Income Tax Severed Letters - 2011-01-28


2010 Ruling 2009-0349701R3 - Article XXIX-A (US Treaty)

Unedited CRA Tags
Article XXIX-A (US); 116(1); 95(2)(f.1); 87

Principal Issues: (i) Whether the Limitation on Benefits provisions in the Canada-US Income Tax Convention (the "Convention") applies to the situation? (ii) Whether the return of capital by Canco to USHoldco be considered as stripping the surplus of CanSubco for Canadian tax purposes? (iii) Whether subsections 15(2) and 17(1) apply? (iv) Whether the net capital loss can be used to reduce a forgiven amount?

Position: (i) No. (ii) No. (iii) No. (iv) Yes.

Reasons: (i) It is reasonable to accept that the capital gains realized by USSubco on the disposition of the shares of CanSubco in the course of the winding-up of USSubco would qualify for the active trade or business test described in Article XXIX-A(3) of the Convention. (ii) The distribution from Canco represents a real return of capital formerly contributed to Canco by USHoldco. (iii) Note 1 and Note 2 will be outstanding for less than a year and the back-to-back provisions of section 17 would not apply. (iv) the net capital loss meets the requirements specified in the term "relevant loss balance" in subsection 80(1) and is thus forms part of the relevant loss balance for the purposes of the debt forgiveness provisions.

Ministerial Correspondence

15 December 2010 Ministerial Correspondence 2010-0387951M4 F - Designated Stock Exchange

Unedited CRA Tags
248(1), 262

Principal Issues: Whether the Open Market of the Frankfurt Stock Exchange is a designated Stock Exchange?

Position: No.

Reasons: The Open Market is not recognized as an official market.

Technical Interpretation - External

11 January 2011 External T.I. 2010-0382741E5 - Taxable Benefits

Unedited CRA Tags
6(1)(a), 15(1)

Principal Issues: 1. Is the installation and operation of a security system at an employee's home a taxable benefit where the cost is paid by the employer? 2. Is the answer the same if the employee is also the sole shareholder of the company? 3. Will the costs of the security system be deductible?

Position: Question of fact.

Reasons: Consistent with the guidelines in IT-470R and related administrative materials.

10 January 2011 External T.I. 2010-0387541E5 - designation of eligible dividends

Unedited CRA Tags

Principal Issues: Whether a fraction of a dividend can be designated as an eligible dividend.

Position: No.

Reasons: Wording of subsection 89(14).

7 January 2011 External T.I. 2010-0384491E5 - 81(1)(h) - social assistance

Unedited CRA Tags
81(1)(h), 56(1)(u)

Principal Issues: Whether the funding received from XXXXXXXXXX for the care of the caregiver's sister is exempt under 81(1)(h)

Position: The income is not exempt under 81(1)(h). It may be considered social assistance under 56(1)(u), with a corresponding deduction under paragraph 110(1)(f), or it may be included in income as business income. The correct determination can only be made after a review of all the relevant facts.

Reasons: The caregiver and the cared-for individual are related.

5 January 2011 External T.I. 2010-0385711E5 - Transfer of Property

Unedited CRA Tags
248(1), 54, 40(2)(b)

Principal Issues: 1. Whether the transfer of legal title of a cottage held in a personal trust from an Aunt's name to her nieces and nephew will trigger a disposition and a capital gain.
2. Who must report the capital gain?
3. Can a personal trust use the principle residence exemption?

Position: 1. Depends on whether there is a change in the beneficial ownership.
2. The specified beneficiary of the property.
3. Yes.

Reasons: If there is no change in the beneficial ownership, then no disposition has occurred, and no taxable capital gain, in accordance with the definition of disposition under section 248. If there is a change of beneficial ownership then a capital gain may be triggered, but the tax could be sheltered if the property meets the criteria for the principal residence exemption.

5 January 2011 External T.I. 2010-0385911E5 - Prescription for exercise equipment as METC

Unedited CRA Tags
118.2(2); Regulation 5700

Principal Issues: Whether exercise equipment qualifies for the purpose of the METC if a prescribed by a medical practitioner.

Position: No.

Reasons: Exercise equipment is not included in subsection 118.2(2), nor is it a prescribed device or equipment listed under Regulation 5700.

