Income Tax Severed Letters - 2006-02-24


2006 Ruling 2005-0148121R3 - ATR-Amended Flexible Benefit Plan

Unedited CRA Tags
6(1)(a) 248(1) definitions of PHSP, EBP, ET, RCA and SDA 56(1)(a) 5(1)

Principal Issues: 1. Whether the implementation of the New Plan will cause the New Plan to be considered an EBP, an ET, an RCA or an SDA pursuant to subsection 248(1). 2. Whether the election to allocate different Flex Credits under the proposed HSA including a potential $XXXXXXXXXX decrease in salary during the annual salary review will result in an amount being included in computing the Employee's income pursuant to sections 3 or 6, subsection 5(1) or paragraph 56(1)(a). 3. Whether the New Plan is a PHSP pursuant to subsection 248(1).

Position: 1. No. 2. No. 3. Yes.

Reasons: 1. The New Plan is not an EBP, an ET an RCA or an SDA. 2. The Flex credits are notional and the employee is required to make an irrevocable selection before the beginning of the Plan Year. Each employee will not be permitted to allocate HSA credits that will result in any more than $XXXXXXXXXX in notional credits being in the employee's HSA at the beginning of any Plan Year. 3. The New Plan is a PHSP.

2006 Ruling 2005-0165041R3 - SWAP Termination Payment

Unedited CRA Tags
39(2) 9(1)

Principal Issues: Cross-currency swap and termination payment

Position: Capital for portion representing notional principal amount of the loan. Income treatment for periodic amounts, representing interest and currencies.

Reasons: Established positions on cross-currency swaps

XXXXXXXXXX 2005-016504


2005 Ruling 2005-0114441R3 - XXXXXXXXXX Supplementary Ruling

Unedited CRA Tags
95(6) 245(2) 15(1) 85.1(3)

Principal Issues: Whether the restructuring of the proposed transactions to obtain favourable rulings on subsections 95(6) and 245(2) is acceptable?

Position: Restructuring is acceptable

Reasons: Class B and Class C ordinary shares with no limitation on the entitlement of the growth of the company will be issued by U.K. Holdco, instead of preferred shares.

2005 Ruling 2005-0129981R3 - Withholding tax - Pooling Mortgages

Unedited CRA Tags

Principal Issues: Whether withholding tax is applicable on interest paid to a non-resident on Canadian Mortgages insured against default by the Insurer

Position: Favourable ruling given

Reasons: For an insurance fee, the Insurer guarantees timely payment of principal and interest on a Canadian Mortgage. The Insurer has a guarantee provided by the Minister of Finance ("Government Guarantee"). XXXXXXXXXX the Government Guarantee satisfies the requirements in clause 212(1)(b)(ii)(C).

2005 Ruling 2005-0151751R3 - interest deductibility; XXXXXXXXXX

Unedited CRA Tags

Principal Issues: 1. Whether GAAR applies where parent of XXXXXXXXXX company borrows to XXXXXXXXXX.
2. Will the transfer of legal title to the Security Assets from ForeignCo #3 to the Custodian constitute a disposition?
3 Does draft para 95(2)(a) of the Feb 27, 2004 proposed amendments apply to that proportion of the income or loss of ForeignCo #3 that can reasonably be considered to be related to the active business carried on by XXXXXXXXXX ? What is the proportion?
4. Is that proportion of the income or loss discussed in Issue #3 above included in computing the "earnings" or "loss" from an active business income of ForeignCo #3 within the meaning of draft subsection 5907(1) per the draft amendments?
5. Will all of the gains realized on the Swaps be included in draft subpara (b)(ii) of the description of "D" in draft subsection 93(2) of the proposed amendments?

Position: 1. No.
2. No
3. Yes.The amount of ForeignCo #3's XXXXXXXXXX will be considered to be directly related to the active business activities of XXXXXXXXXX .
4. Yes
5. No

Reasons: 1. XXXXXXXXXX
2. The transfer does not result in a change in the beneficial ownership of the Security Assets. Ss 248(25.2) will also apply so that the trust is deemed to deal with the property as agent for the transferor until there is a subsequent change in its beneficial ownership.
3. The income or loss that is directly related to XXXXXXXXXX active business activities fits within the provisions of draft paragraph 95(2)(a) of the February 27, 2004 proposed amendments.
4. The income or loss that is included in draft paragraph 95(2)(a) of the February 27, 2004 proposed amendments is also included in the definition of "earnings" and "loss" in subsection 5907(1) of the Regulations as described in the February 27, 2004 proposed amendments.
5. Any gains under the Swaps in relation to amounts that are payable or receivable on a periodic basis will not be included in the computation of any loss realized by PublicCo upon the disposition of the ForeignCo #3 Holdco shares held by it.

