under
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.2)
correction to ACB shown on s. 110.6(19) election did not constitute an amendment to the election
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(27)
correction of ACB shown on s. 110.6(19) election not an election amendment that must comply with s. 110.6(27)

Principales Questions: Est-ce qu'une demande de modification du PBR indiqué sur le formulaire prescrit T664 devrait être acceptée par l'ADRC?

Position Adoptée: La demande de modification du PBR n'est pas une modification du choix fait en vertu du paragraphe 110.6(19) de la Loi et le PBR peut être modifié après 1997 sans pénalité.

Raisons: Le choix avait été fait à l'égard des actions et il n'y a pas de modification du montant indiqué à titre de produit de disposition pour ces actions.

6 January 2004 Internal T.I. 2003-0041431I7 - Meaning of gross revenue

Unedited CRA Tags
248(1) 402(3) 402(5)
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Gross Revenue

Principal Issues: Whether following items are to be included in gross revenue for purposes of section 402 of the Regulations: (1) foreign exchange gains; (2) interest on intercompany loans; (3) ITC; and (4) interest on income tax refunds, trust accounts.

Position: (1) Yes, where on income account; (2) yes; (3) no; (4) yes.

Reasons: (1), (2) and (4) not excluded from the definition; (3) ITC is based on SR&ED expenditures which are generally considered to be capital in nature.