Income Tax Severed Letters - 2004-07-16


14 July 2004 Miscellaneous 2004-0084861E5 - Change in directed person

Unedited CRA Tags

Principal Issues: Are all the relevant parties required to consent to this change in directed person from time to time?.

Position: Claimant need only send notice to issuer of the annuity of the change provided this clause is allowed in the original documents and agreed to earlier by all interested parties.

Reasons: Paragraph 5 of IT-365R2
HAA: 7328-2
SECURITY: For distribution

13 July 2004 Miscellaneous 2003-0049081E5 - FTC beneficiary of Canadian resident trust

Unedited CRA Tags
104(22) 20(11)

Principal Issues: Under U.S. tax rules, it is the beneficiary and not the trust(ee) who pays the tax on income derived from U.S. real property held by a foreign simple trust. Is the beneficiary entitled to a foreign tax credit in respect of the foreign taxes paid on the property income?

Position: As the beneficiary is not entitled to a deduction under 20(11) in respect of the U.S. taxes paid in respect of the real property located in the U.S., the full amount of the taxes will qualify as non-business-income tax, provided that none of (c.1) to (i) of the def'n of non-business-income tax in 126(7) apply.

Reasons: The 104(22) designation does not apply for the purpose of 20(11) such that the beneficiary does not have any foreign source income for the purpose of 20(11). In addition, income from real property is excluded from the application of subsection 20(11).

13 July 2004 Miscellaneous 2004-0083611E5 - Reporting of share disposal transactions

Unedited CRA Tags
69(1)(b) 38(1) Reg 230)

Principal Issues: What are the reporting requirements when a taxpayer transfers shares at fmv held in his own account to an account held by himself and his adult daughter?

Position: Reporting of disposal on T5008 for half of the transfer

Reasons: Disposal - application of 69(1)(b)

12 July 2004 Miscellaneous 2004-0076531E5 - Lease Option-Sale

Unedited CRA Tags
9(1) 49(1) 49(3) 38(1)

Principal Issues: Does a lessee who acquires a XXXXXXXXXX % interest in a business on a yearly basis over a XXXXXXXXXX year-period with no buy-out at the end acquire the property at the beginning of the lease?

Position: Question of fact

Reasons: ITTN #21-- Wording of the Agreement

12 July 2004 Miscellaneous 2004-0063481E5 - Qualified farm property-meaning of principally

Unedited CRA Tags

Principal Issues: In determining whether a real property was used "principally" in the business of farming, within subparagraph (b)(i) of the definition of "interest in a family farm partnership" in subsection 110.6(1), must the asset be used in the business of farming at the time of disposition?

Position: No.

Reasons: In the context of subparagraph (b)(i) of the definition of "interest in a family farm partnership" in subsection 110.6(1), generally it is not solely the current use of the real property that is relevant, but it is the use of the real property over the entire period of ownership. There is no requirement that the property be used immediately before the disposition in the business of farming.

9 July 2004 Miscellaneous 2004-0069111E5 - Medical Expenses - Asthma

Unedited CRA Tags

Principal Issues: Whether the cost of: 1) renovations to a home and 2) a central vacuum cleaner qualify as medical expenses.

Position: 1) Central vacuum cleaner - No; 2) Hardwood Flooring - question of fact

Reasons: 1) Legislation. 2) Jurisprudence (see Appeals Branch response to adverse decision in Seely v The Queen)

9 July 2004 Miscellaneous 2004-0069261E5 - Income of Contractors

Unedited CRA Tags
9(1) 12(1)(b)

Principal Issues: Whether "the construction of a building, road, dam, bridge or similar structure" as described in paragraph 1 of IT-92R2 can be considered to include the construction of electrical power substations and transmission lines.

Position: Question of fact.

Reasons: The construction of electrical power substations and transmission lines would not likely fall within the scope of the administrative position in IT-92R2, on the basis that they are not structures which are similar to a building, road, dam or bridge.

9 July 2004 Miscellaneous 2004-0070061E5 - Training Allowances

Unedited CRA Tags
5(1) 56(1)(n)

Principal Issues: Are payments under an agreement between an employer and an employee, whereby the employee receives various allowances in exchange for a commitment to continue employment, taxable under 56(1)(n) or as employment income? If employment income, does the CRA's position on employer-paid education costs apply to make the payments non-taxable?

