Income Tax Severed Letters - 2007-03-23


2007 Ruling 2006-0218931R3 - Material Adverse Clause and Withholding Exemption

Unedited CRA Tags

Principal Issues: Is the material adverse clause in the material adverse effect provisions of the events of default acceptable for the purposes of the withholding exemption under 212(1)(b)(vii)?

Position: YES

Reasons: Objective standard

2007 Ruling 2006-0201561R3 - settlement of an estate

Unedited CRA Tags
107(2) 108(1)

Principal Issues: 1. Will the amendments to the will, as set out in the Minutes of Settlement and as approved by the court, result in a resettlement of the Trusts or the Estate or a disposition of any of the property of the Estate?
2. Will the consent by the Beneficiaries, being the children and grandchildren of the Deceased, as part of the Minutes of Settlement result in a disposition of any of the their respective interests in the estate?
3. Assuming that the variation of the will results in no disposition of the property of either the trust or the estate, what provision governs the transfer of assets from the estate to the testamentary trusts?
4. Will the trust be a testamentary trust and a personal trust such that 107(2) will apply to any distribution to the beneficiaries?
5. Will the proposed transactions result in any income inclusion under 56(2), 105(1) or 246(1)?

Position: 1. No. 2. No 3. There is no disposition of property, either by operation of law or because of paragraph (f) of the definition of disposition 4. Yes. 5. No.

Reasons: 1. In as far as possible, given the uncertainty of the interpretation of the will, there is no substantial change to any of the entitlements under the will. This is consistent with prior positions taken.
2. Because of the uncertainty caused by the revocation, none of the beneficiaries have a provable right under the will. The Minutes of Settlement together with the approval of the Children's Lawyer and the Court will confirm the beneficiaries' entitlements under the will.
3. Given the stated fact that the trusts are not beneficiaries of the estate, no disposition will arise, either by operation of law or because the conditions in paragraph (f) of the definition of disposition are met.
4. Conditions necessary to meet the definition of personal trust and testamentary trust are met.
5. Since the proposed transactions do not involve the providing of any benefits to a taxpayer by a person or from or under the trusts, the provisions of subsections 105(1) and 246(1) of the Act will not apply as a result of the proposed transactions, in and by themselves. This is consistent with past positions. While subsection 56(2) does not specifically require a transfer of property in order to apply, this case can be distinguished from those in which 56(2) does apply because of the uncertainty in the interpretation of the will. Without certainty, it cannot be said that the heirs are in a position to concur or acquiesce in any subsequent transfer of estate or trust property.

2006 Ruling 2006-0177541R3 - Amendments to Debt, Conversion

Unedited CRA Tags
51 248(1) 80

Principal Issues: Whether (a) the addition of a conversion feature to the debt obligation resulted in a disposition; (b) holder of the debt obligation entitled to use subsection 51(1) on the exercise of the conversion feature; (c) there was a 'forgiven amount'?

Position: (a) No; (b) Yes; (c) No

Reasons: (a) Following provincial law, no disposition occurred and no creation of new debt obligation; (b) The shares were acquired in exchange for capital property that was a bond, debenture or note, the terms of which conferred on the holder the right to make the exchange and no consideration other than the share was received by the holder; (c) Based on given facts, "A" and "B" amounts in formula contained in definition of "forgiven amount" equal each other.

2006 Ruling 2006-0174351R3 - re-organization of income trust to royalty trust

Unedited CRA Tags
132(7) 97(2) 66(15) 53(2)

Principal Issues: 1. Creation & granting of a royalty from partnership to partner- Does the royalty qualify as CRP? ; 2.restructuring asset holdings within the group of related entities in order to avoid 132(7)

Position: 1. Royalty qualifies as CRP. 2. proposed transactions would enable fund to take advantage of 132(7)(a) exception

Reasons: 1.It was determined that the partnership would have an interest in XXXXXXXXXX for purposes of proposed paragraph XXXXXXXXXX of the CRP definition & the terms of the Royalty would respect the 90% threshold for the Production Revenue Component; 2. Given that the royalty will be CRP held by the fund & it will no longer be neccessary for a fund to have held CRP since inception, the 132(7)(a) exclusion will be available.

Ministerial Correspondence

16 March 2007 Ministerial Correspondence 2007-0222151M4 - Fitness Tax Credit

Unedited CRA Tags

Principal Issues: Whether bowling will be considered a "prescribed physical activity" for purposes of the Children's Fitness Tax Credit.

Position: Question of fact.

Reasons: While the provision of the Income Tax Regulations that will define a prescribed physical activity has not yet been drafted, the Department of Finance has indicated that the activity must be ongoing (either a minimum of eight weeks duration with a minimum of one session per week or, in the case of children's camps, five consecutive days), supervised, and suitable for children. In addition, substantially all of the activities must include a significant amount of physical activity that contributes to cardio-respiratory endurance plus one or more of muscular strength, muscular endurance, flexibility, or balance. The Agency will generally rely on the organization to make such determinations since it has the detailed knowledge of the particular program.

