Income Tax Severed Letters - 2007-08-24

Ruling

2007 Ruling 2006-0211381R3 - Sale and bump

Unedited CRA Tags
212.1 245 88(1)(c)

Principal Issues: 1- Whether section 212.1 applies to the sale of the shares of the Canadian subsidiary of a non-resident corporation. 2- Whether subsection 245(2) applies where that sale is preceded by the acquisition of assets from a subsidiary of the Canadian subsidiary. 3) Whether subsection 245(2) applies where the gain realized on the sale of the assets of the subsidiary is not taxable in Canada and the corporate purchaser of the Canadian subsidiary pays for the value of the cash received by the subsidiary of the Canadian subsidiary and uses that cost base to increase the cost base of the shares of the subsidiary under subsection 88(1)(c) on its amalgamation with the Canadian subsidiary.

Position: No.

Reasons: 1 and 2- The proposed transactions were revised so that the increase in the paid-up capital of the shares of the Canadian subsidiary before the sale described in point 1 results in a deemed dividend that is subject to Part XIII tax. 3- The sale of the shares of the subsidiaries described in issue 2 for cash before the transfer of the shares described in issue 1 is not contrary to the scheme evidenced by 55(3.1) (the sale of the shares of the subsidiaries described in issue 2 would have been taxable in a Canadian context) or 88(1)(c)(vi) (the shares of the subsidiaries described in issue 2 were transferred before the amalgamation). It was concluded that the test in subsection 245(4) as changed by the 2005 amendment would not be met as it would not be reasonable to consider that the transactions would result in a misuse or abuse of the provisions of the Act.

2007 Ruling 2007-0240951R3 - Withholding Exemption

Unedited CRA Tags
212(1)(b)(vii)

Principal Issues: Minor changes to definitions

Position: Change does not affect Ruling provided

Reasons: Minor

Ministerial Correspondence

14 August 2007 Ministerial Correspondence 2007-0237401M4 - Fitness Tax Credit

Unedited CRA Tags
118.03

Principal Issues: Whether bowling would be considered an activity eligible for the children's fitness tax credit.

Position: Question of fact.

Reasons: Costs associated with the registration or enrolment of a child in a program of "prescribed physical activity" will be eligible for the fitness tax credit. While Finance has not yet published the provision of the ITA that will define prescribed physical activity, it has indicated that the provision will require that the activity be ongoing, supervised, and suitable for children. Furthermore, the activity must include a significant amount of activity that will contribute 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.

22 June 2007 Ministerial Correspondence 2007-0232651M4 - Mortgage as a qualified investment

Unedited CRA Tags
Reg 4900(1)(j)

Principal Issues: Can a "locked-in" RRSP hold a mortgage as a qualified investment under the Income Tax Act?

Position: Question of Fact

Reasons: Although a debt obligation secured by a mortgage may be a qualified investment for an RRSP if certain conditions are met, an RRSP that is "locked-in" under federal or provincial pension standard legislation is subject to a locking-in agreement. Requirements under this agreement are not imposed by the Income Tax Act and as such, we are unable to provide any specific comments in this matter.

Technical Interpretation - External

16 August 2007 External T.I. 2006-0209001E5 - Interest Deductibility - Returned principal

Unedited CRA Tags
20(1)(c)

Principal Issues: Individual borrows money from the bank to invest in preferred shares, which are redeemed with an interest-bearing note. The bank loan remains outstanding for its term of 24 months whereas the individual receives repayments of interest and principal on the note. The individual uses the repaid principal for personal use. First, can the individual continue to deduct interest on the bank loan under paragraph 20(1)(c) after the preferred shares are redeemed? Second, if so is the interest expense on the portion of the bank loan pertaining to the repayment of principal on the note still deductible under paragraph 20(1)(c)?

Position: To the extent that the current use of the bank loan is to earn income from the note, the interest on the bank loan is deductible. Accordingly, to the extent that the principal amount of the note is repaid, the principal amount of the outstanding bank loan is not being used to earn income.

Reasons: It is the current use of borrowed money that determines the deductibility of interest under paragraph 20(1)(c). Accordingly, with respect to the repayment of principal on the note, the current use of that portion of the bank loan is for personal use and therefore, any interest relating to borrowed money used for personal use is not deductible under paragraph 20(1)(c). See IT-533, 9511817, 9326621, 9726133, 2001-0081025, 2001 0110455,2002-0142475

14 August 2007 External T.I. 2006-0218241E5 - IT 533 - Interest Deductibility

Unedited CRA Tags
20(1)(c)

Principal Issues: Will interest on a line of credit be deductible against revenues where a sole proprietor co-mingles sales revenues with personal funds and utilises the co-mingled funds to pay down a personal mortgage while a line of credit is solely utilised for payment of the proprietorship's business expenses?

Position: Yes

Reasons: Cash damming as discussed in IT-533, paragraph 16.

2006-021824
XXXXXXXXXX L. Carruthers, CA
613-957-2060
August 14, 2007

1 August 2007 External T.I. 2007-0247291E5 - Qualified Investments - Subscription Receipts

Unedited CRA Tags
4900(1)(e.01)
Summary Under
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(e)
right under subscription receipt to receive cash

Principal Issues: Are subscription receipts that provide the holder with the right to receive a cash settlement in lieu of delivery of the underlying property, qualified investments?

