Income Tax Severed Letters - 2011-04-29


2011 Ruling 2010-0388591R3 F - Post Mortem Planning

Unedited CRA Tags
84.1(1), 84(2), 245(2)

Principales Questions: Post Mortem Planning

Position Adoptée: Favourable rulings provided.

Raisons: Meets the requirements of the law.

2011 Ruling 2010-0370751R3 - Loss consolidation

Unedited CRA Tags
20(1)(c), 12(1)(c), 12(1)(x), 15(1), 56(2), 246(1), 112, 245

Principal Issues: Is loss consolidation acceptable?

Position: Yes

Reasons: Within established parameters.

2010 Ruling 2010-0365371R3 - Cross-Border Restructuring

Unedited CRA Tags
Canada-Luxembourg Tax Convention (1999), Canada-United States Tax Convention (1980), s. 18(4)

Principal Issues: 1. Computation of equity of amalgamated corporation. 2. Whether Article 11 of the Canada-Luxembourg Tax Convention applies to interest payments made by Canadian-resident ULC to Luxembourg company.

Position: 1. The paid-up capital of the amalgamated corporation, determined immediately after the amalgamation, will be considered the amount determined under s. 18(4)(a)(ii)(C) in respect of the calendar month in which the amalgamation occurs. 2. Provided the recipient is the beneficial owner of the interest income, treaty benefits may be claimed by the Luxembourg-resident company under the Luxembourg Convention.

Reasons: 1. Extension of position taken with respect to determining paid-up capital of newly-formed incorporations for the purposes of s. 18(4). 2. Requirements for treaty benefits are satisfied.

2010 Ruling 2009-0351931R3 F - CÉLI - Notion d'avantage

Unedited CRA Tags

Principales Questions: 1) Une émission d'actions par une société donnée en faveur de la fiducie régie par le CÉLI d'actionnaires de la société, suite à un gel, donne-t-elle lieu à un avantage au sens du paragraphe 207.01(1)? 2) Une émission d'actions par une société donnée en faveur d'actionnaires de la société, suite à un gel, suivie par la cotisation de ces actions par chacun de ces actionnaires à la fiducie régie par leur CÉLI respectif, donne-t-elle lieu à un avantage au sens du paragraphe 207.01(1) ?

Position Adoptée: 1) et 2) Oui.

Raisons: 1) Le sous-alinéa b)(i) de la définition de l'expression " avantage " s'applique à l'émission d'actions. 2) Le sous-alinéa b)(i) de la définition de l'expression " avantage " au paragraphe 207.01(1) s'applique à la série d'opérations comprenant l'émission d'actions en faveur des actionnaires et la cotisation de ces actions par chacun des actionnaires à la fiducie régie par leur CÉLI respectif.

2010 Ruling 2010-0384371R3 - Supplementary Ruling

Principal Issues: Supplementary Ruling to 2009-030634

Ministerial Correspondence

14 March 2011 Ministerial Correspondence 2011-0394201M4 - Transfer of Farm Property

Unedited CRA Tags
110.6(1), (1.3), (2); 70; 73; 69

Principal Issues: Tax implications of a transfer of taxpayer's farm property to her children.

Position: None taken.

Reasons: General comments.

21 December 2010 Ministerial Correspondence 2010-0385341M4 - Replacement Property Rules

Unedited CRA Tags
44(1), 146.01

Principal Issues: Suggested amendments to the replacement property rules and the Home Buyers Plan.

Position: Copy of correspondence forwarded to Minister of Finance.

Reasons: Any change to legislation is the responsibility of the Department of Finance Canada.

Technical Interpretation - External

19 April 2011 External T.I. 2011-0392761E5 - Motion picture films, ITA 212(5)

Unedited CRA Tags
212(1)(d)(i), 212(5); ITR 202

Principal Issues: Whether payments to non-residents are subject to a 25% withholding tax under subsection 212(5). Whether the treaty provides any relief for royalties under the Canada-US Tax Convention and the Canada-France Tax Convention

Position: Yes.

