Income Tax Severed Letters - 2014-11-19

Ruling

2014 Ruling 2012-0432441R3 - Butterfly reorganization

CRA Tags
55(3.1)(b), 55(3)(b), 55(3.1)(a)
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution
sibling split-up

Principal Issues: Whether the proposed transaction satisfies the requirements applicable to the butterfly exemption found in paragraph 55(3)(b)

Position: Yes

Reasons: The law

Ministerial Correspondence

4 April 2014 Ministerial Correspondence 2014-0519461M4 - ETF a qualified investment if traded on BATS?

CRA Tags
204 "qualified investments", 248(1) "designated stock exchange", 262
Summary Under
Tax Topics - Income Tax Act - Section 262
policy behind stock market designation/BATS

Principal Issues: Is the BATS a designated stock exchange and is an ETF traded on BATS a qualified investment for the purposes of an RRSP or TFSA?

Position: No.

Reasons: BATS is not listed on the Department of Finance's list of Designated Stock Exchanges

27 March 2014 Ministerial Correspondence 2014-0518601M4 - Non-qualified investments held in registered plans

CRA Tags
204 "qualified investments", 207.07(1), 207.01(5), 162(7), 207.04(1), 207.06(2), 207.04(2)
Summary Under
Tax Topics - Income Tax Act - Section 204 - Qualified Investment - Paragraph (d)
meaning of "securities"
Summary Under
Tax Topics - Income Tax Act - Section 207.04 - Subsection 207.04(2)
tax triggered when qualified investment becomes non-qualified

Principal Issues: Was the tax treatment of a qualified investment held in a registered plan, that subsequently becomes a non-qualified investment correct?

Position: Yes.

Reasons: Legislation under subsection 207.04(1) and 207.04(2).

Technical Interpretation - External

29 October 2014 External T.I. 2014-0534641E5 - Deductibility of interest

CRA Tags
20(1)(c)

Principal Issues: Whether interest payments on borrowed money used for the purpose of earning income are deductible under paragraph 20(1)(c)?

Position: Yes, assuming the other requisite tests in the provision are met.

Reasons: Paragraph 20(1)(c) contains an eligible use purpose test and such test must be met

23 October 2014 External T.I. 2014-0526471E5 - EI Benefits to Self-employed Indian fishers

CRA Tags
81(1)(a), Indian Act 87(1)(b)

Principal Issues: If a self-employed Indian's fishing income is exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act, is their employment insurance income also exempt from tax under these provisions?

Position: It depends on the strength of the connection between the employment insurance benefits and the fishing income. If the income which gives rise to the entitlement to employment insurance benefits is situated on a reserve and the connection between the employment insurance benefits received and the income is strong, then the employment insurance benefits received by the self-employed Indian fishers would also be situated on the reserve and thus exempt from tax.

Reasons: Paragraph 87(1)(b) of the Indian Act

6 October 2014 External T.I. 2014-0543751E5 F - Rollover of a part of an interest in a partnership

CRA Tags
85(1), 85(1.1)
Summary Under
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1)
fractional partnership interest qualifies as eligible property
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property
partnership interest is one property - but fraction thereof also is property if transferred

Principales Questions: Whether subsection 85(1) may apply to a transfer of a part of an interest in a partnership by a taxpayer to a taxable Canadian corporation.

Position Adoptée: Yes.

Raisons: A part of an interest in a partnership may be considered an eligible property under subsection 85(1.1).

6 October 2014 External T.I. 2014-0540611E5 - subsection 98(3) election

CRA Tags
220(3.2), 98(3), ITR 600
Summary Under
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3)
election must be made respecting all partnership property

Principal Issues: 1. Whether a subsection 98(3) election is valid where a particular property of a partnership was not included as part of the election? 2. Can a subsection 98(3) election be amended to include a particular property that was not included in the original election filed?

Position: 1. No. 2. No.

Reasons: 1. Subsection 98(3) requires that, in order to be valid, an election must be in respect of all of the partnership property; 2. There is no discretion allowed under the Income Tax Act or Income Tax Regulations to accept amended elections.

