Income Tax Severed Letters - 2007-07-27


2007 Ruling 2006-0201541R3 - SAR-type plan

Unedited CRA Tags

Principal Issues: Whether a plan in which the payout is based on the appreciation of the value of units from the grant date to the payment date will be excluded from the definition of a salary deferral arrangement as defined under subsection 248(1) of the ITA?

Position: Yes.

Reasons: Typical SAR under which the employee has no right conditional or not to receive an amount.

2007 Ruling 2006-0217481R3 - Corporate Reorganization

Unedited CRA Tags
95(2)(f) 88(1)(d) 212.1 GAAR

Principal Issues: 1. Does GAAR apply to the series of transactions described in paragraphs 28, 37, 38, 39, 41, 43 and 44 above? 2. Where (i) a subsidiary (as described in subsection 88(1) of the Act) has a controlling shareholder; (ii) the subsidiary controls another corporation (the "other corporation") that does not have a direct or indirect interest in the subsidiary and (iii) a purchaser with a controlling shareholder directly acquires the other corporation, whether the purchaser would constitute a corporation described in subclause 88(1)(c)(vi)(B)(III) such that the paragraph 88(1)(d) bump would be denied.

Position: 1. Yes. 2. Yes.

Reasons: 1. An almost identical series of transactions was referred to the GAAR committee and they recommended that GAAR be applied to deny the avoidance of subsection 212.1(1). 2. Because the other corporation is a person described in subclause 88(1)(c)(vi)(B)(I) of the Act and the other corporation is a specified shareholder of the purchaser.

2007 Ruling 2007-0232421R3 - bargain purchase under a will

Unedited CRA Tags

Principal Issues: What is the cost to the purchaser, a person who is neither a spouse nor a common law partner of the deceased, of property acquired under the terms of a will where the will requires that person to pay an amount (generally less than the FMV) in exchange for the property acquired?

Position: The cost to the purchaser is determined under subsection 107(2) (and indirectly subsection 70(5)).

Reasons: Subsection 248(8) applies to deem the transfer to have occurred as a consequence of death such the cost of the property to the non-spouse who acquires the property is the FMV of the property immediately before the death of the individual whose will provides for the transfer. This situation can be distinguished from the Husel case, which dealt with an intestacy (and thus no bargain purchase offer provided under a will) and the cases of Penner and the Estate of Hrycej, which dealt with transactions occurring before the introduction of subsection 248(8).

2006 Ruling 2006-0178401R3 - 132.2 reorganization of a mutual fund trust

Unedited CRA Tags
132.2 97(2) 85(1) 253.1

Principal Issues: Reorganization of an existing mutual fund trust, trust- on-corporation structure to a trust-on-partnership structure using rollovers available under s. 85, s.97 and 132.2; Additional issues encountered include deductibility of interest; debt forgiveness; acb of partnership interest & status of the mutual fund trust.

Position: Rulings, with some modifications substantively granted as requested.

Reasons: Proposed transactions will produce the desired outcome using legislative tools available and are within policy intention.

Technical Interpretation - External

18 July 2007 External T.I. 2007-0242081E5 - Payroll Withholdings by Non-Resident Employer

Unedited CRA Tags
153(1) 153(1.1)

Principal Issues: Does a U.S. resident employer have to withhold Canadian payroll deductions from salary or wages paid to a Canadian resident employee who renders services in Canada and the U.S.?

Position: Yes

Reasons: The employer must withhold because the employee is resident in Canada. However, the employee may be able to have withholdings reduced for the relevant foreign tax credit.

