Income Tax Severed Letters - 2005-12-02

Ruling

2005 Ruling 2005-0149551R3 F - Butterfly Transaction - Papillon

Unedited CRA Tags
55(3)(b) 55(3.1) 55(2)

Principal Issues: Split-up butterfly transaction.

Position: Favourable rulings provided.

Reasons: Meets the requirements of the law.

2005 Ruling 2005-0155811R3 - Disposition of Taxable Canadian Property

Unedited CRA Tags
116(1) Article IV of Canada-US Treaty Article XIII of Canada-US Treaty

Principal Issues: Whether paragraph 4 of Article XIII of the Canada-US Treaty will apply to the disposition of taxable Canadian property (shares) by a US partnership that has elected to be treated as a corporation for US income tax purposes.

Position: Yes.

Reasons: The US partnership will be considered to be a "resident" of the US, within the meaning thereof in Article IV of the Canada-US Treaty, such that paragraph 4 of Article XIII will apply to the disposition of the shares.

2004 Ruling 2004-0060571R3 F - Butterfly Reorganization

Unedited CRA Tags
55(3)(b)

Principal Issues: Split-up butterfly reorganization.

Position: Favourable rulings given.

Reasons: Complies with the rules of paragraph 55(3)(b).

Technical Interpretation - External

30 November 2005 External T.I. 2005-0156411E5 - Status Indian employment income - Guideline 4

Unedited CRA Tags
81(1)(a)

Principal Issues: Would Guideline 4 apply to exempt from tax the employment income of the status Indian employees of a particular organization?

Position: Question of fact, but likely the employment income is taxable

Reasons: From the information provided it does not appear that the requirements of Guideline 4 are met.

2005-015641
XXXXXXXXXX Renée Shields
(613) 948-5273
November 30, 2005

29 November 2005 External T.I. 2005-0121941E5 - Thin capitalization

Unedited CRA Tags
18(4)(a)(ii)(A)

Principal Issues: whether retained earnings of predecessor corporations can be included in those of an amalgamated corporation

Position: yes

Reasons: any other interpretation would not be consistent with the scheme of the Act

25 November 2005 External T.I. 2005-0139611E5 - Gift of Art by Will

Unedited CRA Tags
118.1(5)

Principal Issues: Whether a charitable donation of artwork to an art gallery qualifies as a "gift by the individual's will" as referred to in subsection 118.1(5) of the Income Tax Act. The terms of the will indicate that "the pieces of art to be donated will be those pieces of the art collection of the testator remaining after the spouse of the testator has selected, within one year of the demise of the testator, such of the pieces of art as she wishes."

Position: Subject to a review of all of the terms and conditions of the will, once the spouse has selected the pieces of art she wishes to have, the gift of the remaining pieces qualifies as a "gift by the individual's will" as referred to in subsection 118.1(5).

Reasons: The position is based on the interpretation of the words "gift by the individual's will" in subsection 118.1(5) and previous positions on a gift of residue in accordance with the terms of the testator's will. In accordance with the terms of the will, once the spouse makes her selection she releases any right to the remaining property which must be transferred pursuant to the terms of the will to the gallery. The executor does not have any discretion on whether the paintings will be donated. Therefore, the gift of the pieces of art is made pursuant to the testator's intention in accordance with the "individual's will" as referred to in subsection 118.1(5).

24 November 2005 External T.I. 2005-0150271E5 - Shares of Bankrupt Corporations

Unedited CRA Tags
50(1)

Principal Issues: Whether there is some mechanism where you can claim the capital losses incurred in respect of the shares that are essentially worthless but cannot be disposed of because of a cease trading order.

Position: Yes.

Reasons: Subsection 50(1) of the Income Tax Act allows a taxpayer to elect to have a deemed disposition of a share of the capital stock of a corporation in the return of income for the year in certain situations.

23 November 2005 External T.I. 2005-0129051E5 - Tax Status of Claim Settlements

Principal Issues: CRA requirements by a payer and recipient in relation to court awarded damages or payments that are made to settle or avoid litigation. Status of receipts indicated in paragraph 10 of IT-365-R2.

Position: Not Applicable

Reasons: General information request regarding tax treatment of court awarded damages and out of court settlements. No position requested.

