Income Tax Severed Letters - 2011-02-18

Ruling

2010 Ruling 2010-0360361R3 - Indian LP - 20(1)(c) Deduction

Unedited CRA Tags
20(1)(c); 78

Principal Issues: 1. Is the LP income of the Band tax-exempt because the Band is a public body performing a function of government as described in paragraph 149(1)(c) of the ITA? 2. Whether 20(1)(c) allows the deduction of interest for an amount owing between an Indian band and its subsidiary.

Position: 1. Yes. 2. Yes.

Reasons: 1. The Band has passed various by-laws pursuant to sections 81 and 83 of the Indian Act. 2. The subsidiary borrowed the amount from the band in order to obtain income-producing property. The subsidiary is taxable on the income from the property acquired with the amount borrowed. Substantially similar to rulings issued recently to same taxpayer.

XXXXXXXXXX 2010-036036

XXXXXXXXXX , 2010

2010 Ruling 2010-0359981R3 - License and Service Fee Payments

Unedited CRA Tags
Canada-United States Income Tax Convention (1980) - Article IV(7)(b)

Principal Issues: 1) Whether a subsection 84(1) deemed dividend is a dividend for the purposes of Article X of the Treaty; 2) Whether Article IV(7)(b) of the Treaty applies to treat a subsection 84(1) deemed dividend as not being paid to or derived by a resident of the United States; 3) Whether Article IV(7)(b) of the Treaty applies to treat certain royalty and service fee payments as not being paid to or derived by a resident of the United States.

Position: 1) The definition of "dividends" in Article X(3) of the Treaty is broad enough to include a subsection 84(1) deemed dividend; 2) Article IV(7)(b) does not apply because the deemed dividend is subject to the same treatment under the taxation laws of the United States as it would be if the dividend payer were not fiscally transparent; 3) Article IV(7)(b) does not apply because the royalties and service fees are subject to the same treatment under the taxation laws of the United States as they would be if the payer of the fees was not fiscally transparent.

Technical Interpretation - External

21 January 2011 External T.I. 2010-0359261E5 - Carrying on Business in Canada

Unedited CRA Tags
ITA 2(3), 4(1)(b), 13(7), 13(9), 20(1)(a), 20(16), 115, 150 & 250; IT Regulations 102 & 105

Principal Issues: 1) Will the maintenance of a structure located on the Canadian side of the Canada-U.S. border by a resident of the United States result in the non-resident being considered to be carrying on business in Canada through a permanent establishment? 2) What rules apply to the use of equipment in Canada?

Position: 1) The non-resident will be considered to be carrying on a business in Canada - the existence of a permanent establishment will depend on the whether the non-resident's work on the structure lasts longer than twelve months; 2) The equipment will be deemed to be acquired for Canadian tax purposes at its fair market value at the time it enters and leaves Canada

Reasons: 1) Subsection 2(3) and section 115 of the Income Tax Act and Articles V and VII of the Canada-United States Tax Convention; 2) Subsection 13(7) of the Income Tax Act

11 January 2011 External T.I. 2010-0376961E5 - Passive income and 149(1)(d.5)

Unedited CRA Tags
149(1)(d.5), 149(1)(c), 149(2), 3

Principal Issues: Are factors evaluated in previous interpretation 1999-0006955 still applicable?

Position: Generally, yes, but each situation must be considered based on its own facts.

Reasons: The location of activities carried on for the purpose of paragraph 149(1)(d.5) is a factual determination.

6 January 2011 External T.I. 2009-0306591E5 - Deductibility of legal costs to create a Trust

Unedited CRA Tags
18(1)(a); 18(1)(b); 14(5); 20(1)(b); 74.3;75(2);(56(4.1)

Principal Issues: 1. Whether legal costs to create a trust are deductible as a current expense or eligible capital expenditure? 2. Whether payment of legal costs by trustee would be considered a contribution to trust and invoke attribution rules?

