Income Tax Severed Letters - 2012-08-24

Principales Questions: In a situation where the purpose test set out in subsection 74.4(2) is met with respect to a transfer of property by X, how would be computed the amount to be included in X's income by virtue of subsection 74.4(2) after the transfer of the excluded consideration received by X from the corporation in favour of another corporation controlled by X?

Position Adoptée: General information provided.

Raisons: Wording of the Act.

Principal Issues: "Approved" status requested XXXXXXXXXX.

Position: Approval recommended.

Reasons: Information submitted meets the conditions for approval, as set out in Application Policy Paper 96-10 which provides certain requirements to be met in respect of (a) SR&ED, (b) facilities and personnel (c) non-profit status (d) the public as beneficiary and (e) adequate funding for the SR&ED activities. These requirements are described in this letter.

Principal Issues: Whether the term “share” as described in subparagraph 3(b)(ii) of Article XIII(3) of the Canada-U.S. Tax Convention (1980) includes an option in respect thereof.

Position: No

Reasons: Under the Treaty, real property situated in Canada generally includes a share of the capital stock of a company resident in Canada. However, “a share” is defined under the Treaty to have the same meaning which it has under the Income Tax Act, which does not include an option in a share.

Principal Issues: What are the Canadian tax implications for a Canadian resident (“Taxpayer”) who works as a full-time employee at a corporation resident in the United States (“US”) and participates in its 401(k) plan?

Position: It is question of fact how a 401(k) plan will be treated under the Act. If there are no employer contributions to a 401(k) plan, the employee contributions will not be deductible under the Act. If there are employer contributions, a 401(k) plan will be considered an EBP.
However, despite this determination, paragraph 10 of Article XVIII of the Canada-US Convention states that all Taxpayer and employer contributions to “qualifying retirement plan” (“QRP”) will be deductible/excludible from the Taxpayer’s income. A 401(k) plan is considered a QRP.
The amount of contributions otherwise allowable as a deduction under paragraph 10 of Article XVIII may not exceed the individual's deduction limit for contributions to registered retirement savings plans (RRSPs) remaining after taking into account the amount of contributions to RRSPs deducted by the individual under the law of Canada for the year. The amount deducted by the individual under paragraph 10 of Article XVIII will be taken into account in computing the individual's deduction limit for subsequent taxation years for contributions to RRSPs.

Reasons: See below.