Income Tax Severed Letters - 2004-02-20

Miscellaneous

18 February 2004 Income Tax Severed Letter 2003-0050841E2 - Paragraph 81(1)(h)

Unedited CRA Tags
81(1)(h) 9

Principal Issues: Does paragraph 81(1)(h) apply to amounts received in specific situations?

Position: 1. Amounts received by a corporation do not qualify.
2. Received by a principal shareholder who resides in the residence where the cared-for individuals reside may qualify.
3. Amounts received by the shareholder who resides elsewhere do not qualify.

Reasons: 1. Paragraph 81(1)(h) does not apply to corporations.
2. Question of fact.
3. The requirement that the cared-for individual resides in the caregiver's principal place of residence is not satisfied.

Ruling

2003 Ruling 2003-0030923 - Art. 10 (6)(b) German Tax Treaty

Unedited CRA Tags
Art. 10(6) Germany

Principal Issues: Whether a German corporation which transfers all its income to its parent under a Profit Transfer Agreement and an Organschaft in accordance with German laws is considered a resident of Germany for the purpose of the Canada-Germany Income Tax Agreement?

Position: Yes.

Reasons: It is a person because it is a body corporate and it is liable to tax by reason of its domicile, residence, place of management, and any other criterion of a similar nature.

2003 Ruling 2003-0033103 - Loss Utilization in a Related Group

Unedited CRA Tags
XXXXXXXXXX XXXXXXXXXX 112(1)

Principal Issues: Loss utilization in a related group of companies.

Position: The loss utilization is acceptable.

Reasons:

Ministerial Correspondence

4 February 2004 Ministerial Correspondence 2004-0055401M4 - Clergy Residence deduction

Unedited CRA Tags
8(1)(c)

Principal Issues: Is a minister who is no longer required to be in full active service entitled to the 8(1)(c) deduction?

Position: YES, on the employment income

Reasons: Part-time employment qualifies for the 8(1)(c) deduction

Technical Interpretation - External

18 February 2004 External T.I. 2004-0056481E5 - Gift of Shares

Unedited CRA Tags
6(1)(a) 69

Principal Issues: Whether shares of a company given by the primary shareholder and director of a company to an employee for doing a good job is a taxable benefit.

Position: Question of fact, but likely yes.

Reasons: Paragraph 6(1)(a) includes in employment income "the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, ..."

17 February 2004 External T.I. 2004-0056781E5 - Credit For Wholly Dependent Person

Unedited CRA Tags
118(1)(b) 118(4) 118(5)

Principal Issues: In a factual situation, whether in the year of marriage breakdown parents are each entitled to claim a non-refundable tax credit for a wholly dependent person in respect of one of their two children.

Position: Question of fact.

Reasons: Paragraph 118(1)(b) of the Act requires that the parent support the child in the self-contained domestic establishment being maintained for that purpose. Pursuant to paragraph 118(4)(b) of the Act, not more than one individual is entitled to the credit in respect of the same domestic establishment. In this situation it is apparent that the children are being supported in the same domestic establishment (the marriage separation agreement indicates that the children live in the main residence portion of the marital home). However, if the facts show that at any point in time during the year one or both children lived in the self-contained basement apartment with one of the parents, paragraph 118(4)(b) of the Act will not apply to prevent both parents from claiming the credit.

17 February 2004 External T.I. 2003-0052601E5 - Volunteer exemption

Unedited CRA Tags
81(4)

Principal Issues: Whether or not the subsection 81(4) volunteer exemption applies to on-call firefighters.

Position: Question of fact.

Reasons: Subsection 81(4) provides an exemption of up to $1,000 that an individual receives in the year from a government, municipality or other public authority ("the employer") for performing certain volunteer duties. The duties may include those of an ambulance technician or firefighter, or a person assisting in the search for or rescue of individuals or in other emergency situations. The individual cannot have been employed or engaged by "the employer" in the same year, otherwise than as a volunteer, in connection with the performance of any of the duties described above, or similar duties. The amount paid to an individual acting as a volunteer is usually nominal in comparison to what it would have cost in the same circumstances to have the same duties performed by a regular full-time or part-time individual.

