Income Tax Severed Letters - 2011-04-01

Ruling

2011 Ruling 2010-0374291R3 F - Spin-off butterfly

Unedited CRA Tags
55(3)(b); 80(1); 112(1); 186

Principales Questions: Will subsection 55(2) apply to the proposed transactions?

Position Adoptée: No

Raisons: Paragraph 55(3)(b) will apply.

15 December 2010 Ruling 2010-0374211R3 F - Withdrawn Ruling Request

Unedited CRA Tags
40(3.6), 84(2), 84.1, 245(2)

Principales Questions: Whether we can rule that the GAAR does not apply to the proposed transactions?

Position Adoptée: No.

Raisons: According to the taxpayer's representative, the proposed transactions in the ruling request involve a series of transactions similar to the one in ruling F 2005-0134731R3 ("Previous ITR") in which we gave a favourable ruling regarding the GAAR. However, the proposed transactions in this ruling request can be distinguished in many ways from those in the Previous ITR. Among others, the fact that at the outset, the controlling shareholder owns only freeze shares of the capital stock of the corporation carrying on the family business is an important distinguishing factor compared to the Previous ITR. In our opinion, the proposed transactions in the ruling request results in abusive dividend stripping and all the conditions to apply the GAAR are met.

2010 Ruling 2010-0357061R3 - Split-up butterfly

Unedited CRA Tags
55

Principal Issues: A co-ownership agreement will be entered into by the transferees in respect of some of the butterflied property.

Position: The representative made a representation that the transferees will not enter into a partnership in respect of the butterflied property. As long as that statement is accurate, the entering into a co-ownership agreement in itself does not taint the butterfly.

Reasons: 55(3.1)(c) does not apply.

Ministerial Correspondence

24 March 2011 Ministerial Correspondence 2010-0385321M4 - medical expenses - travel

Unedited CRA Tags
118.2(2)(h)

Principal Issues: What medical expenses can be claimed with respect to travel for purposes of paragraph 118.2(2)(h)?

Position: Paragraph 118.2(2)(h) provides that reasonable travel expenses can be claimed if a patient must travel at least 80 km from the locality where the patient dwells to a place where medical services are provided if substantially equivalent medical services are not available in that locality; the route travelled by the patient is a reasonable direct route, having regard to the circumstances; and the patient travels to that place to obtain medical services for himself or herself and it is reasonable under the circumstances to travel to that place to obtain those services. Reasonable travel expenses include accommodation, meals, and parking while en route to the medical facility and also once the patient arrives and is receiving treatment at the medical facility such as a hospital. In addition, if a patient is an outpatient at a medical facility and is staying at a hotel, the patient can claim the cost of meals, accommodation, and parking. If the patient's medical practitioner certifies that the patient is incapable of travelling alone, the patient can also claim the cost of meals, accommodation and parking of a accompanying individual.

Reasons: Clarification of policy with respect to medical expenses - travel. See 2010 CTF Q&A on medical travel.

24 March 2011 Ministerial Correspondence 2010-0391371M4 - medical expenses - travel

Unedited CRA Tags
118.2(2)(h)

Principal Issues: What medical expenses can be claimed with respect to travel for purposes of paragraph 118.2(2)(h)?

Position: Paragraph 118.2(2)(h) provides that reasonable travel expenses can be claimed if a patient must travel at least 80 km from the locality where the patient dwells to a place where medical services are provided if substantially equivalent medical services are not available in that locality; the route travelled by the patient is a reasonable direct route, having regard to the circumstances; and the patient travels to that place to obtain medical services for himself or herself and it is reasonable under the circumstances to travel to that place to obtain those services. Reasonable travel expenses include accommodation, meals, and parking while en route to the medical facility and also once the patient arrives and is receiving treatment at the medical facility such as a hospital. In addition, if a patient is an outpatient at a medical facility and is staying at a hotel, the patient can claim the cost of meals, accommodation, and parking. If the patient's medical practitioner certifies that the patient is incapable of travelling alone, the patient can also claim the cost of meals, accommodation and parking of a accompanying individual.

Reasons: Clarification of policy with respect to medical expenses - travel. See 2010 CTF Q&A on medical travel.

28 September 2010 Ministerial Correspondence 2010-0378121M4 - medical expenses - vitamins

Unedited CRA Tags
118.2(2)(n)

Principal Issues: Whether the cost of vitamins qualifies as a medical expense for the purposes of the medical expense tax credit

Position: No

Reasons: Wording of 118.2(2)(n)

Technical Interpretation - External

29 March 2011 External T.I. 2009-0351721E5 - Interest/ Penalty on Taxpayer-Requested Adjustment

Unedited CRA Tags
s. 161(7)(b), 162(1).