2 October 2014 External T.I. 2013-0508651E5 - Services provided by non-residents

CRA Tags
ITR 102, Section 153, ITR 100
Summary Under
Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a)
potential employment arrangement with supplier's employees

Principal Issues: Where a taxpayer hires a USCo to provide the services of its employees in Canada, can the taxpayer be liable for withholding and remitting of income tax from the remuneration paid to the employees of USCo.

Position: Question of fact.

Reasons: The payer of remuneration is responsible for withholding pursuant to subsection 153(1). Generally, the employer is the payer. However, where an employer/employee relationship exists between the taxpayer and the employees, the taxpayer could be responsible for withholding as the payer.

26 August 2014 External T.I. 2014-0528701E5 - Non-profit organization - Condominium

CRA Tags
149(1)(l)
Summary Under
Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(l)
commercial condo corp

Principal Issues: Can a commercial condominium corporation qualify as a non-profit organization?

Position: Maybe.

Reasons: Provided it meets the criteria of 149(1)(l), it must be organized and operated for any purpose except profit and it cannot provide any part of its income to its members. If a profit does result it must be incidental to its non-profit purposes.

23 June 2014 External T.I. 2014-0528551E5 - Transfer of refund of premium

CRA Tags
60(l)
Summary Under
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(l)
transfer of refund of premiums to non-disabled child's RPP

Principal Issues: Can a deceased RRSP annuitant's financially dependent child or grandchild, who was not dependent on the deceased by reason of physical or mental infirmity, claim a deduction under paragraph 60(l) of the ITA for the amount of a refund of premium that is transferred to a PRPP or an SPP?

Position: No.

Reasons: Clause 60(l)(v)(B.1) limits the amount that may be deducted by a deceased RRSP annuitant's financially dependent non-infirm child or grandchild to the amount of a refund of premiums under an RRSP that was transferred to a qualifying annuity for a fixed term not exceeding 18 years minus the child's or grandchild's age.

20 June 2014 External T.I. 2014-0521931E5 - Employment Income - Indians

CRA Tags
81(1)(a), Indian Act - 87

Principal Issues: Whether employment income of Indians would be exempt from tax?

Position: No, not in this situation.

Reasons: See below.

11 March 2014 External T.I. 2013-0503771E5 - EPSP

CRA Tags
144(10), 144(1)
Summary Under
Tax Topics - Income Tax Act - Section 144 - Subsection 144(1) - Employee Profit Sharing Plan
no contribution for deceased employee

Principal Issues: (i) Whether amounts can be paid to an EPSP (and deducted by the employer) after an employee dies; (ii) if so, would the allocation of that payment then be taxable in the deceased employee's final return or taxable to the deceased employee's estate?

Position: (i) Amounts cannot be paid to an EPSP after an employee dies; and (ii) The second question does not need to be addressed.

Reasons: An employer cannot make payments into an EPSP after an employee dies. This is because following the death of an employee, he or she is no longer an "employee of the employer", but would be considered a former employee. Since the first question is answered in the negative, the second question does not need to be addressed.

7 March 2014 External T.I. 2012-0458781E5 - Annuity in respect of pension obligation

CRA Tags
56(1)(a)(i), 248(1) "retirement compensation arrangement", 6(1)(a)(ii), 147.4(1), 56(1)(x), 254
Summary Under
Tax Topics - Income Tax Act - Section 147.4 - Subsection 147.4(1)
no rectification where failure to purchase annuity at time of RPP termination

Principal Issues: Can an employer purchase an annuity in the individual employee's name after the termination of the registered pension plan with funds from the employer?

Position: Where an individual receives an annuity contract otherwise than in accordance with subsection 147.4(1), the individual is considered to have received a pension benefit and is required to include the FMV of the annuity contract in income under paragraph 56(1)(a) in the year of receipt. If the employer acquires ownership of the annuity it would be considered an RCA.