2005 Ruling 2005-0155371R3 - Alter Ego Trust Planning

Unedited CRA Tags
88(1)(d) 118.1 40(3.6) 88(1)(c.2)(ii)

Principal Issues: 1. Whether s. 88(1)(d) bump is available where alter ego trust holds shares of subsidiary. 2. Whether 88(1)(d.3) will apply to deem acquisition of control from non-arm's-length person. 3. Whether partnerships and trusts are to be recharacterized as corporations for the purposes of ascertaining specified shareholders for the purposes of s. 88(1)(c)(vi). 4. Whether alter ego trust may claim charitable donation tax credit upon making gift to registered charity. 5. Whether capital losses arising on share-for-share exchange involving trust and wholly-owned subsidiary that are denied under s. 40(3.6) will be realized on dispositions of shares to beneficiaries and donees of trust and are available to be carried back by trust to offset capital gains realized by trust pursuant to s. 104(4).

Position: 1. Yes 2. Yes 3. Yes 4. Yes 5. Yes

Reasons: 1. Technical requirements are met. 2. Shares of subsidiary are acquired as a consequence of death pursuant to the directions of the settlor in the terms governing the alter ego trust, trustees of the alter ego trust under equitable obligation to transfer shares of subsidiary to parent on the death of the settlor. 3. Wording of s. 88(1)(c.2) provides that recharacterization rules are to be taken into account for the purposes of s. 88(1)(c)(vi). 4. Trustee has full discretion to make voluntary transfer of property to charity in accordance with the intent of the settlor. 5. Property of trust will be fully distributed before the end of the third taxation year of the trust following the year in which it is deemed to dispose of its property pursuant to s. 104(4).

Technical Interpretation - External

21 February 2006 External T.I. 2005-0120751E5 - Specified Investment Business & Partnerships

Unedited CRA Tags

Principal Issues: Would the exclusion in paragraph 125(7)(b) at the definition of specified investment business be met where the relevant associated corporation was a corporate partner and the partnership provided services to the particular corporation?

Position: Question of fact. Based on the limited hypothetical set of facts provided it appears that the exclusion in paragraph (b) would be met.

Reasons: Consistent with jurisprudence and our reading of the law.

21 February 2006 External T.I. 2005-0150091E5 - Motor Vehicle Gas and Laundry Expense

Unedited CRA Tags
6(1)(b) 18(1)(a)

Principal Issues: Whether nominal amounts paid to the employee for each client's house visited for gas and laundry expense are considered taxable benefits and whether the amounts are deductible for the employer.

Position: The amounts paid to the employee are not taxable benefits and are deductible for the employer.

Reasons: Where an employee is reimbursed for actual expenses incurred in connection with the duties of employment and the amount is nominal, the amount is generally not a taxable benefit. The payments made by the employer are considered incurred for the purpose of gaining or producing business income.

15 February 2006 External T.I. 2005-0159391E5 - Business Transactions Prior to Incorporation

Unedited CRA Tags

Principal Issues:
1) Are business activities, incurred before incorporation, considered activities of the corporation?
2) Is there an absolute time limit for business conversions or new business incorporation for the purpose of determining whether expenses incurred prior to incorporation are considered incurred by the corporation?

1) Question of Fact.
2) No.

1) Conditions for deductibility as set out in IT-454.
2) Provided the delay is not due to any action taken or not taken by the parties involved.

14 February 2006 External T.I. 2005-0141981E5 - Application of Subsection 98(3)

Unedited CRA Tags
98(3) 110.6(19) 39.1(1)

Principal Issues: Is it possible to revoke an election made pursuant to subsection 98(3)?

Position: No.

Reasons: Subsection 98(3) of the Act is an elective provision and there is no provision that would allow the election to be revoked.

14 February 2006 External T.I. 2005-0154271E5 - Intervivos Transfer of Farm Property

Unedited CRA Tags
73(3) 69(11)

Principal Issues: (i) Does subsection 73(3) require the taxpayer to be the individual undertaking the business of farming? (ii) Does subsection 69(11) apply?

Position: (i) No. Subsection 73(3) of the Act permits the transfer of property to a child of the taxpayer who was resident in Canada immediately before the transfer, and the property was, before the transfer, used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis (ii) Question of fact.

Reasons: (i) Literal interpretation of subsection 73(3) does not require the taxpayer to be the individual undertaking the business of farming. (ii) Where the "one of the main purposes" test has been met, subsection 69(11) will apply because parents and children are not affiliated under subsection 251.1 of the Act.

Technical Interpretation - Internal

14 February 2006 Internal T.I. 2005-0118521I7 - Art XV of Canada-US Convention employees of LLC's

Unedited CRA Tags
Article XV of the Canada-US Tax Convention

Principal Issues: Whether a US LLC can be considered to have a PE in Canada for the purposes of paragraph XV(2) of the Canada-US Tax Convention?

Position: Yes

Reasons: A US LLC which is treated as a partnership under US tax laws is not liable to tax in the US and does not qualify as a resident under the Convention. However, paragraph 9 of Article V provides that, for the purposes of the Convention, the provisions of Article V apply in determining whether a person (in this case, a LLC) other than a resident of Canada or the US has a PE in any State.