Income Tax Severed Letters - 2007-03-02

Ruling

2007 Ruling 2006-0217071R3 - Structured Settlement

Unedited CRA Tags
56(1)(d) 60(a)

Principal Issues: An individual (Plaintiff) suffered personal injuries as a result of a motor vehicle accident. The Plaintiff commenced an action for damages against the driver (Defendant). Pursuant to an out of court settlement, the Assignee of the Defendant's Insurer (pursuant to an Assignment and Assumption Agreement) will purchase a single-premium annuity contract with a life insurance company (Lifeco) to provide the proposed periodic payments to be received under a settlement agreement. The Assignee will direct Lifeco to pay the periodic payments under the annuity contract to the Plaintiff. Will such payments be taxable in the hands of the recipient?

Position: No.

Reasons: The terms of the structured settlement are consistent with the CRA's position as set out in Interpretation Bulletin IT-365R2.

2007 Ruling 2006-0196401R3 - Reorganization of a mutual fund trust - s. 132.2

Unedited CRA Tags
132.2 131 132 87

Principal Issues: (1) Whether the settlement of some debts will result in a "forgiven amount" as defined in s. 80 of the Act; (2) Whether s. 87(2)(e.1) of the Act will apply in respect of an amalgamation between two corporations; (3) Whether two separate transfers of property will constitute "qualifying exchanges" within the meaning of s. 132.2(2) of the Act and whether at the time of such transfers the transferors and transferees will qualify as "mutual fund corporations" within the meaning of s. 131(8) of the Act or as "mutual fund trusts" within the meaning of s. 132(6) of the Act, as the case may be; (4) Whether s. 253.1 of the Act will apply; (5) Whether the amendment of the declaration of trust of two different trusts will result in such trusts being considered to have disposed of their properties and resettled new trusts; (6) Whether s. 245(2) of the Act will apply so as to redetermine the tax consequences of the rulings given; and (7) Whether the consolidation of the units of a trust will result in a disposition of such units by the unit holders.

Position: (1) No; (2) Yes; (3) Yes; (4) Yes; (5) No; (6) No; and (7) No.

Reasons: See statement of principal issues.

2007 Ruling 2006-0198211R3 - Avoidance of subsection 149(10)

Unedited CRA Tags
149(1)(d.5) 149(10) 88(1)(d) 87(11)

Principal Issues: Whether there is an avoidance and abuse of the "fresh start" rules in subsection 149(10)?

Position: No

Reasons: The proposed transactions include the creation of a taxable corporation; latent gains and recapture would be taxable in that corporation. Tax policy not offended.

2007 Ruling 2006-0207721R3 - Public corporation spin-off

Unedited CRA Tags
55(3)(b) 55(302)

Principal Issues: Whether a proposed spin-off is exempt from the application of subsection 55(2)

Position: Yes.

Reasons: It meets the requirements of paragraph 55(3)(b).

2006 Ruling 2006-0201051R3 - Paid-up capital reduction - public corporation

Unedited CRA Tags
84(4.1) 84(2)

Principal Issues: Exchange by a public corporation of an interest in a partnership for units of a mutual fund trust. Subsequent distribution of the trust units to shareholders on a paid-up capital reduction. Does 84(4.1) deem a dividend to have been paid by the corporation and received by the shareholder?

Position: No.

Reasons: The transaction meets the exceptions of subsection 84(4.1) as proposed to be amended

2006 Ruling 2006-0189011R3 - Split-up Butterfly

Unedited CRA Tags
55(3)(b) 74.4(2)

Principal Issues: Standard double-wing split-up butterfly.

2006 Ruling 2006-0198111R3 F - Intérêt exonéré d'impôt - alinéa 81(1)a)

Unedited CRA Tags
81(1)a)

Principales Questions: Les intérêts qu'un Indien reçoit sont-ils exonérés d'impôt en vertu de l'alinéa 81(1)a)?

Position Adoptée: Oui

Raisons: L'activité qui a généré le revenu est étroitement liée à une réserve, c'est-à-dire qu'elle fait partie intégrante de la vie dans une réserve. L'utilisation du produit des trois prêts n'est pas faite sur le marché ordinaire. Les activités génératrices du revenu de la Société (l'émettrice des obligations dont les intérêts sont exonérés) sont exclusivement sur une réserve.

Technical Interpretation - External

23 February 2007 External T.I. 2006-0187061E5 - Paragraph 80.4(2)(e) and Subsection 249.1(1)

Unedited CRA Tags
80.4(2)(e 249(1); 250.1; 249.1(1)

Principal Issues: 1) The meaning of "year" in paragraph 80.4(2)(e) of the Income Tax Act as it relates to a borrower that is a non-resident corporation. 2) How to determine the inaugural fiscal period in Canada of a non-resident corporation. 3) At what date does the inaugural fiscal period commence?