Reasons: Given the facts provided, the funds used to purchase the annuity were not from the RPP therefore 147.4(1) does not apply. Where the employer acquires ownership of the annuity contract, the annuity would be considered an RCA and therefore subject to those rules.

Conference

16 June 2014 STEP Roundtable, 2014-0523091C6 - STEP CRA Roundtable – June 2014

CRA Tags
248(8), 252(3), 70(6.2), 70(6), 248(1), 70(5)
Summary Under
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6)
bequests to both spouse and common law spouse

Principal Issues: Can the rollover provisions of subsection 70(6) apply to a transfer of property to a taxpayer's spouse and transfer of another property to a common-law partner?

Position: Yes, provided all the conditions in subsection 70(6) are met.

Reasons: It is possible that a person could be legally separated and have a common-law partner at the same time.

16 June 2014 STEP Roundtable, 2014-0526581C6 - STEP CRA Roundtable - June 2014 - Q18

CRA Tags
107(2.11), 107(2.1), 107(2.001), 107(2.002)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.001)
property-by-property, election procedure
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.002)
election procedure, gain if election
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.11)
election procedure

Principal Issues: 1. Whether the subsection 107(2.001) election applies to all the property distributed to a beneficiary in full or partial satisfaction of the beneficiary's capital interest in a trust or whether the trust can make the election on a property by property basis? 2. Subsection 107(2.001), (2.11), and (2.002) each require an election to be made in prescribed form. As there are no prescribed forms available, how should each election be made?

Position: 1. The 107(2.001) election can be made in respect of a single property. 2. In the case of the subsection 107(2.001) and (2.11) elections a letter should be attached to the trust's return of income, for the 107(2.002) election a letter should be attached to the beneficiary's return of income. Where the beneficiary files electronically the election should be sent to the CRA separately.

Reasons: 1. Subsection 107(2.001) refers to a "distribution of a property to a beneficiary". The words " a property" refers to a singular property such that the election can be used in respect of only one property of all the property distributed. 2. See document

16 June 2014 STEP Roundtable, 2014-0526591C6 - STEP CRA Roundtable – June 2014 – Question 9

CRA Tags
156
Summary Under
Tax Topics - Income Tax Act - Section 156 - Subsection 156(1)
relief for interest and penalties on deficient inter vivos trust instalments

Principal Issues: Whether the CRA will continue with its practice of not assessing interest and penalties where an inter vivos trust does not make instalment payments as required under section 156.

Position: Not known at this time.

Reasons: In preparation for the introduction of the new trust rules announced in Budget 2014, all associated administrative practices of the CRA are being examined.

10 October 2014 APFF Roundtable, 2014-0538021C6 F - Meaning of beneficiary

CRA Tags
55(5)(e), 248(25)
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(25)
Propep applied: beneficiary under s. 55(5)(e)(ii) included beneficially interested per s. 248(25)(a)
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(5) - Paragraph 55(5)(e) - Subparagraph 55(5)(e)(ii)
beneficiary under s. 55(5)(e)(ii) includes beneficially interested under s. 248(25)(a)

Principal Issues: Meaning of beneficiary for the purposes of subparagraph 55(5)(e)(ii).

Position: The CRA will apply the broad meaning of beneficiary adopted by the Federal Court of Appeal in the Queen v. Propep Inc. (2009 CAF 274) for the purpose of subparagraph 55(5)(e)(ii). Therefore, the CRA will take into account for that purpose, the definition of "beneficially interested" in subsection 248(25). To determine whether a person is a "beneficiary" or has a "right as a beneficiary" in a particular situation requires the analysis of the common law or the civil law, as the case may be.

Reasons: The Propep decision. The words "is or may... be entitled" used in subparagraph 55(5)(e)(ii) also support a broad meaning of the notion of beneficiary.