18 July 2007 External T.I. 2007-0242921E5 - remainder interest in A's prin res held by B

Unedited CRA Tags
43.2 54

Principal Issues: 1. In computing the eventual gain on property held by a child where the parent transferred a remainder interest in that property to the child prior to death, is the child's ACB of the property based on the fair market value of the property at the time the remainder interest was given or the fair market value at the time of the parent's death.
2. Is a formal real estate appraisal is required to establish the fair market value of the property at the relevant time?
3. General comments on personal tax situation requested

Position: 1. The ACB of remainder interest is determined under 43.1(2) with the result that, following the parent's death and absent any capital improvement's by the child, the ACB will not be more than the FMV of the property at the time the remainder interest was given.
2. No.
3. General comments on principal residence, determination of individual's residence and filing obligations as of the date of death given.

Reasons: 1. The Court addressed the taxpayer's issues concerning the effect of 43.1(2) in Depedrina et al v. the Queen (2005 DTC 1386).
2. Where there is a reference to "fair market value' as to whether a taxpayer is expected to obtain professional valuation or appraisal advise of their real estate, the answer is no. However, because the Canadian tax system is one of self-assessment, there is an obligation for taxpayers to voluntary comply and report their fair share of taxes. Taxpayers are also expected to maintain and keep, for a period of time, books and records to assist in calculating their taxable income. Depending on one's tax situation, a taxpayer may have to resort to obtaining professional assistance in order to ensure that proper books and records are well prepared and this would include hiring accountants, tax preparers, valuators or appraisers where the need is evident. There is no obligation imposed by CRA but if a taxpayer does not have the technical expertise to calculate his gains or losses for a specific transaction then it would be logical that assistance be obtained. It may be in the taxpayer's best interest to have an accurate understanding of the "fair market value" of the asset at the time of acquisition, whether or not the property was purchased or transferred in a non-arm's length transaction (ITA - 69(1)) or deemed to have been disposed at the date of death (ITA 70(5)) or some other similar transactions.
Whether a valuation analysis was prepared by a taxpayer himself or a professional valuator or appraiser, the Canada Revenue Agency is not obligated to accept the reported amount and can review the report and/or calculations provided before accepting the reported value.

12 July 2007 External T.I. 2007-0219611E5 - Meals - Transport employee

Unedited CRA Tags
8(1)(g) 8(1)(h) 8(4) 8(10)

Principal Issues: Whether transport employees who travel significant distances but return home each day are entitled to claim meals under paragraph 8(1)(g) of the Income Tax Act.

Position: No. May be deductible under subsection 8(1)(h), question of fact.

Reasons: Paragraph 8(1)(g) of the Act. No overnight stay therefore fails to meet the lodging condition.

12 July 2007 External T.I. 2007-0225651E5 - Executor Fees

Unedited CRA Tags
6(1)(c) 9(1)

Principal Issues: Tax consequences of a gift in lieu of fees.

Position: Taxable transaction.

Reasons: Transaction is not a gift but a barter transaction.

11 July 2007 External T.I. 2006-0216491E5 - 75(2) & CCA limitation on rental income

Unedited CRA Tags

Principal Issues: When 75(2) applies to attribute rental income earned by an alter ego trust to an individual who also earns income from rental properties owned by him directly, is the CCA limited to the rental income earned on all the property or are there separate CCA limitations for the property held by the alter ego trust and for the property held by the individual?

Position: The CCA limitation for computing the trust's income to be attributed to the individual is computed separately from the CCA limitation on property owned by the individual directly.

Reasons: Plain meaning of the words in regulation 1100(11)(a)

Technical Interpretation - Internal

19 July 2007 Internal T.I. 2006-0194571I7 - section 44.1

Unedited CRA Tags
44.1 245

Principal Issues: In a series of transactions undertaken by the taxpayer and spouse which resulted in a disposition of shares to a third party, can section 44.1 be used to designate a replacement share? Does subsection 44.1(12) apply? Does GAAR apply?

Position: 1. Yes, a replacement share can be designated. 2. No subsection 44.1(12) does not apply. 3. No GAAR does not apply.

Reasons: 1. Section 44.1 permits the taxpayer and spouse to designate a replacement share. 2. The law 3. There is no misuse or abuse of the Act.