Income Tax Severed Letters - 2008-02-22

Ruling

2008 Ruling 2007-0254721R3 - Lease termination receipt

Unedited CRA Tags
12(1)(x) 54 40(2)(b)

Principal Issues: Where a tenant, who lives in and operates a sole proprietorship from a leased housing unit, receives an amount due to the early termination of their residential lease is the amount received on account of income or capital?

Position: It is received on account of capital. The resulting capital gain may qualify for the principal residence exemption pursuant to 40(2)(b).

Reasons: The amount is a capital receipt received as replacement for the loss of a capital asset (the leasehold interest in a housing unit). The leasehold interest being disposed of may qualify as the principal residence of the individual on the basis that the property is so designated for the relevant years with respect to the formula set out in paragraph 40(2)(b) of the Act assuming the other relevant provisions of the definition of a principal residence have been met.

2008 Ruling 2007-0255401R3 - Swap Termination

Unedited CRA Tags
212 9 39(2) 20(1)(c)

Principal Issues: 1. Are the periodic payments or receipts under the swap deductible or included in income under section 9?
2. Is the termination payment on account of capital?
3. Is the gain or loss on the foreign exchange subject to 39(2)?
4. Are the new loans at a lower interest rate deductible under 20(1)(c)?

Position: 1.YES 2. YES 3. YES 4. YES

Reasons: 1. No lender borrower relationship - adventure in the nature - 2.follows what it hedges
3.Imperial Oil Decision
4. Funds still used in the business

2008 Ruling 2007-0259901R3 - Loss utilization

Unedited CRA Tags
20(1)(c) 12(1) 245(2)

Principal Issues: Standard loss-consolidation within an affiliated corporate group.

Position: Acceptable.

Reasons: Consistent with similar previous rulings and tax policy.

2008 Ruling 2008-0265361R3 - Withholding Exemption - Use of Finco

Unedited CRA Tags
212(1)(b)(vii) 15(2.3) 245

Principal Issues: This is a supplemental ruling to file # 2007-022628 involves a 212(1)(b)(vii) exemption- a change is required because paragraph 16 does not reflect this aspect of the transaction.

Position: 1. Accept minor change

Reasons: Only minor change made and no issues raised as a result of the change.

2008 Ruling 2008-0265751R3 - Swap Termination

Unedited CRA Tags
212 9 39(2) 20(1)(c)

Principal Issues: minor changes to Ruling 2007-025540

Position: does not affect Ruling provided

Reasons: minor

2007 Ruling 2007-0230761R3 - 55(3)(a) - stock dividend - sale to non-resident

Unedited CRA Tags
55(3)(a) 245

Principal Issues: 1) Whether it is appropriate in this case to create the shares that will be cross-redeemed in a transaction that qualifies for the exception in paragraph 55(3)(a) by way of a stock dividend. 2) Whether it is appropriate for a related group to use the exception in paragraph 55(3)(a) to transfer shares of a subsidiary to a sister of the distributing corporation where the shares of the transferee corporation are subsequently transferred to an offshore entity and the resulting capital gain is not taxable in Canada as a result of the application of an income tax treaty.

Position: 1) Legal constraints appear to make the creation of another class of shares difficult in this case. We consider that it is not inappropriate to create shares of the distributing corporation that will be cross-redeemed through a stock dividend for an amount equal to the FMV of the assets that will subsequently be distributed where the paid-up capital is increased only by $1 because: (i) the parent of the distributing corporation would not be taxable in Canada on an eventual disposition of the shares of the distributing corporation due to be application of the applicable income tax treaty between Canada and its country of residence, which makes the lack of ACB adjustment on its other shares academic; (ii) the fair market value of the assets left in the distributing corporation after the distribution of its subsidiary is greater than the ACB and PUC of its shares after distribution; (iii) the rate of withholding that would apply on a dividend paid to the parent of the distributing corporation as adjusted by the applicable income tax treaty is low; (iv) The distributing corporation represents that it will not distribute capital in excess of what would have been the adjusted ACB within the next two years. 2) No GAAR ruling was asked for, but in this particular case there seems to be no clear impediment to issue this letter.