Reasons: Under subsection 212(5) withholding tax applies to payments to a non-resident for a "right in or to the use of" a) a motion picture film or b) a film, video tape or other means of reproduction for use in connection with television, that has been or is to be used or reproduced in Canada. Both the Canada-US and Canada-France Treaty may provide relief, as royalties may be reduced to a tax rate of 10% under certain circumstances.

13 April 2011 External T.I. 2011-0395501E5 - Transfer of rental property to a corporation

Unedited CRA Tags

Principal Issues: 1) Can section 85 of the Act be used in transferring depreciable property of two individuals to a corporation and: 2) what amount can be established as the transfer price?

Position: 1) Yes section 85 can be used. 2) No comment on which amount should be established as the transfer amount.

Reasons: 1) A rental property meets the definition of eligible property. 2) It is not the ITR directorate's practice to offer tax planning advice.

13 April 2011 External T.I. 2011-0391751E5 - Art. XXIX(2)(b) and Former U.S. Residents

Unedited CRA Tags
Canada-U.S. Treaty - Art. XXIX(2)(b), Art. XXIX(3)(a), Art. XXIV(3)(b), Art. XV(2)(b)

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.

13 April 2011 External T.I. 2010-0391541E5 - Article V (9) of the Canada-US Tax Convention

Unedited CRA Tags
ITA: 2(3), 115(1); ITR: 105

Principal Issues: Whether Article V (9)(b) of the Treaty will apply to deem USco1 or USco2 to have a permanent establishment in Canada in respect of services provided to a customer described in that subparagraph.

Position: Yes

Reasons: Article V (9)(b) of the Treaty deems an enterprise to have a permanent establishment in Canada, if they provide services for more than 183 days in Canada.

12 April 2011 External T.I. 2010-0385701E5 - US Social Security Lump Sum

Unedited CRA Tags
Paragraph 5(a) of Article XVIII, Canada-US Tax Convention; subsection 56(8); section 120.3

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).

12 April 2011 External T.I. 2010-0390751E5 - Child support - retroactive provision

Unedited CRA Tags
56.1(3); 60.1(3); 56.1(4)

Principal Issues: Whether the child support payments are taxable/deductible in a situation where a court order reducing the child support payments is dated May XXXXXXXXXX , 1997 but the court order stated that this reduction begun on March 1st, 1997.

Position: The new rules apply as a result that the child support payments are non taxable/non deductible from May XXXXXXXXXX , 1997.

Reasons: Where child support payments have already been made under a pre-May 1997 court order and the payer contemplates to have it varied by a court which is effective prior to May 1997, the new rules would generally not be avoided.

11 April 2011 External T.I. 2011-0398011E5 - Active business

Unedited CRA Tags
110.6(1), 125(7), 248(1)

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.

11 April 2011 External T.I. 2011-0397351E5 - Sale of Shares on Account of Income or Capital

Unedited CRA Tags
9, 248(1) "business"; 39(1)

Principal Issues: Whether a disposition of shares where the underlying asset is vacant land is on account of income or capital.

Position: It is a question of fact which depends on the circumstances.

Reasons: It is possible for a taxpayer to have an alternate or secondary intention, at the time of acquiring vacant land, of reselling it at a profit if the main or primary intention is thwarted. If this secondary intention is carried out any gain realized on the sale of the shares will usually be taxed as business income.

7 April 2011 External T.I. 2011-0398601E5 - Reporting Requirements - Farm Support Payments

Unedited CRA Tags
Subsections 162(7), (7.01), (7.02) and paragraph 221(1)(d) of the Act and Regulation 234, 205.1 and 209

Principal Issues: Reporting requirements for farm support payments.

Position: AGR-1 must be filed with CRA when amount equals or exceeds $100.

Reasons: The law.

7 April 2011 External T.I. 2011-0399341E5 - Non-arm's Length Lease of a Luxury Automobile

Unedited CRA Tags
20(1)(a) and 13(2)

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.