23 November 2005 External T.I. 2005-0156071E5 - deductibility of prepayments under s. 18(9.1)

Unedited CRA Tags
18(9.1) 20(1)(c)

Principal Issues: Explanation of position in paragraph 7 of IT-104R3 requested.

Position: Prepayments are to be prorated over the remaining term of the debt obligation.

Reasons: Prepayments can reasonably be considered to relate to the whole term of the debt obligation.

2005-015607
XXXXXXXXXX R. Albert
(613) 957-2100
November 23, 2005

17 November 2005 External T.I. 2004-0069741E5 - Reporting entity - Foreign affiliate

Unedited CRA Tags
233.4

Principal Issues: 1. Whether a foreign entity is a partnership?
2. What are the reporting requirements in respect of a foreign affiliate or a controlled foreign affiliate included in the assets of a partnership?

Position: 1. No definitive position.
2. If the Canadian-resident partners are entitled to more than 10% of the partnership's income or loss, the partnership will have to produce a prescribed form under section 233.4 of the Act in respect of its foreign affiliate or its controlled foreign affiliate.

Reasons: 1. We would need a detailed description of the characteristics of the foreign entity.
2. Subsection 233.4(1) of the Act and the presumptions of subsection 233.4(2) of the Act.

17 November 2005 External T.I. 2005-0118101E5 F - Disposition réputée

Unedited CRA Tags
128.1(4) 39(1)c)

Principales Questions:
1)En faveur de qui la disposition réputée prévue à l'alinéa 128.1(4)b) est-elle effectuée?
2)Si une perte en capital résulte de la disposition réputée prévue à l'alinéa 128.1(4)b), le contribuable peut-il déduire une perte au titre d'un placement d'entreprise dans sa déclaration de revenu pour l'année d'imposition de son départ du Canada?

Position Adoptée:
1)Le contribuable est réputé avoir disposé d'un bien lui appartenant au moment de la disposition et est réputé l'avoir acquis de nouveau au moment donné.
2)Non.

Raisons:
1)Interprétation des alinéas 128.1(4)b) et c) de la Loi.
2)Les conditions prévues aux sous-alinéas 39(1)c)(i) ou (ii) de la Loi ne sont pas rencontrées.

17 November 2005 External T.I. 2005-0118181E5 F - Signification "was applicable" vs "s'est appliqué"

Unedited CRA Tags
75(2) 107(4.1)

Principales Questions:
Aux fins de l'alinéa 107(4.1)b) de la Loi, peut-on prétendre que " le paragraphe 75(2) s'est appliqué à un moment donné aux biens " (dans la version anglaise " subsection 75(2) was applicable... " malgré le fait qu'aucun revenu ni gain en capital n'a été attribué en vertu du paragraphe 75(2) de la Loi?

Position Adoptée:
Oui.

Raisons:
Les dispositions du paragraphe 75(2) de la Loi sont applicables lorsque les conditions des alinéas 75(2)a) ou 75(2)b) sont rencontrées. Même si la fiducie n'a attribué aucun revenu au constituant de la fiducie en vertu du paragraphe 75(2) de la Loi, ce paragraphe demeure applicable. Conséquemment, les dispositions du paragraphe 107(4.1) de la Loi s'appliquent même si aucune conséquence fiscale immédiate ne découle de l'application du paragraphe 75(2) de la Loi.

10 November 2005 External T.I. 2005-0154081E5 - Inheritance tax paid on capital property

Unedited CRA Tags
70(5) 126(7)

Principal Issues: 1. A resident of Canada dies while owning a capital property in Denmark which is an immovable property. Should the final return of the deceased include a gain from the disposition of the capital property?
2. Does the inheritance tax paid on the value of the property to Denmark give right to a foreign tax credit or a deduction of the Canadian tax payable?

Position: 1. There is a deemed disposition of the capital property by the resident of Canada even if the immovable property is situated in Denmark. The deemed disposition is at fair market value.
2. A Canadian taxpayer cannot reduce tax payable in Canada by any inheritance tax paid in Denmark because the inheritance tax is not an "income or profits tax", as required in Canada for determining foreign tax credits or deduction from income for taxes paid to a foreign government.