Principal Issues: Whether interest and penalty are exigible on a request to revise the small business deduction allocation to zero, then carry back sufficient losses to reduce the resulting tax payable to zero.

Position: Interest, yes; penalty, no. But the associated companies could be eligible for a refund.

Reasons: Pursuant to subparagraph 161(7)(b)(iv), interest is payable for another 30 days on the tax that would have been payable, but for the loss carry-back. A penalty is not exigible as a return has not been filed late; rather, it is an adjustment requested of a return.

23 March 2011 External T.I. 2010-0382351E5 F - Bourses d'études ou subventions de recherche

Unedited CRA Tags
56(1)n); 56(1)o); 56(3); 5
research was conducted in course of doctoral studies, so that expenses thereof non-deductible
Words and Phrases
scholarship

Principales Questions: Un étudiant de troisième cycle peut-il déduire les frais associés à l'acquisition d'un paramoteur qui est nécessaire à la poursuite de ses travaux de recherche?

Position Adoptée: Question de fait. En l'espèce, non. L'étudiant ne semble pas recevoir des subventions de recherche mais plutôt des bourses d'études ou de perfectionnement.

Raisons: La Loi de l'impôt sur le revenu.

21 March 2011 External T.I. 2011-0395011E5 - Deductibility of Ontario SAT

Unedited CRA Tags
18

Principal Issues: Whether the Ontario Special Additional Tax on Life Insurance Corporations (SAT) is considered a capital tax and is therefore deductible in computing income for tax purposes.

Position: The amount is deductible for federal and provincial purposes for taxation years ending after December 31, 2008. Consequently, when the SAT credit is applied to reduce income taxes payable in a subsequent year, it is taxable under 12(1)(x)(iv) as a reimbursement of an outlay or expense.

Reasons: The SAT is a provincial capital tax because it is paid on the taxable paid-up capital of the life insurance corporation. Provincial capital taxes are generally deductible.

21 March 2011 External T.I. 2010-0375341E5 F - Associé déterminé

Unedited CRA Tags
248(1); 40(3.1)
an upper-tier partnership, and potentially a corporate partner, may be actively involved in the partnership

Principales Questions: Est-ce qu'une société en nom collectif ou une société peut prendre une part active dans les activités de l'entreprise d'une société en nom collectif de façon régulière, continue et importante durant toute l'année?

Position Adoptée: Question de fait. Dans la première situation, c'est possible en raison des activités de l'associé sous réserve des contrats de société de personnes impliquées. Dans la seconde situation, nous sommes d'avis qu'il serait possible de tenir compte du degré d'implication entres autres, des administrateurs et des employés de la société pour vérifier si cette dernière participe de façon active à l'entreprise de la société de personnes.

Raisons: La Loi de l'impôt sur le revenu.

14 March 2011 External T.I. 2010-0390311E5 - Section 159 of the Income Tax Act

Unedited CRA Tags
s. 159

Principal Issues: Whether the administrator of an estate could be held personally liable for using estate assets to defray expenses without first obtaining a clearance certificate?

Position: Yes.

Reasons: Subsection 159(3) imposes a personal liability on the legal representative of an estate for distributing the estate's assets without first obtaining a clearance certificate. Were the derivative liability under subsection 159(3) to be assessed, the administrator could challenge the underlying assessment.

12 January 2011 External T.I. 2010-0388821E5 F - Discretionary dividend

SIOH where two discretionary-dividend classes potentially allocable fully to class with 100% winding-up participation
Opco with voting shares held by individual and prefs held by his Holdco was connected to Holdco

Principal Issues: In a situation where a corporation (SoOp) has always had 100 class A (held by Mr. A) and 900 class B shares (held by a corporation (Gesco) wholly-owned by Mr. A) of its capital stock issued and outstanding, the class A shares having all the usual rights of a common share and the class B shares being non voting, non participating in the distribution of the corporation`s property in the process of dissolution and having the right to discretionary dividends: how safe income on hand should be allocated between the two classes of shares

Position: The amount of safe income on hand allocatable to a share is a question of fact which requires a review of all facts and circumstances. In this particular situation, it is possible that all the safe income on hand may be allocated to the class A shares.

Reasons: Position in document 2002-0158885 involving a similar situation.

6 January 2011 External T.I. 2009-0350811E5 - Testamentary Insurance Trust

Unedited CRA Tags
s.108(1)

Principal Issues: Whether the trust created by an individual, on the receipt of insurance proceeds, payable upon his death to one of his children will be viewed by the Canada Revenue Agency as a testamentary trust or an inter vivos trust.

Position: The trust created will be viewed as a testamentary insurance trust provided the trust is a valid trust and was created by the individual whose life is insured.

