Income Tax Severed Letters - 2011-04-29

Principal Issues: a) As it applies to former long-term residents of the U.S. (i.e. former green card holders), which country has the right to tax income relating to services performed in the U.S.?
b) Which country should provide a foreign tax credit?

Position: a) Both countries will have the right to tax such income.
b) Canada will provide a foreign tax credit.

Reasons: a) The U.S. reserves the first right to tax former long-term residents on income arising in the U.S. pursuant to Article XXIX(2)(a)(i). Since the individual is also a resident of Canada, the taxpayer's worldwide income is also subject to tax in Canada.
b) Article XXIV does not apply in such instances as Article XXIV(3)(b) effectively deems the income to arise in Canada for the purposes of Article XXIV. This prevents Canada from being required to provide a tax credit under Article XXIV(2)(a)(i) as the income is not arising in the U.S. for the purposes of Article XXIV. The U.S. will not be required to provide any tax credit to be applied against U.S. taxes under Article XXIV(1) since this provision only applies to citizens and residents of the U.S. Article XXIV(1) does not specifically provide any relief to be granted to former long-term residents of the U.S. As the Internal Revenue Code does not appear to provide any other relief in such instances, Canada will have to provide a foreign tax credit pursuant to subsection 126(1) of the Act.

Principal Issues: Subsection 56(8) provides an election to a Canadian resident individual to exclude from income in the year received, the portion of a lump-sum Canada Pension Plan benefit that is in respect of previous years, and consequently, the calculation of additional tax pursuant to section 120.3 will be invoked. Can the election at subsection 56(8) be made in respect of a retroactive lump-sum U.S. Social Security benefit?

Position: Yes

Reasons: Paragraph 5(a) of Article XVIII of the Canada-US Tax Convention provides that a benefit under the social security legislation in the United States paid to a resident of Canada shall be taxable in Canada as though it were a benefit under the Canada Pension Plan, except that 15 percent of the amount of the benefit will be exempt from Canadian tax. Therefore a resident of Canada in receipt of a retroactive lump-sum U.S. Social Security benefit is eligible to make the election pursuant to subsection 56(8).

Principal Issues: Whether the activity of a corporation is considered to be an active business, required for compliance with the definition in subsection 110.6(1) of "qualified small business corporation share", or a "specified investment business".

Position: The activity is considered to be a "specified investment business".

Reasons: It is indicated that the corporation's only business is to receive royalty payments and it has not been indicated that it has more than 5 full-time employees throughout the year.

Principal Issues: Whether the cost of the luxury automobile can be included in Class 10 of Schedule II of the Income Tax Regulations (the "Regulations") instead of Class 10.1.

Position: Probably not in this situation.

Reasons: While a question of fact, it appears that there is an attempt to avoid Class 10.1 treatment.

Principales Questions: Le contribuable veut connaître les exigences concernant la production des déclarations de revenus des sociétés au Canada et les démarches, s'il en est, devant être mises de l'avant afin de permettre à la société par actions de cesser de résider au Canada ou de procéder à sa prorogation. Il désire connaître les incidences d'une liquidation sur le solde des bénéfices non répartis (BNR) de l'actuelle société par actions.

Position Adoptée: Commentaires généraux

Principal Issues: Whether certain residential properties to which the deceased taxpayer held legal title are beneficially owned by the taxpayer's surviving daughters.

Position: None taken. Matter referred to Winnipeg Tax Centre for resolution.

Reasons: The matter concerned completed transactions involving questions of fact in relation to previously assessed T1 income tax returns. The tax centre is responsible for verifying, and processing T1 adjustment requests to previously filed income tax returns.

Principal Issues: 1. If a portion of business income earned by an Indian sole proprietor results from work completed on a reserve will this income be exempt from tax? 2. Can an Indian sole proprietor rely on the Guidelines?

Position: 1. Maybe 2. No

Reasons: 1. If the income is a result of specific tasks or contracts that are more than incidental to the business and can be readily identified then it is possible to claim a partial exemption from tax. 2. The Guidelines are for employment income only.

Principal Issues: (1) Whether payments received from a RDSP are taxed when received by an Indian beneficiary. (2) Whether investment income earned in a RDSP is taxable when paid to an Indian beneficiary.

Position: (1) Yes, other than contributions. (2) Yes, in most cases.

Reasons: (1) Contributions made to an RDSP are not deductible and are not included in the income of a beneficiary when paid out. However, government grants and bonds are included in income when paid out to a beneficiary. Government grants and bonds are not considered to be connected to a reserve. (2) Depends on whether the income-generating activities of the issuer occur on a reserve; likely they do not.

Principal Issues: Whether a Rabbi, who is an employee of the XXXXXXXXXX (the "Entity"), is considered to be exclusively in full- time administrative service by appointment of a religious order.

Position: No.

Reasons: The Entity does not qualify as a religious order for the purpose of paragraph 8(1)(c) of the Act as it does not satisfy at least one of the six conditions necessary to qualify as a religious order.