Position: 1) The "year" refers to the taxation year of the person to whom the paragraph applies. In this case, the taxation year of the non-resident corporate shareholder. 2) A non-resident corporation may select a fiscal period as long as it does not end more that 53 weeks after it commenced. 3) Generally, a non-resident corporation may commence its fiscal period no later than the day it commences activities in Canada. The commencement date of a non-resident corporation subject to a deemed interest benefit by virtue of subsection 80.4(2) could be no later than the date of inception of the loan.

Reasons: 1) Subsection 80.4(2) of the Act. 2) Generally, for Canadian tax purposes, a non-resident corporation would not be obligated to adopt the same fiscal period that it uses in its home jurisdiction. Pursuant to section 250.1 of the Act, a non-resident person's taxation year is generally determined in the same manner as Canadian residents. 3) Part XIII tax is an assessment as contemplated in subsection 249.1(1) of the Act and subsection 80.4(2) of the Act deems an interest benefit from the date of the loan inception.

19 February 2007 External T.I. 2007-0223581E5 - Clergy residence deduction

Unedited CRA Tags
8(1)(c)

Principal Issues: Is a part-time youth worker entitled to the clergy residence deduction?

Position: No

Reasons: Does not meet status or function of the clergy

15 February 2007 External T.I. 2006-0214151E5 - Disposition of Partnership Interest

Unedited CRA Tags
100(2)
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition
dissolution of partnership triggers disposition

Principal Issues:
Whether a capital loss is available in respect of the disposition of a partnership interest in a partnership on dissolution.

Position:
Question of fact.

Reasons:
In the year the Partnership is dissolved and the partners has no proceeds of disposition; a capital loss would result to the extent of any positive ACB of the partnership interest held. If the ACB is negative, a capital gain would result.

15 February 2007 External T.I. 2006-0206951E5 - Maternity or Parental Leave Top-up Plan

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

Principal Issues:
Whether benefits from a maternity or parental leave top-up plan can be paid from an existing Health and Welfare Trust.

Position:
No.

Reasons:
Payments from maternity or parental leave top-up plans are considered regular employment income of the employee under section 5. Benefits that are considered regular employment income under section 5 cannot be paid out of a Health and Welfare Trust regardless of whether the plan meets the criteria of a group accident or sickness insurance plan or not.

15 February 2007 External T.I. 2006-0217631E5 - PHSP Premium and RST, GST and Premium Tax

Unedited CRA Tags
20.01(1) 20.01(2)(c) 118.2(2)(q)

Principal Issues:
Whether the available deduction in respect of the premium paid to a private health services plan for purposes of the limit set out in paragraph 20.01(2)(c) of the Income Tax Act includes the applicable retail sales tax ("RST"), goods and services tax ("GST") and the premium tax.

Position:
Yes but subject the applicable dollar limit.

Reasons:
To the extent that payment of a premium to a PHSP, and its related taxes (RST, GST and Premium Tax), is required to be included in the income of an employee as a taxable benefit, the same basis may be utilized in computing the medical expense tax credit by virtue of paragraph 118.2(2)(q). By extension, it is our view that the premium paid to a PHSP, and its related taxes (RST, GST and Premium Tax), may be utilized in computing the deduction under section 20.01 subject to the applicable dollar limit.

Technical Interpretation - Internal

19 February 2007 Internal T.I. 2006-0216591I7 - Meaning of "tradesperson"

Unedited CRA Tags
8(1)(s)

Principal Issues: How should the term "tradesperson" in proposed new paragraph 8(1)(s) be interpreted.

Position: The term tradesperson should be interpreted using its ordinary or everyday meaning. In this regard, there is no requirement that a tradesperson need be registered.

Reasons: There is no definition of this term in the Act.

15 February 2007 Internal T.I. 2006-0206761I7 - Lease of used equipment & non-arm's length party

Unedited CRA Tags
127(9) 37(1) 37(8)(ii)(A)(I) 127; 2902(b)(iii)

Principal Issues: (1) Does paragraph 127(11.8)(a) apply to reduce to nil the cost of acquiring used equipment to the non-arm's length supplier so that the SR&ED claimant is deemed not to have any qualified expenditure in respect of the leased of said equipment? (2) If so, is that the intent of the legislation?

Position: (1) Yes. (2) Yes.

Reasons: (1) Plain reading of the Act and its Regulations. (2) It is our understanding that any expenditure related to used equipment is intended to be a prescribed expenditure.

13 February 2007 Internal T.I. 2006-0217701I7 - Retroactive Support Arrears

Unedited CRA Tags
60.1(3)(b)

Principal Issues: 1. Do the deeming rules provided in paragraph 60.1(3)(b) of the Act apply to unpaid arrears? 2. Does paragraph 60.1(3)(b) create deductible arrears support as a consequence of deeming a retroactive commencement date?

Position: 1. No - application is restricted to amounts "paid". 2. No. The deeming provisions apply only for the purposes of restating the commencement date to permit a deduction for "paid" amounts in the year or the preceding year. Payments in subsequent years must meet the conditions of 60(b).

Reasons: The Act.