Income Tax Severed Letters - 2004-04-09

Ruling

2004 Ruling 2001-0097453 - RRSP SECURITY FOR A LOAN

Unedited CRA Tags
146(10)

Principal Issues:
Does a guarantee to pay the obligations of one corporation to another constitute security for a loan within the meaning of subsection 146(10)?

Position: No, as long as the obligations guaranteed are not loans.

Reasons:
Subsection 146(10) will only apply if the debt which is guaranteed by the pledge of the assets of an RRSP is a loan (i.e. a transaction in which money has been lent so that there is a borrower-lender relationship created, not just a potential debtor-creditor relationship).

Ministerial Correspondence

19 March 2004 Ministerial Correspondence 2004-0058631M4 - Policy Loan Interest

Unedited CRA Tags
20(1)(c) 20(2.1) 60(s); 148(1) 148(9)

Principal Issues: To determine what amount, if any, of the amount paid by the taxpayer to the insurer in XXXXXXXXXX is deductible under paragraph 20(1)(c) of the Income Tax Act.

Position: Depends on the terms of the policy

Reasons: The insurer accrued interest on a policy loan held by the taxpayer. The taxpayer did not pay the interest and the insurer capitalized the interest as a new policy loan. The taxpayer did not deduct the interest under paragraph 20(1)(c) in any of the preceding years. Where the interest amount is added to the adjusted cost basis of the policy loan under the terms of the policy, the amount is not deductible from income.

Technical Interpretation - External

7 April 2004 External T.I. 2003-0039421E5 - Property in an RRSP used as security for a loan

Unedited CRA Tags
146(7) 146(10)

Principal Issues: Tax consequences of using property in an RRSP as security for a loan.

Position: Included in the annuitant's income for the year under subsection 146(10). A deduction from income is allowed under subsection 146(7) when the loan ceases to exist.

Reasons: As per RRSPs rules in section 146 of the Act.

5 April 2004 External T.I. 2003-0034061E5 F - Frais relatifs aux études payés par l'employeur

Unedited CRA Tags
6(1)a) 6(1)b) 5(1)
Summary Under
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b)
“allowance” received based on an estimate of costs incurred by employee for employer-desired master's degree would not be taxable

Principales Questions: Un employé profite d'un congé d'études partiellement payé par son employeur. Durant les dix mois que dureront son congé, l'employé reçoit de son employeur, une allocation de remplacement de son salaire (15 500 $) ainsi qu'un montant additionnel (7 000 $) pour défrayer des frais de scolarité. Quels sont les montants non imposables pour l'employé?

Position Adoptée: Il semble que la formation soit liée à l'emploi et que cette dernière pourrait profiter plus à l'employeur qu'à l'employé. Par conséquent, si l'employé est remboursé pour certains frais liés à la formation, il n'y aura pas d'avantages imposables. Toutefois, si l'employé reçoit plutôt une allocation, cette dernière sera imposable en vertu de l'alinéa 6(1)b) de la Loi sauf si, dans les faits, il s'agit plutôt d'un remboursement. .

Raisons: Dans certains cas, même si un employeur identifie un montant versé comme étant une allocation, il est possible que les faits démontrent clairement que ce montant est plutôt un remboursement.

5 April 2004 External T.I. 2004-0068021E5 - Escalator term deposit

Unedited CRA Tags
12(4) 12(9) 7000(1)(c) 7000(2)(c.1)
Summary Under
Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(c.1)

Principal Issues: How is interest reported on an escalating Term deposit

Position: Yield to maturity basis.

Reasons: Paragraph 7000(2)(c.1)

5 April 2004 External T.I. 2003-0050331E5 F - Allocations vestimentaires/Policiers

Unedited CRA Tags
6(1)b)
Summary Under
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b)
civvy clothing allowances received by police officers likely were taxable

Principales Questions: Quel est le traitement fiscal à accorder aux montants de remboursements journaliers de dépenses vestimentaires auxquels ont droit les policiers devant travailler de façon temporaire en tenue vestimentaire civile ?

Position Adoptée: Ces montants sont généralement imposables en vertu de l'alinéa 6(1)b) de la Loi.

Raisons: Les montants constituent des allocations et sont probablement versés pour des vêtements réguliers qui peuvent être portés à des fins personnelles, à d'autres endroits que le lieu de travail et à d'autres périodes de temps que les heures de travail.

5 April 2004 External T.I. 2003-0050671E5 - attribution of property transferred to a trust

Unedited CRA Tags
75(2)

Principal Issues: 1. Would 75(2) apply if settlor is one of two or more trustees acting in a fiduciary capacity and the trustees do not have the power to add beneficiaries?
2. Would 75(2) apply if the settlor is not a beneficiary but the terms of the trust give the settlor's spouse a power of appointment, exercisable by will, to distribute the trust's property as she chooses?
3. Would the response be different if the terms of the trust specifically preclude the settlor from being appointed a beneficiary?

