Income Tax Severed Letters - 2008-06-06

Ruling

2008 Ruling 2007-0247611R3 - Public butterfly reorganization

Unedited CRA Tags
55(3)(b) 55(3.1)(b)

Principal Issues: Whether the proposed spin-off of DC's rental business qualifies for the butterfly exemption provided in paragraph 55(3)(b)

Position: (1) The proposed spin-off of DC's rental business will qualify for the butterfly reorganization under paragraph 55(3)(b) provided that there is no 55(3.1)(b) event as part of the series (e.g. an unrelated person acquires the Spinco common shares from a specified shareholder and/or a person or group of person acquires control of Spinco) (2) Given DC issued a press release prior to the formal annoucement of the proposed butterfly reorganization stating it was considering an offer to purchase DC's rental business from an unrelated party, we included a caveat to confirm that nothing in this ruling can be construed as implying that the CRA has made any determination as to whether any future transaction of DC will be part of the same series of transactions for the purpose of paragraph 55(3.1)(b) (3) Should there be a transaction further to the butterfly reorganization, we will make such a determination on the basis of the circumstances surrounding such a transaction

Reasons: Paragraphs 55(3)(b) and 55(3.1)(b)

2008 Ruling 2008-0264671R3 - Entity Classification

Unedited CRA Tags
248(1) "corporation" 85.1(3) 95(6)

Principal Issues: 1. Whether the proposed XXXXXXXXXX cooperative will be treated as a corporation for purposes of the Act. 2. Whether subsection 85.1(3) of the Act will apply to the share transfers.

Position: 1. Question of fact depending on the articles creating the cooperative. In this particular case, it will be treated as a corporation. 2. Yes.

Reasons: 1. The provisions of the foreign legislation and the articles creating the cooperative support the conclusion that this cooperative should be treated as a corporation for purposes of the Act. 2. The share transfers satisfy the requirements of that provision.

2007 Ruling 2007-0237011R3 - XXXXXXXXXX - foreign buy-out of Canadian MFT

Unedited CRA Tags
107(2.1) 40(3.3) 132(6.2)
following Buyco purchase of income fund, it is wound-up through sale of property to Buyco for note, distribution of capital gain to Buyco through note issuance with s. 104(21) designation (with no ACB reduction under 53(2)(h)(i.1)) and note set-offs

Principal Issues: 1. Can capital gains be paid out of the trust & then subsequently out of the fund by promissory note ("PN")? 2. Is 107(2.1) applicable to the chain of transactions; 3.Application of 40(3.3) or 40(3.4); 4.Application of GAAR--possible back door butterfly?

Position: 1. Gains can be made payable by PN; 2. 107(2.1) is applicable on transfer of PN from Trust to Fund but not on issue of PN from Fund to corp; 3. 40(3.3) & 40(3.4) have no application; 4. Gaar is not applicable.

Reasons: 1. Payment of income in specie is an acceptable method of payment. 2. 107(2.1) is applicable on transfer of PN from trust to fund because it is a transfer of property, however it is not applicable on the issue of the promissory note from the Fund to the corp as it is not a transfer of property...also there is some question as to whether this is a distribution in satisfaction of a capital interest. 3. The Fund will be wound up immediately following the redemption of the Fund Units 4. Firstly it is not the goal of these transactions to achieve a back door butterfly...however no similar provision to 88(1) exists to deals with the wind-up of trusts......a caveat was added to the ruling that there was no intention for former unitholders to acquire assets of the former partnership.

Technical Interpretation - External

29 May 2008 External T.I. 2007-0262591E5 F - Remboursement de sommes versées par erreur

Unedited CRA Tags
8(1)n)

Principales Questions: Quel est le traitement fiscal pour le contribuable des sommes remboursées à un assureur?

Position Adoptée: Question de fait. En l'espèce, l'alinéa 8(1)n) semble être applicable.

Raisons: Toutes les conditions d'application de l'alinéa 8(1)n) semblent avoir été respectées.