17 February 2004 External T.I. 2004-0057631E5 - Personal Use Of An Employer's Auto

Unedited CRA Tags
6(2)

Principal Issues: Whether use of an employer's automobile to travel from home to one or more work locations, at which the employee must carry out his or her duties of employment, is personal.

Position: Yes.

Reasons: Longstanding position that travel between an employee's home and a regular place of employment is considered personal. In this regard, an employee can have more than one regular place of employment.

17 February 2004 External T.I. 2004-0055431E5 - Designated Benefit from a RRIF

Unedited CRA Tags
146.3(6) 146.3(6.1) 146.3(6.2)

Principal Issues: What are the income tax consequences of a transfer of funds from a RRIF to a surviving spouse after the death of an annuitant where the surviving spouse is named as the sole beneficiary of the RRIF in the will?

Position: Possible transfer of designated benefit, if joint election is filed with the legal representative of the estate and possible paragraph 60(l) deduction for the surviving spouse

Reasons: The tax consequences are clear from the legislation in this case

16 February 2004 External T.I. 2003-0051021E5 - Class 43.1 - Ground source heat pump

Unedited CRA Tags
Class 43.1

Principal Issues: Whether use of a ground source heat pump to produce energy to heat residential units is use in an industrial process?

Position: No.

Reasons: An "industrial process" generally means an operation in which goods are manufactured or processed.

16 February 2004 External T.I. 2004-0057101E5 - Subsection 67.1(1) of the Act

Unedited CRA Tags
67.1(1) 67.1(2)

Principal Issues: Whether the cost of coffee and water a business provides to clients and staff is subject to the 50% rule in subsection 67.1(1) of the Act.

Position: Yes.

Reasons: Subsection 67.1(1) of the Act provides that an otherwise deductible amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is restricted to 50% of the lesser of the amount actually paid or payable and an amount that is reasonable in the circumstances. This restriction applies to the costs incurred by a business for coffee and water provided to clients and staff. There are exceptions to the application of subsection 67.1(1) of the Act contained in subsection 67.1(2), but it is not evident that any of these exceptions are applicable in the situation described.

16 February 2004 External T.I. 2003-0033421E5 - Interaction of section 119 and ITAR 10(6)

Unedited CRA Tags
119(b) ITAR 10(6) Art. X (US)

Principal Issues: Interaction of section 119 of the Income Tax Act and subsection 10(6) of the Income Tax Application Rules.

Position: Treaty rate applies with respect to the calculation of the credit under paragraph 119(b), not the regular Part XIII rate of 25%.

Reasons: Based on the interaction of paragraph 10(6) of ITAR and the implementing Act that gives the treaty the force of law in Canada.

13 February 2004 External T.I. 2003-0046181E5 - Indian, Corporate & Business Income

Unedited CRA Tags
81(1)(a)

Principal Issues: 1) Will income generated by a corporation owned by a status Indian be tax exempt? 2) Will business income generated by a status Indian be tax exempt?

Position: 1) No 2) Question of fact

Reasons: 1) Corporations do not qualify for exemption under section 87 of the Indian Act. 2) Only business income earned on a reserve will be tax exempt.

13 February 2004 External T.I. 2003-0027361E5 F - Déductibilité des intérêts -TPS et TVQ

Unedited CRA Tags
9
Summary Under
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose
interest on assessments for failure to collect or remit GST that was collectible in respect of a business or property, is deductible

Principales Questions:
1. Est-ce que les intérêts sont une dépense déductible lorsqu'ils sont liés à une cotisation de TPS et TVQ non perçues et non remises ou encore lorsqu'ils sont liés à une cotisation de TPS et TVQ perçues mais non remises ? / Whether interest assessed and/or reassessed under Excise Tax Act is deductible in computing income for income tax purposes when it relates to an assessment and/or reassessment of GST and QST collected but not remitted or when it relates to an assessment of GST and QST not collected and not remitted.