4 January 2011 External T.I. 2008-0289051E5 - Section 116 & Treaty Protected Property

Unedited CRA Tags

Principal Issues: (1) In a transfer between parties that are not related persons, in order for the property transferred to qualify as "excluded property" pursuant to paragraph 116(6)(i) of the Act, does the notice described in subsection 116(5.02) have to be filed if the property is "treaty-protected property" as that term is defined in subsection 248(1)? (2) Is the requirement to file a notification under subsection 116(5.02) only applicable to a transfer of property by a non-resident vendor to a related person?

Position: (1) No. (2) In certain circumstances the filing of a subsection 116(5.02) notice may be beneficial to a purchaser in the case of an arm's length transfer.

Reasons: (1) The provisions of 116(6.1) and 116(6)(i). (2) If the purchaser fails to notify the CRA in the manner set out in subsection 116(5.02), that he acquired property from a non-resident and it turns out the property was not treaty-protected property the purchaser will not benefit from the safe-harbour provision of subsection 116(5.01) in paragraph 116(5)(a.1) and 116(5.3)(a).

4 January 2011 External T.I. 2010-0384691E5 - US partnership income or loss

Unedited CRA Tags
96(1), 261(2)

Principal Issues: 1. Where do you report on your individual income tax return in Canada your share of the net income or loss of a US partnership? 2. What exchange rates should be used in the calculations?

Position: 1. Generally, you enter your share of the net income or loss from the US partnership on line 122 of the T1 General Return if the partnership did not include a rental or farming operation and you were a limited partner or not actively involved in the partnership and not otherwise involved in a business. 2. Exchange rate in effect at the time of the transaction or the average annual exchange rate published by the Bank of Canada.

Reasons: 1. T1 General Income Tax and Benefit Guide 2009. 2. Subsection 261(2)

30 December 2010 External T.I. 2010-0389031E5 - Income or Capital account

Unedited CRA Tags
9(1), 18(1)(a)

Principal Issues: Whether a loss from the disposition of a dwelling would be on account of income or capital.

Position: General comments provided.

Reasons: Question of fact.

23 December 2010 External T.I. 2010-0390021E5 - Farming Income and Riding Stables

Unedited CRA Tags
28(1), 248(1) "farming"

Principal Issues: Whether horse boarding services and horse riding lessons are considered farming.

Position: Generally no

Reasons: Does not meet the definition of farming in ss.248(1) unless the activities are incidental to an activity that otherwise qualifies as farming.

22 December 2010 External T.I. 2010-0387591E5 - Subsections 129(6) and 256(2)

Unedited CRA Tags
129(6), 256(2) and 125

Principal Issues: Does an election by a third corporation not to be associated with another corporation under 256(2) mean that income that was or may be deductible in computing income from an active business carried on in Canada by the otherwise associated corporation cease to be treated as income from an active business of the recipient corporation for the purposes of section 125 as required by subsection 129(6)?

Position: No. While it remains a question of fact as to whether the particular corporations, absent subsection 256(2), would otherwise be associated under section 256, the fact that an election is made not to be associated does not affect the application of subsection 129(3).

Reasons: The law.

22 December 2010 External T.I. 2010-0389001E5 - Treatment of Costs of Two Public-Private Projects

Unedited CRA Tags
13(7.5), 14(5), 1102(14.3) of the Regulations

Principal Issues: Whether the costs incurred by two separate Public-Private projects for designing and building two road and bridge projects would be classified as roads (Class 17) and bridges (Class 1), by reason of paragraph 13(7.5)(b) of the Act.

Position: Question of fact - no specific comments.

Reasons: This is a completed transaction and we don't have all the facts. The matter should be handled by the appropriate TSO.

Technical Interpretation - Internal

7 January 2011 Internal T.I. 2010-0387011I7 F - DPA dans une année prescrite

Unedited CRA Tags
tax from s. 152(4)(a)(i) reassessment of statute-barred year could not be offset through increased CCA claims for that year
CCA claims could not be increased in “open” year to generate loss for carryback to year CRA had reassessed outside the normal reassessment period

Principales Questions: Est-ce que le ministre peut établir une nouvelle cotisation en vertu du paragraphe 152(4) dans une situation donnée?

Position Adoptée: Non

Raisons: Analyse législative

7 January 2011 Internal T.I. 2010-0389181I7 F - Paiement forfaitaire - pension alimentaire

Unedited CRA Tags
lump sum support payment did not qualify

Principales Questions: Application de la définition du terme " pension alimentaire " à des faits particuliers.

Position Adoptée: Dans la présente situation, le paiement fait en vertu du Consentement sur mesures accessoires ne se qualifie à titre de pension alimentaire au sens du paragraphe 56.1(4).

