Income Tax Severed Letters - 2005-07-15

Ruling

2005 Ruling 2004-0088711R3 - MFT investing its funds in property

Unedited CRA Tags
132(6)

Principal Issues: Whether the acquisition of rights assigned or sold under a credit agreement meet the criteria of 132(6)((b)(i).

Position: Yes

Reasons: The MFT invests part of its funds in those rights.

XXXXXXXXXX 2004-008871

Technical Interpretation - External

12 July 2005 External T.I. 2004-0092961E5 - Personal credits in different provinces-Bankruptcy

Unedited CRA Tags
118.95 128(2)(d)

Principal Issues: Whether the calculation of provincial non-refundable tax credits (referred to in the provincial equivalent to paragraph 118.95(b) of the Federal Act) for the post-bankruptcy period should be reduced by the amount claimed in another province for the pre-bankruptcy period, where the individual resides in different provinces in both periods.

Position: No.

Reasons: Where an individual becomes a bankrupt in a calendar year and resides in different provinces at the end of each taxation year ending in that calendar year, the individual can claim a portion of these credits allowed in the province of residence at the end of each taxation year as can reasonably be considered applicable to that taxation year. In our view, that portion must be calculated on a pro-rata basis, based on the number of days in the period for which the applicable pre-bankruptcy or post-bankruptcy return is filed.

12 July 2005 External T.I. 2004-0106021E5 - jointly owned real estate and securities

Unedited CRA Tags
3(b) 2(3)(c)

Principal Issues: 1. The basis of allocating of income and capital gains from a source in Canada or the United States where the property is held jointly by spouses resident in Canada. 2. The basis of allocating of income and capital gains from a source in Canada where the property is held jointly by spouses resident in the U.S.

Position: 1. When income or a capital gain is derived from property held in joint tenancy by spouses resident in Canada, it should generally be allocated proportionately according to each spouse's respective contribution of capital to acquire the property. This position applies regardless of whether the income or capital gain is from a source in Canada or the U.S. 2. Where an election is made under subsection 216(1) on rental property held in joint tenancy by spouses resident in the U.S. or there is a capital gain from the disposition of taxable Canadian property held in joint tenancy by spouses resident in the U.S., the rental income or capital gain would generally be allocated proportionately according to each spouse's respective contribution of capital to acquire that property.

Reasons: As per previous positions taken on reporting of capital gains and income from property held in joint tenancy.

7 July 2005 External T.I. 2005-0120351E5 - Private Health Services Plan

Unedited CRA Tags
6(1)(a)(i) 15(1) 20.01 248(1)

Principal Issues: 1) Where an owner/shareholder of a Professional Corporation is paid only a dividend, can the owner/shareholder qualify for reimbursement of medical and dental expenses through a Private Health Services Plan?
2) Would the answer in question 1 change if the owner/shareholder were paid a fee for management or other services?
3) Would an adult child of an owner of an unincorporated business who is not living at home but is an employee of the unincorporated business qualify for medical reimbursement under a Private Health Services Plan? Are there any limitations?

Position: 1) Question of Fact. 2) Question of Fact. 3) Yes. No.

Reasons: 1) It is a question of fact whether the benefit, from an employer's contribution to a PHSP is derived by virtue of an individual's shareholding or by virtue of the individual's office or employment. Generally, benefits received by employees are not subject to tax by virtue of subparagraph 6(1)(a)(i) of the Income Tax Act. However, there is no similar exclusion where the benefit is derived by virtue of an individual's shareholdings. The benefit received by the shareholder would be included in the shareholder's income pursuant to subsection 15(1) of the Income Tax Act.
2) It is also a question of fact whether a fee for management and other services is received as income from a business or income from an office or employment.
3) Where the adult child of an owner of an unincorporated business receives a benefit by virtue of his/her employment derived from the contributions of his/her employer to a private health services plan, the benefits will not be included in income by virtue of subparagraph 6(1)(a)(i). The limitations in section 20.01 of the Income Tax Act do not apply in this case.

7 July 2005 External T.I. 2005-0124131E5 - Fees to be deducted from Investment Income

Unedited CRA Tags
20(1)(bb) T-238R2

Principal Issues: Whether the fees charged to clients for advice given with respect to their investment portfolios are deductible for tax purposes.

Position: No

Reasons: An amount paid by a taxpayer in the year to a person for advice on the advisability of buying or selling a specific security or share is deductible where that person's principal business is advising others as to the advisability of purchasing or selling shares or securities. A person's principal business is generally one where more than 50% of the time is spent on that activity or where more than 50% of the gross revenue is generated from that activity.