Position: A subscription receipt would not be precluded from qualifying as a qualified investment under paragraph 4900(1)(e.01) solely because it provides the holder with the right to receive a cash settlement in lieu of delivery of the underlying property.

Reasons: The wording in the Regulations is clear.

2007-024729
XXXXXXXXXX Bruce Hartt
(613) 946-3558
August 1, 2007

24 July 2007 External T.I. 2006-0217681E5 - workers' compensation and annuities

Unedited CRA Tags
56(1)(v) 56(1)(d)

Principal Issues: Is U.S. sourced workers' compensation taxable?

Position: Yes. Based on the information provided the amount will be taxable as an annuity.

Reasons: There are no provisions that exempt the amount from taxation and no treaty provision that provides a deduction under 110(1)(f).

2006-021768
XXXXXXXXXX W. C. Harding
(613) 957-8953
July 24, 2007

18 July 2007 External T.I. 2007-0230311E5 - RRIF Minimum Amount

Unedited CRA Tags
146.3

Principal Issues: Confirmation of previous position - where a taxpayer is the annuitant of multiple separate RRIFs with the same RRIF carrier, the payment of the minimum amounts must be made from each separate RRIF.

Position: Position confirmed

Reasons: no legislative amendment that would otherwise change our interpretation - position remains unchanged

16 July 2007 External T.I. 2007-0227591E5 - Qualified Investments - Subscription Receipts

Unedited CRA Tags
4900(1)(e.01)

Principal Issues: Are subscription receipts qualified investments?

Position: Yes, provided they are listed on a prescribed stock exchange and are in respect of property all of which is a qualified investment.

Reasons: The wording in the Regulations is clear.

2007-022759
XXXXXXXXXX Bruce Hartt
(613) 946-3558
July 16, 2007

7 June 2007 External T.I. 2006-0217731E5 - Tax Treatment of Employee Stock Options

Unedited CRA Tags
7(1)(a) 153(1)(a)

Principal Issues: 1) When to report a stock option benefit? 2) Who is responsible for withholding and reporting the benefit when it is conferred on the employees of a Canadian subsidiary by a US parent?

Position: 1) When to report a stock option benefit is a question of fact. 2) If the US parent has agreed to sell or issue shares to the employees, they will report the benefit and be responsible for withholding.

Reasons: 1) Subsection 7(1) is clear. 2) Subsection 153(1) is clear.

2006-021773
XXXXXXXXXX Bruce Hartt
(613) 946-3558
June 7, 2007

Technical Interpretation - Internal

10 August 2007 Internal T.I. 2007-0226111I7 - Golf Club Membership

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

Principal Issues: 1. Whether or not a golf club membership will result in a taxable employment benefit. 2. If there is an employment benefit, should it be prorated between the employee and employer portions pursuant to the Gillis case?

Position: 1. It is always a question of fact. 2. No.

Reasons: 1. It depends on whether the employee or employer is primarily benefiting from the membership. 2. The primary beneficiary approach to the assessing and valuation of taxable employment benefits is incompatible with proration.

23 July 2007 Internal T.I. 2007-0228601I7 F - Redemption of U.S. Denominated Shares

Unedited CRA Tags
39(2)
Summary Under
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2)
s. 86 exchange of US-dollar denominated prefs does not affect patrimony of issuer
Summary Under
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3)
MacMillan Bloedel distinguished where redemption for preferred shares rather than cash

Principal Issues: A parent corporation ("Parentco") owns preferred shares of the capital stock of a subsidiary wholly-owned corporation ("Subco") denominated in U.S. dollars (the "U.S. Preferred Shares"). Subco purchases for cancellation the U.S. Preferred Shares. In consideration, it issues to Parentco preferred shares of another class denominated in Canadian dollars (the "Canadian Preferred Shares"). The purchase price, in Canadian dollars, of the U.S. Preferred Shares and the stated capital, in Canadian dollars of the Canadian Preferred Shares are higher than the value, in Canadian dollars, of the U.S. Preferred Shares at the time of their issuance. Subsection 86(1) of the Act applies with respect to the disposition of the U.S. Preferred Shares by Parentco. Whether Subco has sustained a loss pursuant to subsection 39(2) of the Act by reason of the purchase for cancellation of the U.S. Preferred Shares and the issuance of the Canadian Preferred Shares.

Position: There is a good argument that Subco has not sustained a loss pursuant to subsection 39(2) of the Act by reason of the purchase for cancellation of the U.S. Preferred Shares and the issuance of the Canadian Preferred Shares.

Reasons: The patrimony of Subco remained unaffected by the transaction since Subco did not transfer any property (money or other) it owned at that time to Parentco in payment of the U.S. Preferred Shares. The only effect of the transaction was merely to change the claims of various classes of shareholders on Subco's assets. In this situation, even this effect of the transaction is theoretical considering that Subco is a subsidiary wholly-owned corporation. The decision of the Federal Court of Appeal in MacMillan Bloedel Ltd. can be distinguished from the situation in this file because, in MacMillan Bloedel, the taxpayer redeemed its preferred shares by paying a cash amount to the shareholders. This had a clear impact on the taxpayer's patrimony.