Income Tax Severed Letters - 2005-11-04


2005 Ruling 2005-0123631R3 - Thin Capitalization Rules

Unedited CRA Tags
18(4) 18(6) 245(2)

Principal Issues:
Whether subsection 18(6) of the Act will apply to the debts acquired by the partnership?
Whether GAAR will apply to the proposed transaction of inserting a partnership to acquire debts outstanding to specified non-residents to avoid the application of subsection 18(4) of the Act?

1. No.
2. Yes.

1. Subsection 18(6) of the Act does not apply to the acquisition of a loan. It only applies to the "making" of a loan.
2. The taxpayer's outstanding debts to specified non-residents currently exceeds the 2:1 ratio provided for in subsection 18(4) of the Act. The only purpose for transferring the outstanding debts to specified non-residents to the partnership is to avoid the application of subsection 18(4) of the Act. Therefore GAAR will apply to ensure that the outstanding debts to specified non-residents continue to be subject to the application of subsection 18(4) of the Act.

2005 Ruling 2003-0011341R3 - Arrangement to satisfy SEC

Unedited CRA Tags
96(1.1) 248(1)

Principal Issues: The proposed arrangement is designed to satisfy SEC independence requirements of a partnership to a client in a situation where a retired partner entitled to a retiring allowance from the partnership will become an officer or director of a public company which is a client of the partnership. The issue is whether the proposed arrangement is viewed as "transparent," such that the tax consequences that would otherwise apply remain unchanged.

Position: The proposed arrangement is viewed as transparent.

Reasons: The terms of the arrangement as written do not result in the partnership parting with all the elements of ownership of the assets that will be used to fund the retirement benefits to the retired partner.

XXXXXXXXXX 2003-001134

2005 Ruling 2005-0113011R3 - release of an Income Interest

Unedited CRA Tags
106(1) 107(1) 107(4) 105(1)

Principal Issues:
1. does the variation cause a disposition of trust property?
2. Will Mrs A be considered to have received fmv proceeds where income interest is released with no direction & for no consideration?
3. Does 56(2), 105(1) or 246(1) apply?
4. Is 107(2) applicable on the distribution of property to capital beneficiaries?

1. no; 2. no; 3. no; 4. no

1. See IT-385R2 & previous rulings;
2. previous position maintained;
3. previous positions applicable;
4. trust is a spousal trust-107(4) not 107(2) is applicable

2005 Ruling 2005-0126111R3 - Spin-off butterfly

Unedited CRA Tags

Principal Issues: Spin-off butterfly involving a public company - no types of property basis. Mostly standard issues. Is DC and Spinco related at the time the stock options issued by DC are exchanged for new stock options of DC and Spinco.

Position: Yes, Spinco and DC are related at that time.

Reasons: The law.

2005 Ruling 2005-0132221R3 F - Conv. of Apt Bldg to Condo Princ/Res.

Unedited CRA Tags
84(2) 69(5) 88(2) 248(21)

Principal Issues: In the particular situation, in the province of XXXXXXXXXX , where a corporation owns an apartment building occupied by its shareholders pursuant to a right granted by the corporation, whether (1) the corporation can wind-up such that the shareholders acquire an undivided interest in the building and in turn the shareholders can convert the undivided interest into divided interest in the building (condominium)? (2) each shareholder's shares in the corporation and right to occupy an apartment represent a property that is a dwelling for the purpose of the definition of principal residence under section 54? and (3) ss 248(21) applies such that the deemed disposition rule under 248(20) does not apply on the partition (subdivision) of the building resulting from the conversion of the undivided interest into divided interest?

Position: (1), (2) and (3) Yes.

Reasons: (1), (2) and (3) Previous positions.

2005 Ruling 2005-0132891R3 - In-house loss consolidation

Unedited CRA Tags
20(1)(c) 55(3)(a)

Principal Issues: Whether particular arrangement relating to utilization of non-capital losses within an affiliated group of companies is acceptable.

Position: Yes.

Reasons: Based upon the facts of the situation and traditional practice concerning borrowing to acquire common shares.

Technical Interpretation - External

2 November 2005 External T.I. 2005-0154431E5 - Deferred Salary Leave Plan - 10 month Employee

Unedited CRA Tags
Reg 6801(a)(i)

Principal Issues: Can an employee of a school board who works for 10 months each year and is out of work and collecting EI benefits for the other 2 months each year remain in the DSLP over the course of several such periods of employment?

Position: No.

Reasons: Violates the requirements of subparagraph 6801(a)(i). There would be a series of deferrals, rather than a period of deferral. Also, the leave would commence after the individual has ceased employment, thus it cannot be considered to be a leave of absence.