4 April 2011 External T.I. 2010-0388741E5 F - Société quittant le Canada

Unedited CRA Tags
88(2); 115(1); 128.1(4); 150(1)a); 219; 250(4)a); 250(5); 250(5.1); Partie XIII; Partie XIV
no requirement to file Canadian returns following continuance

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

30 March 2011 External T.I. 2010-0389161E5 - Not for profit - payments to members

Unedited CRA Tags
149(1)(l), 56(1)(u), 3, 56(1)(n)

Principal Issues: 1. How are certain payments to members taxed and what are the reporting requirements of the organization in respect of the payments?
2. Do the payments disqualify the organization from being exempt from tax under 149(1)(l) of the Act?
3. Should payments made to non-residents or Canadian students outside Canada be treated differently?

Position: 1. The payments could be bursaries or gifts, but are likely social assistance payments pursuant to 56(1)(u) of the Act.
2. Yes, possibly.
3. Reference to relevant guide.

Reasons: 1. Payments are made on the basis of a means, needs or income test.
2. Income cannot be made available for the benefit of members.
3. Canadian residents attending school in another country could still be resident in Canada.

29 March 2011 External T.I. 2011-0398881E5 - Capital Gains - beneficial ownership

Unedited CRA Tags
38; 39

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.

29 March 2011 External T.I. 2010-0390201E5 - Indian--Real Estate Income--Taxable?

Unedited CRA Tags

Principal Issues: Will income earned by an Indian real estate agent be taxable if the Indian is an employee? Will it be taxable if the Indian is self-employed?

Position: Income may be taxable in each situation.

Reasons: Guideline 1, 2 or 3 may apply. If a full exemption is not available a proration may be claimed for income earned from duties completed on a reserve. However, for business income (self-employed) generally we look to the location of the house being sold as the location where the income-earning activities take place.

29 March 2011 External T.I. 2011-0395841E5 - Indian Sole Proprietor

Unedited CRA Tags

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.

28 March 2011 External T.I. 2010-0386381E5 - CCA classification - laser cutting machine

Unedited CRA Tags
20(1)(a) ITA, Class 29, 43, 50, 52 Schedule II, ITR

Principal Issues: Whether a laser cutting machine which is CNC system -controlled is included in class 52.

Position: No.

Reasons: Machinery and equipment that is used in manufacturing or processing of goods for sale or lease and that is acquired after March 18, 2007 and before 2012 is generally included under class 29.

11 March 2011 External T.I. 2010-0377331E5 - Indians - Taxation of RDSP Payments

Unedited CRA Tags
81(1)(a); 146.4(2)

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.

7 February 2011 External T.I. 2011-0392781E5 - Certification as a mineral resource

Unedited CRA Tags

Principal Issues: Whether the particular deposit will qualify as a mineral resource.

Position: Yes.

Reasons: Based on an opinion from Natural Resources Canada who provided a certification that the principal mineral is an industrial mineral contained in a non-bedded desposit.

1 February 2011 External T.I. 2010-0383881E5 - Clergy residence deduction

Unedited CRA Tags

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.

11 January 2011 External T.I. 2009-0341441E5 - Foreign Affiliates

Unedited CRA Tags
Part LIX of the Income Tax Regulations

Principal Issues: Whether a Barbados-incorporated life insurance QIC is resident in Barbados for the purpose of Part LIX of the Income Tax Regulations

Position: Yes, provided that the QIC is managed and controlled in Barbados and is liable to tax in Barbados within the meaning of Article IV of the Canada-Barbados Tax Agreement

Reasons: See document


8 October 2010 Roundtable, 2010-0379341C6 F - Monetization arrangements

Unedited CRA Tags
248(1), 20(1)(c), 245

Principal Issues: Status of CRA's position on monetization arrangements.

Position: See below.

Reasons: See below.

