Income Tax Severed Letters - 2005-06-03


2005 Ruling 2004-0088551R3 - Post-Mortem Estate Plan

Unedited CRA Tags
88(1)(c)(vi) 88(1)(d.3) 112(3.2)

Principal Issues: (1) Whether bump available to increase adjusted cost base of subsidiary's capital property distributed on amalgamation (2) Timing of Acquisition of Control for Bump Purposes (3) Grandfathering of exemption from stop-loss rule in 112(3.2)

Position: (1) XXXXXXXXXX . (2) Acquisition of Control occurs immediately after death of Deceased (3) Grandfathering rule applies.

Reasons: (1) Shares of parent may constitute substituted property under ss. 88(1)(c.3)(i) and (ii) and some of those shares are to be acquired by trust for benefit of Deceased's grandchildren who are not specified persons. (2) Acquisition of control block of shares of subsidiary by the person who subsequently transfers those shares to the parent is within 248(8)(a). (3) Technical requirements met.

2005 Ruling 2005-0114501R3 - employee stock option

Unedited CRA Tags
7(1) 110(1)(d) reg. 6204

Principal Issues: Is the plan, as amended, an employee stock option plan that is subject to subsection 7(1) and will the shares be prescribed shares?

Position: Yes

Reasons: This ruling was previously given in respect of a proposal that did not proceed on a timely basis. The proposal has been resubmitted and is, in general, the same as previously proposed. There have been certain amendments but these are not significant to the requested rulings.
The Plan is complex and has undergone a number of amendments. Essentially the Plan is a stock option arrangement that permits employees to acquire shares of a foreign, private corporation where the shares would not be prescribed shares due to certain terms of the shares. However, the Plan provides that these terms are not applicable to shares acquired under the options and substitutes similar and/or identical terms in the Plan documentation with the understanding that these terms are included in the option agreement to provide a market for the shares. Accordingly, the shares are converted to prescribed shares. The ruling also confirms that a stock attestation procedure commonly used in the U.S. to acquire shares under options will result in the application of paragraph 7(1)(b) under the Act.

XXXXXXXXXX 2005-011450

2005 Ruling 2005-0117641R3 - Loss Utilization

Unedited CRA Tags
20(1)(c) 112(1) 80(1) 245(2)

Principal Issues: A loss utilization within an affiliated group of corporations where profitcos are partners in an LP.

Position: acceptable

Reasons: Paragraph 32 of IT-533

2004 Ruling 2004-0091911R3 - XXXXXXXXXX spin-off

Unedited CRA Tags

Principal Issues: Whether a proposed reorganization meets the requirements of paragraph 55(3)(b)?

Position: Yes.

Reasons: It meets the requirements of the law

Ministerial Correspondence

18 May 2005 Ministerial Correspondence 2005-0123001M4 - Acquisition of a put option by an RRSP

Unedited CRA Tags
Reg 4900(1)(e) 4900(1)(e.01)

Principal Issues: Can an RRSP trust hold a put option?

Position: Under the current legislation, a put option would constitute a non-qualified investment for an RRSP. However, proposed new paragraph 4900(1)(e.01) provides that call or put options listed on a prescribed stock exchange will be qualified investments.

Reasons: A put option provides the holder with the right to dispose of, rather than acquire, property, thus it does not meet the requirements of existing paragraph 4900(1)(e).

Technical Interpretation - External

30 May 2005 External T.I. 2005-0127821E5 - RRIF - Disabled Child Beneficiary

Unedited CRA Tags
146.3(6) 60(l)

Principal Issues: Can an amount be transferred out of an RRIF on a tax-deferred basis under paragraph 60(l), to an infirm adult child of the annuitant of the RRIF on the death of the annuitant?

Position: Provided the amount is a designated benefit as defined in subsection 146.3(1) of the Act, the amount may be transferred in accordance with paragraph 60(l) to an RRSP, a RRIF or an annuity.