1 November 2005 External T.I. 2005-0121801E5 - withholding of income tax on salary paid

Unedited CRA Tags
Reg. 102(1) Reg. 104(2) paragraph 153(1)(a)

Principal Issues: Whether an employee who has a home in Canada but works for a U.S. employer and spends over 50% of his time working in the U.S. is subject to withholding of Canadian or U.S. income tax on his pay cheques?

Position: Since the employee appears to be a resident of Canada, the employer is required to withhold Canadian income tax. General discussion of "tie-breaker" rules under the Canada-U.S. Tax Convention provided.

Reasons: Par. 153(1)(a), Reg. 102(1) and Reg. 104(2) require withholding of Canadian income tax by a resident and non-resident employer when the employee is a resident of Canada.

28 October 2005 External T.I. 2005-0145891E5 F - Redemption of Shares - Balance of Purchase Price

Unedited CRA Tags
84(3) 248(1) "Amount"
amount of deemed dividend arose on redemption date based on amount of covenanted future redemption payments

Principal Issues: How would subsection 84(3) of the Act apply where common shares of a corporation are immediately purchased for cancellation, and the corporation owes a balance of purchase price.

Position: The amount of the dividend arising at the time of the purchase would equal the value of any type of consideration given for the shares, including an undertaking or promise to pay, less the paid-up capital in respect of the shares redeemed.

Reasons: Wording of the Act and previous positions.
(613) 957-8975
Le 28 octobre 2005

27 October 2005 External T.I. 2005-0152891E5 - Land Development Costs

Unedited CRA Tags
9(1) 18(1) 10(1)

Principal Issues: Whether costs to develop land can be deducted as a business expense.

Position: No

Reasons: These costs are considered to constitute a component of the cost of the inventory of land for the purposes of subsection 10(1).

26 October 2005 External T.I. 2005-0149621E5 - Nursing Home Deduction and TL2 Meals and Lodging

Unedited CRA Tags
118.2(2)(b) 118.2(2)(d) 69(1)(a)

Principal Issues: 1) Whether filing a T2201 is a requirement in order to claim nursing home expenses as medical expenses. 2) Whether a lodging expense is a requirement for making a meals deduction under paragraph 8(1)(g). 3) What is the number of hours that a transport employee has to be away from town in order to qualify for the meals deduction under paragraph 8(1)(g).

Position: 1) For a claim under paragraph 118.2(2)(b) yes and under 118(2)(d) a medical practitioner may certify the patient's mental capacity in either a letter or by completing Form T2201. 2) The CRA is prepared to allow a deduction for meals only, even though no disbursement has been made for lodging, provided the duties of employment required the employee to stay away overnight and the employee can demonstrate that, rather than paying for lodging, he or she used other facilities. 3) The Canada Revenue Agency is generally prepared to allow a maximum of one meal after every four hours from the departure time to a maximum of three meals per day. A claim for meals will be allowed to the extent the number of meals in a day is reasonable, which will depend on the number of hours the employee was away from home in the course of the employment duties.

Reasons: 1) legislation. 2) IC 73-21R8, Claims for Meals and Lodging Expenses of Transport Employees, paragraph 3. 3) IC 73-21R8, paragraph 14

26 October 2005 External T.I. 2005-0152201E5 - Positions in IT-114

Unedited CRA Tags

Principal Issues: Whether positions in paragraphs 11 and 16 of cancelled IT-114 are still valid

Position: General comments given

Reasons: N/A

26 October 2005 External T.I. 2005-0141321E5 - Taxation of employment income of a status Indian

Unedited CRA Tags

Principal Issues: Would Guideline 4 apply in a particular fact situation?

Position: Question of fact; however, likely not.

Reasons: Consistent with the Indian Act Exemption for Employment Income Guidelines - the "exclusively" test in element (b) of the requirements of Guideline 4 does not appear to be met as only 75% of the student population is status Indian

26 October 2005 External T.I. 2005-0125831E5 - Principal Residence Deduction

Unedited CRA Tags
54(1)(a) definition of "principal residence", 45(1), 45(2) 45(3), 45(4) 0(1), 40(2)

Principal Issues: Contract signed to buy a condo unit before construction started, intended as principal residence. Prior to completion, intention changed and taxpayer intends to rent it out. In this situation, is the no-change-in-use election available to the taxpayer under subsection 45(2)?

Position: No.