Technical Interpretation - Internal

21 April 2011 Internal T.I. 2010-0388651I7 - Combined application of 124, 125, 126

Unedited CRA Tags
124, 125, 126(2)

Principal Issues: Where a Canadian corporation is considered to have Nexus with a US State without having a PE under the Canada-US Convention:
1. For the purpose of subsection 126(2), would the Canadian corporation be considered to carry on business in the US?
2. For the purpose of paragraph 125(1)(a), can the Canadian corporation include, in income for the year from an active business carried on in Canada, its US business income?
3. For the purpose of section 124 and corresponding regulations, can the Canadian corporation's US business income be included in its "taxable income earned in the year in a province"?

Position: 1.Question of fact; 2. No; 3. Question of fact.

Reasons: Wording of the ITA and previous positions.

19 April 2011 Internal T.I. 2011-0400561I7 - GST deductible under ITA

Unedited CRA Tags
ITA: 12(1)(x); 18(1)(a); 18(1)(t); 20(1)(hh); 67.6; 248(16); 248(18) ETA: 221; 225.2(2); 280(1)

Principal Issues: 1 - Is GST deductible under the ITA? 2 - Is interest assessed on GST deductible for ITA purposes? 3 - Is a penalty assessed under the ETA for late-filed GST deductible for income tax purposes?

Position: 1 - GST is deductible for income tax purposes if it was paid on an expense that is otherwise deductible under the ITA. 2 - An amount paid or payable as interest under Part IX of the ETA, which relates to a GST liability that arose in the course of earning income from a business or property will be deductible provided that the interest accrued during a taxation year that commenced before April 1, 2007. 3 - In this case yes.

Reasons: 1 - IC 77-11 provides for the deductibility of a sales tax reassessment (which would include GST) in computing income under the ITA. It is considered a cost of doing business. 2 -Subparagraph 18(1)(t)(ii) only provides a deduction for interest accrued in a taxation year that commenced before April 1, 2007. 3 - In accordance with section 67.6 of the ITA, fines or penalties that have been imposed after March 22, 2004 are not deductible by a taxpayer. However, one exception is for prescribed penalties. Penalties assessed under paragraphs 280(1)(a), 280(1.1)(a) and 280(2)(a) of the ETA are prescribed penalties for purposes of section 67.6 of the ITA.

15 April 2011 Internal T.I. 2011-0401981I7 - Repayment of vacation

Unedited CRA Tags

Principal Issues: Is a repayment of vacation pay (previously included in employment income) repaid to the employer when the employee terminates his employment early, deductible under paragraph 8(1)(n) of the Act?

Position: Yes

Reasons: The word "period" in paragraph 8(1)(n) of the Act refers to the critical day or days under a contract that the employee must have worked to retain salary/wages. Where an employee is required to repay a prorated amount (the amount of vacation that was not earned), then the period of the contract not worked which gives rise to the partial repayment is the critical period referred to in paragraph 8(1)(n).

April 15, 2011

8 April 2011 Internal T.I. 2011-0395571I7 - Special Workplace Designation

Unedited CRA Tags

Principal Issues: Whether certain employment would be considered employment at a special work site for purposes of subsection 6(6) of the Income Tax Act.

Position: It is a question of fact, but in this situation no.

Reasons: employment is not temporary

7 April 2011 Internal T.I. 2010-0380581I7 - Paragraph 149(1)(l) of the Income Tax Act

Unedited CRA Tags

Principal Issues: 1. Can an unregistered charity qualify for a tax exemption provided by paragraph 149(1)(l)? 2. Is an organization restricted to certain activities or objectives in order to qualify for this tax exemption? 3. Can such an organization fundraise and continue to qualify for an exemption from tax?

Position: 1. No. 2. No, but cannot have any profit purpose. 3. Incidental profits, basic fundraising (lotteries, bake sales, chocolate bar sales etc.), soliciting gifts and grants allowed.

Reasons: 1. Wording of paragraph 149(1)(l) - organization cannot be "charity". 2. The provision does not restrict an organization to a particular activity or objective, only to a lack of profit purpose. 3. Organization must operate "exclusively" for purposes other than profit; incidental profits do not amount to profit purpose.