Reasons: An infirm adult child must be financially dependent on the annuitant of the RRIF at the time of the annuitant's death to qualify for a transfer in accordance with paragraph 60(l) of the Act.

30 May 2005 External T.I. 2005-0127861E5 - Securities transactions - capital gain or income

Unedited CRA Tags
IT-479R applicable but daily share option trading on income account

Principal Issues: Whether an individual who deals in share options and also buys and sells stock is carrying on a business

Position: General comments

Reasons: Based on comments in IT-479R

(613) 957-8982
May 30, 2005

30 May 2005 External T.I. 2005-0119711E5 - Legal Fees

Unedited CRA Tags
18(1)(a) 18(1)(b)

Principal Issues: Are the legal fees incurred by the taxpayer deductible for tax purposes?

Position: The legal fees are capital expenditures incurred to preserve or protect an asset of enduring benefit.

Reasons: The taxpayer currently has no source of business income.

30 May 2005 External T.I. 2005-0130361E5 - Retiring Allowances - Paragraph 60(j.1)

Unedited CRA Tags

Principal Issues: In order for the extended meaning of, "person related to the employer" to apply for the purposes of subparagraph 60(j.1)(ii), must the provisions of both subparagraphs 60(j.1)(iv) and (v) be satisfied?

Position: No.

Reasons: Either subparagraph 60(j.1)(iv) or (v) can be satisfied in order for the extended meaning of "person related to the employer" to apply.

30 May 2005 External T.I. 2005-0125261E5 - Segregated Fund Annuity Court Settlement

Unedited CRA Tags

Principal Issues: What are the tax consequences of an out of court settlement payment made in connection with a segregated fund annuity?

Position: None, other than the fact that the "surrogatum principle" may be relevant.

Reasons: A meaningful response cannot be provided without the opportunity to review the annuity contract and the settlement documentation.

27 May 2005 External T.I. 2005-0116061E5 - Salary Repayment

Unedited CRA Tags

Principal Issues: Whether 8(1)(n) can be interpreted to apply in situations where the employee did not perform the duties of office or employment appropriately.

Position: No. 8(1)(n) only applies in situations where inter alia the employee did not perform the duties of office or employment.

Reasons: Reading of the Act.

27 May 2005 External T.I. 2005-0122901E5 - Deferred Salary Leave Plans

Unedited CRA Tags

Principal Issues: Can a term employee whose contract is renewed each year but who is only factually employed for 10 months each year remain in the DSLP over the course of several such contracts?

Position: No.

Reasons: Violates the requirements on 6801(a)(i), which requires that the leave of absence commence immediately after a period of deferrals. There is not a period of deferrals in this case, but rather, a series of periods of deferral, thus the requirement cannot be met. Also, the leave is planned to start in July, when the employee's contract is up. At that point, it cannot be accurately described as a leave of absence, as the individual is no longer an employee.

26 May 2005 External T.I. 2005-0124821E5 - When to Issue T2200

Unedited CRA Tags

Principal Issues: Whether an employer has reasonable grounds to issue a T2200 to an employee

Position: It is a question of fact to be determined upon a review of the circumstances.

20 May 2005 External T.I. 2005-0127641E5 - Additional north. residents deduction

Unedited CRA Tags
110.7 1

Principal Issues: Whether a person residing in a hotel room would qualify to claim the additional northern residents deduction.

Position: It is a question of fact to be determined by the circumstances. In this case, a person is residing in a hotel room under circumstances similar to that of residing in an apartment and thus would meet the requirement for the additional northern residents deduction.

Reasons: Due to a housing shortage, the hotel was being operated similar to an apartment building. The resident was paying rent monthly, had a separate entrance and could cook and eat in her room.

18 May 2005 External T.I. 2005-0119101E5 - Distributions from RCA

Unedited CRA Tags
ITR 106(1)

Principal Issues: 1. What are applicable rules for the following distributions from a RCA: refunds of excess contributions to plan Sponsor; distribution of remaining assets of the plan on wind-up to the Sponsor?
2. If Sponsor is tax exempt, is withholding rate nil?