Reasons: The condo unit would not meet the definition of a "principal residence" under section 54 for the year 2005, and could not be designated as such because it will not have been ordinarily inhabited in the year by the taxpayer, or a family member (i.e., spouse or common-law partner, former spouse or common-law partner or a child of the taxpayer).
At the time the property begins to be used as an income producing property, it will not have previously been used as a principal residence by any persons mentioned above. In this situation, subparagraph 45(1)(a)(i) will not be triggered to deem a disposition of the property and the subsection 45(2) no-change-in-use election would be inapplicable.
Reverse situation: If at a later time, the taxpayer were to move into the condo unit, changing its use from income producing to his principal residence, then at that later time, an election under 45(3) may be available to the taxpayer, to defer the deemed disposition that would otherwise occur as a result of the change of use to a principal residence by virtue of subparagraph 45(1)(a)(ii), subject to the provisions of subsection 45(4)

25 October 2005 External T.I. 2005-0145991E5 - Non-arm's length sale of shares

Unedited CRA Tags
84.1 85(2.1)

Principal Issues: Application of section 84.1 before May 23, 1985 to a particular fact situation.

Position: General comments only.

Reasons: We do not provide confirmation of tax calculations.

XXXXXXXXXX 2005-014599
Michael Cooke
October 25, 2005

25 October 2005 External T.I. 2005-0131771E5 - Part I.3 and Tiered Partnerships

Unedited CRA Tags
181.2(3) 181.2(4)

Principal Issues: Part I.3 implications to a corporation that is a member in a partnership that is in turn a member of a second tier partnership in circumstances where the corporation makes a loan to the second tier partnership and vice versa.

Position: General discussion of application of the current legislation and the draft legislation released on July 18, 2005.

Reasons: Legislation and draft legislation

XXXXXXXXXX 2005-013177

20 October 2005 External T.I. 2005-0153611E5 - Gift Certificates and Taxable Benefits

Unedited CRA Tags

Principal Issues: Whether Gift Certificates given to employees at Christmas to buy groceries would be considered a taxable benefit if the certificates are under $500, not redeemable for cash, and limited by an expiry date.

Position: Yes, they are a taxable benefit under 6(1)(a).

Reasons: Consistent with Agency policy.

19 October 2005 External T.I. 2005-0114241E5 - Costs incurred in unsuccessful asset acquisition

Unedited CRA Tags
39(1)(b) 39(1)(c) 14(5)

Principal Issues: Can the costs incurred on an unsuccessful acquisition attempt of an investment property be claimed as a capital loss, business investment loss or eligible capital expenditure.

Position: No

Reasons: There is no capital asset to which to add the cost to the adjusted cost base of the capital property. The amounts were not incurred in respect of a share or a debt of a small business corporation. The amounts were not incurred for the purpose of earning income from a business

19 October 2005 External T.I. 2005-0127001E5 - Automobile benefit

Unedited CRA Tags
6(1)(e) 6(1)(k) 248(1)

Principal Issues: Are certain employees in receipt of an employment benefit relating to the personal use of an employer-supplied automobile?

Position: Question of fact. However, if the vehicles meet the definition of "automobile" in subsection 248(1) of the Act, the standby charge/operating cost benefit will apply. If the vehicles do not meet the definition of "automobile" there is a paragraph 6(1)(a) benefit for personal use.

Reasons: It must be determined whether the pick-up trucks in question fit the definition of "automobile". Further, it would have to be determined whether the employees make personal use of the vehicles. These determinations are not possible based on the information provided.

XXXXXXXXXX Renée Shields
(613) 948-5273
October 19, 2005

18 October 2005 External T.I. 2004-0106211E5 - Ecological Gifts

Unedited CRA Tags
118.1(6)(b) 110.1(3)(a)(ii)

Principal Issues: Whether the words "real property situated in Canada" referred to in paragraph 118.1(6)(b) and subparagraph 110.1(3)(a)(ii) of the Income Tax Act (the "Act") would apply to a gift by a non-resident of "a servitude for the use and benefit of a dominant land, a covenant or an easement" as referred to in the definition of "total ecological gifts" in subsection 118.1(1) and "ecological gifts" in paragraph 110.1(1)(d) of the Act.

Position: Yes, provided that the granting of the easement, covenant or servitude referred to in the definition of "total ecological gifts" in subsection 118.1(1) and "ecological gifts" in 110.1(1)(d) of the Act constitutes a gift.

Reasons: The context of paragraph 118.1(6)(b) and subparagraph 110.1(3)(a)(ii) of the Act suggest that the phrase "real property situated in Canada" would include a "servitude for the use and benefit of a dominant land, a covenant or an easement" as referred to in the definition of "total ecological gifts" in subsection 118.1(1) and "ecological gifts" in paragraph 110.1(1)(d) of the Act.

17 October 2005 External T.I. 2005-0136781E5 - Scholarship, Tuition, & Education Tax Credits

Unedited CRA Tags
56(1)(n) 56(3) 118.5(1) 118.6(2)

Principal Issues: 1) Can a scholarship exemption be obtained where employment ends, and the employee receives an amount from their employer termed a "retraining allowance", which is paid directly to a school outside Canada for a one-month ESL teacher training course? 2) What other, if any, deductions or tax credits are available?