5 April 2011 Internal T.I. 2011-0395551I7 - Clergy residence deduction

Unedited CRA Tags

Principal Issues: Is a campus minister with the Navigators of Canada eligible for a clergy residence deduction pursuant to paragraph 8(1)(c) of the Income Tax Act (the "Act")?

Position: Yes.

Reasons: The individual satisfies both the status and function tests for the purpose of claiming a deduction under paragraph 8(1)(c) of the Act.

5 April 2011 Internal T.I. 2009-0342481I7 - Canada-France Tax Treaty, Article XX

Unedited CRA Tags
ITA 5(1), 110(1)(f)(i) and 115(1); Canada-France Tax Treaty Article XX

Principal Issues: Whether allowances received by taxpayer are exempt from Canadian taxation pursuant to Article XX of the Canada-France Tax Treaty.

Position: Part of the allowances could be exempted under Article XX of the Treaty provided the conditions of that Article are met.

Reasons: See below.

22 March 2011 Internal T.I. 2011-0396221I7 - 45(2) Election - deemed no change in use

Unedited CRA Tags
54; 40(2)(b); 45(1)(a), 45(2); 220(3.2); ITR 600

Principal Issues: 1. Whether a late-election under subsection 45(2) can be accepted by the CRA. 2. If late-filed 45(2) election is accepted, what are tax implications regarding the adjusted cost base when the taxpayer subsequently sells the property?

Position: 1. The Minister has the authority to accept a late-filed 45(2) election. 2. General comments.

Reasons: 1. Subsection 220(3.2) of the Act in conjunction with Regulation 600 gives the Minister discretion to accept a late filed election. 2. See comments.

March 22, 2011

22 March 2011 Internal T.I. 2010-0387551I7 F - Dépenses - travailleur indépendant

Unedited CRA Tags
18(1)b), 18(1)h), 20(1)a), Règlement 1100(1), Annexe II catégorie 8 et 12
erotic costumes used on website did not qualify
expenses of costumes, breast implants and rejuvenation expenses of erotic website were non-deductible

Principales Questions: Une contribuable qui exploite une entreprise sous forme d'un site Web érotique peut-elle déduire des frais pour un abonnement à un centre de conditionnement physique, pour des implants mammaires, des traitements d'esthétiques et pour des costumes et de la lingerie fine?

Position Adoptée: Question de fait. En l'espèce non puisque les dépenses semblent être de nature personnelle.

Raisons: Loi de l'impôt sur le revenu, position de longue date de l'ARC.

16 March 2011 Internal T.I. 2011-0394691I7 - Definition of a Public Holiday

Unedited CRA Tags
s. 35(1) Interpretation Act

Principal Issues: 1.What are the public holidays that impact the administration of revenue statutes?

Position: While subsection 35(1) of the Interpretation Act includes federal as well as provincial and municipal holidays, further legal research is required to determine which of the latter would apply to the CRA.

7 March 2011 Internal T.I. 2010-0388611I7 - Entity Classification - Liechtenstein Foundation

Unedited CRA Tags
95(1); 91(1)

Principal Issues: 1. Is a Liechtenstein Foundation considered a corporation or a trust for the purposes of the Income Tax Act?
2. Would the Foundation be a controlled foreign affiliate ("CFA") of the taxpayer as defined in subsection 95(1) of the Income Tax Act?

Position: 1. A Liechtenstein Foundation is considered a trust for the purposes of the Income Tax Act
2. No.

Reasons: 1. Technical interpretation 2008-0266251 I7 dated April 15, 2008 found that a Liechtenstein Foundation should be classified as a trust for Canadian income tax purposes as it more closely resembles a Canadian trust under our common law.
2. Due to the fact that we now consider a Liechtenstein Foundation to be a trust, the entity would not meet the definitions of a foreign affiliate or a controlled foreign affiliate in subsection 95(1) of the Act. Therefore, the FAPI rules would not apply to the Foundation.