Position: Taxable as employment income, except for the allowance for tuition, which may be non-taxable.

Reasons: The position in IT-470R is not applicable because the allowances are non-accountable and exceed the actual education costs. However, in the case of the allowance for tuition, we may treat the allowance as a reimbursement in certain circumstances.

9 July 2004 Miscellaneous 2004-0083231E5 - income inclusion for prospectors

Unedited CRA Tags

Principal Issues: whether amount to be included in income of prospector should be 50% of the proceeds received on the sale of the shares.

Position: no

Reasons: among other things, such treatment assumes that any gain on the sale of the shares will be a capital gain which is not necessarily the case

8 July 2004 Miscellaneous 2004-0074581E5 - Expenses for Canadian Lobbyists

Unedited CRA Tags
20(1)(cc) 20(1)(9)

Principal Issues: Can a corporation resident in Canada deduct the salaries and other expenses of employees whose primary duties are to lobby the government?

Position: Question of fact. Provided the expenses are paid and incurred to make a representation relating to a business carried on by the taxpayer.

Reasons: 20(1)(cc) of the Act

8 July 2004 Miscellaneous 2004-0075691E5 - Taxable Motor Vehicle Allowance

Unedited CRA Tags
6(1)(b) 8(1)(h.1) Regulation 7306

Principal Issues: Whether an allowance of 28 cents per kilometre for the business use of an employee's motor vehicle is unreasonable and therefore taxable, thus entitling the employee to deduct allowable motor vehicle expenses.

Position: Question of fact.

Reasons: The reasonableness of a particular allowance is a determination that can only be made after a careful examination of all of the relevant facts. A reasonable motor vehicle allowance for 2004 in most areas of Canada is 42¢ per kilometre for the first 5,000 kilometres and 36¢ thereafter, pursuant to section 7306 of the Income Tax Regulations. Pursuant to paragraph 8(1)(h.1), motor vehicle expenses cannot be deducted in computing employment income when an allowance for such expenses is excluded from income under one of the exceptions in paragraph 6(1)(b). However, if the employee can show that the business-related motor vehicle expenses are in excess of the allowance, and voluntarily includes the per-kilometre allowance in income, the CRA will permit the deduction (assuming all the other requirements of section 8 are met, including the employer's certification that the employee is required to use the motor vehicle in connection with his or her duties of employment).

6 July 2004 Miscellaneous 2004-0077331E5 - allocation of income of estate to heirs

Unedited CRA Tags

Principal Issues: Can an estate allocate income to the beneficiaries of the estate where the income is not payable to the beneficiaries?

Position: Assuming that none of the beneficiaries are preferred beneficiaries within the meaning of 108(1), no.

Reasons: A deduction under 104(6) is only available in respect of amounts payable to the beneficiaries, or in respect of an amount of the accumulating income that has been designated by the trustee and the preferred beneficiary in a preferred beneficary election. Other conditions may further restrict the amount of the 104(6) deduction.

6 July 2004 Miscellaneous 2004-0081631E5 F - Price Adjustment Clauses

Unedited CRA Tags
85(1) 85(7.1) 85(8) 97(2)

Principal Issues: Whether the condition stated in IT-169 to file a letter attached to the return can be substituted where a rollover form is filed. Whether, in circumstances where no rollover form is required, the condition to file a letter attached to the return is mandatory.

Position: The condition to file a letter attached to the return, as stated in IT-169, can be substituted. Administratively, the CRA does accept a rollover form such as T2057, T2058 or T2059, filed with a "yes" answer to the question concerning the existence of a price adjustment clause, as sufficient notice. However, a price adjustment clause does not automatically amend a section 85 election. In order to give effect to a price adjustment clause, the parties will have to file an amended election under subsection 85(7.1) and pay the penalty under subsection 85(8). CRA's position on that point is the same with respect to an election under subsection 97(2). Consequently, the parties will have to file an amended election under subsection 96(5.1) and pay the penalty under subsection 96(6). Finally, in circumstances where no form is required (e.g., section 86 or 51 of the Act), the CRA has stated that simply not notifying the CRA does not prevent Interpretation Bulletin IT-169 from being applied if all of the other conditions are met.

Reasons: Previous positions.

