Income Tax Severed Letters - 2004-11-12


10 November 2004 Miscellaneous 2004-0100761E5 - Structured settlements

Unedited CRA Tags

Principal Issues: 1. Can funds held in trust be structured and
2. Can proceeds from a life insurance policy be structured?

Position: 1. Yes 2. No

Reasons: Paragraph 5 of IT-365R2

10 November 2004 Miscellaneous 2004-0096991E5 F - Shareholders' agreement

Unedited CRA Tags

Principal Issues: Whether a shareholder is deemed to own all the shares of the corporation pursuant to 256(1.4)(a) because of the shareholders' agreement in the situation described?

Position: Yes

Reasons: Wording of 256(1.4).

8 November 2004 Miscellaneous 2004-0092021E5 F - RDTOH: Foreign tax credit under sub. 126(1)

Unedited CRA Tags
129(3)(a)(i) 126(1)

Principal Issues: In a given fact situation, a CCPC's foreign tax for a given year is classified as non-business-income tax even though the income in respect of which the tax is exacted is business related. The CCPC has also income for the given year from a source in Canada that is a property. In the calculation of the CCPC's RDTOH, should we interpret the subparagraph 129(3)(a)(i) in a manner that only foreign tax deducted under 126(1) related to "income" as defined in subsection 129(4) would be considered?

Position: No. The total amount of the foreign tax deducted under subsection 126(1) should be considered.

Reasons: The Act.

8 November 2004 Miscellaneous 2004-0067161E5 F - Change étranger

Unedited CRA Tags
9(1) 39(2)

Principales Questions: Demande de confirmation du traitement fiscal

Position Adoptée: Voir ci-dessous.

Raisons: Voir ci-dessous

5 November 2004 Miscellaneous 2004-0092211I7 - Securities lending arrangements

Unedited CRA Tags
260 82(1)(a)(ii)

Principal Issues: General discussion

Position: General discussion

Reasons: Sections 260 and 82 ITA

5 November 2004 Miscellaneous 2004-0098081E5 - Interest deductibility

Unedited CRA Tags

Principal Issues: Whether interest is deductible when borrowed money is used to replace employment income withheld to purchase shares of employer

Position: Depends on direct use of the borrowed money

Reasons: ITA

5 November 2004 Miscellaneous 2004-0063651E5 F - offset interest/intérêts compensateurs

Unedited CRA Tags
161(2) 161(2.2) 157(1) 164(3)

Principal Issues: In the given situation, where a corporate taxpayer's (Opco) tax instalments pursuant to 157(1) for January and February 2004 are late, the March 2004 instalment becomes due on March 31st (the 3 instalments together is referred to below as Opco's liability), and the reassessment on March 30, 2004 of its T2- 2002 gives rise to an overpayment pursuant to 164(7) of an amount in excess of Opco's liability, (1) whether the CRA will apply the overpayment to Opco's liability? (2) if Opco makes the request, whether the CRA will accept the amount representing the amount of the overpayment in excess of Opco's liability as prepaid instalments? (3) for the purpose of computing interest charges on the late instalments pursuant to the contra interest (offset interest) method under 161(2.2), will the contra credit interest computation start date under 161(2.2)(b) be the first day of year 2004 or the date that is 30 days after filing the T2-2002? and (4) whether any interest is payable to Opco on its overpayment for the year 2002 under 164(3)?

Position: (1) and (2) Yes. (3) Neither, the contra credit interest computation start date under 161(2.2)(b) is the date of the day immediately following the day the instalment prepayment is made which, in the given situation, would be the day after the overpayment was assessed.
(4) No.