2007 Ruling 2007-0239291R3 - Assumption of debt for assets

Unedited CRA Tags
39(2) 20(1)(c) 212(1)(b)(vii) 40(3.3)

Principal Issues: Whether: (1) foreign exchange gain realized when debt assumed by purchaser as part consideration for assets; (2) addition of purchaser as debtor to the existing agreement under State of XXXXXXXXXX law would result in a disposition of debt by the creditor for purposes of subparagraph 212(1)(b)(vii); (3) proposed transactions caused interest previously deductible to no longer be deductible under paragraph 20(1)(c); (4) the suspended loss rules applied; (5) general anti-avoidance provision applied?

Position: (1) yes; (2) no; (3); no; (4) no; (5) no

Reasons: (1) the debt that was assumed represented part of proceeds of disposition for the assets sold and a foreign exchange gain crystallized vis-a-vis the transferor of the debt at that time; under State of XXXXXXXXXX law, no disposition occurred; (2) under the laws of the State of XXXXXXXXXX , there was no novation or disposition of the debt; (3) to extent interest was deductible for purposes of paragraph 20(1)(c), proposed transactions did not cause interest expense to no longer be deductible under that provision; (4) exception contained in paragraph 40(3.3)(a) applied; (5) although the transactions are avoidance transactions, there is no misuse or abuse.

2007 Ruling 2004-0099631R3 - Retirement Compensation Arrangement

Unedited CRA Tags
248(1) 56(1)(x) 56(1)(z)

Principal Issues: Will a portion of a company's supplemental executive retirement plan be a retirement compensation arrangement for purposes of the Income Tax Act?

Position: Yes.

Reasons: The arrangement described satisfies the definition of RCA in subsection 248(1) of the Act.

2006 Ruling 2005-0151001R3 - Prescribed Shares / plan of arrangement

Unedited CRA Tags
110(1)(d) 251(5)(b) Reg 6204(1) Reg 6204(3)(a)
Summary Under
Tax Topics - Income Tax Regulations - Regulation 6204 - Subsection 6204(3)

Principal Issues: Will the corporation that acquired the shares of the target Canadian public corporation be a "specified person" for purposes of subsection 6204(1) of the Income Tax Regulations?

Position: No.

Reasons: Is excluded pursuant to paragraph 6204(3)(a) of the Regulations.

2006 Ruling 2006-0194461R3 - Consolidation of two Phantom Share Plans

Unedited CRA Tags
6801(d) 248(1)

Principal Issues: 1. Will an amendment to a plan to allow an employee to convert a unit into another unit result in any taxation in and of itself?
2. Will the creation of an exchangeable unit that is obtainable by a participant through the conversion of an existing unit result in taxation?
3. Will the conversion of existing units to the exchangeable units cause the taxation of existing units in and of itself?
4. Will the exchange of the exchangeable units for units of a second plan be a taxable event?

Position: 1.-4 No

Reasons: The employee has a right to receive an amount after the end of a year and the transactions in and of themselves will not result in a change to this right or cause the inclusion of the right in income assuming the exchange ratio is such that the participant has a right to receive the same amount of value immediately after the exchange. The right may become taxable if at any time the plans do not comply with regulation 6801(d).

XXXXXXXXXX 2006-019446

Technical Interpretation - External

15 February 2008 External T.I. 2007-0232041E5 F - Crédit pour la condition physique des enfants

Unedited CRA Tags
118.03
Summary Under
Tax Topics - Income Tax Act - Section 118.03 - Subsection 118.03(2)
eligible expenses could include mandatory affiliation fees

Principales Questions: Les frais suivants représentent-ils des dépenses admissibles pour activités physiques aux fins du crédit d'impôt pour la condition physique des enfants:
(1) des frais d'inscription aux cours;
(2) des frais de location de patins de vitesse;
(3) des frais obligatoires d'affiliation à la Fédération de patinage de vitesse du Québec;
(4) des frais d'inscription à une compétition.

Position Adoptée: Dans la mesure où les frais se rapportent tous à un programme qui est un programme d'activités physiques visé par règlement, l'Agence du revenu du Canada est d'avis que les frais représentent une dépense admissible pour activités physiques.

Raisons: Libellé de la définition de "dépense admissible pour activités physiques" au paragraphe 118.03(1) de la Loi de l'impôt sur le revenu.