30 June 2004 Miscellaneous 2004-0062121E5 - resident and n/r estate with resident and n/r bene

Unedited CRA Tags
104(13) 94 94.1

Principal Issues: 1.What are the tax consequences of an estate resident in Canada with non-resident beneficiaries?
2. What are the tax consequences of an non-resident estate with beneficiaries resident in Canada?

Position: 1. Generally, Part XIII tax on distributions of income.
2. The change in executors will result in a deemed disposition but the trust will likely not be deemed resident in Canada under existing 94(1)(c) or proposed 94(3) as the deceased was never resident in Canada. However, proposed 94.1 may apply.

Reasons: See general comments in letter.

23 June 2004 Miscellaneous 2004-0080881E5 - Transfer of retiring allowance - related employers

Unedited CRA Tags
60(j.1) 251(2)

Principal Issues: Where part of a retiree's total years of service with a former employer has been recognized under the RPP of the current employer, can the years of service with the former employer be included in calculating the amount of retiring allowance eligible to be transferred pursuant to paragraph 60(j.1) of the Act?

Position: Yes.

Reasons: Subparagraph 60(j.1)(v) is clear.

2004 Miscellaneous 2002-0151821R3 - Small Business Investment Trust

Unedited CRA Tags
146(1) 4900(6)(c) 5103(1) 5103(2)

Principal Issues: Will units of the trust be a "qualified investment" for trusts governed by RRSPs

Position: Yes, subject to 4900(8) and (9) and 5104(4).

Reasons: The trust will be a Small Business Investment Trust, as defined in subsection 5103(1) of the Regulations.

2004 Miscellaneous 2003-0031811R3 - Employee Bonus Plan - SDA paragraph (k)

Unedited CRA Tags
248(1) 6(1)

Principal Issues: Will a bonus plan be considered a plan to which paragraph (k) of the SDA rules apply such that it is not considered to be an SDA?

Position: The Plan fits under the provisions of paragraph (k) of the SDA provisions.

Reasons: The amount is a bonus that is paid within 3 years

XXXXXXXXXX 2003-003181

2004 Miscellaneous 2003-0051381R3 - Steps to avoid gain - 21 yr

Unedited CRA Tags
107(2) 86(1) 83(2)

Principal Issues: 1. Does 86(1) apply to the reorganization of Holdco? 2. Does 84(1), 83(2) and 53(1)(b) apply to the subsequent increase in the PUC? 3. Does 107(2) apply to the distribution of shares from the trust? 4. Does 15(1), 105, 246(1) or GAAR apply to proposed transactions?

Position: 1 & 2. Yes. 3. Provided that the trustee does not elect under subsection 107(2.001), yes. 4. No.

Reasons: 1 to 4. Consistent with prior rulings.

2004 Miscellaneous 2004-0072741R3 - ATR-Shareholder/Manager Bonus&Non-Capital Loss

Unedited CRA Tags
67 18(1)(a) 111(1)(a) 78(4)

Principal Issues: 1. Whether a shareholder/manager bonus can be considered reasonable if it creates a non-capital loss. 2. Whether the non-capital loss created by the bonus can be carried back pursuant to paragraph 111(1)(a), to the three preceding taxation years to reduce income approximately to the small business deduction limit.

Position: 1. Yes. 2. Yes.

Reasons: 1. The proposed payment is within the scope of the CRA policy with respect to the reasonableness of shareholder/manager remuneration. The company has adopted a policy of declaring bonuses to its principal shareholder/manager to remunerate him for the profits the company has earned that are attributable to his special know-how, connections and entrepreneurial skill. The company is a CCPC paying a bonus to an active, principal shareholder/manager who is resident in Canada, in order to reduce the CCPC's taxable income approximately to the small business deduction limit for the carryback period. The remuneration will be paid out of income derived from the normal, ongoing operations of the business. The loss carryback request will not generate any undue tax advantage. Refund interest will be effective from the date of reassessment to adjust for the loss carryback. 2. Straightforward application of the law.

2004 Miscellaneous 2004-0067551R3 - Supplemental Ruling to 2003-000851

Unedited CRA Tags
5 or 6

Principal Issues: Will clarification of administration of the Plan impact on previous rulings given?

Position: No

Reasons: The proposed Top-Up / Claw-Back payments do not impact on rulings given in 2003-000851