Reasons: (1) and (2) The law and CRA's practice (3) 161(2.2)(b) provides that the contra credit interest is the interest computed under 164(3), applied making the presumptions under 161(2.2)(b)(i) to (iv). In this context, 164(3) applies to the refund created by the application of the presumption under 161(2.2)(b)(i) in respect of the taxation year 2004 (not the refund of the overpayment related to a prior year, such as in this case, the refund in respect of the year 2002). 161(2.2) and 164(3) each provide a different period for the computation of interest. But, the presumption under 161(2.2)(b)(iv) in effect sets the interest computation period start date under 161(2.2) as the start date for the application of 164(3) i.e. the first day of the year. However, the contra credit interest computation start date is the first day of the year only if the instalment prepayment is made before begins the instalment year to which it is to be applied. Otherwise, the contra credit interest computation start date corresponds to the date of the day immediately after the day the instalment prepayment is made. (4) The interest computation period begins and ends on the same day (March 30, 2004) pursuant to 164(3)(d) and 164(5)(j)(k)(l)

4 November 2004 Miscellaneous 2004-0084611E5 - Scholarships, Bursaries, Prizes

Unedited CRA Tags
56(1)(n) Reg. 7700

Principal Issues: Whether the prizes awarded in an essay contest to Ontario and Quebec high schools students and schools are prescribed prizes within the meaning of Regulation 7700.

Position: No

Reasons: The prizes do not appear to meet the "recognized by the general public" criteria. Furthermore, the prizes are identified in the contest rules as "scholarships" and would therefore be taxed as scholarships under paragraph 56(1)(n).

4 November 2004 Miscellaneous 2004-0101641E5 - Bonus or Commission

Unedited CRA Tags
5 8(1)(f)

Principal Issues: Whether a particular payment is a bonus or a commission.

Position: Question of fact. However, in this case, the payment is a bonus.

Reasons: The payments have the characteristics of a bonus. The contract refers to the payment as a bonus and employee cannot receive bonus unless still employed at time of payment.

4 November 2004 Miscellaneous 2004-0087721E5 - Taxable Income

Unedited CRA Tags
248(1) 56(1)(a) 60(n)

Principal Issues: Can the repayment of a severance amount be deducted from income in the year of repayment?

Position: Question of Fact.

Reasons: Where the amount received by the taxpayer meets the definition of "retiring allowance" in subsection 248(1) of the Act and is included in income by virtue of 56(1)(a)(ii) of the Act, the amount of any repayment is deductible under subparagraph 60(n)(iii) of the Act.

3 November 2004 Miscellaneous 2004-0079171E5 - Subsection 97(2)

Unedited CRA Tags

Principal Issues: Would the proposed partnership structure and transaction be suitable to accomplish capital gains tax deferral?

Position: No response was given since it appears to be a factual situation involving a partnership. Since the transaction involves the sharing of income through a partnership with minor children and a partial estate freeze we cautioned about possible application of section 103 of the Act.

Reasons: This is a proposed transaction and we are being asked to confirm the tax consequences outside of a ruling request.

2 November 2004 Miscellaneous 2004-0098981E5 - Sale of property in Scotland

Unedited CRA Tags
40(1) 69(1) 110(1)(f)(i)

Principal Issues: Whether sale of property situated in Scotland exempted from tax in Canada where Scottish tax laws do not tax the gain on disposition?

Position: No.

Reasons: Pursuant to subsections 40(1) and 39(1), a capital gain from the disposition of property would arise in the circumstances described; nothing in the Canada-United Kingdom Income Tax Convention to prevent Canada from taxing the gain under the Income Tax Act.

XXXXXXXXXX 2004-009898
S. Chua
November 2, 2004

2 November 2004 Miscellaneous 2004-0063491E5 F - Droit de bénéficiaire et résidence principale

Unedited CRA Tags
248(25) 104(1.1) 54

Principales Questions: Voir ci-dessous

Position Adoptée: Voir ci-dessous

Raisons: Voir ci-dessous

1 November 2004 Miscellaneous 2004-0091071E5 - Eligible Investment of Credit Union

Unedited CRA Tags

Principal Issues: A credit union invests in shares or long-term debt of a wholly-owned subsidiary of a second credit union. The first credit union is a member or shareholder of both the second credit union and the subsidiary; however, the subsidiary is not a credit union. Is the investment an eligible investment of the first credit union within the meaning of subsection 181.3(5)? Will it make a difference if the subsidiary was created to carry out functions previously carried out by the second credit union?

Position: The shares and long-term debt of the subsidiary are not eligible investments of the first credit union unless the two entities are related. In assessing whether the two entities are related, paragraph 181.3(5)(b) would not apply to deem the credit union to be related to a person who controls the subsidiary within the meaning of subparagraph 251(2)(b)(iii). The functions of the subsidiary are not relevant in this regard.

Reasons: The legislation. Paragraph 181.3(5)(a) requires that the credit union be related to the subsidiary if the subsidiary's shares or long-term debt are to be eligible investments of the credit union. Paragraph 181.3(5)(b) applies for purposes of subsection 181.3(4) only.

27 October 2004 Miscellaneous 2004-0080191E5 F - Paragraphes 6(1) et 6(2) de la Loi

Unedited CRA Tags
6(1) 6(2)

Principales Questions: 1. Lors de la détermination d'un avantage imposable en vertu de l'alinéa 6(1)a) de la Loi pour un employé découlant de l'achat par celui-ci d'une automobile appartenant à son employeur à un prix inférieur à la juste valeur marchande, doit-on tenir compte du fait que l'employé a eu à inclure dans le calcul de son revenu au cours des quatre années antérieures à l'achat de l'automobile un montant pour droit d'usage pour la même automobile ?
2. Quelle serait la réponse dans le cas où l'employé est aussi un actionnaire de la société ?

Position Adoptée: 1. L'avantage imposable en vertu de l'alinéa 6(1)a) de la Loi équivaut à la différence entre la juste valeur marchande de l'automobile au moment de la vente et le montant payé par l'employé et ce, sans tenir compte de l'avantage pour le droit d'usage de l'automobile calculé au cours des quatre années antérieures à l'achat.
2. Même réponse qu'en 1 si le particulier effectue la transaction en sa qualité d'employé. Il y a un avantage imposable en vertu du paragraphe 15(1) de la Loi si le particulier effectue la transaction en sa qualité d'actionnaire de la société sans que la valeur de l'avantage aux fins de ce paragraphe ne soit réduite du montant de l'avantage pour l'usage d'une automobile qui aurait été calculé en vertu du paragraphe 15(5) de la Loi dans les années antérieures à l'achat de l'automobile par l'actionnaire.

Raisons: 1. L'employé a joui d'un avantage au cours de l'année au titre, dans l'occupation ou en vertu de son emploi. Il s'est vu conférer un avantage économique du fait que son patrimoine s'est accru étant donné qu'il est maintenant propriétaire d'un bien pour lequel il a déboursé un montant inférieur à la juste valeur marchande qu'il aurait autrement payé pour acquérir un tel bien.
2. Si en sa qualité d'employé, voir en 1. Si en sa qualité d'actionnaire, ce dernier s'est vu conférer un avantage par sa société puisqu'il a acquis un bien pour un montant moindre que la juste valeur marchande de ce bien.

27 October 2004 Miscellaneous 2004-0065821E5 - Article 18 Canada-UK treaty

Unedited CRA Tags

Principal Issues: Whether individual employed by Ontario Securities Commission ("OSC") on secondment to UK Financial Services Authority falls within paragraph (a) or (b) of Article 18(1) of the Canada-UK Income Tax Convention (the "Treaty").

Position: Neither paragraph (a) or (b) of Article 18(1) would apply.

Reasons: Mr. X did not render services to the OSC during the time he was in the UK. In any case, the OSC is not a "political subdivision" or "local authority" for purposes of the Treaty. Accordingly, the words in paragraph (a) of Article 18(1) would not be met. As Mr. X was a resident of Canada for purposes of the Treaty, paragraph (b) of Article 18(1) would not apply.

613 957-2115
October 27, 2004

27 October 2004 Miscellaneous 2004-0063061E5 F - Provision pour somme payable

Unedited CRA Tags
104(6)b) 104(13) 18(1)a) 18(1)e)

Principales Questions: Une fiducie peut-elle déduire un montant à titre de provision pour somme payable aux bénéficiaires?

Position Adoptée: Non.

Raisons: Voir ci-dessous

27 October 2004 Miscellaneous 2004-0088581E5 F - Prêt à un actionnaire

Unedited CRA Tags
15(2) 15(2.4)

Principales Questions: 1. Est-ce que le prêt obtenu de la société par le particulier fait l'objet de l'application du paragraphe 15(2) de la Loi ?
2. Dans le cas où l'alinéa 15(2.4)b) de la Loi s'applique, est-ce que cette exception à l'inclusion du prêt dans le revenu du particulier continue à s'appliquer si, subséquemment à l'obtention du prêt, le particulier n'est plus un employé de la société ?

Position Adoptée: 1. Question de fait.
2. S'il s'agit toujours du même prêt, l'exception, si applicable au moment de l'obtention du prêt, devrait habituellement continuer à s'appliquer.

Raisons: 1. Le prêt ne respecte peut-être pas les conditions aux alinéas 15(2.4)e) et f) de la Loi et une partie du prêt n'a pas pour objet de permettre au particulier d'acquérir une habitation destinée à son propre usage mais plutôt pour faire des rénovations (paragraphe 19 du IT-119R4).
2. Libellé de la Loi (paragraphe 15(2) de la Loi).

25 October 2004 Miscellaneous 2003-0009211E5 - Paragraph 214(3)(f)

Unedited CRA Tags
214(3)(f) 104(13) 104(24)

Principal Issues: Paragraph 214(3)(f) and timing of remittance of withholding tax.

Position: Based on facts, withholding tax exigible when amount paid to beneficiary.

Reasons: Based on facts.

613 957-2115
October 25, 2004

25 October 2004 Miscellaneous 2004-0077651E5 - Transfer of retiring allowance to RRSP

Unedited CRA Tags

Principal Issues: 1) Application of 60(j.1) in determining how much of a retiring allowance can be transferred to the employee's RRSP.
2) How to correct an error where the Employer understated the amount of retiring allowance eligible for transfer to the employee's RRSP in a prior year and whether there is any administrative relief available to the employee who may wish to make a contribution to his RRSP equivalent to the amount of the understatement now that the statutory time limit to make the contribution has passed.

Position: 1) Paragraph 60(j.1) allows an individual to transfer portions of a retiring allowance to an RRSP on a tax-deferred basis. The amounts that can be transferred are equal to $2,000 for each year of employment with the payer of the retiring allowance before 1996 and an additional $1,500 for each year of employment before 1989 as long as no pension benefits from the employer have vested in the employee for those years. The number of years of employment need not be continuous. The years of service that may be counted are years of service with the employer or with a "person related to the employer".
2) Referred the administrative issues to Client Services Directorate.

22 October 2004 Miscellaneous 2004-0079791I7 F - Pension alimentaire

Unedited CRA Tags
56.1(4) 60.1(3)

Principales Questions: Est-ce que des sommes versées par Monsieur à Madame en XXXXXXXXXX et XXXXXXXXXX à titre d'avance sur le partage de patrimoine familial peuvent être déductibles de son revenu, lorsqu'un jugement émis en XXXXXXXXXX ne reconnaît pas la nature de ces sommes et indique qu'elles ont plutôt servi à des fins alimentaires ?

Position Adoptée: Non.

Raisons: Les sommes versées ne respectent pas les paramètres de la définition de "pension alimentaire". i.e. elles n'ont pas été payées en vertu d'une ordonnance ou d'un accord écrit. De plus, le paragraphe 60.1(3) ne s'applique pas, les sommes ayant été versées plus d'un an avant le jugement qui les reconnaît à titre alimentaire.

5 October 2004 Miscellaneous 2004-0061861E5 - Status of a Malagasy SARL

Principal Issues: Whether a limited liability company organized in Madagascar is a corporation for purposes of the Act.

Position: Yes.

Reasons: An SARL has several characteristics of a corporation, including the separate legal entity.

2004 Miscellaneous 2003-0051591R3 - Private Health Services Plan

Unedited CRA Tags

Principal Issues: Qualification of a medical dental spending account (MDSA) as a private health services plan. Under the terms of the MDSA agreement, the employer pays a fixed monthly amount, plus an administration fee to a third party administrator. Employees submit medical claims to the administrator, who reviews the claims and reimburses the employee up to a pre-determined maximum level of coverage. Medical claims in excess of the maximum level of coverage will not be reimbursed. Unused amounts in the MDSA will be paid back to the employer. The main issues in the ruling are as follows: 1) the qualification of the plan as a PHSP; 2) the deductibility of monthly payment to the MDSA; 3) the deductibility of the administration fee; and 4) whether the reimbursement of medical expenses to an employee is a taxable benefit to the employee.

Position: 1) the plan qualifies as a private health services plan; 2) the monthly payment to the MDSA will be deductible by the employer to the extent of the amount of medical expenses approved by the Administrator for reimbursement; 3) the administration fee will be deductible; and 4) the monthly payments to the administrator will not constitute a taxable benefit to the employees.

Reasons: Satisfies the requirements of IT-339R2.

2004 Miscellaneous 2004-0074311R3 - Income Trust

Unedited CRA Tags
104(7.1) 108(2)(a)

Principal Issues: See below

Position: See below

Reasons: See below

2004 Miscellaneous 2004-0093591R3 - Withholding - GP corporation on loans to LP

Unedited CRA Tags
212(1)(b)(vii) 245(1)

Principal Issues: Is there an avoidance transaction where a corporation, that is the general partner of a limited partnership, that qualifies for the 212(1)(b) (vii) exemption on-loans funds to the limited partnership that would not qualify on its own.

Position: NO

Reasons: There is a business purpose. The structure has been existence for some time.

2004 Miscellaneous 2004-0095681R3 - Stock options; employee benefit plans

Unedited CRA Tags
248(1) 6(1) 104 32.1

Principal Issues: Supplemental Ruling to 2004-007521. Will changes to a plan affect the rulings previously provided?

Position: No

Reasons: No significant consequence to the rulings provided

11 October 2000 Miscellaneous 2000-0044071I7 - Environmental Assessment Expenses

Unedited CRA Tags
66.2(5) 66.1(6) 66(15)

Principal Issues: Clarification of views expressed in earlier memorandum concerning certain environmental assessment expenses.

Position: The appropriate treatment of particular environmental assessment expenses remains a question of fact. However, in the situation at hand, the expenses related to the preparation of an environmental impact statement appear to form part of the cost of obtaining a mining lease which would constitute a Canadian resource property. As such, those expenses should remain classified as CDE.

Reasons: Based upon the provisions of the Act and the relevant provincial legislation as well as the facts of this situation.

8 October 2004 Miscellaneous 2004-0085671C6 F - Scission d'entreprise - choix de 86.1

Unedited CRA Tags

Principales Questions: Procédure relative au choix de 86.1.

Position Adoptée: Commentaires généraux.

Raisons: Voir réponse.

8 October 2004 Miscellaneous 2004-0090831C6 F - 12(4) L.I.R. et fiducies personnelles

Unedited CRA Tags
12(4) 104(24)

Principales Questions: Voir ci-dessous

Position Adoptée: Voir ci-dessous

Raisons: Voir ci-dessous