Position: 1) No 2) The tuition tax credit and education tax credit are not available in this particular situation.

Reasons: 1) 56(1)(n) of the Income Tax Act excludes as scholarships, bursaries etc, amounts received in the course of business, or amounts received in respect of or in the course of, or by virtue of an office or employment and therefore, are ineligible for the taxpayer's scholarship exemption for the year computed under subsection 56(3). 2) Course taken outside Canada does not meet 13-week length requirement to be eligible for tuition and education tax credits.

17 October 2005 External T.I. 2005-0136951E5 - Teacher and Support Staff Development Payments

Unedited CRA Tags
5(1) 6(1)(a)

Principal Issues: What are the tax implications to an individual receiving a one-time payment for professional development?

Position: Non-taxable reimbursement of expenditures.

Reasons: Ransom v MNR

20 September 2005 External T.I. 2005-0140601E5 F - Ristournes - Coop de travailleurs actionnaire

Unedited CRA Tags
135(1) 135(3) 135(7)

Principales Questions: 1. Est-ce qu'une coopérative de travailleurs actionnaire peut faire des paiements à ses membres qui seront déductibles en vertu du paragraphe 135(1)?
2. Pour le membre, est-ce que le montant reçu est considéré comme un salaire ou comme une ristourne imposable en vertu du paragraphe 135(7)?
3. Est-ce que la coopérative de travailleurs actionnaire doit calculer les retenues à la source sur les montants versés à ses membres en utilisant les montants d'impôt pour les revenus d'emploi ou en calculant un montant égal à 15% des ristournes excédant 100 $?
4. Une demande de dispense de verser des retenues à la source peut-elle être formulée dans le cas où la ristourne serait visée par le paragraphe 135(3)?

Position Adoptée: 1. Oui.
2. S'il s'agit d'une ristourne, elle sera imposable en vertu du paragraphe 135(7).
3. S'il s'agit d'une ristourne, les retenues à la source sont égales à 15% des ristournes excédant 100 $.
4. Non.

Raisons: 1. Notre interprétation de l'expression " répartition proportionnelle à l'apport commercial " et du mot " client " dans des dossiers précédents.
2. La détermination de la nature d'un paiement est une question de fait dans chaque cas particulier.
3. Libellé du paragraphe 135(3).
4. Aucune dispense n'est prévue par la Loi.

XXXXXXXXXX 2005-014060
A. St-Amour, CA
Le 20 septembre 2005

15 March 2004 External T.I. 2004-0063391E5 - Retiring allowance - Salary continuance

Unedited CRA Tags
248(1) 56(1)(a)(ii)

Principal Issues:
1. Whether the amount paid following the conversion of a severance pay to an equivalent number of weeks of leave with pay will constitute a retiring allowance?
2. Whether it is possible to elect to defer the receipt of a retiring allowance?

1. No, if the employee is entitled to accrue benefits including pension service during the leave with pay.
2. Yes, if the election is made prior to retirement or loss of employment.

Previous position taken

23 September 1998 External T.I. 98089850 - REFUNDABLE TAX - SDA NOT RCA

Unedited CRA Tags
207.5(1) 12(1)(n.3)

Principal Issues: What would be the tax implications of the refundable tax where a portion of contributions under an RCA is considered to be:
1. unreasonable; or
2. an SDA.

Position: In all cases the custodian is the ultimate responsible of the RCA trust's tax account and distribution made under the RCA trust is a question of fact and law.

Reasons: wording of the Act and terms of the agreement.

Technical Interpretation - Internal

12 September 2005 Internal T.I. 2005-0143901I7 - interaction of 94(1)(c) and 104(21) and 116(1)

Unedited CRA Tags
104(21) 116(1)

Principal Issues: Since 94(1)(c)(i)(A) requires a trust that is subject to 94(1)(c) to compute its income as if it is non-resident, is the trust precluded from making a 104(21) designation in respect of income described in 94(1)(c)(i)(A)? Is a trust that is subject to 94(1)(c) required to obtain a certificate of compliance under 116 in respect of the disposition of property that gives rise to a capital gain that is included in its income under 94(1)(c)(i)(A)?

Position: No to both questions. However, assuming that the draft legislation on NRTs is enacted in substantially the same form as proposed, the trust would be required to obtain a certificate of compliance in respect of a disposition of property after 2002.

Reasons: A trust that is deemed to be resident in Canada under 94(1)(c) is deemed to be resident in Canada for the purpose of Part I of the Act whereas as a trust that is deemed to be resident in Canada under proposed 94(3) for the purposes set out in that subsection, including subsection 104(21), is not deemed to be resident in Canada for the purpose of 116.