Technical Interpretation - External

19 March 2007 External T.I. 2006-0198331E5 - Texas sales and franchise taxes

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

Principal Issues: Whether Texas sales and franchise taxes can be deducted in the year the particular assessments are raised or in the year to which the particular taxes relate.

Position: Since the Texas sales taxes are not liabilities of the taxpayer unless an assessment is issued, such sales taxes are deductible in the year in which the assessment is issued. However, the liability for the Texas franchise taxes is imposed by reference to a taxation year and accordingly can only be deducted in that year. In both cases, the taxes must satisfy the requirements in paragraph 18(1)(a) of the Act.

Reasons: Generally, expenses should be deducted in the year that they are "incurred."

14 March 2007 External T.I. 2005-0161661E5 - Indirect Use of Funds

Unedited CRA Tags

Principal Issues: Are financing costs under paragraph 20(1)(e) of the Act deductible where the indirect use of funds test under paragraph 20(1)(c) of the Act is met as commented on in paragraphs 22 to 26 of IT-533?

Position: YES

Reasons: Par 9 IT 341R3, Trans-Prairie Pipelines Ltd. 70DTC 6351

14 March 2007 External T.I. 2007-0227011E5 - Education credit - course related to employment

Unedited CRA Tags

Principal Issues: Two questions are posed:
(1) Is a course taken in connection with one's job eligible for the education tax credit?
(2) In such a situation, if one's employer partially reimburses the individual for the course, can a prorated part of the education tax credit be taken?

Position: (1) Yes
(2) No

Reasons: (1) The March 2004 budget eliminated the exclusion for courses taken while an individual is employed and the course is taken in connection with that employment.
(2) The definition of "qualifying educational program" excludes programs for which any sort of allowance, benefit, grant or reimbursement is provided by an arm's length person. Partial reimbursement would fall into this description and disqualify the course or program.

XXXXXXXXXX 2007-022701
Renée Shields
March 14, 2007 (613) 948-5273

9 March 2007 External T.I. 2007-0225661E5 - Renewable Energy Property

Unedited CRA Tags
Class 43.1 Class 43.2

Principal Issues: Request for description of property encompassed by paragraph (d) of Class 43.1 and Class 43.2.

Position: General comments provided.

Reasons: As requested.

9 March 2007 External T.I. 2006-0178661E5 - New Accounting Standards for Financial Instruments

Unedited CRA Tags

Principal Issues: How do the new accounting standards released by the Canadian Accounting Standards Board for financial instruments issued under the CICA Handbook sections 1530, 3251, 3855 and 3865, affect reporting for tax purposes?

Position: The new accounting standards constitute part of generally accepted accounting principles ("GAAP"), which is one element to consider in obtaining an accurate picture of profit.

Reasons: The new accounting standards are not law and as such, the standards and other equivalent regulations would not change how the CRA interprets and applies the Act with respect to financial instruments or a taxpayer's interests in financial instruments. However, the new accounting standards will be taken into consideration when the CRA interprets and applies the Act in a given situation.

8 March 2007 External T.I. 2007-0220531E5 - Medical Expense Tax Credit

Unedited CRA Tags
118.2(2)(m) 5700

Principal Issues: Whether the cost of a G-Tube insertion and the accompanying apparatus used for an electronic feeding process qualifies for the medical expense tax credit.

Position: No. Except for one exception, neither a G-tube insertion nor any device or equipment associated with the purpose of this equipment is included in regulation 5700. Only a syringe may qualify for a medical expense tax credit pursuant to Regulation 5700.

Reasons: A G-tube insertion is not described in regulation 5700. Except for one exception, none of the apparatus accommodating a feeding and medication routine utilizing a G-tube insertion is described in regulation 5700. A device or equipment is allowed under paragraph 118.2(2)(m) if it meets all the conditions in that paragraph. Subparagraph 118.2(2)(m)(i) includes the condition that the device or equipment be of a prescribed kind. Regulation 5700 prescribes the kind of device or equipment for the purposes of subparagraph 118.2(2)(m)(i). Only Regulation 5700(b) includes a device, which is consistent with the description of a component part within the G-tube apparatus. Regulation 5700(b) includes a syringe designed to be used for the purpose of giving an injection. The identification of a component part which is described in regulation 5700, and the isolation of its cost, may permit that cost to qualify as an eligible medical expense, if it meets all the other conditions contained in paragraph 118.2(2)(m).

