Income Tax Severed Letters - 2009-01-16


2008 Ruling 2007-0249451R3 - Split-up butterfly

Unedited CRA Tags
55(2); 55(3)(b)

Principal Issues: Whether a two-stage transfer of property to be made by DC to each TC's respective Subco in the course of the proposed butterfly as described in the ruling would comply with the requirement in clause 55(3)(b)(i)(A)?

Position: Yes

Reasons: The two-stage transfer would comply with the requirement in clause 55(3)(b)(i)(A).

2008 Ruling 2007-0256671R3 - Interest deductibility

Unedited CRA Tags
20(1)(c)(i) 20(1)(c)(ii)

Principal Issues: Will the facts that an income-source, originally acquired with borrowed money and an amount payable, is disposed of and the proceeds of disposition are used to fund a return of capital, in and of themselves, cause interest on the borrowed money and the amount payable to not be deductible pursuant to paragraph 20(1)(c)?

Position: No

Reasons: The conditions of IT-533 paragraphs 17, 23 and 27-29 are met.

2008 Ruling 2008-0286001R3 - Merger LSVCC

Unedited CRA Tags

Principal Issues: Whether transaction qualifies as a "merger" pursuant to ss204.85(3)?

Position: Yes

Reasons: In accordance with the Act and conforms to tax policy described by Department of Finance.

2008 Ruling 2008-0288221R3 - Post-Mortem Bump

Unedited CRA Tags
88(1)(d); 88(1)(c); 84.1; 88(1)(d.2)

Principal Issues: 1. Application of s. 84.1 to share transfer. 2. Timing of acquisition of control of subsidiary. 3. Availability of s. 88(1)(d) bump.

Position: 1. Does not apply to deem receipt of dividend by transferor. 2. Acquisition of control considered to occur immediately after death of controlling shareholder for the purposes of s. 88(1)(c) and (d). 3. Not available under current legislation but Department of Finance has previously issued comfort letter to indicate it would recommend that Act be amended to ensure bump would be available.

Reasons: 1. Adjusted cost base of transferred shares determined under s. 84.1(2) will be equal to the fair market value of the non-share consideration taken back by transferor. 2. Paragraph 88(1)(d.2) is interpreted with reference to s. 88(1)(d.3), so the newly- incorporated corporation that acquired the shares of the subsidiary from the estate of the deceased will be considered to have acquired control from an arm's length person immediately after the death of the deceased for the purposes of s. 88(1)(c) and (d). 3. Grandchildren of deceased and trusts established for their benefit will acquire substituted property described in s. 88(1)(c.3) as part of the series of transactions or events described in s. 88(1)(c)(vi)(A) and (B) and are not specified persons under s. 88(1)(c.2)(i) as it currently reads.

Technical Interpretation - External

12 January 2009 External T.I. 2008-0300251E5 - Qualifying amount

Unedited CRA Tags

Principal Issues: Whether an amount received from the Province of XXXXXXXXXX as a grievance settlement is a qualifying amount under subsection 110.2(1) of the Act?

Position: no

Reasons: Subsection 110.2(1) definition of qualifying amount requires that the amount be received pursuant to an order or judgment of a competent tribunal; an arbitration award; or a contract by which the payor and the individual terminate a legal proceeding. The payment received by the employee according to the grievance settlement was not pursuant to one of these conditions.

9 January 2009 External T.I. 2008-0287981E5 - Quarterly Instalment Remitting

Unedited CRA Tags

Principal Issues: 1(a). Whether the "first time" in respect of the requirement to pay income tax in quarterly instalment payments means the first time in the person's life as a taxpayer.
1(b). Whether the Canada Revenue Agency tracks the number of times an individual has exceeded the threshold for paying such instalments.
2. Whether an individual has to pay such tax in the last two quarters of the year, if the Canada Revenue Agency assesses the previous year's return later than the date when it sends out instalment reminders for that period.

Position: 1(a). The "first time" refers to the period where an individual has not received an instalment reminder in the previous 6 years. Thus, an individual who has not received an instalment reminder in the past 6 years and who was assessed net tax in excess of the threshold, would be considered as a first time remitter.

1(b). Yes.

2. Yes.

Reasons: 1. TOM 99(15) 4.32.; TOM 99(15) 6.3

9 January 2009 External T.I. 2008-0291191E5 - Employment Expenses - Hairstylist

Unedited CRA Tags
8(1)(i)(iii); 8(1)(s); 8(6.1); 8(10)

Principal Issues:
1. Can a Hairstylist deduct the cost of supplies consumed directly in the performance of his/her employment under subparagraph 8(1)(i)(iii)?
2. Is a Hairstylist considered a "tradesperson" for purposes of paragraph 8(1)(s) of the Act such that he/she is entitled to deduct the cost of "eligible tools" purchased in the year under paragraph 8(1)(s) of the Act?