Reasons: 1. Subsection 70(5) of the Act.
2. Subsection 126(7) of the Act.

4 November 2005 External T.I. 2005-0131741E5 F - Don par testament d'un bien culturel

Unedited CRA Tags
39(1)a)(i.1)(A) 70(5) 104(4) 118.1(5)

Principales Questions:
Le gain en capital résultant de la disposition réputée d'œuvre d'art, en vertu du paragraphe 70(5) de la Loi, est-il imposable si les dispositions du sous-alinéa 39(1)a)(i.1) de la Loi sont rencontrées?

Position Adoptée:
En faisant l'hypothèse que les conditions du sous-alinéa 39(1)a)(i.1) de la Loi sont rencontrées pour chacune des œuvres d'art faisant l'objet d'une disposition réputée selon le paragraphe 70(5) de la Loi, le gain en capital résultant de cette disposition réputée serait exclu aux fins du paragraphe 39(1) de la Loi pourvu que l'aliénation se produise dans le délai prévu à la division 39(1)a)(i.1)(A) de la Loi.

Raisons:
Interprétation de la Loi.

4 November 2005 External T.I. 2004-0108271E5 F - Frais juridiques-105(2)

Unedited CRA Tags
105(2) 18(1)a) 18(1)b)

Principales Questions:
Des frais juridiques engagés par un contribuable pour défendre d'une part, un droit d'usage d'une propriété et d'autre part, un droit pour impenses et pour l'entretien relatif à cette propriété sont-ils déductibles dans le calcul de son revenu?

Position Adoptée:
Seulement la partie des frais juridiques qui a été engagée pour défendre le droit pour impenses et pour l'entretien de la propriété est déductible dans le calcul du revenu du contribuable. La partie des frais qui a été engagée pour défendre le droit d'usage est une dépense de nature capitale.

Raisons:
Le revenu tiré d'une fiducie en vertu du paragraphe 105(2) est normalement considéré comme un revenu tiré d'un bien qui constitue une participation dans la fiducie en vertu de l'alinéa 108(5)a) de la Loi et est inclus dans le calcul de revenu de bien du contribuable en vertu de l'alinéa 12(1)m) de la Loi.

Conference

7 October 2005 Roundtable, 2005-0140951C6 F - Application de 75(2) et 104(6)

Unedited CRA Tags
75(2) 104(6)

Principales Questions: a) 75(2) s'applique-t-il lorsqu'une fiducie détient 100% des actions d'une société qu'elle a constituée et que cette société est bénéficiaire discrétionnaire du revenu et du capital de la fiducie? b) la fiducie a-t-elle droit à une déduction en vertu de 104(6) à l'égard des revenus distribués à la société dans un tel cas?

Position Adoptée: a) oui; b) non

Raisons: a) 75(2) s'applique lorsque la personne, incluant une société, de qui des biens ont été reçus directement ou indirectement par une fiducie est bénéficiaire du capital de cette fiducie; b) tout montant attribué en vertu de 75(2) doit être exclu du revenu de la fiducie et ne peut donc donner lieu à une déduction en vertu de 104(6)

7 October 2005 Roundtable, 2005-0140961C6 F - Benefit Conferred on a Person - 246(1) and 56(2)

Unedited CRA Tags
246(1) 56(2) 245(2)

Principal Issues: An individual ("Father") owns all of the issued and outstanding shares of the capital stock of a corporation ("Corporation A"). The son of Father ("Son") owns all of the issued and outstanding shares of the capital stock of another corporation ("Corporation B"). Corporation A would like to invest its excess cash in Corporation B. This could be done by subscribing to redeemable and retractable preferred shares of the capital stock of Corporation B, or by making an interest-free loan to Corporation B. Whether subsection 246(1) would apply in the given fact situation?