Position: 1. No. 2. Unable to comment.

Reasons: 1.Legal costs are on account of capital, but not incurred in respect of a business and not incurred for the purpose of gaining or producing income from a business or property. 2. Information not sufficient to comment.

6 January 2011 External T.I. 2010-0372531E5 - First Nation Land Claim Settlement Trust Income

Unedited CRA Tags
75(2); 104(6); 104(13); 149(1)(c)

Principal Issues: What is the tax treatment of income derived from a trust on: (1) amounts paid out to beneficiaries; (2) amounts reinvested in the trust; and (3) any income earned on reinvested amounts.

Position: (1) Depends on the facts; (2) depends on whether or not subsection 75(2) applies; (3) income to the trust which may be taxed in the trust or paid to beneficiaries.

Reasons: Subsection 75(2) does not apply to secondary income.

8 December 2010 External T.I. 2010-0380481E5 - Indian - employment income - proration

Unedited CRA Tags
81(1)(a)

Principal Issues: How is the Indian Act exemption calculated with respect to employment income in a specific situation?

Position: Example proration given.

Reasons: Guideline 1 appears to apply to prorate the exemption.

14 October 2010 External T.I. 2010-0377351E5 - Bursaries and Education credits - Indian

Unedited CRA Tags
56(1)(n), 56(3), 118.5, 118.6, Reg 200(2)

Principal Issues: 1. Is financial assistance for education paid by XXXXXXXXXX First Nation taxable to the students?
2. Should income tax be withheld on amounts paid for financial assistance to students?
3. Does anything change if the student is an employee of the First Nation?
4. What tax credits are available to the students?
5. Does it make any difference to the student if the student is not resident in XXXXXXXXXX ?

Position: 1. Scholarships and bursaries are taxable under 56(1)(n), but the student may qualify for the scholarship exemption under 56(3).
2. If the amount is determined to be a scholarship or bursary, no income tax withholdings are required.
3. Possibly - see the document.
4. Tuition, education and textbook tax credits are available, subject to all of the usual criteria, to the students.
5. Generally, in this situation, the taxation is the same for all students resident in Canada.

Conference

8 October 2010 Roundtable, 2010-0373131C6 F - Présomption d'action concertée

Summary Under
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(2) - Paragraph 251.2(2)(a)
Q of fact re whether 3 or more CCPC shareholders form a group

Principales Questions: Est-ce que l'ARC peut préciser le fondement de la présomption contenue dans le bulletin d'interprétation IT-419R2 à l'effet que les actionnaires d'une société fermée qui a trois actionnaires non liés agiront ensemble en vue d'exercer le contrôle de la société?

Position Adoptée: Aucune.

Raisons: Question de fait. Bien que l'ARC présume effectivement que, dans de telle situation, les actionnaires agissent ensemble en vue de contrôler la société et par conséquent, qu'ils forment un groupe de personnes qui la contrôle, il est toutefois possible, après un examen et une analyse de tous les faits, documents légaux et circonstances entourant une situation particulière, que l'ARC considère que les trois actionnaires ne forment pas un groupe de personnes qui contrôle la société s'il est démontré qu'il n'existe pas de lien ou d'intérêt commun entre ces trois actionnaires ou que ceux-ci n'agissent pas ensemble en vue de contrôler la société.

Technical Interpretation - Internal

24 January 2011 Internal T.I. 2010-0389251I7 F - Farm-out agreement and warrants

Unedited CRA Tags
49(3); 66.1(6)
Summary Under
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (j)
CEE to be incurred under simple farmout reduced by an allocation to warrants issued by farmee
Summary Under
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)
valuation of “free” warrants issued as part of a simple farmout agreement determined based on what would be a s. 15(1) benefit
Summary Under
Tax Topics - General Concepts - Fair Market Value - Options
amount allocated out of consideration to “free” warrants based on the greater of their trading and in-the-money value
Summary Under
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (f)
application of farmout policy to situation where free warrants issued along with incurring of CEE

Principales Questions: What are the income tax consequences with respect to an agreement where a purchaser agrees to expend money in exploration expenses in consideration for the acquisition of an undivided interest in an unproven resource property of the seller and the granting by the seller of warrants to acquire shares of the capital stock of the seller?