1. Yes, as long as the requirements in that subparagraph are met.
2. Question of fact, but generally, yes.

1. Subparagraph 8(1)(i)(iii) is not restricted to employees of specific occupations.
2. There is no definition of "tradesperson" in the Act and accordingly the term should be interpreted using its everyday meaning. A hairstylist is considered a "tradesperson" in Canada.

7 January 2009 External T.I. 2008-0302981E5 - Tax Shelter Prescribed Benefit

Unedited CRA Tags
237.1(1); 143.2(7); Regulation 231(6.1)

Principal Issues: Would certain long term debt borrowed by a limited partnership be a prescribed benefit for the purposes of the tax shelter definition.

Position: Insufficient information to conclude. Depending on the facts, it is possible that it would cause an interest in the partnership to be a tax shelter.

Reasons: Our reading of the relevant legislation. Consistent with other positions previously taken.

7 January 2009 External T.I. 2008-0286111E5 F - 88(1)d) and 87(11)-Late-filed designation

Unedited CRA Tags
88(1)d) 87(11)

Principal Issues: Whether a taxpayer is entitled to make a late-filed designation under paragraph 88(1)(d) and subsection 87(11).

Position: Technically no, but administratively yes, in certain circumstances. More precisely, the CRA would administratively accept a paragraph 88(1)(d) late-filed designation where: (1) the parent (or the corporate entity formed as a result of an amalgamation described in subsection 87(11)) agrees to make a pro rata designation of the bump amount (determined under paragraph 88(1)(d)) among all capital properties that are not "ineligible properties" (as defined in paragraph 88(1)(c)) based on the maximum bump that is allowed under subparagraph 88(1)(d)(ii); or (2) the parent (or the corporate entity formed as a result of an amalgamation described in subsection 87(11)) accepts that the CRA determines, at its discretion, what portion of the bump amount will be added to the cost of any property. The CRA will not accept a late-filed designation in cases of retroactive tax planning, if the designation is part of a tax avoidance scheme or if it is necessary, in order to give effect to the designation, to issue a notice of assessment or reassessment for a year that is statute-barred. In all cases, the decision to accept or not a late-filed designation will be based on the particular facts pertaining to the taxpayer's situation. A taxpayer should submit a written request for approval of a late-filed designation to the Director of the local Tax Services Office.

Reasons: CRA's administrative position.

7 January 2009 External T.I. 2008-0303091E5 - Excessive Capital Dividend and 87(2)(z.2)

Unedited CRA Tags
88(1) 88(1)(e.2) 87(2)(z.1) 87(2)(z.2)

Principal Issues: Could a parent corporation, whose subsidiary would pay an excessive capital dividend and subsequently be wound-up and dissolved, be deemed to be a continuation of the subsidiary such that the parent could make an excessive capital dividend election pursuant to subsection 184(3) and 184(4) of the Income Tax Act ("ITA")?

Position: Yes. Paragraph 88(1)(e.2) provides that paragraph 87(2)(z.2) applies to the winding-up to which subsection 88(1) applies. Paragraph 87(2)(z.2) provides that for the purposes of Parts III and III.1, the parent is deemed to be the same corporation as, and a continuation of, the subsidiary. Consequently, the parent generally would be permitted to make an excessive capital dividend election pursuant to subsections 184(3) and 184(4) in the foregoing circumstance.

Reasons: Wording of the ITA.

23 December 2008 External T.I. 2007-0253271E5 - Timing of Deductibility of Damage Awards

Unedited CRA Tags
ITA: 18(1)(e)

Principal Issues: Can a deduction for a damage award be taken in the taxation year of the damage award irrespective of when the damage occurred or when the payment is actually made?

Position: Question of fact. A liability will be deductible when it is ascertained and becomes an absolute and unconditional obligation.

Reasons: Jurisprudence

XXXXXXXXXX 2007-025327
S. Bernards
December 23, 2008

23 December 2008 External T.I. 2008-0297661E5 - Income Earned in Canada by Non-Residents

Unedited CRA Tags

Principal Issues: Application of section 118.94 of the Act where non-resident individual receives a special work site allowance described in subsection 6(6).

Position: Special work site allowance not included in income or in taxable income earned in Canada.

