Income Tax Severed Letters - 2015-08-19

Principal Issues: Are amounts received as financial assistance under the Program by individuals participating in an apprenticeship taxable to the recipient?

Position: Question of fact

Reasons: Where the amounts are provided through a program that is established under the Labour Market Development Agreement, the amounts appear to meet the criteria of subparagraph 56(1)(r)(iii) of the Act and would be included in income under that provision. Some of the financial assistance would be considered an earnings supplement under subparagraph 56(1)(r)(i) of the Act and some would be a bursary within the meaning of paragraph 56(1)(n) of the Act.

Principal Issues: Whether a royalty payable by a resident of Canada to a non-resident of Canada that was, in lieu of actual payment, applied to reduce the amount of a promissory note owing to the resident of Canada by the same non-resident of Canada is subject to the application of paragraph 212(1)(d)?

Position: Yes, the amount of the royalty payable to the non-resident that is applied against the promissory note in lieu of actual payment would be considered credited to the non-resident by the resident of Canada and, therefore, subject to a 25% withholding tax under paragraph 212(1)(d).

Reasons: The CRA's long standing position regarding the meaning of "credited" for purposes of Part XIII of the Act, as set out in paragraph 5 of Information Circular 77-16R4, includes circumstances where an amount due was applied by a resident of Canada against an amount owing by the non-resident to the resident of Canada. This is also consistent with the decision of the Tax Court of Canada in Richard Lewin Re: The J.J. Herbert Family Trust #1 v. The Queen which was subsequently upheld by the Federal Court of Appeal.

Principal Issues: 1. To the extent that an exempt foreign trust would be deemed to be a non-resident corporation controlled by its beneficiary under subsection 94.2(2) and, therefore, a CFA of its beneficiary under subsection 95(1) and the beneficiary is a "financial institution" (as defined in subsection 142.2(1)), would the trust also be a "financial institution" (as defined in subsection 142.2(1)) and, therefore, subject to the specified debt obligation and mark-to-market property rules in sections 142.2 to 142.6 when calculating its FAPI? 2. Would the application of the deeming rule in subsection 94.2(2) to the trust result in the trust being required to compute its FAPI in Canadian currency under paragraph 95(2)(f.14) and, if so, could a proxy calculation be used to calculate its foreign currency gains/losses in circumstances where the trust does not provide the required information to the beneficiary?

Position: 1. Yes, the trust would be a financial institution under subparagraph (a)(iii) of the definition of "financial institution" in subsection 142.2(1) and would be subject to the specified debt obligation and mark-to-market rules in sections 142.2 to 142.6 for purposes of computing its FAPI under section 95. 2. Yes, the foreign currency gains and losses that would be FAPI of the trust would be required to be computed using Canadian currency. Although section 94.2 is a relatively new provision of the Act, the question of how to compute FAPI in circumstances where complete and full information may not be accessible is not novel, as it has historically been relevant in connection with CFA status under former subparagraph 94(1)(d) and paragraph (b) of the definition of "controlled foreign affiliate" in subsection 95(1) and as such, we will not comment on the specific proxy used in the particular circumstances.

Reasons: 1) To the extent that the conditions of subsection 94.2(1) would be met, subsection 94.2(2) deems the trust to be a corporation controlled by its beneficiary for the purposes of applying, amongst others, section 95 and subsection 91(1). As such, when applying section 95, the trust would be a CFA of its beneficiary and, therefore, the FAPI of the trust would be determined on the basis of Canadian tax principles which would include subsection 142.2(1) as well as the rules in sections 142.3 to 142.6. 2) Similar to 1), as the trust would be deemed to be a non-resident corporation that is controlled by its beneficiary for the purposes of applying section 95, the trust's FAPI would be determined as though it were resident in Canada and in Canadian currency under paragraphs 95(2)(f) and 95(2)(f.14), respectively, and as such, the foreign currency gains or losses that would be FAPI of the trust would be computed using Canadian currency and in accordance with the Act.

Principales Questions: In a situation where an individual becomes a beneficiary of a trust either before or after the disposition of qualified small business corporation shares (QSBCS) by the trust, whether the trustees can allocate the net taxable capital gain pursuant to subsection 104(21) and the eligible taxable capital gain pursuant to subsection 104(21.2) in the year of disposition and the three following years if the cost recovery method described in IT-426 is used to report the capital gain.

Position Adoptée: Yes

Raisons: Wording of the definition of QSBCS of subsection 110.6(1). The conditions of the definition of QSBCS should be respected at the level of the trust. Wording of subsection 104(21.2): this deeming rule applies only for purposes of the beneficiary's claiming a section 110.6 capital gains deduction.

Principal Issues: Whether the Registered Shiatsu Therapists in BC are considered authorized medical practitioners for purposes of the medical expense tax credit.

Position: No.

Reasons: They are not authorized to practise as such, pursuant to the laws of the jurisdiction in which the service is rendered.