Position: No. Assuming that Son and Corporation B would not have an interest in Corporation A (for example, Son and Corporation B are not, and are not contemplating becoming, shareholders of Corporation A) and would not have any business relationship with Corporation A, one of the conditions of subsection 246(1) would not be met (that is, the inclusion in the taxpayer's income of the amount of the benefit if such amount had been a payment made directly by the person to the taxpayer). However, other provisions of the Act could apply, depending of the facts and circumstances pertaining to the given situation. For example, subsection 56(2) would technically be applicable if it is possible to establish that a payment or transfer of property would be made by Corporation A, pursuant to the direction or with the concurrence of Father, as a benefit that Father desired to have conferred on Corporation B, and if the payment or transfer would be included in computing Father's income if the said payment or transfer had been made to Father (for example, under subsection 15(1) in the circumstances). If subsection 56(2) were applicable, the payment or transfer would be included in the Father's income. However, case law has established that subsection 56(2) will not generally be applicable in a situation involving a bona fide loan. However, where it is apparent at the time the loan is made that the corporation receiving the funds will not be in a position to repay the loan or to provide reasonable security for repayment, the shareholder who has directed the payment may be considered to have deliberately and permanently removed value from the corporation. Consequently, in such circumstances, subsection 56(2) may apply. Furthermore, if a loan is forgiven in a particular situation, the advance of funds may become a "payment or transfer" of property subject to subsection 56(2) at the time of the forgiveness of the said loan. Finally, to our knowledge, no court has specifically dealt with the application of subsection 56(2) in a situation involving a subscription of shares.

Reasons: Wording of the Act and previous positions.

7 October 2005 Roundtable, 2005-0141181C6 F - Fiducie au profit du conjoint

Unedited CRA Tags
70(6) 108(1)

Principales Questions: (a) Est-ce qu'une clause permettant au bénéficiaire d'une fiducie au profit du conjoint de renoncer, au bénéfice de la fiducie, à l'encaissement de certains revenus réalisés par la fiducie contrevient au sous-alinéa 70(6)b)(ii)? (b) Est-ce que l'exercice de cette option par le bénéficiaire constitue une remise de biens ayant pour effet de disqualifier la fiducie à titre de fiducie testamentaire au sens du paragraphe 108(1)? (c) La réponse serait-elle différente si les revenus auxquels renonçait le bénéficiaire ne constituaient pas des sommes qui lui sont payables?

Position Adoptée: (a) Non; (b) Oui; (c) La renonciation effectuée à l'égard de revenus éventuels non réalisés par la fiducie ne constituerait pas une remise pour les fins de la définition de fiducie testamentaire contenue au paragraphe 108(1).

Raisons: (a), (b) et (c) Dispositions de la Loi et positions antérieures.

7 October 2005 Roundtable, 2005-0145311C6 F - Vente d'actions et clause d'indexation

Unedited CRA Tags
116 212(1)d)(v)

Principales Questions: (1) Est-ce que les montants payables en vertu d'une clause d'indexation sur les bénéfices futurs sont assujettis à 212(1)d)(v)? (2) Si 212(1)d)(v) ne s'applique pas, comment le non-résident devra-t-il calculer son gain en capital résultant de la vente et comment l'ARC appliquera-t-elle l'article 116 dans un tel cas?

Position Adoptée: (1) Non dans la mesure où les actions constituent des biens canadiens imposables et que les quatre premières conditions mentionnées au paragraphe 2 du IT-426R sont rencontrées. (2) La JVM du droit de recevoir des sommes en vertu de la clause d'indexation sur les bénéfices futurs devra être incluse dans son produit de disposition pour les fins du calcul de son gain en capital de même que pour les fins de l'article 116.

Raisons: Analyse effectuée dans le dossier 2005-014121 et lors de la révision du IT-426.

7 October 2005 APFF Roundtable Q. 1, 2005-0140881C6 F - Acquisition of Control - Foreign Corp. - Losses

Unedited CRA Tags
111(4) 249(4)

Principal Issues: Corporation A is a non-resident of Canada, does not have a permanent establishment in Canada and does not carry on a business in Canada. Corporation A owns all of the issued and outstanding shares of the capital stock of Corporation B, a taxable Canadian corporation. Corporation C, a non-resident of Canada that does not have a permanent establishment in Canada and does not carry on a business in Canada, acquires control of Corporation A. At the time of the acquisition of control, the adjusted cost base, to corporation A, of the shares of the capital stock of corporation B exceeds the fair market value of such shares at that time. Whether paragraph 111(4)(c) applies in such a situation.