2. Est-ce que les TPS et TVQ perçues mais non remises seraient déductibles dans le calcul du revenu suite à une cotisation ? / In a situation where GST and QST were initially collected but not remitted and later an assessment was issued, are the taxes deductible in computing income for income tax purposes ?

Position Adoptée:
1. Fort probablement. / Generally yes.
2. Non/ No.

Raisons:
1. En général, les intérêts liés à une cotisation de TPS et TVQ sont déductibles dans le calcul du revenu en autant qu'ils se rapportent à des montants de TPS et TVQ reliés à une entreprise ou à un bien dont le revenu est inclus en vertu de l'article 9 de la Loi./ Generally, interest paid in respect to a GST and QST assessment is deductible in computing income if the GST and QST element relate to a business or property.

13 February 2004 External T.I. 2004-0060321E5 - Pre-Judgement Interest

Unedited CRA Tags
12(1)(c)

Principal Issues: Whether an amount paid in respect of pre-judgement interest in a wrongful dismissal claim is taxable to the recipient.

Position: It depends on the date of the court order or settlement.

Reasons: According to the new CRA administrative position, where a court order or settlement for wrongful dismissal is finalized on or after January 1, 2004, the pre-judgement interest will be taxable to the recipient under paragraph 12(1)(c).

13 February 2004 External T.I. 2003-0042541E5 - NPO status

Unedited CRA Tags
149(1)(l)

Principal Issues: Will certain income generated by an entity jeopardize its status as a non-profit organization?

Position: Question of fact

Reasons: The fact that services will be provided to a business thereby creating a new stream of income for an entity will not necessarily result in the loss of NPO status by the entity. The determination of whether the entity retains its NPO status will depend on the instruments creating the entity and what it will do with the income generated from the new income stream.

12 February 2004 External T.I. 2003-0053501E5 - School Allowances

Unedited CRA Tags
6(1)(b)(ix)

Principal Issues: Whether subparagraph 6(1)(b)(ix) of the Act excludes from inclusion in an employee's income, an allowance received from the employer in respect of the schooling of a child of the employee, in a situation where the child does not board in a facility operated by the school

Position: Question of fact. However, there is no requirement in subparagraph 6(1)(b)(ix) of the Act that requires the child to actually board in a facility that is operated by the school attended.

Reasons: Subparagraph 6(1)(b)(ix) of the Act.

12 February 2004 External T.I. 2004-0055411E5 - PAC'S AND STRUCTURED SETTLEMENTS

Unedited CRA Tags
56(1)(d) 60(a) Reg 304 12.2

Principal Issues: What requirement is there relating to the disposition of a "prescribed annuity contract" ("PAC")? Can a PAC be terminated before death of the annuity holder and if so, what are the tax consequences?

Position: To qualify as a PAC, the terms and conditions of the annuity contract must not provide for the disposition of the annuity other than on death of the annuity holder. It is possible to amend the terms of an annuity that originally qualified as a PAC, to provide for the disposition of the annuity prior to the death of the annuity holder, however the amendment will result in the annuity no longer qualifying as a PAC. Generally, the contract will be deemed to have been disposed of at the time it ceases to qualify as a PAC and any policy gain arising from the disposition must be included in the annuity holder's income.

Reasons: The legislation.

11 February 2004 External T.I. 2003-0023111E5 - NPO

Unedited CRA Tags
149(1)(l)

Principal Issues: Whether a certain society was organized for non-profit purposes and exempt from Part 1 tax under section 149(1)(l) of the Act.

Position: Question of fact - only general comments provided

Reasons: This determination can only be made at the end of each particular taxation year and only having regard to all the facts - as such this determination falls within the responsibility of the appropriate TSO.

11 February 2004 External T.I. 2003-0038285 - Application of Subsection 66(12.6012)

Unedited CRA Tags
66(12.6012) 66(12.601)

Principal Issues: Does subsection 66(12.6012) apply to deny the investment allowance in computing the taxable capital of an amalgamated corporation where subsection 66(12.6013) deems the taxable capital of the corporation to be equal to the combined taxable capital of each of the predecessor corporations?