29 May 2008 External T.I. 2008-0271391E5 - Indian Guidelines; Remote Access Employment

Unedited CRA Tags
81(1)(a); 87 Indian Act

Principal Issues: Whether performing some duties of employment through remote access to a server located on a reserve could be considered as performing duties of employment on the reserve for purposes of the Guidelines.

Position: Probably not.

Reasons: The Guidelines are intended to apply to standard work situations where the facts are clear. For purposes of the Guidelines, the duties of employment are generally performed where the employee is physically located. Performing duties of employment through remote access to a server on a reserve could be a connecting factor for purposes of the general connecting factors test (depending on the nature of the duties of employment), however all of the circumstances would have to be considered in order to determine the weight to be given such a factor.

27 May 2008 External T.I. 2007-0250501E5 - Executor's Compensation

Unedited CRA Tags
6(1)(c) 248(1)

Principal Issues: Whether an estate has to obtain a business number

Position: Yes.

Reasons: s.6(1)(c) and s.248(1)

26 May 2008 External T.I. 2007-0263001E5 F - 2006 GRIP Addition

Unedited CRA Tags
89(7)

Principal Issues: (1) In a given situation, where two corporate shareholders (ABCco and DEFco) own equally a third corporation (SRco), the total amount of SRco's variable A of the 2006 GRIP Addition, per subsection 89(7) , is $504,000; in 2002, SRco paid a $400,000 taxable dividend to ABCco, and in 2004, a $400,000 taxable dividend to DEFco, whether the amount under paragraph c) of variable A for each of ABCco and DEFco should be $252,000. (2) In another given situation, where two sister corporations (ABCco and DEFco) are connected to each other, the total amount of ABCco's variable A of the 2006 GRIP Addition is $504,000; in 2002, shares of ABCco owned by DEFco and shares of DEFco owned by ABCco are cross redeemed resulting in two $800,000 taxable dividends, whether the amount of the 2006 GRIP Addition for ABCco and DEFco should be $208,000 and $0, respectively.

Position: (1) Yes. (2)

Reasons: (1) The amount of $504,000 should be apportioned between ABCco and DEFco proportionately to the dividends they received from SRco between 2001 and 2005. (2) ABCco's and DEFco's 2006 GRIP Addition should be $504,000 and $0, respectively as demonstrated in Tables 1 and 2 in this document.

22 May 2008 External T.I. 2008-0264561E5 - Subsection 89(7) Calculation

Unedited CRA Tags
89(7) 123.4

Principal Issues: Calculation of the GRIP for the first taxation year of a CCPC that includes any part of January 1, 2006 where the CCPC paid and received taxable dividends as a consequence of a cross-redemption of shares between the CCPC and a corporation connected with the CCPC in a taxation year ending after 2000 and before 2006.

Position: Although the CCPC paid a taxable dividend on the cross-redemption that exceeded 63% of the full rate taxable income that the CCPC had accumulated in taxation years that ended prior to the cross-redemption, the cross-redemption will have no net effect on the amount determined under subsection 89(7) in respect of the CCPC in these particular circumstances.

Reasons: In the particular circumstances, and given the circular nature of a cross-redemption of shares, it is reasonable to consider that the dividend received by the connected corporation from the CCPC on the cross-redemption is attributable to (i) the after-tax portion of the full rate taxable income that the CCPC accumulated in taxation years prior to the cross-redemption and (ii) the amount that the connected corporation includes its subsection 89(7) computation in respect of the dividend that the CCPC paid to the connected corporation on the cross-redemption. This increases the amount that the connected corporation can add in its subsection 89(7) computation in respect of the dividend it was deemed to receive from the CCPC on the cross-redemption, which gives rise to a corresponding increase in the amount that the CCPC can include in its subsection 89(7) computation in respect of the dividend it was deemed to receive from the connected corporation on the cross-redemption.

16 May 2008 External T.I. 2007-0259081E5 - Paying Income Tax by Instalments

Unedited CRA Tags
150 156 156.1 161, 163.1

Principal Issues: 1. The meaning of "the first time" as is used in E2000-0004525.
2. The rules for paying quarterly instalment amounts.

