Income Tax Severed Letters - 2005-11-25

Principal Issues: whether a boiler fuelled by wood pellets to generate heat for use in a greenhouse will qualify for inclusion in Class 43.1

Position: General comments provided

Reasons: question of fact

Principal Issues: An employee that is a member of a flexible employee benefit program has a choice of various medical benefits. The employee allocates all available coverage in one year to, for example, dental expenses and incurs unexpected drug expenses. 1. Can the employee carry forward the drug expenses and allocate sufficient coverage in the subsequent year to use up the expenses? 2. Must the employee allocate at least 1 cent to drug expense coverage in the first year in order to be eligible to carry forward drug expenses? 3. Will such a plan retain its character as a PHSP?

Position: No, the plan would not qualify as a PHSP.

Reasons: 1. A plan will not be considered a PHSP if it allows a participating employee who has no allocation to a particular component of the plan in the prior year to carry those expenses forward or back to another year. 2. A plan that allows a participating employee to allocate a nominal amount to a particular component of a plan in a year merely to allow the carry forward of excess expenses into another plan year would not be considered a PHSP. 3. We cannot envisage how such a plan contains the requisite element of insurance since it has little or no risk.

Principal Issues: Whether it is appropriate to reduce a taxable benefit for a rent-free apartment from 2/3 of the fair market value to 25% on the basis of the TCC decision in Potvin.

Position: No.

Reasons: The CRA does not have a general position on the amount of a reduction that is appropriate in different situations; only that the reduction must be reasonable in the circumstances. We do not envision any situation where an employee's privacy and quiet enjoyment is so disrupted that no taxable benefit is appropriate. The value of the benefit determined by the TCC in the Potvin decision would be on the low end of the scale. A distinctive fact in Potvin that is worth noting, other than the general nature of the tenants and the usual problems encountered by building managers in these situations, is that Mr. and Mrs. Potvin were the only individuals who managed two townhouse complexes (24 and 36 units) and they were on call 24 hours each day. In the case at hand, there are three superintendent couples and a resident manager couple that collectively manage the property, and these employees are only on call 6 days per month.

Principal Issues: (a) The taxable status of a $XXXXXXXXXX terminal loss incurred by an employer in respect of a leased automobile at the end of the lease - should the entire amount of the terminal loss be included in the employee's income as a taxable benefit? (b) Should an individual be entitled to a deduction for the entire "personal amount" under the Ontario Tax Reduction Program?

Position: (a) The whole amount will not be entirely reflected in the amount of the automobile benefit that is included in the employee's income for the year. (b) The OTR is not a rebate program nor does it provide for a deduction in computing Ontario taxable income.

Reasons: (a) When calculating the standby charge on a leased automobile, the amount of the terminal charge incurred at the end of a lease is included in the employer's cost of leasing the automobile for that year. The maximum amount that could possibly included in the employee's income for the year on the basis of the formula in subsection 6(2) of the Act, is two-thirds (2/3) of the terminal charge. This amount could be further reduced if the employee is required by the employer to use the automobile in connection with or in the course of the office or employment and the distance travelled is primarily in connection with or in the course of that office or employment. (b) The OTR will provide an individual with Ontario tax relief in one of two ways: (1) it will eliminate Ontario tax payable for an individual who in the taxation year has Ontario tax otherwise payable that is less than the individual's "personal amount", as calculated under the Ontario Act, or (2) it will reduce an individual's Ontario tax payable if it is in excess of the individual's personal amount, by reducing it by the amount, if any, by which twice the individual's personal amount exceeds the Ontario tax otherwise payable.

Principal Issues: Will employment income earned by status Indians employed by a First Nation band be tax exempt where the status Indian employees are then subcontracted to various industries both on and off reserve?

Position: Question of fact

Reasons: Consistent with previous positions and based on the connecting factors test

2005-012218
XXXXXXXXXX Kimberly Duval
(613) 599-6054
November 21, 2005