Reasons: Specifically excluded from income by subsection 6(6) of the Act.

18 December 2008 External T.I. 2008-0300731E5 - Costs of Clearing Land / Replanting

Unedited CRA Tags
9(1); 18(1)(b); 30

Principal Issues: 1. Proper treatment of Orchards and Vineyards Transition Program (OVTP) payments. 2. Whether the costs of clearing and levelling land are deductible. 3. Proper treatment of re-planting costs of an orchard or vineyard.

Position: 1. Receipts should offset the costs of clearing the land which may be deductible if incurred in respect of a farming business, otherwise the receipts should be offset against the cost of the land. 2. Clearing and levelling land costs are generally deductible if incurred in a farming business; otherwise, those costs are generally capital in nature. 3. The cost of trees or plants to create an orchard or vineyard should be capitalized to the cost of the land.

Reasons: 1. Consistent with IT273R2. 2. Section 30 permits an income deduction for such costs if a farming business, otherwise paragraph 18(1)(b) would apply. 3. Fixed plants (i.e. trees and shrubs) generally become part of the land when planted and their costs should be capitalized accordingly. Consistent with prior positions.

8 December 2008 External T.I. 2008-0268631E5 - Transfer of life insurance policy to a "child"

Unedited CRA Tags
70(10), 107(2), 148(1), 148(7), 148(8), 148(9), 251, 252(1)

Principal Issues:
Tax liability arising from ;
1. (a) The transfer of a life insurance policy on the life of the policyholder's grandchild to a parent of the grandchild, and
(b) The subsequent transfer of the policy to the grandchild when he/she attains a certain age.
2. (a) The transfer of a life insurance policy on the life of the policyholder's grandchild to an aunt or uncle of the grandchild, and
(b) The subsequent transfer of the policy to the grandchild when he/she attains a certain age.
3. (a) The transfer of a life insurance policy on the life of the policyholder's grandchild to a "trust" in which the grandchild is the beneficiary, and
(b) The subsequent transfer of the policy to the grandchild when he/she attains a certain age.

1. (a) No tax liability,
(b) No tax liability.
2. (a) If aunt or uncle is a "child" of the policyholder, then no tax liability,
(b) Generally, would result in a tax liability to the aunt or uncle.
3. (a) Tax liability to the policyholder, since trust not considered a "child" of the policyholder,
(b) Generally, no tax liability to either the trust or beneficiary.

S.148(8) allows the transfer of a life insurance policy to a "child" of the policyholder for deemed proceeds of disposition equal to the adjusted cost basis of the policy; 1.(a), 1.(b) and 2.(a).
S.148(7) allows for the transfer of a life insurance policy, for no consideration, to a non arm's length person for a deemed proceeds of disposition equal to the cash surrender value of the policy; 2.(b) and 3.(a).
S.107(2) allows for the transfer of property (life insurance policy) to a beneficiary of the trust, in satisfaction of all or part of their interest in the property of the trust, for deemed proceeds of disposition equal to the cost amount (to the trust) of the property; 3.(b)


9 December 2008 Roundtable, 2008-0300571C6 - 5th Protocol - Changes to Article 15(2)(b)

Unedited CRA Tags
Article XV(2)

Principal Issues: What is the CRA's interpretation of the change of the word "employer" to the word "person" in subparagraph 2(b) of Article XV of the 5th Protocol to the Canada-U.S. Tax Convention?

Position: No change in position

Reasons: Whether the word "person" or the word "employer" is used, Canada will refer to principles developed under Canadian jurisprudence and the Quebec Civil Code to determine who, in fact, is exercising the functions of employer.

Technical Interpretation - Internal

9 January 2009 Internal T.I. 2008-0300311I7 - Non-Arm's Length Transfer of Property

Unedited CRA Tags
s. 160

Principal Issues: Whether a transferee is liable to pay if the transferor is yet to be assessed.

Position: Yes.

Reasons: The liability is created by the operation of the Act; the transfer of the property triggers the liability.

8 January 2009 Internal T.I. 2008-0299371I7 F - Montant pour enfant

Unedited CRA Tags
118(1)b); 118(1)b.1); 118(4)a)

Principales Questions: Des conjoints vivent séparés et ont la garde partagée de leurs deux enfants. Est-ce que madame B, qui vit en union de fait avec un nouveau conjoint, est en mesure de réclamer le crédit d'impôt pour enfants aux termes du sous-alinéa 118(1)b.1) à l'égard d'un enfant issu du mariage? Est-ce que monsieur A, dont l'état civil demeure "divorcé", peut réclamer le crédit d'impôt pour enfants à l'égard de l'autre enfant? Monsieur A serait-il en mesure de réclamer le crédit d'impôt à l'égard des deux enfants?