Position: 1. The amount to be deducted or withheld from a distribution that is a refund of the Sponsor's excess contributions would be determined pursuant to subsection 106(1) of the Act. The amount to be deducted or withheld from a distribution of the remaining assets in a RCA to the Sponsor upon wind-up of the plan would be determined pursuant to subsection 106(1) of the Regulations if the RCA is not a "superannuation or pension fund or plan" and pursuant to subsection 103(4) if it is.
2. The amount to be withheld pursuant to subsection 106(1) is based on the amount of tax that may reasonably be expected to be payable under the Act by the recipient. It is a question of fact what is a reasonable method for computing the amount to be withheld in particular situations. If the Sponsor is tax exempt, the withholding rate would be nil only if the Sponsor has provided the RCA with a letter of authority from its Tax Services Office.

Reasons: Part I of and Schedule I to the Income Tax Regulations.


3 May 2005 CALU Roundtable Q. 5, 2005-0116661C6 - Interest deductibility on second loan - Gifford

Unedited CRA Tags

Principal Issues: CALU Question 5.
Scenario 1: A taxpayer borrows money to use in business. To pay interest on the first loan, the taxpayer borrows money under a second loan. Is the interest on the second loan deductible under paragraph 20(1)(c)?
Scenario 2: A taxpayer borrows money to acquire shares of a corporation. To pay interest on the first loan, the taxpayer borrows money under a second loan. Is the interest on the second loan deductible under paragraph 20(1)(c)?

Position: Scenario 1: Yes
Scenario 2: Yes

Reasons: Previous position taken in Rulings interpretation 2004-007034. Also see legal opinion from Justice.

Technical Interpretation - Internal

30 May 2005 Internal T.I. 2005-0130431I7 - Internet Connection Fees

Unedited CRA Tags
18(1)(a) 9(1)

Principal Issues: Whether a self-employed person who uses a computer for both business and personal use can claim a reasonable portion of internet connection fees as a business expense.

Position: It is a question of fact depending on the circumstances.

Reasons: Under subsection 9(1) of the Income Tax Act (the "Act"), a taxpayer's income from a business or property is the "profit" therefrom for the year, subject to the particular rules in Part I of the Act.

8 May 2003 Internal T.I. 2002-01674770 - INVESTMENT PROPERTY OF INSURERS

Unedited CRA Tags
REG 2400 REG 2411 138(9)

Principal Issues:
1. What is meant by an amount due or accrued to the insurer on account of income from designated insurance property that was "assumed in computing the insurer's Canadian reserve liabilities" for purposes of the definitions of "investment property" and "Canadian investment property" in Part XXIV?
2. Whether an insurer should "scale down" the value of amounts due or accrued when designating Canadian investment property and investment property in circumstances where the insurer's mean Canadian reserve liabilities are less than its mean Canadian investment fund.
3. Whether the formula in paragraph 2411(3)(b) of the Regulations provides the appropriate result in computing the minimum net investment revenue for purposes of paragraph 138(9)(b).

1. It is our understanding that in the annual return filed with OSFI due or accrued investment income is usually reported separately from the related property. Where due or accrued investment income from designated insurance property supports policy liabilities that are included in the insurer's Canadian reserve liabilities, such income will qualify as Canadian investment property or investment property and may be designated by the insurer as designated insurance property to the extent permitted under section 2401 of the Regulations.
2. There is no legislative requirement for the "scale down". However, due or accrued amounts designated by the insurer must clearly support Canadian policy liabilities to be considered Canadian investment property or investment property.
3. Result appears to be unintended. We will refer the matter to the Department of Finance for consideration.

1. Wording and intent of the legislation.
2. Legislation and question of fact.
3. Under the current rules, due or accrued amounts are included in calculating the average yield on investment property (i.e., B, E and H) but are specifically carved out of the total value of the investment property (i.e., C, F and J) in the formula. This appears to result in the use of an average yield that is less than the actual yield to the insurer in respect of its investment property.