Income Tax Severed Letters - 2013-02-13


2012 Ruling 2010-0386201R3 - Tower structure capitalized by interest-free loans

CRA Tags
95(2)(a)(ii)(D), 20(12), 126, 247(2), 95(2)(a)(ii)(B), 39(1), 245(2), 113, 17(8), 17(3), 39(2), 95(2)(i), 17(2), 112, 95(1), 40(2)(g)(ii), 17(1), 20(1)(c), 247(7)
unwinding of tower where LLC and ULC funded with non-interest bearing U.S. dollar loans - Byram applied
non-interest-bearing loans is made for income producing purposes: generating dividends

Summary under s. 40(2)(g)(ii).

Principal Issues: (1) Whether income of FA Opco from carrying on its business operations in relation to the O&M Agreement will be regarded as "income from an active business" (95(1))? (2) Whether 95(2)(a)(ii)(B) and 95(2)(a)(ii)(D) requalification rules will apply? (3) Whether 95(2)(i) will apply to deem any gain or loss realized on the settlement of interest-free loans made to capitalized the structure (Loans) to be gain or loss from disposition of "excluded property" (95)(1)? (4) Whether 39(1) and 39(2) will apply in respect of any gain or loss realized on the settlement of Loans? (5) Whether 40(2)(g)(ii) will apply in respect of any loss realized on the settlement of Loans? (6) Whether 17(1) will apply to result in an inclusion in computing the income of ULC? (7) Whether 112 and 113 will apply in respect of dividend paid by LLC and ULC? (8) Whether 20(1)(c) will apply? (9) Whether 245(2) and 247(2)?

Position: (1) Yes. (2) Yes. (3) Yes. (4) Yes. (5) No. (6) No. (7) Yes. (8) Yes. (9) No, subject to caveat.

Reasons: Application of the Act and previous interpretation.

Technical Interpretation - External

23 October 2012 External T.I. 2011-0431301E5 - Meaning of Substantial Operation

CRA Tags
Canada-Sweden Tax Convention, 248(1), 250(6)

Principal Issues: What is the meaning of the term "substantial operation" for the purposes of paragraph 2 of Article 8 of the Canada-Sweden Tax

Position: The Canada-Sweden Tax Convention does not clarify the meaning of the term "substantial operation". This term is also not defined in the Act. The term takes on its ordinary meaning under domestic law.

Reasons: Whether or not an enterprise has a "substantial operation" for the purposes of the treaty is essentially a question of fact. The CRA will review and evaluate a number of factors or criteria in making such a determination.

Technical Interpretation - Internal

21 December 2012 Internal T.I. 2009-0327221I7 - Paragraph 7(1)(e) - Death of a Taxpayer

CRA Tags
164(6.1), 7(1)(e), 110(1)(d), 49(3)(b), 69(1)(c)

Summaries under ss. 110(1)(d) and 69(1)(c).

Principal Issues: Where an employee held unexercised employee stock options at the time of the employee's death, what are the tax consequences to the deceased employee and the estate of the deceased employee? What are an employer's reporting obligations in this situation?

Position: The employee is deemed to have received a benefit in the year of death equal to the value of the stock options immediately after death less any amount paid by the employee to acquire the options. We generally accept to apply the provisions of paragraph 69(1)(c) of the Act such that the stock option is deemed to have been acquired by the estate at a cost equal to its fair market value. In general, where the estate exercises an employee stock option, the adjusted cost base of the option will be added to the cost of the shares acquired. The employer is required to issue a T4 slip in the name of the deceased employee in the year of death.

Reasons: Paragraph 7(1)(e). The provisions of paragraphs 69(1)(c) and 49(3)(b). Subsection 200(1) and (2) of the Income Tax Regulations.

5 November 2012 Internal T.I. 2011-0402381I7 - Transitional Tax Debit and Credit

CRA Tags
Taxation Act 46(2), Taxation Act 48(1), Taxation Act 48(2), Taxation Act 46(1)

Principal Issues: Whether the revised CCA and CEC deductions in years prior to 2009 are a "tainting transaction" where the CCA and CEC amounts are increased and a smaller non-capital loss is applied and the non-capital loss expires before 2009.

Position: Yes, but not one to which we would apply subsection 46(2) to shorten the amortization period.

Reasons: The reduced federal UCC and CEC pools reduce the transitional tax debit, however, it also leaves less CCA and CEC to be deducted in years after 2008. The reduced transitional debit is offset by higher Ontario income tax after 2008.