(416) 952-8930
March 8, 2007

7 March 2007 External T.I. 2005-0157381E5 - Regulation 6204

Unedited CRA Tags

Principal Issues: Whether a covenant made pursuant to a loan arrangement would cause a share not to be a prescribed share under subparagraph 6204(1)(a)(i) of the Regulations?

Position: Generally yes but question of fact.

Reasons: The preamble of paragraph 6204(1)(a) of the Regulation indicates that the restrictions apply to the terms and conditions of the share or any agreement in respect of the share or its issue. Accordingly, we must consider whether the terms and conditions of the shares and all of the agreements, both written and implied, that pertain to the shares or their issue.

XXXXXXXXXX 2005-015738
S. Chua LLB(Hons), FCA
March 7, 2007

7 March 2007 External T.I. 2006-0218191E5 - testamentary trust administrative error

Unedited CRA Tags

Principal Issues: taxpayer concerned that administrative correction to properly evidence the testamentary trust would result in a disposition of all trust property.

Position: no disposition upon correction

Reasons: testamentary trust assets invested, erroneously placed in name of primary beneficiary; as long as correction of an error and assets had not actually been distributed to the beneficiary, correction would have no tax consequence.

6 March 2007 External T.I. 2005-0113491E5 - Prescribed stock exchanges

Unedited CRA Tags
125(7) 3201

Principal Issues: Whether an OTC quotation service is a prescribed stock exchange for the purposes of section 3201 of the Income Tax Regulations

Position: Generally, no.

Reasons: Consistent with previous positions taken concerning section 4900 of the Regulations.


6 October 2006 Roundtable, 2006-0195951C6 F - Latent loss on depreciable properties

Unedited CRA Tags
111(5.1) 1100(1) 1100(1)(a)

Principal Issues: See below.

Position: See below.

Reasons: See below.


Question 35

6 October 2006 Roundtable, 2006-0195971C6 F - Discretionary trust and associated corporations

Unedited CRA Tags
256(1.2)(f)(ii) 248(25) 108(1)

Principal Issues: See below

Position: See below.

Reasons: See below.

6 October 2006 Roundtable, 2006-0196021C6 F - Pénalités/Penalties

Unedited CRA Tags
163(2) 163.2

Principal Issues: In a situation where, contrary to the CRA's published position, a taxpayer takes the view in his return of income that the GAAR does not apply because the CRA's position is not supported by the jurisprudence (1) whether the taxpayer could be subject to the penalty under ss. 163(2), and (2) whether the taxpayer's tax return preparer could be subject to the third party civil penalty under s. 163.2?

Position: Probably no, to both.

Reasons: (1) Whether the ss. 163(2) penalty applies in a given case is a question of fact that can be determined only after a review of all the facts. Generally, the fact that a taxpayer does not follow the CRA's published position on the application of the GAAR in a given situation ìn and by itself is not a reason to apply the penalty under ss. 163(2). The CRA could apply the ss. 163(2) penalty if it is possible to conclude that a taxpayer knowingly or under circumstances amounting to gross negligence made a false statement or an omission in a return, for example, when the taxpayer ignores the jusrisprudence supporting the application of GAAR in a situation similar to the taxpayer`s. (2) IC 01-1 paragraph 16.

6 October 2006 Roundtable, 2006-0196041C6 F - Administration of notices of objections

Unedited CRA Tags

Principal Issues: See below.

Position: See below.

Reasons: See below.


Question 3

6 October 2006 Roundtable, 2006-0196091C6 F - Emission de feuillets T4A

Principales Questions:
Demande de commentaires relativement à la possibilité que l'ARC change sa politique administrative sur l'émission des feuillets T4A pour les travailleurs autonomes.

Position Adoptée:

La question est sous étude.

Technical Interpretation - Internal

12 March 2007 Internal T.I. 2006-0215161I7 - Opening balance in shareholder loan account

Unedited CRA Tags

Principal Issues: Whether the opening balance in a shareholder loan account in a particular year can be included in income under subsection 15(2) in that year.

Position: No.

Reasons: The opening balance in a particular year relates to a loan made in a previous taxation year(s) and thus an income inclusion, if applicable, must be made in the particular previous taxation(s)

8 March 2007 Internal T.I. 2007-0221471I7 - Self-employed clergyman

Unedited CRA Tags
8(1)(c) 3 9 248(1) office

Principal Issues: 1. Are voluntary payments made to clergyperson taxable? 2. If so, are the amounts by virtue of an office or employment or self-employment? 3. If by virtue of an office, is a deduction under 8(1)(c) allowable?

Position: 1. Income is taxable 2. Self-employment 3. No 8(1)(c) deduction available

Reasons: 1. Voluntary payments by virtue of carrying on a business are taxable 2. An office holder's remuneration has to be fixed or ascertainable 3. Since the remuneration is not by office or employment, 8(1)(c) does not apply.