23 June 2005 External T.I. 2005-0125951E5 - reconcilation of the ACB of investor's MFT holding

Unedited CRA Tags
40(3)

Principal Issues: How does an investor determine the amount of capital gain arising from a distribution of income from a unit trust?

Position: A capital gain arises when the ACB of the investor's interest is negative by reason of ss 40(3). Capital distributions, both the amounts shown in box 42 of the T3 slip and similar distributions received before 2004 will generally reduce the ACB of the interest. The investor is responsible for keeping track of the ACB of each investment. Where a multiple fund T3 slip is issued by a fund or an investment company, the slip should provide sufficient detail to determine the ACB adjustment, or capital gain, applicable to each investment.

Reasons: The enquirer was aware of the requirements but was having difficulty in obtaining the required information from the fund's trustee and\or the investment broker.

23 June 2005 External T.I. 2005-0127911E5 - residence of a trust

Unedited CRA Tags
104

Principal Issues: Will Canada recognize a trust as a resident of the US if it is considered resident in the US for US tax purposes? In the facts given, the trustees were all resident in Canada but the trust was governed by the laws of a state within the U.S.

Position: Trustee should seek resolution of the dual residency under the competent authority procedures set out in IC 71-17R5

Reasons: Trust meets the criteria for being considered resident in Canada for the purposes of Canadian domestic law.

XXXXXXXXXX 2005-012791
Annemarie Humenuk
Attention: XXXXXXXXXX

Conference

26 May 2005 Roundtable, 2005-0126031C6 - Carrying on an Insurance Business

Unedited CRA Tags
138(1) 115.2(2)

Principal Issues: Particular fact situation - is insurer carrying on an insurance business in Canada?

Position: No.

Reasons: See Q&A

26 May 2005 Roundtable, 2005-0126041C6 - Mark-to-Market Property/Tax. CDN Property

Unedited CRA Tags
116(3)

Principal Issues: Whether a non-resident insurer that is not carrying on a business in Canada is subject to the requirements of section 116 in respect of a deemed disposition of a mark-to-market property that is a taxable Canadian property.

Position: Yes, but if the non-resident insurer has no final tax liability to Canada, the non-resident insurer may request a reduction to the required payment on account of tax.

Reasons: There is nothing in the definition of "excluded property" in subsection 116(6) that would exempt a non-resident insurer from having to fulfill the requirements of section 116 in respect of a deemed disposition of mark-to-market property.

26 May 2005 Roundtable, 2005-0126051C6 - S. 138(5)(b) Interest Deductibility

Unedited CRA Tags
138(5)(b) 20(1)(c)

Principal Issues: Application of subsection 138(5)(b) in several scenarios.

Position: See document

Reasons: See document

Technical Interpretation - Internal

11 July 2005 Internal T.I. 2005-0136961I7 - Share Capital Reflected in the Balance Sheet

Unedited CRA Tags
181(3)

Principal Issues: Following a non-arm's length transfer of assets, a corporation's books reflected the transferred assets at fair market value. The share capital reported on the consolidated balance sheet presented to the shareholders reflected the transferred assets at fair market value. The share capital reported on the unconsolidated balance sheet prepared for Part I.3 tax purposes reported a lesser amount in share capital as if the transferred assets were carried at the rollover transfer amount rather than fair market value. Can the unconsolidated balance sheet prepared using different accounting principles than those used in preparing the consolidated financial statements presented to the shareholders be used for purposes of Part I.3?

Position: It depends upon whether the accounting presentation for that transaction as reflected in the consolidated statements was in accordance with GAAP. If it was, the same accounting principles must be employed in establishing the unconsolidated balances for Part I.3 purposes. If it was not, a presentation for the transaction that is in accordance with GAAP must be employed in preparing the unconsolidated financial statements.

Reasons: Subsection 181(3) of the Act requires that amounts reflected in the unconsolidated balance sheet prepared in accordance with GAAP and presented to the shareholders shall be used for Part I.3 purposes. Where no such balance sheet exists, the balances that would have been reflected in such a balance sheet shall be used. Where only a consolidated balance sheet has been prepared and presented to the shareholders, the unconsolidated balance sheet prepared for tax purposes shall incorporate only those changes necessary to satisfy the criteria of subsection 181(3). Hence, if the consolidated statements were prepared in accordance with GAAP, the only acceptable changes would be to remove the effects of consolidation.