Position Adoptée: Madame B ne peut réclamer le crédit d'impôt pour enfants à l'égard de l'un ou l'autre des enfants issus du mariage. Toutefois, monsieur B peut réclamer ce crédit à l'égard des deux enfants.

Raisons: Puisque le sous-alinéa 118(1)b.1)(i) n'est pas applicable à madame B et qu'elle ne peut réclamer le crédit équivalent pour personnes entièrement à charge à l'égard de l'un ou l'autre des enfants issus du mariage, madame B ne pourra réclamer le crédit d'impôt pour enfants.

7 January 2009 Internal T.I. 2008-0304901I7 - Taxation & Insolvency

Unedited CRA Tags

Principal Issues: Whether all post-bankruptcy refunds vest automatically in a trustee in bankruptcy.

Position: No; only the post-bankruptcy refund associated with the calendar year of the bankruptcy vests automatically in a trustee in bankruptcy.

Reasons: Paragraph 67(1)(c) of the Bankruptcy and Insolvency Act states that the income tax refund arising from the return for the calendar year of the bankruptcy vests in a trustee in bankruptcy.

6 January 2009 Internal T.I. 2008-0280111I7 - FX loss on disposition of cash

Unedited CRA Tags
39(2); 40(2)(g); 40(3.3); 40(3.4); 95(2)(f); 248(1) def'n property
substituted property did not include cash

Principal Issues: Whether subsections 40(3.3) and 40(3.4) and subparagraph 40(2)(g)(i) apply to deny a foreign exchange loss realized on the disposition of foreign cash

Position: No

Reasons: In the context of a foreign exchange loss on the disposition of cash, the cash would not be "property" for the purposes of those provisions.

6 January 2009 Internal T.I. 2008-0301721I7 F - Frais judiciaires et droit de propriété

Unedited CRA Tags
18(1)a); 18(1)b)

Principales Questions: Peut-on déduire ou doit-on capitaliser les frais juridiques et les frais d'arpentage encourus afin de faire reconnaître des titre de propriété d'un terrain utilisé dans le cadre d'une entreprise?

Position Adoptée: Certains frais sont déductibles à l'encontre du revenu d'entreprise et d'autres doivent être capitalisés au prix de base rajusté du terrain.

Raisons: Faits entourant l'acquisition, l'utilisation du terrain et la nature des frais engagés.

22 December 2008 Internal T.I. 2008-0280431I7 - Property tax by-laws under the FSMA for 149(1)(c)

Unedited CRA Tags

Principal Issues: 1. Will a First Nation that is a public body performing a function of government (PBPFG) because it has both section 81 and 83 by-laws under the Indian Act (IA), that transfers its section 83 by-law to operate under the authority of the First Nations Fiscal and Statistical Management Act (FSMA), still be considered a PBPFG?
2. Will a First Nation that has a section 81 by-law under the IA but does not have a section 83 by-law under the IA, and that is added to the FSMA schedule qualify as a PBPFG?
3. Will a First Nation that has a section 81 by-law under the IA but does not have a section 83 by-law under the IA, and has a by-law under subsection 5(1) of the FSMA, qualify as a PBPFG?

Position: 1. Yes.
2. No. Being added to the FSMA schedule is not enough. A by-law must be enacted.
3. Yes.

Reasons: 1. and 3. The FSMA has the equivalent or more authority and structure than section 83 of the Indian Act for the creation, approval and administration of property tax by-laws.
2. A First Nation can request to be added to the schedule, but not enact a local revenue by-law.

19 December 2008 Internal T.I. 2008-0295631I7 - Directors' Liability

Unedited CRA Tags

Principal Issues: Whether directors of a non-profit corporation are liable for source deductions.

Position: Yes.

Reasons: "Corporation" in s. 227.1 of the Act is unrestricted and unqualified; therefore, it covers all types of corporations.

19 December 2008 Internal T.I. 2008-0300301I7 - Taxation and Bankruptcy

Unedited CRA Tags
128(1)(d) 128(2)(d)

Principal Issues: Whether the calendar year in a person becomes bankrupt contains two taxation years.

Position: Yes.

Reasons: S. 128(1)(d) and (2)(d) provide that the current taxation year ends on the day before bankruptcy, while the new one begins on the day of bankruptcy.