Position: No. CRA's position is that paragraphs 111(4)(c) and (d) are not applicable in circumstances in which subsection 249(4) does not apply. In the given situation, provided that Corporation A does not have a taxation year that would, but for paragraph 249(4)(a), have included the time control of corporation A was acquired (for example, Corporation A does not carry on a business in Canada and does not dispose of a taxable Canadian property in the relevant period), subsection 249(4) would not be applicable in respect of the acquisition of control of Corporation A. Consequently, paragraphs 111(4)(c) and 111(4)(d) would also not be applicable in respect of the acquisition of control of Corporation A.

Reasons: Wording of the Act and previous positions.

7 October 2005 APFF Roundtable Q. 6, 2005-0140981C6 F - Loss Carryforward under subsection 111(5)

Unedited CRA Tags
111(5) 87(2.1)

Principal Issues: Corporation A and corporation B are taxable Canadian corporations. Each of them carries on a business of manufacturing furniture. A is profitable while B has non-capital losses. An arm's length third party acquires the control of A and B. Following such acquisition of control, the businesses of A and B are reorganized. B leases all of the assets used in its business to A, and the employees of B are transferred to A. In the year following the acquisition of control, B realizes a profit. At the end of this first year following the acquisition of control, A and B are amalgamated to form corporation D. 1) Whether B may deduct its non-capital losses in the first year following the acquisition of control. 2) Whether D may deduct the non-capital losses sustained originally by B in its first taxation year.

Position: 1) No. It is understood that the "Loss Business" would never cease to exist at any relevant time. However, the Loss Business would be carried on by A, and not by B, after the reorganization of the businesses and before the amalgamation of A and B. Consequently, the non-capital losses would not be deductible by B in its first taxation year following the acquisition of control because the condition stated in subparagraph 111(5)(a)(i) is not met. 2) Yes. Provided that the Loss Business is carried on without interruption throughout the first year following the acquisition of control, and provided that the Loss Business is carried on by D for profit or with a reasonable expectation of profit throughout its first taxation year, the non-capital loss originally sustained by B may be deducted by D in its first taxation year to the extent of the amount established under subparagraph 111(5)(a)(ii), and subject to the limitations set out in paragraph 111(1)(a), the restrictions set out in subsection 111(3), and any other requirements of the Act regarding the deductibility of non-capital losses. Of course, if the Loss Business ceases to exist and/or to be carried on following the business reorganization, the non-capital losses would not be deductible by D in any taxation year.

Reasons: Wording of the Act and previous positions.

7 October 2005 APFF Roundtable Q. 13, 2005-0141061C6 F - Purchase of Shares by Subsidiary - Sec. 84.1 & 245

Unedited CRA Tags
84.1 245(2) 251(1)

Principal Issues: An individual ("X") owns 20% of the issued and outstanding shares of the capital stock of an operating corporation ("Opco"). X is not related to the other shareholders of Opco, or to Opco. As a result of a dispute between X and the other shareholders, X wishes to dispose of his or her shares of the capital stock of Opco in consideration for $200,000 in cash. Opco incorporates a corporation ("Subco") and subscribes for shares of Subco for $200,000 in cash. Subco then uses this cash to acquire the shares of the capital stock of Opco held by X. Whether section 84.1 or subsection 245(2) would apply to the given fact situation.

Position: General comments provided. It is assumed that cash or near-cash does not constitute a significant portion of Opco's assets. Furthermore, it is assumed that, at all relevant times, Opco would continue to carry on its business. Based on the limited information provided with respect to the given situation, there is no reason to believe that X and Subco would not deal with each other at arm's length with respect to the acquisition of the shares of the capital stock of Opco. On such a basis, subsection 84.1(1) would appear to be inapplicable. With respect to the potential application of subsection 245(2) and assuming that Opco and Subco would merge, the given fact situation and the situation described in paragraph 4 of Supplement 1 of the Information Circular IC 88-2 (the "Example") would appear to be similar. CRA's position is not to apply subsection 245(2) to situations that are identical or similar to the Example. However, if it was established that Subco and Opco would not merge after the acquisition of shares, other elements may have to be considered in order to determine if subsection 245(2) would apply to the given fact situation.

Reasons: Wording of the Act and previous positions.