Position: No.

Reasons: It would be inappropriate to deny an investment allowance in the circumstances

Technical Interpretation - Internal

17 February 2004 Internal T.I. 2003-0046981I7 F - Paragraphe 98(5) de la Loi

Unedited CRA Tags
98(5)
Summary Under
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5)
s. 98(5) inapplicable on an amalgamation of the members

Principales Questions: 1. Est-ce que le paragraphe 98(5) de la Loi peut s'appliquer dans le cas où tous les associés d'une société de personnes vendent simultanément leur participation à une société (qui n'est pas un associé de la société de personnes) dont ils sont tous les actionnaires ?

2. Est-ce que le paragraphe 98(5) de la Loi peut s'appliquer dans une situation semblable à la précédente à l'exception du fait que les associés vendent leur participation de façon successive à la société ?

3. Est-ce que le paragraphe 98(5) de la Loi peut s'appliquer lorsque tous les associés (qui sont des sociétés) d'une société de personnes fusionnent et que la société de personnes cesse d'exister en raison de la fusion ?

Position Adoptée: 1. Non 2. Oui, si toutes les conditions du paragraphe 98(5) sont respectées. 3. Non

Raisons: 1. La société n'était pas un associé de la société de personnes immédiatement avant la cessation de l'existence de la société de personnes.
2. La société était un associé de la société de personnes immédiatement avant la cessation de l'existence de la société de personnes.
3. Paragraphe 53 du Bulletin d'interprétation IT-474R.

16 February 2004 Internal T.I. 2003-0051701I7 - Interaction of ss 256(2) and 125(5.1)

Unedited CRA Tags
256(2) 125(5.1)

Principal Issues: Whether an election under subsection 256(2) of the Act allows an otherwise associated corporation to use the full $10 million capital deduction when calculating its LCT for purposes of the business limit reduction under subsection 125(5.1)?

Position: No.

Reasons: Since an election filed under subsection 256(2) applies for purposes of section 125 only, it is our view that there is no basis for giving effect to an election under this provision when determining a corporation's LCT under section 181.1.

13 February 2004 Internal T.I. 2003-0036081I7 - Termination payment interest rate swap

Unedited CRA Tags
9(1) 20(1)(e) 20(1)(c)

Principal Issues: Are termination payments under an interest rate swap deductible?

Position: Yes

Reasons: The use of underlying funds is not relevant and in this situation there was no borrowing-strictly a speculative transaction

9 February 2004 Internal T.I. 2004-0059891I7 - safe income - intercorporate dividends

Unedited CRA Tags
55(2) 55(5)(b) 55(5)(c)

Principal Issues: whether dividends paid on preferred shares within a corporate group are included in safe income where the payor did not earn any net income during the period that the shares were outstanding

Position: based on the facts of this case such dividends could be included in safe income of the recipient

Reasons: when the dividends were paid they would reduce the safe income attributable to the common shareholders, therefore, it is not inappropriate for them to be included in the recipient's safe income

6 February 2004 Internal T.I. 2003-0037271I7 - Cross-Border Stock Options

Unedited CRA Tags
7(1)(a) 7(4) 115(1)(a) Article XV - Cda/US Treaty

Principal Issues: Whether stock option benefit is attributable to services rendered in Canada?

Position: Yes

Reasons: Since there is no compelling evidence to suggest some other period, we will apply our default position that stock option benefits relate to services rendered in the year of grant. However, the taxpayer may apply to U.S. Competent Authority to see if there is relief available.

6 February 2004 Internal T.I. 2003-0052831I7 F - Application of subparagraph 84.1(2)(a.1)(ii)

Unedited CRA Tags
84.1(2)(a.1)(ii)
Summary Under
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(a.1)
no change to the ACB grind under s. 84.1(2)(a.1) if a loss is subsequently proposed to be carried back to reduce the amount that was claimed under s. 110.6(2.1)

Principal Issues: In a particular situation, whether the carry back of a capital loss derived from the redemption of shares may have an impact on the calculation of the ACB of particular shares under subparagraph 84.1(2)(a.1)(ii) where the PUC of the redeemed shares had been reduced under 84.1(1)(a)?

