Income Tax Severed Letters - 2013-10-16

Ruling

2013 Ruling 2012-0467721R3 - IV(7)(b) & PUC increase

CRA Tags
212(2), 84(1), 245, Treaties Article IV(7)(b), 83, Treaties Article X
Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 4
two-step distribution to two S-Corp shareholders of ULC/interest payment to one

Principal Issues: 1. Whether subparagraph 7(b) of Article IV of the Canada-United States Income Tax Convention will apply to deny treaty benefits where a Canadian resident unlimited liability company that is fiscally transparent for United States tax purposes increases its paid up capital and subsequently makes a payment that reduces its paid up capital. 2. Whether subparagraph (7)(b) of Article IV of the Treaty will apply to deny treaty benefits where a Canadian resident unlimited liability company pays interest to its United States-resident shareholder?

Position: 1. No 2. No

Reasons: 1. Subsections 84(1) and 212(2) of the Income Tax Act will apply on the increase of paid-up capital. Tax treatment of the deemed dividend income under the taxation laws of the United States would be the same if the payer of the deemed dividend were not fiscally transparent. 2. Tax treatment of the interest payment under the taxation laws of the United States would be the same if the payer were not fiscally transparent.

Technical Interpretation - External

2 October 2013 External T.I. 2013-0503581E5 - Deductibility of boat expenses

CRA Tags
18(1)(l), 9(1), 18(1)(h), 18(1)(b), 18(1)(a), 67, 248(1) "personal and living expenses"

Principal Issues: Whether expenses for travel from a cottage to the mainland by a boat owned by the taxpayer are deductible; whether expenses for using that boat to entertain clients are deductible

Position: Not likely

Reasons: The law

6 September 2013 External T.I. 2012-0459531E5 - Gross royalty trust units held by an estate

CRA Tags
104(4)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4)
application to Public Trustee trust

Principal Issues: Whether the 21-year deemed realization rule applies where an estate holds gross royalty trust certificates on which income continued to be paid to the estate after the deceased's death.

Position: Yes, where the gross royalty trust certificates are capital in nature.

Reasons: Where gross royalty trust certificates are capital in nature, the 21-year deemed realization rule would apply pursuant to subsection 104(4) of the Act.

Conference

10 June 2013 Roundtable, 2013-0480391C6 - 2013 STEP CRA Roundtable Question 14

Principal Issues: CRA's intention to leverage third parties

Position: General comments

Reasons: See below

10 June 2013 Roundtable, 2013-0480401C6 - 2013 STEP CRA Roundtable Question 15

Principal Issues: Registration style system for tax preparers.

Position: General comments

Reasons: See below

10 June 2013 Roundtable, 2013-0480411C6 - STEP Roundtable – June 2013 - Question 10

Principal Issues: Deductibility of probate and related fees by an estate.

Position: Question of fact

Reasons: In our view, the Tax Court of Canada's decision under the informal procedure was based on the unique facts of the case.

12 June 2013 STEP Roundtable, 2013-0481001C6 - 2013 STEP Canada Roundtable, Question 8

CRA Tags
46(3)
Summary Under
Tax Topics - Income Tax Act - Section 46 - Subsection 46(3)

Principal Issues: What constitutes a "set" under subsection 46(3).

Position: Question of fact

Reasons: See below

11 June 2013 STEP Roundtable, 2013-0480321C6 - 2013 STEP Question 6 US LLCs - FAPI, FAT and FTCs

CRA Tags
20(12), 91(1), 20(11), 126(1), 95(1)
Summary Under
Tax Topics - Income Tax Act - Section 113 - Subsection 113(1) - Paragraph 113(1)(c)
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12)
deduction for US tax on LLC income which also is FAPI
Summary Under
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Foreign Accrual Tax

Principal Issues: 1. Is the US tax paid by the Canadian resident owner of an LLC considered to be foreign accrual tax in respect of the LLC?
2. Would the FAPI income which arises in the hands of the taxpayer be considered foreign source income and can a foreign tax credit then be claimed by the taxpayer against the FAPI inclusion?

Position: 1. No. 2. Yes, if the taxpayer is an individual. No, if the taxpayer is a corporation.

Reasons: 1. In order for an income or profits tax to qualify as foreign accrual tax, the tax must be paid by the particular affiliate (or any other affiliate of the taxpayer in respect of a dividend received from the particular affiliate). 2. Any amount included in income under subsection 91(1), would be considered income from sources in the US for purposes of subsections 20(11) and 126(1). However, any US tax paid in respect of a corporation's share of the income of an LLC would be paid by the corporation in respect of income from a share of the capital stock of a foreign affiliate of the corporation.

10 June 2013 STEP Roundtable, 2013-0480311C6 - 2013 STEP CRA Roundtable - Question 5

CRA Tags
126
Summary Under
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1)

Principal Issues: Can part-year residents claim the foreign tax paid for the entire year as a foreign tax paid for purposes of the foreign tax credit?