Position: 1. The first time as is used in E2000-0004525 refers to the second preceding year where the net tax owing exceeded the threshold.
2. Individuals may have to remit pay taxes by way of quarterly instalments if their net tax owing exceeds a certain threshold. For 2008, the threshold everywhere but in Quebec is $3,000. In Quebec, it is $1,500.

Reasons: Sections 156 and 156.1 of the Income Tax Act.

9 May 2008 External T.I. 2007-0246031E5 - Director's Fees

Unedited CRA Tags
6(1)(C) 8(2) 248(1)

Principal Issues: Whether director's fees can be paid to a corporation where the director is in the regular employ of that corporation, and if so, what are the reporting requirements.

Position: In certain circumstances, fees earned by a director can be paid to the corporation.

XXXXXXXXXX 2007-024603

Conference

22 May 2008 Roundtable, 2008-0276731C6 - Proposed loss denial rules on shares

Unedited CRA Tags
88(3)

Principal Issues: Comfort letter dated April 12, 2006 issued by the Department of Finance adds additional and distinct rules to the rules provided for in subsection 88(3) (dissolution of a foreign affiliate) applicable when certain circumstances are met and where a taxpayer elects in writing to have these rules apply. Under those new rules, there is a loss denial rule on shares. Taxpayers are requesting comments about the fairness or the unfairness of that loss denial rule.

Position: Proposed answer sent to Calgary TSO stating our general understanding of the additional rules included in the comfort letter without commenting on the fairness or the unfairness of the rules.

Reasons: Request for comments on a comfort letter should be sent to the Department of Finance. We do not comment on comfort letter before it is incorporated in draft legislation.

Technical Interpretation - Internal

26 May 2008 Internal T.I. 2008-0272771I7 - Straight-line Amortization or Averaging of Rent

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

Principal Issues: Whether escalating lease payments, which are deductible under generally accepted accounting principles on a straight-line basis, are deductible for tax purposes?

Position: No.

Reasons: Legislation.

26 May 2008 Internal T.I. 2008-0274071I7 - Reduction of operating expense benefit

Unedited CRA Tags
6(1)(k) 15(5)

Principal Issues: Can an operating expense benefit be reduced by the operating expenses paid by the employee directly to third parties within the time frame specified in the legislation?

Position: Yes

Reasons: This approach is administratively acceptable.

6 May 2008 Internal T.I. 2007-0263361I7 - Employee/Shareholder Automobile Benefit

Unedited CRA Tags
6(1)(a) 6(1)(e) 6(1)(1) 6(1)(k)

Principal Issues: An automobile is personally leased by a shareholder/employee in order to obtain preferential pricing and the employer corporation pays all the operating and lease costs.

Position: Whether a standby charge and operating cost benefit applies to the shareholder/employee.

Reasons: No because the corporation is not the lessee.

Internal Memorandum

14 May 2008 Internal Memo 2007-0246481A11 - The Adjustment of a Pre-Bankruptcy Year

Unedited CRA Tags
128(2)(a) 152(4.2)

Principal Issues: Who is authorised to request an adjustment under s. 152(4.2) of the Income Tax Act in respect of a year prior to the year of bankruptcy when:
(a) the taxpayer and the trustee have been discharged; or
(b) the taxpayer and/or the trustee have not been discharged?

Position: (a) the trustee
(b) the trustee

Reasons: Subsection 71(2) of the Bankruptcy and Insolvency Act states that at bankruptcy a bankrupt ceases to have any capacity to deal with his or her property. Paragraph 128(2)(a) of the Income Tax Act deems the trustee in bankruptcy to be the bankrupt's agent for all purposes of the Income Tax Act. Subsection 152(4.2) of the Income Tax Act permits the Minister to make a reassessment or redetermination beyond the normal reassessment period for a deduction or a credit, which normally results in a refund. Property includes an income tax refund.

9 May 2008 Internal Memo 2007-0260511A11 - Taxation & Insolvency

Unedited CRA Tags
s. 128(2)(e)

Principal Issues: Who pays the tax on funds, remitted by court order, to the trustee?

Position: The trustee in bankruptcy should file an in-bankruptcy return and remit the tax arising from the funds received.

Reasons: Paragraph 128(2)(e).