12 February 2008 External T.I. 2007-0260931E5 - T2202A Questions

Unedited CRA Tags
Sections 118.5 and 118.6

Principal Issues: Can the XXXXXXXXXX which acts as agent in delivering a distance-learning program for the XXXXXXXXXX issue T2202A's to students participating in the distance-learning program?

Position: If the agency agreement allows for it, XXXXXXXXXX can issue form TL11A on behalf of the foreign university if XXXXXXXXXX is satisfied that the student is enrolled full or part-time in a designated educational institution and the program is a qualifying educational program.

Reasons: Sections 118.5 and 118.6 of the ITA.

12 February 2008 External T.I. 2008-0264171E5 - Clergy Residence

Unedited CRA Tags
8(1)(c)

Principal Issues: Is an XXXXXXXXXX entitled to the clergy residence deduction under paragraph 8(1)(c)?

Position: It is a question of fact whether an XXXXXXXXXX is "engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination".

Reasons: Status test appears to be met but not enough information to conclude that the function test is met.

XXXXXXXXXX 2008-026417
L. Carruthers, CA
February 12, 2008

12 February 2008 External T.I. 2006-0217301E5 F - Actions admissibles de petite entreprise

Unedited CRA Tags
110.6 110.6(1) 110.6(1)c)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share - Paragraph (c) - Subparagraph (c)(i)
assets held through a trust do not qualify

Principales Questions: Les biens détenus par une fiducie dont une société est la bénéficiaire peuvent-ils être considérés comme étant des actifs de la société aux fins de la définition de "action admissible de petite entreprise" au paragraphe 110.6(1) de la Loi de l'impôt sur le revenu?
Can assets held by a trust, of whom a corporation is the beneficiary, be considered assets of the corporation for purposes of the definition of "qualified small business corporation share" at subsection 110.6(1) of the Income Tax Act?

Position Adoptée: Non.
No.

Raisons: Les actifs d'une société aux fins du critère de l'utilisation des actifs à l'alinéa 110.6(1)c) de la définition de AAPE sont les actifs de la société ainsi que les actions d'une société rattachée détenues par la société.
Assets of a corporation for purposes of the "asset utilization test" at paragraph 110.6(1)(c) of the QSBC definition are assets of the corporation and shares of a connected corporation held by the corporation.

7 February 2008 External T.I. 2007-0234891E5 - Employee Car Allowances; Gas Expenses

Unedited CRA Tags
6(1)(b)(xi) 8(1) 7306

Principal Issues: 1. Whether a flat-rate car allowance is a taxable benefit.
2. Whether an employer reimbursement paid to an employee as repayment of amounts spent on similar motor vehicle expenses is a taxable benefit.

Position: 1. Yes. 2. Question of fact.

Reasons: Reading of the legislation. 1. The allowances were not based solely on kilometres driven and reimbursements for motor vehicle costs were also paid to the same employees. Therefore, the allowance is deemed to be unreasonable by virtue of subparagraphs 6(1)(b)(x) and (xi) respectively, for purposes of subparagraph 6(1)(b)(v). 2. Only reimbursements representing payment of employees personal expenses will give rise to an income inclusion under either paragraph 6(1)(a) or 6(1)(b). Allocation of reimbursements between personal and business expenses is a question of fact to be determined on a case-by-case basis.

6 February 2008 External T.I. 2007-0247031E5 - medical expense hearing aid warranty

Unedited CRA Tags
118.2(2)(i)

Principal Issues: Whether the cost of a service contract (warranty) on a hearing aid qualifies as a medical expense for purposes of the medical expense tax credit.

Position: Likely yes

Reasons: The wording in 118.2(2)(i) states " for, or in respect of....an aid to hearing." As this wording is quite broad, we have taken the position that this would encompass not only the cost of a hearing aid but also related items such as batteries, repairs and warranty costs. We have taken similar positions relating to other devices in paragraph 118.2(2)(i).

19 December 2007 External T.I. 2007-0248001E5 - BC Training Tax Credit

Unedited CRA Tags
6

Principal Issues: Whether the British Columbia Provincial Training Tax Credit (BC TTC) provided to an apprentice (individual) is to be included in the taxable income of an apprentice for purposes of the Income Tax Act (Canada) and the Income Tax Act (British Columbia).