Raisons: Le paiement n'est pas une allocation périodique.

7 January 2011 Internal T.I. 2010-0391502I7 - Principal Residence Exemption - Diplomats

Unedited CRA Tags

Principal Issues: Are officers or servants of the government of a country other than Canada who are assigned to Canada subject to a capital gains tax on the sale of a personal residence purchased during their assignment to Canada? If the personal residence was jointly owned by a taxpayer who qualifies for the exemption and another person, would the other person be entitled to the exemption?

Position: Our administrative position is that no capital gains tax will be imposed on the sale of a principal residence that was purchased and lived in by anyone who would qualify for the exemption under paragraph 149(1)(a) of the Act if it were read without subparagraph (ii) thereof, provided the country of residence grants a similar exemption from taxation in respect of gains on principal residences, which exemption is applicable to an officer or servant of Canada of the same class. Where a gain is realized on a home that was jointly owned by a taxpayer who qualifies for the exemption discussed above and another person, then only such portion of the gain that is attributable to a taxpayer who qualifies for the exemption will be exempted.

Reasons: Administrative position.

January 7, 2011

5 January 2011 Internal T.I. 2010-0389761I7 F - Application du paragraphe 162(7.01)

Unedited CRA Tags
162(7); 162(7.01); 162(7.02);
s. 162(7.01) penalty is cumulative with (7.02). and is computed aggregating base and summary slips and both are computed from initial final deadline if s. 220(3) deadline is missed

Principales Questions:

1. Est-ce que les pénalités prévues aux paragraphes 162(7), 162(7.01) et 167(7.02) peuvent être cumulées?
2. À compter de quelle date le calcul des pénalités sera effectué par l'ARC si les déclarations de renseignements étaient produites après la date de prorogation obtenue conformément au paragraphe 220(3) ?
3. Comment calcule-t-on le nombre de déclarations de renseignements pour les fins du paragraphe 162(7.01) ?

Position Adoptée:

1. Non à l'égard de 162(7) mais possible pour 162(7.01) et 167(7.02).
2. La pénalité pour production tardive sera imposée à partir la date initiale d'exigibilité si la déclaration n'est pas produite avant la fin du délai prorogé.
3. Le nombre de feuillets et de sommaires par type de paiement doivent être additionné afin de déterminer le nombre de déclarations de renseignement en retard et par conséquent, établir la pénalité applicable.

Raisons: Analyse législative.

22 December 2010 Internal T.I. 2010-0390181I7 - Involuntary Disposition - Subsection 44(2)

Principal Issues: Where a property is subject to an involuntary disposition and only a portion of the proceeds have been received how should such amounts be treated for income tax purposes?

Position: The rules in subsection 44(2) will determine the timing of when such amounts should be reported.

Reasons: The law.

21 December 2010 Internal T.I. 2010-0354421I7 - Foreign exchange losses on disposition of cash

Unedited CRA Tags
95(1); 95(2)(a.2); ITR 5907(5)-(6)

Principal Issues: Is it appropriate for the CFA to claim the mark-to-market foreign losses in computing its FAPI and what exchange rate should the taxpayer use when it disposes of its cash?

Position: As the taxpayer is already using GAAP, the temporal method is a method that the CRA accepts. Thus, the taxpayer would have to translate the monetary items at the exchange rate in effect at the balance sheet date. In addition, offsetting FAPI with foreign exchanges losses stemming from year-end exchange rate fluctuations do not seem inappropriate since none of the income of the CFA is from an active business and all amounts seem relevant in the computation of FAPI.

Reasons: Previously stated -- position unchanged.

3 December 2010 Internal T.I. 2010-0375961I7 - Exchange Rate for Foreign Tax Credit

Unedited CRA Tags
126(2); 39(2); 261(2)

Principal Issues: 1. What exchange rate should be used in computing a foreign tax credit?
2. Discuss how subsection 261(2) of the Act affects the rate of exchange used in computing a foreign tax credit.

Position: 1. The weighted average rate for which the income itself was earned or the rate as of the date of actual payment would both be considered acceptable for converting the amount of foreign income-taxes paid for the purposes of determining a foreign tax credit in subsection 126(2) of the Act. The method chosen by the taxpayer would have to remain consistent.
2. The amendment of section 261 in the year 2009 does not change our opinion that both the weighted average rate and the rate as of the date of the actual payment of foreign taxes would be acceptable for converting the amount of foreign income-taxes paid for the purposes of determining a foreign tax credit in subsection 126(2) of the Act.