Income Tax Severed Letters - 2009-03-13

Principal Issues: What interpretation does the CRA want to give to the notion of contributed surplus to which paragraph 53(1)(b) of the ITA makes reference?

Position: The term "contributed surplus" is not defined in the ITA. However, the CRA is of the view that the meaning of "contributed surplus" should be based on the meaning given to this term under GAAP.

Reasons: Wording of the Act and previous positions.

Principales Questions: Un contribuable a effectué un choix en vertu de l'alinéa 110.6(19)b) à l'égard d'un achalandage. En conséquence de ce choix, le solde des gains exonérés du contribuable, tel que défini au paragraphe 14(5), est de 75000$. Le contribuable cesse d'exploiter son entreprise et la conjointe acquiert tous les biens et le solde du MCIA selon 24(2). Le jour suivant, la conjointe dispose de l'achalandage pour un produit de disposition de 100000$. Est-ce que la conjointe devra être imposée sur un revenu tiré d'une entreprise d'un montant de 50000$ même si le contribuable s'est déjà imposé sur ce gain lors de l'exercice du choix de 1994?

Position Adoptée: Non

Raisons: L'ARC estime que le paragraphe 14(3) peut s'appliquer malgré les dispositions de 24(2). Le contribuable peut ainsi choisir de vendre les immobilisations admissibles à sa conjointe pour un montant égal à leur JVM et appliquer son solde des gains exonérés à l'encontre du montant à inclure dans son revenu selon 14(1). Pour la conjointe, sa dépense en capital admissible sera réduite de l'exonération réclamée selon 110.6(19)b) par le contribuable. Cependant, selon 14(3)c) et d), la réduction réputée de la dépense en capital admissible de la conjointe sera annulée lorsqu'elle disposera des immobilisations admissibles en faveur d'une personne non liée pour un produit de disposition équivalent à la JVM

Principal Issues: First scenario: Bco holds 500 preferred shares of the capital stock of Aco, having an ACB of $1, a paid-up capital of $1 and a FMV of $150,000. For the purposes of section 55, the "safe income on hand" attributable to these shares is $90,000. As of December 31, 2007, the GRIP of Aco is $70,000. On December 31, 2007, Aco acquires the preferred shares of its capital stock held by Bco for an amount of $150,000. Aco is then deemed to have paid, and Bco is deemed to have received, a dividend in the amount of $149,999 pursuant to subsection 84(3) of the ITA. Pursuant to paragraph 55(5)(f), Bco designates the amounts of $70,000, $20,000 and $59,999 as separate taxable dividends. Is it possible for Aco to designate the first amount of $70,000 to be an eligible dividend pursuant to subsection 89(14) of the ITA? Second scenario: instead of acquiring the preferred shares, Aco declares a dividend of $70,000 in favour of Bco in a situation involving the application of section 55 of the ITA. Aco designates the total amount to be an eligible dividend pursuant to subsection 89(14). Furthermore, Bco makes an election pursuant to paragraph 55(5)(f) to consider this taxable dividend as seven separate dividends of $10,000 each. The CRA revises the amount of the safe income on hand attributable to the preferred shares to $60,000. What is the amount that must be deducted from the GRIP of Aco and what is the GRIP addition of Bco?

Position: Fisrt scenario: the wording of subsection 89(14) of the ITA requires that the entire amount of the dividend paid by a corporation must be designated as an eligible dividend. Consequently, the designation of a fraction of a dividend is not possible. Second scenario: the GRIP of Aco would have to be reduced by an amount of $70,000. The GRIP of Bco should be increased by an amount of $60,000.

Reasons: Wording of the Act and previous positions.

Principal Issues: A woman ("Mother") controls a corporation ("MotherCo"), a man ("Father") controls a second corporation ("FatherCo") and the two children of Father and Mother who have reached the age of majority, control a third corporation ("ChildrenCo"). A discretionary trust owns 100% of the common shares of ChildrenCo. The trustees of this trust are Mother and Father. The beneficiaries of this trust are the two adult children and the grandchildren. Question a): For the purposes of the rules mentioned in section 256 and in the context of Quebec civil law, whether the trust (and not the trustees) is the owner of the shares that it holds. Question b): What criteria would the CRA apply in order to determine if two trusts constitute the same person for the purposes of applying paragraph 256(1.2)(c)? Question c): Is the CRA of the view that each of the trustees is the owner of 100% of the shares held by the trust or does the CRA consider that the shares are owned by all the trustees as a group? Question d): Is the CRA of the view that subsection 104(1) must be considered for the purposes of the analysis of question a)?

Position: Answer to question a): Based on the terms of subsections 104(1) and (2) and paragraph 256(1)(d), the position of the CRA is to the effect that both the trust and the trustees of this trust would be considered the owners of the common shares of the capital stock of ChildrenCo for the purposes of paragraph 256(1)(d). Thus, in the example described in this question, each of MotherCo and FatherCo would be associated with ChildrenCo pursuant to paragraph 256(1)(d) even if the Québec civil law is applicable in the particular situation. Answer to question b): the question of determining whether there are one or more trusts, and thus, if there are one or more individuals/persons, generally depends on the terms of the trust indentures, subject, however, to the potential application of subsection 104(2). However, the application of subsection 104(1) must also be considered for the purposes of section 256 of the ITA. Thus and as an example, an individual acting as a trustee for two trusts would be considered as one and the same person for purposes of the application of section 256, subject to the potential application of subsection 256(4). Answer to question c): in the example described in this question, the two trustees, Mother and Father, would be considered to own together all of the common shares of the capital stock of ChildrenCo by reason of the application of subsection 104(1). Consequently, the CRA would normally consider that each of Mother and Father would be the owner of at least 25% of the issued shares of any class, other than a specified class, of the capital stock of ChildrenCo for the purposes of paragraph 256(1)(d). Answer to question d): Yes.

Reasons: Wordin of the Act.