Position: No.

Reasons: The fact that the apprentice need not be employed to be eligible for the credit suggests the credit does not have employment as its source and thus would not be taxable under section 6 of the Income Tax Act (Canada)

Conference

5 October 2007 Roundtable, 2007-0243181C6 F - Déductibilité de l'intérêt

Unedited CRA Tags
20(1)(c)

Principales Questions:
1. Est-ce qu'un contribuable peut réduire en premier la portion d'un emprunt utilisée à des fins personnelles lorsqu'il effectue des remboursements? 2.Les intérêts sur de l'argent emprunté pour souscrire des actions continuent-ils d'être déductibles suite à une réduction du capital versé qui est remis à l'actionnaire?

Position Adoptée:
Non.
2. Non si les fonds reçus par l'actionnaire ne sont pas utilisés pour gagner du revenu.

Raisons:
1. Les remboursements doivent être appliqués au prorata entre les portions admissible et non admissible de l'argent emprunté.
2. Un lien entre l'argent emprunté et le capital retourné doit être établi.

Technical Interpretation - Internal

14 February 2008 Internal T.I. 2007-0256401I7 F - Vente d'un surplus actuariel

Unedited CRA Tags
56(1)a)(i) 248(1)
Summary Under
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i)
amount of asset sale price allocated to actuarial surplus was includible under s. 56(1)(a)(i) as being in lieu of refund of such surplus
Words and Phrases
in lieu of

Principales Questions: Quel est le traitement fiscal de la vente des droits d'un employeur dans le surplus actuariel d'un régime de pension?

Position Adoptée: En vertu du sous-alinéa 56(1)a)(i), le produit de la vente doit être ajouté au revenu du vendeur dans l'année d'imposition où il est reçu.

Raisons: Selon les faits, le produit de la vente du surplus actuariel constitue un paiement au titre d'une prestation de retraite ou de pension.

12 February 2008 Internal T.I. 2007-0240721I7 F - Crédit d'impôt pour frais médicaux

Unedited CRA Tags
118(6) 118.2(2)(e) 118.03(1)(2)(2.1); 9400(1),(2),(5);
Summary Under
Tax Topics - Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(e)
a riding school is not an “other place”

Principales Questions: Est-ce que les frais engagés pour des séances en équitation thérapeutique peuvent donner droit au crédit d'impôt pour frais médicaux?

Position Adoptée: Non

Raisons: Un centre équestre thérapeutique ne peut pas être considéré comme étant un " autre endroit " aux fins de l'application de l'alinéa 118.2(2)e) puisqu'il ne s'agit pas d'un endroit suffisamment similaire à une école ou à une institution. Cependant, il est possible que les frais soient admissibles au titre du crédit d'impôt pour la condition physique des enfants et du crédit d'impôt additionnel pour la condition physique des enfants handicapés.

24 January 2008 Internal T.I. 2007-0263291I7 - US based Deferred Income Plan

Unedited CRA Tags
248(1) 6(11) 94

Principal Issues: Is a particular arrangement a salary deferral arrangement?

Position: Based on the information provided we concur with the TSO that the employee received her salary and directed a portion of it be deferred under the arrangement. We note that the plan would be an SDA had it been determined that the taxpayer's employer contributed the deferred amounts to the plan and the employee had not received the amounts.

Reasons: The provisions of the plan permit her to request a portion of her remuneration to be withheld and contributed on her behalf to a trust governed by the plan. There is no evidence that the employer made any contributions to the trust on its own behalf. There is no issue concerning constructive receipt since the employee effectively received and directed the amount to be withheld on her behalf.

10 January 2008 Internal T.I. 2007-0259851I7 - Employer Contribution to RCA

Unedited CRA Tags
20(1)(r) 248(1)

Principal Issues: Is a deduction for a contribution to an RCA permitted by an employer pursuant to paragraph 20(1)(r) of the Act where the majority of the service provided by the employee was rendered to subsidiaries of the employer and not to the employer itself?

Position: No

Reasons: With respect to the deductibility by the taxpayer of employer contributions to an RCA, it is the CRA's view that the contributions must be made to the RCA in respect of a person, that person must be an employee or former employee of the taxpayer, and the contributions must be in respect of services rendered to the taxpayer.