Reasons: A trust created pursuant to the individual's will or other testamentary instrument will not lose its testamentary trust status solely be reason of the receipt of the proceeds of an insurance policy on that individual (who was the policyholder), where the trust is the designated beneficiary under the policy and the trust was not created or settled before the death of the individual.

Conference

8 October 2010 Roundtable, 2010-0373211C6 F - Butterfly Transaction - Permitted Exchange

Unedited CRA Tags
55(1), 55(3)(b), 55(3.1), 248(10)
issuance of shares by TC after the DC distribution not relevant to there being “permitted exchange”
issuance of shares by TC after the DC distribution without AOC of TC does not engage s. 55(3.1)(b)

Principales Questions: Where, after a butterfly transaction, a family trust acquires shares of the capital stock of a transferee corporation, whether it has an effect on the application of the definition of "permitted exchange" in subsection 55(1).

Position Adoptée: General comments provided.

Raisons: See response below.

8 October 2010 Roundtable, 2010-0373231C6 F - Application of subsections 51(1) and 85(1)

Unedited CRA Tags
51(1), 85(1)
share consideration need not be immediately issuable

Principales Questions: a) Paragraph 35 of the Interpretation Bulletin IT-291R3 states that CRA accepts an election under subsection 85(1) where the shares to be issued as consideration for the transferred property have not been legally authorized under the articles of the corporation at the time of the transfer provided that all the conditions set out in this paragraph are satisfied. Whether this position is still valid; b) Whether CRA would accept an election under subsection 85(1) in the case where the articles of the corporation are modified after the deadline set out in subsection 85(6) provided that all the conditions set out in paragraph 35 of the Interpretation Bulletin IT-291R3 are satisfied; c) whether the position stated in document 2003-0030145 is still valid; and d) If the answer to question c) is positive, CRA is asked to explain the difference between its position regarding the application of subsection 51(1) compared to the one regarding the application of subsection 85(1).

Position Adoptée: a) yes; b) yes; c) yes; and d) The expression "consideration that includes shares" in subsection 85(1) does not imply that the shares must necessarily be issued simultaneously with the transfer of property to the company. However the wording of subsection 51(1) is clear as to the fact that a share of the capital stock of a corporation must be received by a taxpayer simultaneously with the remittance by the later of the exchanged property to the corporation

Raisons: Wording of the Act and previous positions.

8 October 2010 Roundtable, 2010-0373241C6 F - Acquisition of Control

Unedited CRA Tags
256(6.1), 256(7)(d)
question of fact whether somersault transaction results in acquisition of control of a public company
purpose is to take into account simultaneous control at the various levels

Principales Questions: Whether paragraphs 256(6.1)(a) and 256(7)(d) apply in a given situation in such a way as to not cause the acquisition of control of Opco.

Position Adoptée: General comments provided.

Raisons: Wording of the Act and previous positions.

Technical Interpretation - Internal

23 March 2011 Internal T.I. 2010-0389081I7 F - Disposition of a resource property

Unedited CRA Tags
66.2(5); 66.1(6)
proceeds from mineral claims sale included undiscounted deferred cash proceeds, but might exclude share consideration until issued; purchaser’s CEE obligation excluded
proceeds included full (undiscounted) deferred cash proceeds, but might exclude share consideration (with volatile market price) until issued
Words and Phrases
sale price
deferred share consideration potentially not recognized until issuance
full undiscounted amount of future cash consideration to be included as an amount receivable

Principal Issues: 1. At what time the resource property was transferred by the Vendor to the Purchaser?
2. In which taxation year the proceeds of disposition or part of it should be included in the amount described in F of the definition of cumulative Canadian development expense?
3. Will the CRA apply the administrative position described in paragraph 14 of the Interpretation Bulletin IT-125R4 with respect to the exploration expenses the Purchaser has to incur in consideration for the acquisition of the resource property that is unproven?

Position: 1. In the present situation, the date of the transfer is the effective date provided for in the contract.
2. It will depend on when the proceeds of disposition will become receivable by the Vendor and more specifically, on when the proceeds or part of it will be ascertainable.
3. Yes

Reasons: 1. XXXXXXXXXX .
2. Wording of the Act.
3. Even if the situation in this file is different from the examples described in paragraph 14 of IT-125R4, the CRA will accept to apply the administrative position with respect to farm-out transactions. Consequently, an amount corresponding to the exploration expenses to be incurred by the Purchaser would not give rise to proceeds of disposition for the Vendor for purposes of F of the definition of cumulative Canadian development expense

10 January 2011 Internal T.I. 2009-0344251I7 - Application of subsection 246(1)

Unedited CRA Tags
246(1); 15(1)
246(1) application to upper-tier shareholder

Principal Issues: Whether, in this case, subsection 246(1) can be applied on its own as a stand-alone basis of assessment.

Position: Yes.

Reasons: Federal Court of Appeal decision in Massicotte.