Position: No.

Reasons: There is no requirement in section 84.1 to recalculate the ACB of particular shares immediately before their disposition where a taxpayer chooses to carry back a capital loss to a prior year thereby reducing the capital gains deduction claimed in respect of the particular shares.
Le 6 février 2004

4 February 2004 Internal T.I. 2003-0035061I7 - Automobile stand-by charge; taxable benefit in US

Unedited CRA Tags
6(1) 153 Reg.200(3)

Principal Issues: Where US subco pays for car lease of Canco's employee while in the US, who should issue the reporting slip and should it be a T4 or T4A? Also, what is the appropriate foreign exchange rate?

Position: Canco must issue a T4. A reasonable exchange rate should be used.

Reasons: Regulations 200(2) and 200(3). No fixed rules for exchange rate calculation.

2 February 2004 Internal T.I. 2003-0031111I7 - Resource Allowance and s. 80.2

Unedited CRA Tags
20(1)(v.1) 80.2 Regulations 1206 and 1210

Principal Issues: Impact of payment of royalties by producer to freehold owner of mineral rights under standard petroleum and natural gas lease on producer's "adjusted resource profits".

Position: Royalties will not be considered to be "production royalties" pursuant to s. 1206(1) of the Income Tax Regulations.

Reasons: The recipient of the royalty payment is not subject to any "Crown royalty" that is described within the production royalty definition. In particular, it is unlikely that the holder of the royalty is liable to the tax imposed under The Freehold Oil and Gas Production Tax Act (Saskatchewan) since the royalty does not fall within the definition of a working interest under that legislation. Furthermore, the standard lease agreement cannot be interpreted as containing an obligation for the recipient of the royalty to reimburse the payor for taxes paid by the payor in respect of the related oil and gas production pursuant to The Freehold Oil and Gas Production Tax Act (Saskatchewan).

28 January 2004 Internal T.I. 2003-0043517 - Intellectual Property as TCP

Unedited CRA Tags
248(1) 84(1), 15(1) 128.1(4)(b) 14(5)

Principal Issues:
1. Is intellectual property owned by a non-resident TCP?
2. Confirm computation of deemed dividend and shareholder benefit.

Position:
1. No
2. Confirmed

Reasons:
1. The property was not used or held in, nor eligible capital property in respect of, a business carried on in Canada by the non-resident.
2. Similar to example in paragraph 7 of IT-432R2.

28 January 2004 Internal T.I. 2004-0054681I7 - Provincial Residency

Unedited CRA Tags
Reg 2607

Principal Issues: Determination of provincial residence status.

Position: Dual resident with primary residence in Alberta.

Reasons: Facts and regulation 2607.

15 January 2004 Internal T.I. 2003-0026827 - Non-resident & Tuition & Educations credits

Unedited CRA Tags
118.5 118.6 118.9
Summary Under
Tax Topics - Income Tax Act - Section 118.9
no ability of child to transfer the credit where she was a non-resident with no Cdn. source of income

Principal Issues: Whether a non-resident with no Canadian source income is entitled to claim a tuition and education tax credit?

Position: No

Reasons: Based on Oceanspan Carriers Limited v. The Queen 87 DTC 5102, there is no need to utilize the tax credits because the individual does not compute Part I tax.

9 July 2002 Internal T.I. 2000-0051797 - DEBTORS GAIN ON SETTLEMENT OF DEBT

Unedited CRA Tags
80(1)

Principal Issues:

? Whether the comments concerning amounts otherwise included in income as stated in paragraphs 19(e), 25 and 26 of Interpretation Bulletin IT-293R entitled "Debtor's Gain on Settlement of Debt" are still valid.

Position:

? Yes

Reasons: