Income Tax Severed Letters - 2005-05-13


2005 Ruling 2004-0055911R3 - Withholding tax on interest; Part XIII

Unedited CRA Tags

Principal Issues: 1. Whether an "obligation" per clause 212(1)(b)(iii)(E) 2. Whether "interest" is payable on XXXXXXXXXX bonds denominated in a foreign currency where principal amount may be satisfied by transferring reference shares to the creditor.

Position: Yes / yes

Reasons: XXXXXXXXXX - 1. "Obligation" is a broad term 2. Interest is payable (fixed or floating rate determined before the note is issued) on amount advanced to the taxpayer.

2005 Ruling 2004-0100611R3 - Payment to Australia

Unedited CRA Tags

Principal Issues: Whether a payment for software to an Australian vendor is subject to withholding under Part XIII of the Income Tax Act.

Position: No.

Reasons: The payment is not a royalty for purposes of the Canada-Australia Income Tax Convention and Australian vendor does not have a permanent establishment in Canada.

XXXXXXXXXX 2004-010061

2005 Ruling 2005-0109741R3 - XXXXXXXXXX

Unedited CRA Tags
113 5905 5907 95

Principal Issues: Whether the conversion of a French société anonyme into a French société par actions simplifiée would result: (1) in the rulings issued in 2001, 2003 and 2004 to a Canadian corporation of whom the converted entity is a controlled foreign affiliate being void or inapplicable; (2) in the converted entity still being treated as a corporation for the purposes of the ITA; (3) in a disposition of the shares of the converted entity held by a Canadian corporation; (4) in a disposition of the property and assets of the converted entity; and (5) in changes to the exempt surplus, exempt deficit, taxable surplus, taxable deficit and underlying tax account balances of the converted entity with respect to a Canadian corporation of whom it is a controlled foreign affiliate.

Position: (1) no; (2) yes; (3) no; (4) no; (5) no

Reasons: Position adopted in ruling E 2002-0132163.

2005 Ruling 2005-0114011R3 - Withholding Tax Exemption re On-loan to an LP

Unedited CRA Tags
212(1)(b)(vii) 245(2)

Principal Issues: Can a corporation on-loan to a limited partnership ?

Position: Yes

Reasons: Corporate structure in place GP's business same as LP Better security for the lenders

2005 Ruling 2005-0127241R3 - Withholding Tax Exemption re On-loan to an LP

Unedited CRA Tags
212(1)(b)(vii) 245(2)

Principal Issues: Can a corporation on-loan to a limited partnership ?

Position: Yes

Reasons: Corporate structure in place. GP's business is the same as LP. Better security for the lenders

Technical Interpretation - External

12 May 2005 External T.I. 2005-0114801E5 - Net Cost of Pure Insurance

Unedited CRA Tags

Principal Issues: Regulation 308 requires that the mortality data set out in the 1969-75 mortality tables of the Canadian Institute of Actuaries be used in computing the net cost of pure insurance (NCPI) of an interest in a life insurance policy. These table provide mortality data for life insureds up to an issue age of 70. We are asked how the Regulation is to be interpreted where a policy is underwritten for a life insured that is older than age 70. Where more than one method is available to determine an appropriate mortality rate, must the insurer use the same method for all life insurance policies it issues for life insureds older than age 70?

Position: Where the tables do not prescribe a particular rate of mortality due to the age of the life insured, it is necessary to extrapolate from the information set out in the tables in order to derive the appropriate NCPI for a particular life insurance policy. The method employed to determine the appropriate mortality rate in such circumstances must reflect the mortality data in the tables. This determination would appropriately be made by the company's actuary(ies) in accordance with accepted actuarial practices. The method selected must be employed consistently across all the company's policies of the particular class for which such extrapolation is necessary.

Reasons: Words and purpose of Regulation 308.

XXXXXXXXXX 2005-011480
R. Maley
May 12, 2005

11 May 2005 External T.I. 2005-0111721E5 - Distribution from RRIF - Liability for tax

Unedited CRA Tags

Principal Issues: Whether in the province of Quebec, irrevocable beneficiaries of a RRIF are jointly and severally liable for taxes applicable to the RRIF owing by the estate of a deceased RRIF annuitant even if the proceeds of the RRIF do not flow through the estate of the annuitant.

Position: Yes. If the estate has insufficient funds to pay the taxes owing arising from the RRIF, the recipient of the proceeds of the RRIF is jointly and severally liable for the taxes applicable to the RRIF proceeds.

Reasons: Based on the wording of subsection 160.2(2) of the Act

(613) 957-8982
May 11, 2005

9 May 2005 External T.I. 2005-0110151E5 - Disposition of Livestock

Unedited CRA Tags
9(1) 39(1)

Principal Issues: Whether any portion of the proceeds of disposition of a milk goat herd relates to a goat milk quota.

Position: No.

Reasons: There is no "quota" system for goat's milk. The only limit on a goat milk farmer is the demand for the end products. Restricting supply to match demand is not the equivalent of a "quota" system.

6 May 2005 External T.I. 2004-0078561E5 - Withholding on services outside Canada

Unedited CRA Tags

Principal Issues: The employee works for a non-resident employer outside of Canada. Does the employer have to withhold at source?

Position: Yes

Reasons: 153(1)(a) and Part I of the Regulations. There is no exemption when the employee is a resident of Canada.

5 May 2005 External T.I. 2005-0124661E5 - Child Care Expenses

Unedited CRA Tags

Principal Issues: Whether a day care subsidy is a taxable benefit to employees.

The subsidy provided by the employer from offering its employees reduced rates at the day care centres it operates will result in a taxable benefit to the employee.
Where an employee is required to include an amount in income as or on account of the benefit derived from employer assistance with child care, the amount of the benefit included in income will be considered to be an amount paid on account of child care for the purpose of determining the eligible costs under section 63 of the Act.

Reasons: While it is our general position that no amount is included in an employee's income from the use of child care facilities managed by the employer and available to all employees for little or no cost, this position does not extend where the employer subsidizes a facility which is operated by a third party in exchange for subsidized rates for its employees or where the employer makes the facilities available to non-employees at rates in excess of that which is charged to employees. Where the employer provides child care to the public at large for a fee greater than that charged to its own employees, the difference is considered to be a subsidy to the employee which must be included in the employee's income from employment.

5 May 2005 External T.I. 2005-0113121E5 - Section 118.2(2)(e) Receipting

Unedited CRA Tags

Principal Issues: Are the receipts issued by the personal care home appropriate for the purposes of the medical expense tax credit in paragraph 118.2(2)(e) of the Income Tax Act? What are the criteria for determining if an individual, resident in a personal care home, can claim the medical expense tax credit under paragraph 118.2(2)(e) of the Act?

Position: The receipts issued should detail the cost of care or care and training from other costs. In order for an amount to qualify as a medical expense under paragraph 118.2(2)(e) of the Act, the individual receiving care or care and training at the particular place must be certified by an appropriately qualified person to be in need of the specialized equipment, facilities or personnel provided by that place for care or care and training of individuals with the handicap suffered by that individual.

Reasons: Wording in the Act.

5 May 2005 External T.I. 2005-0116281E5 - Guarantee Fee Received

Unedited CRA Tags
9 153(1) Regulation 200

Principal Issues: A husband and wife each own 50% of the common shares of a CCPC. It has a loan with a Canadian chartered bank that requires the shareholders to personally guarantee the loan. Once a year, the CCPC pays the shareholders a guarantee fee of 1% of the amount guaranteed. The shareholders have not guaranteed any other debt. 1. Whether the guarantee fee received would be considered employment or other income of the shareholders. 2. What are the reporting requirements for the corporation with respect to the guarantee fees paid?

Position: 1. Guarantee fees received by a shareholder from the corporation will generally be considered income with respect to services rendered. 2. The corporation is required to report the guarantee fees paid on a T4A slip.

Reasons: 1. Section 9. 2. Pursuant to section 200 of the Regulations, every person who makes a payment described in subsection 153(1) of the Act shall make an information return in prescribed form in respect of the payment. The payment of guarantee fees is included under paragraph 153(1)(g) of the Act.

5 May 2005 External T.I. 2005-0121151E5 - Health and Welfare Trusts

Unedited CRA Tags

Principal Issues: A variety of issues affecting the status of trusts as health and welfare trusts.

Position: General comments provided.

Reasons: Such determinations are always questions of fact.

4 May 2005 External T.I. 2005-0120271E5 F - Change of Control - CDA & RDTOH

Unedited CRA Tags
249(4) 256(7) 89(1)

Principales Questions: In a given fact situation, where all the shares of a CCPC are sold to a sibling, whether (1) there is a change of control for the purpose of 249(4)? and (2) the change of control results in the CCPC's CDA and RDTOH becoming nil

Position Adoptée: (1) No. (2) No to both.

Raisons: The law.

18 April 2005 External T.I. 2004-0093821E5 F - Fiducie créée par testament

Unedited CRA Tags
70(6) 104(1) 108(1)

Principales Questions: 1. Est-ce que ce qui a été créé par le testament d'un contribuable est une fiducie?
2. Est-ce que la fiducie qui est par ailleurs une fiducie visée à l'alinéa 70(6)b) de la Loi perd ce statut si le conjoint a la discrétion de ne pas exiger le paiement annuel du revenu, toute portion non payée étant ajoutée au capital de la fiducie?
3. Est-ce que la fiducie est testamentaire si le conjoint décide de ne pas exiger la remise de tout ou partie du revenu ou du capital de la fiducie?

Position Adoptée: 1. La validité d'une fiducie est une question de droit. Cette question doit être déterminée en fonction du droit civil ou du droit commun, selon le cas.
2. Pour qu'un conjoint puisse être considéré comme ayant droit à tous les revenus de la fiducie, il n'y a que le conjoint qui peut avoir une discrétion quant à la distribution de tout ou partie du revenu de la fiducie. Dans la mesure où le conjoint a droit à tous les revenus de la fiducie en vertu de l'acte de fiducie mais indique par écrit son désir de ne pas recevoir tout ou partie de ces revenus, le fait que la partie des revenus de la fiducie à laquelle le conjoint a renoncé soit conservée par la fiducie et ajoutée à son capital n'aura pas en soi pour effet de disqualifier la fiducie de fiducie visée à l'alinéa 70(6)b) de la Loi.
3. Pour ce qui est du revenu, cela dépend des circonstances. Pour ce qui est du capital, il n'y a pas de contribution à la fiducie par le conjoint en raison du fait que les fiduciaires ont décidé de ne pas remettre de capital au conjoint ou que le conjoint n'a pas fait la demande de remise de capital.

Raisons: 1. Le paragraphe 104(1) ne définit pas ce qu'est une fiducie.
2. Le conjoint a quand même droit à tous les revenus de la fiducie et personne d'autre que le conjoint n'a droit à ces revenus durant sa vie.
3. Lorsqu'un conjoint renonce au revenu alors que le revenu est payable à celui-ci, le conjoint remet à la fiducie le bien qui consiste en ce revenu payable. Pour ce qui est du capital, il n'y a pas de montant payable tant que les fiduciaires n'ont pas exercé leur discrétion ou que le conjoint n'en a pas fait la demande.

XXXXXXXXXX Sylvie Labarre, CA
Le 18 avril 2005

18 April 2005 External T.I. 2004-0096231E5 F - Déduction de l'impôt payable - emploi à l'étranger

Unedited CRA Tags
5 122.3 248(1)

Principales Questions: Est-ce qu'un contribuable a droit, en 2002, à la déduction de l'impôt payable en cas d'emploi à l'étranger en vertu de l'article 122.3 de la Loi à l'égard du salaire et de la prime de séparation payé au cours d'une année d'imposition donnée?

Position Adoptée: Non, il ne respecte pas les conditions d'application de l'article 122.3 relativement à son contrat d'emploi au XXXXXXXXXX puisqu'il a cessé d'être à l'emploi en 2001. Le revenu tiré de l'emploi qui a été reçu au cours d'une année d'imposition ne pourra être inclus au revenu tiré de l'emploi de l'année précédente. Il faudra également déterminer si la prime de séparation est une allocation de retraite ou un revenu tiré de l'emploi.

Raisons: Le revenu tiré de l'emploi pour une année d'imposition est le salaire, traitement ou autre rémunération reçu au cours de l'année.
Il faudrait examiner tous les faits parce que la prime de séparation pourrait être une somme reçue à l'égard de la perte d'un emploi et répondre à la définition de allocation de retraite au paragraphe 248(1) de la Loi.
La déduction de l'impôt payable en cas d'emploi à l'étranger ne vise que le revenu tiré d'un emploi.

XXXXXXXXXX Sylvie Labarre, CA
Le 18 avril 2005

13 April 2005 External T.I. 2005-0124181E5 - Pension benefits used to purchase annuity

Unedited CRA Tags

Principal Issues: Foreign pension matured, and proceeds used to purchase an annuity. Are the proceeds taxable?

Position: Referred to TSO

Reasons: Completed transaction

11 April 2005 External T.I. 2004-0091721E5 F - Usufruit d'un bien immeuble situé en France

Unedited CRA Tags

Principales Questions: Qui doit s'imposer lorsqu'il y a un usufruit

Position Adoptée: L'usufruitier

Raisons: 248(3)

22 March 2005 External T.I. 2004-0098591E5 F - Application de l'alinéa 212(9)d) proposé

Unedited CRA Tags

Principales Questions: 1) L'exemption prévue à la disposition s'appliquera-t-elle avant que la disposition ne devienne loi; et 2) l'exemption s'appliquerait-elle si une autorité provinciale plutôt que fédérale était impliquée?

Position Adoptée: Aucune exemption n'est accordée avant que la législation proposée ne devienne loi, et compte tenu de l'exigence actuelle de la disposition à l'effet que le Surintendant fédéral des institutions financières doit être partie à l'acte de fiducie en réassurance.

Raisons: Une opinion a été demandée concernant l'application de cette disposition de la Direction des impôts internationaux.


8 October 2004 Roundtable, 2004-0086691C6 - Rectification Orders & Annulment of Contracts

Principal Issues: Whether the decision of the court in B.E.A. Holdings Inc. v. Trafsys Inc. and Trafsys Communications Inc changed the position of the CRA mentioned in Technical News # 22 with respect to rectification orders.

Position: No change in position.

Reasons: Rectification orders are not recognized under the Quebec Civil Code, but the annulment of a contract may be granted in very specific circumstances.

8 October 2004 Roundtable, 2004-0086811C6 - Shares Held by an Individual & Exempt Surplus

Unedited CRA Tags
Reg. 5907 12(1)(k) 113(1)(a) 90

Principal Issues: Can an individual who owns all the shares of a non-resident corporation transfer his shares to a Canadian corporation and benefit from the exempt surplus treatment under the Act on the income of the foreign corporation earned before the transfer to a Canadian corporation?

Position: No.

Reasons: Regulation 5907 restricts exempt surpluses to corporations, so a deduction cannot be claimed pursuant to subsection 113(1) in respect of the income of a foreign affiliate while owned directly by an individual.

8 October 2004 Roundtable, 2004-0086971C6 - Net Taxable Capital Gains Designated by a Trust

Unedited CRA Tags
104(21) 104(21.2)

Principal Issues: Whether a trust can designate a portion of its net taxable gains under 104(21) in order to maximize capital gains exemption of its beneficiaries.

Position: Yes.

Reasons: The provisions of the Act do not preclude designations that are effected in such a manner as to allow the beneficiaries to maximize their capital gains exemption, provided this is done in accordance with the terms of the trust instrument and the applicable law.

Technical Interpretation - Internal

6 May 2005 Internal T.I. 2005-0117751I7 - Foreign Currency Hedging Losses - Resource Profits

Unedited CRA Tags
REG 1204(1) REG 1204(1.1)

Principal Issues: Whether losses on certain foreign exchange forward contracts would reduce either "gross resource profits" or "resource profits".

Position: Yes.

Reasons: The facts of this situation and historic jurisprudence support the view that the foreign exchange forward contracts should be considered as integral to the taxpayer's mineral production business. As such, it is appropriate that the losses realized in respect of those contracts be taken into account in the determination of the taxpayer's "gross resource profits". Even if it could be found that any amount of such losses should not be taken into account in that determination, such amount would reduce the taxpayer's "resource profits" as the facts indicate it would relate to a "resource activity" of the taxpayer rather than a business, or other source, not including any resource activity of the taxpayer.

3 May 2005 Internal T.I. 2005-0120021I7 F - Pension de retraite provenant de la France

Unedited CRA Tags

Principales Questions: Est-ce que la pension de retraite reçue par un conjoint survivant est déductible conformément au sous-alinéa 110(1)f)(i) de la Loi si elle provient de la France et qu'elle est reçue en raison de l'emploi antérieur en France d'un contribuable décédé?

Position Adoptée: Oui

Raisons: Le paragraphe 1 de l'article XVIII de la Convention fiscale entre le Canada et la France s'applique également à la pension versée au particulier qui est le conjoint survivant du contribuable qui a occupé l'emploi antérieur en France.

13 April 2005 Internal T.I. 2004-0109071I7 F - Partie XIII et revenus locatifs

Unedited CRA Tags
212(1)d) 214(1) 215(3) 216(4)

Principales Questions: Est-ce que l'impôt de la Partie XIII s'applique au montant brut des loyers perçus par le mandataire d'une personne non-résidente ou aux montants effectivement versés par le mandataire à la personne non-résidente.

Position Adoptée: Au montant brut des loyers perçus par le mandataire, sauf si le choix prévu au paragraphe 216(4) est effectué.

Raisons: Paragraphes 214(1), 215(3) et 216(4) de la Loi et Bulletin d'interprétation IT-393R2.

12 April 2005 Internal T.I. 2004-0081151I7 - Foreign tax credit - tax exempt income

Unedited CRA Tags

Principal Issues:
1. What is the correct exchange rate to use to convert pension income and foreign tax paid?
2. Is interest income from a foreign source included in "tax exempt income" if it is not taxable in the foreign country?

1. The Bank of Canada average annual exchange rate is acceptable.
2. Yes if the interest income is exempt under the treaty. No if it is not exempt under the treaty.

1. Administrative practice.
2. Even though the interest income was not taxed in the foreign country, it is not included in "tax exempt income" unless it is exempt under the treaty.