Position: 1. Generally no.
2. Where the power of appointment would allow the settlor to be appointed as a capital beneficiary, yes.
3. If it is clear that the provision which precludes the settlor from becoming a capital beneficiary of the trust also precludes the spouse from exercising that power of appointment in favour of her spouse, the condition in paragraph 75(2)(a) would presumably not be met.

Reasons: Reiteration of past positions set out in 2000-0042505, 1999-0013065,2002-0116535, 2002-139205,2002-0162855.

XXXXXXXXXX Annemarie Humenuk
2003-005067
Attention: XXXXXXXXXX

2 April 2004 External T.I. 2004-0057741E5 - Paragraph 20(1)(m) reserve and 12(1)(e) inclusion

Unedited CRA Tags
20(1)(m) 12(1)(e)(i) 12(1)(a) 20(24)

Principal Issues: When a business is transferred on a tax-deferred basis to another Canadian resident taxpayer, does a paragraph 20(1)(m) reserve follow the business to the transferee and, if so, does this relieve the transferor from including the reserve in its taxable income for the subsequent taxation year pursuant to subparagraph 12(1)(e)(i).

Position: The paragraph 20(1)(m) reserve does not follow the business which has been transferred on a tax deferred basis. Since neither the transferor nor the transferee may claim a reserve under paragraph 20(1)(m) at the end of the taxation year in which the transfer of the business occurred, neither is required to include an amount in calculating business income for the immediately following year under subparagraph 12(1)(e)(i). However, where the transferor has paid a reasonable amount to the transferee as consideration for undertaking to provide the goods or services, the transferor and transferee may file a joint election under subsection 20(24) to alleviate the tax consequences described above.

Reasons: The transferor ceases to carry on the business and generally no longer has any obligation to deliver goods or render services related to that business so the transferor cannot claim a paragraph 20(1)(m) reserve in the year the business is transferred for an amount that is included in computing business income in the year under paragraph 12(1)(a). The transferee is not entitled to claim a reserve under paragraph 20(1)(m) because it did not include in its business income under paragraph 12(1)(a) any amount which related to the obligation to deliver the goods or render the services in question.

30 March 2004 External T.I. 2004-0062291E5 - Discretionary interest in a non-resident trust

Unedited CRA Tags
94.1 94 248(25)

Principal Issues:
1. Whether an interest in a discretionary non-resident trust would be a participating interest in a foreign investment entity?
2. Whether the FMV of an interest a discretionary non-resident trust is nil?

Position: 1. Yes, assuming the proposed legislation is enacted as proposed.
2. Not necessarily.

Reasons: 1. The Canadian resident beneficiaries are "beneficially interested" in the non-resident trust, by virtue of subsection 248(25).
2. It would be unreasonable to conclude in all cases that the FMV of an interest in a discretionary trust holding property with significant value has no value.

26 March 2004 External T.I. 2003-0047061E5 - Foreign currency and FAPI

Unedited CRA Tags
95(1) 91(1)
Summary Under
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Foreign Accrual Property Income

Principal Issues: How does a Canadian taxpayer compute the FAPI of a foreign affiliate that is denominated in a currency other than the Canadian dollar?

Position: Rate of the exchange prevailing at the time of the transaction or average rate.

Reasons: Words in sections 95(1), 91

2003-004706
XXXXXXXXXX Suzanie Chua
613 957-2115
March 26, 2004

Technical Interpretation - Internal

6 April 2004 Internal T.I. 2004-0062831I7 - Recharacterization of amounts -EPSP

Unedited CRA Tags
144(1) 6(1)(d)

Principal Issues: Whether contributions by an employer to an EPSP which are included in the employee's income under 6(1)(d) could be recharacterized as something other than employment income when they are distributed out of the trust.

Position: No.

Reasons: In order that there be tax certainty, the characterization of amounts for tax purposes must be determined at the time of tax incidence i.e. for the employer - at the time that the contributions are made, and for the employees - when they are allocated under section 144.

12 February 2004 Internal T.I. 2003-0027201I7 - Swaps and Part I.3 Tax

Unedited CRA Tags
181
Summary Under
Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3)

Principal Issues: 1. Whether the obligation with regard to principal under swap contracts would be viewed as a "loan or advance" for the purposes of subsections 181.2(3) and 181.2(4) of the Act.
2. Whether a particular credit amount in the taxpayer's records should be included in computing the taxpayer's capital for purposes of Part I.3 of the Act?

Position: 1. No
2. Unable to conclude

Reasons: 1. Consistent with the position taken for purposes of Part I and Part XIII. XXXXXXXXXX
2. Insufficient information to determine how the credit amount arose and how it was treated in the financial statements. The nature of the amount must be determined before the issue of whether it is an amount to be included in the computation of capital can be addressed.