Position Adoptée: Part of the exploration expenses incurred should constitute a consideration for a right to a share of the seller. The value of such consideration would reduce the Canadian exploration expenses of the purchaser pursuant to paragraph (j) of the definition of "Canadian exploration expense" (CEE) in subsection 66.1(6) of the Act. However, if it was demonstrated that no consideration was given by the purchaser for the warrants, subsection 15(1) would apply to include in the purchaser's income the value of the benefit. Alternatively, the warrants could be found to constitute assistance, as defined in subsection 66(15) of the Act, in respect of a portion of the CEE. This would reduce the cumulative CEE pursuant to item J of the definition of such term in subsection 66.1(6). The amount that would reduce the CEE or cumulative CEE, or the amount added in income pursuant to subsection 15(1), would constitute the acquisition cost of the warrants which would be added, pursuant to subsection 49(3), to the cost of the shares acquired at the time of the exercise of the warrants.
The administrative position stated in Interpretation Bulletin IT-125R4 with respect to the simple farm-out would apply with respect to the acquisition of the interest in the unproven resource property in consideration for the CEE that are not part of the consideration for the warrants. The property would not have an acquisition cost for the purchaser and the consideration for that part of the deal would be considered CEE if the expenses otherwise qualify. The seller would not include in its income any proceeds of disposition with respect to the disposition of the unproven resource property.

Raisons: Wording of the Act and previous positions.

9 December 2010 Internal T.I. 2010-0371741I7 F - Automobiles mises à la disposition des employés

Summary Under
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(e)
employer-provided automobile to attend occasional off-site meetings did not generate a benefit
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Automobile
qualification as automobiles turns on design, not use

Principal Issues: Est-ce que l'usage des véhicules à moteur fournis par l'employeur dans les situations décrites ci-dessus donne lieu à un avantage imposable à être inclus dans le revenu des employés utilisant lesdits véhicules. Dans le cadre de cette analyse, est-ce que les véhicules fournis par l'employeur aux employés satisfont à la définition d'automobile aux termes du paragraphe 248(1).

Position: Nous serions d'avis - à la lumière de l'utilisation qui en est fait - que ces véhicules sont des automobiles aux fins de la Loi. Nous sommes d'avis que les deux situations décrites ne donneraient pas lieu à un avantage imposable à inclure dans le calcul du revenu de l'employé.

Reasons: Puisque les véhicules de XXXXXXXXXX sont conçus et aménagés avec plus de trois place assise et qu'ils ne sont pas semblables à une fourgonnette ou à une camionnette. Sous réserve d'un examen de tous les faits pertinents, de tels déplacements (de la résidence de l'employé) seraient considérés comme des déplacements liés au travail de l'employé de l'Employeur.

19 November 2010 Internal T.I. 2010-0383001I7 - Meaning of "Operated"--149(1)(l)

Unedited CRA Tags
149(1)(l)

Principal Issues: When interpreting paragraph 149(1)(l) of the Act what meaning is given to the word "operated"?

Position: Operated means the way the organization's activities were undertaken in the past.

Reasons: Wording of paragraph 149(1)(l).

25 October 2010 Internal T.I. 2010-0378361I7 - Sabbatical leave - Indian Employee

Unedited CRA Tags
81(1)(a)

Principal Issues: Is the employment income of an Indian exempt from tax if the employee is on sabbatical and has an office on a reserve during this time?

Position: No, the employment income is taxable.

Reasons: Guidelines 2 and 4 are not relevant in this situation. For the purposes of Guidelines 1 and 3, the employee is not performing "duties of employment" while on sabbatical.