10 October 2014 APFF Roundtable, 2014-0538141C6 F - Interest deductibility

CRA Tags
20(1)(c)
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii)
interest on mortgage assumed on devise of land to beneficiary considered as amount payable for the property

Principales Questions: 1) A trust borrows money to acquire a rental property. The trust distributes the rental property to one of its beneficiaries which assumes the debt attached to the rental property. 2) An individual borrows money to acquire a rental property. The individual dies and the rental property is the object of a legacy by particular title in favour of his child who assumes the debt attached to the rental property. In each scenario, whether the amount of the debt assumed would constitute "an amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of producing income from a business" for the purpose of subparagraph 20(1)(c)(ii).

Position Adoptée: Provided that the debt is assumed as a condition of acquiring the property, the amount of the debt assumed would constitute "an amount payable for property acquired" for the purpose of subparagraph 20(1)(c)(ii). However, deductibility under subparagraph 20(1)(c)(ii) depends on the facts and circumstances of each case.

Raisons: Wording of the Act.

Technical Interpretation - Internal

17 October 2014 Internal T.I. 2014-0535121I7 F - Hypothèque et créance irrécouvrable

CRA Tags
50(2), 40(1), 50(1), 40(2)
Summary Under
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1)
second mortgagee not entitled to deduction as it did not exercise its remedies

Principales Questions: 1) Lorsqu'un contribuable détenant une créance hypothécaire secondaire ne peut reprendre le bien et n'est pas remboursé non plus par le créancier détenant la créance hypothécaire principale, est-ce que le contribuable peut réclamer une perte pour mauvaise créance en vertu du paragraphe 50(1)? / When a taxpayer who owns a secondary mortgage cannot take the property back and is not reimbursed by the primary mortgagee, can this taxpayer claim a loss on bad debt under subsection 50(1)?
2) Est-ce que la définition de créances irrécouvrables dans le guide « T4037 - Gains en capital » doit être modifiée? / Should the definition of bad debts in the guide "T4037 – Capital Gains" be modified?

Position Adoptée: 1) Non / No 2) Non / No

Raisons: La créance n'est pas encore irrécouvrable puisque le contribuable n'a pas épuisé tous les recours légaux qui s'offrent à lui. / The debt is not bad yet since the taxpayer has not exhausted all legal means of collection.

8 August 2014 Internal T.I. 2014-0524971I7 - Distributing Estate Property When Estate is Liable

CRA Tags
159(2), 159(3)
Summary Under
Tax Topics - Income Tax Act - Section 159 - Subsection 159(2)
s. 159 applies to distribution of RESP

Principal Issues: Whether an executor should pay the estate's liability under the Act before distributing property to the beneficiary of the estate?

Position: Yes.

Reasons: Subsection 159(2) requires a legal representative (an executor) to pay, or provide security for, an estate's, and the executor's liability incurred as a legal representative before distributing estate property. Failure to do so results in the executor being personally liable.

30 June 2014 Internal T.I. 2013-0508411I7 F - Part IV Tax and the Dividend Refund

CRA Tags
152(4)a)(i), 129(1), 163.2(4), 186(1), 163(2)
Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i)
failure to circularly calculate Part IV tax and dividend refund is neglect given published TIs
Summary Under
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1)
when to stop circular calculation for cross dividends arising after tuck under

Principales Questions: (1) Is the corporate taxpayer entitled to an income tax refund of $XXXXXXXXXX in a situation of cross-redemptions of shares between two connected corporations?
(2) If the answer to question (1) is no, can the Minister of National Revenue reassess the taxpayer after the normal reassessment period pursuant to subparagraph 152(4)(a)(i)?

Position Adoptée: (1) No. (2) Yes.

Raisons: (1) Had the taxpayer provided the correct information and had completed the circular calculation pertaining to Part IV tax and the dividend tax refund, the refund payable to the taxpayer would have been $XXXXXXXXXX.
(2) By failing to provide accurate information relating to, among others, its RDTOH and its dividend tax refund for the taxation year immediately preceding the taxation year in which the taxable dividends were paid, the taxpayer made a misrepresentation that is attributable to neglect, carelessness or wilful default. The taxpayer also failed to do the circular calculation required to establish the amount of Part IV tax it owed for the particular taxation year and the dividend tax refund it was entitled to.