Position: While the foreign non-business-income tax or business-income tax paid in respect of the full year is the starting point, the amount of foreign tax credit available to part-year residents is determined by the operation of the formulas in section 126. This is reflected on Form T2209 and explained in greater detail in Income Tax Folio S5-F2-C1, Foreign Tax Credit.

Reasons: Text of section 126.

10 June 2013 STEP Roundtable, 2013-0486001C6 - 2013 STEP CRA Roundtable Question 11

CRA Tags
104(5.3), 104(4), 104(5.8)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(5.8)

Principal Issues: Deemed disposition day of transferee trust on a trust-to-trust transfer where the trust's deemed disposition day was deferred to January 1, 1999.

Position: In this scenario, the earliest day determined under subparagraph 104(5.8)(a)(i) is the day determined under clause 104(5.8)(a)(i)(A).

Reasons: See below.

10 June 2013 STEP Roundtable, 2013-0485761C6 - 2013 STEP CRA Roundtable Question 3

CRA Tags
94.1, 94, 94.2
Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b.2)
Summary Under
Tax Topics - Income Tax Act - Section 233.3 - Subsection 233.3(3)

Principal Issues: Prescribed Form T1135

Position: Extension of reassessment period

Reasons: 2013 Federal Budget proposals; general comments provided.

10 June 2013 STEP Roundtable, 2013-0480371C6 - 2013 STEP Question 13 - US LLCs and 20(11)

CRA Tags
126(1), 20(11)
Summary Under
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(11)
s. 20(11) becomes applicable where LLC income distributed

Principal Issues: Whether a subsection 20(11) deduction is available to an individual in respect of US tax paid on their share of income earned by a US LLC?

Position: Yes, if the individual received a distribution in the year from the LLC. Otherwise, no.

Reasons: In computing the individual's income from the shares of the LLC, there may be deducted under subsection 20(11) the amount, if any, by which the amount of the US tax paid by the individual exceeds 15% of the amount of the dividend income included in computing the individual's income for the year from the LLC.

10 June 2013 STEP Roundtable Q. 7, 2013-0480291C6 - 2013 STEP Roundtable Q.7 - Price adjustment clause

Summary Under
Tax Topics - General Concepts - Effective Date

Principal Issues: Whether a taxpayer's failure to notify the CRA of the existence of a price adjustment clause to an agreement compromises the effectiveness of the price adjustment clause?

Position: No

Reasons: The failure to notify the CRA of the existence of a price adjustment clause when filing a tax return will not, in and of itself, preclude the CRA from recognizing the effectiveness of a price adjustment clause

11 June 2013 STEP Roundtable Q. 9, 2013-0480351C6 - STEP CRA Roundtable Q9 - June 2013

CRA Tags
75(2), 94(8.2), 94(4)(h), 94(8.1), 107(4.1)
Summary Under
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2)
meaning of sale in Sommerer
Words and Phrases
sale

Principal Issues: Does CRA accept the Sommerer decision and can CRA provide guidance on when 75(2) will apply to transactions between an individual and a trust.

Position: Commentary provided on our view of impact of the decision and Budget 2013 changes to 75(2).

Reasons: See below

10 June 2013 STEP CRA Roundtable, 2013-0480361C6 - 2013 STEP, QUESTION 12. RDTOH and Dividend Refunds

CRA Tags
129(1.2)
Summary Under
Tax Topics - Income Tax Act - Section 129 - Subsection 129(1.2)

Principal Issues: An update on our position as stated at the 2005 STEP CRA Roundtable (question 3)

Position: The response to question 3 of the 2005 STEP CRA Roundtable remains our position.

Reasons: See above

10 June 2013 STEP CRA Roundtable, 2013-0480301C6 - 2013 STEP CRA Roundtable – Question 4

CRA Tags
Treaties Article XXIV, 126(7) "non-business-income tax", 20(11), Treaties Article V
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(11)
Art. XXIV(5) rules in US Treaty supplant s. 20(11) and (12) rules
Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 24
Art. 24(5) of US treaty a complete code for US citizens

Principal Issues: What credits and deductions are available to U.S. citizens resident in Canada on taxes paid in respect of dividend income now that rates have increased in conjunction with the "fiscal cliff".

Position: Elimination of double taxation is handled by Art. XXIV,5 Canada-US Treaty.

Reasons: Text of the treaty.

Technical Interpretation - Internal

28 June 2013 Internal T.I. 2013-0474311I7 - Indian - employment income

CRA Tags
81(1)(a)

Principal Issues: 1. Is the employment income of Indian employees exempt under Guideline 4?
2. If not exempt under Guideline 4, will another Guideline or connecting factors apply?

Position: 1. No.
2. Guidelines 1, 2 and 3 may apply to a few employees. Overall, for most employees, the employment income is likely not connected to a reserve and is taxable.

Reasons: 1. The income does not meet the criteria in Guideline 4.
2. For the most part, this is an employee leasing situation. There does not appear to be sufficient benefits flowing to the reserve from the employers to connect the income to a reserve. One company does not appear to be resident on a reserve.