20 May 1992 Income Tax Severed Letter 2M01790 - Prairie Province Tax Conference

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 1

Subsection 85(5.1) is a "stop loss" rule which applies, among other situations, where the transferee was a member of a group of persons that immediately after the disposition controlled the transferor directly or indirectly in any manner whatever (paragraph 85(5.1)(b)). If A and B are unrelated individuals who own 95% and 5%, respectively, of the shares of Opco, could the rule apply to a transfer of depreciable property from Opco to B? What if A and B each own 50% of the shares of Opco? Should the section refer to transfers to members of a "related group" instead of to transfers to members of a "group"?

DEPARTMENT'S POSITION

In the first situation (where B owns 5% of the shares of Opco), B is not, for the purposes of subsection 85(5.1), a member of a group which directly or indirectly controls Opco since A acting on his own controls Opco. In Southside Car Market Ltd. et. al. v. M.N.R. [[1982] C.T.C. 214] (82 DTC 6179 (FCTD)) the court held that where one person controls a corporation, it cannot also be said to be controlled by a group.

Assuming that neither B nor his spouse has any direct or indirect influence that would, if exercised, result in control in fact of Opco, subsection 85(5.1) would not apply to a transfer of

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

depreciable property from Opco to B. In the second situation (where A and B each own 50% of the shares of Opco), it is a question of fact as to whether A and B are a group which directly or indirectly controls Opco and the question could only be answered after a review of all the relevant circumstances. For A and B to constitute a group that controls Opco, there must exist a common link or interest between them (which must involve more than their status as shareholders). If they are, in fact, such a group, then subsection 85(5.1) could apply to a transfer of depreciable property from Opco to B.

The final question relates to tax policy and should be addressed to the Department of Finance.

• PRAIRIE PROVINCES TAX CONFERENCE MAY 19 & 20, 1992 QUESTION 2

In a situation wherein a class 10 vehicle is traded for a class 10.1 vehicle, it may result in recapture of capital cost allowance with respect to the class 10 vehicle. Is there an election available, similar to section 1103 of the Income Tax Regulations, to shelter that recapture from immediate income inclusion?

DEPARTMENT'S POSITION

No, there is no provision in the Income Tax Regulations, similar to section 1103 thereof, to shelter any recapture of capital cost allowance in a situation wherein a class 10 vehicle is traded for a class 10.1 vehicle.

• PRAIRIE PROVINCES TAX CONFERENCE MAY 19 & 20, 1992 QUESTION 3

Application of Paragraph 55(3)(b) "Butterfly Exemption" Subco 2 is a wholly-owned subsidiary of Subco 1 which, in turn, is wholly-owned by Parentco. Subco 1 and Subco 2 are engaged in identical businesses but in different countries. All of the assets of Subco 1 and Subco 2 are used to produce active business income, and none of their assets is cash or near cash. Parentco wishes to effect a reorganization whereby the two subsidiaries will become sister companies with each being wholly-owned by Parentco. It is contemplated that Subco 2 may be sold in the next couple of years. A newly created company ("Newco") would be set up as a wholly-owned subsidiary of Parentco. Parentco would transfer shares of Subco 1 to Newco having a fair market value

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

equal to the fair market value of Subco 2. The reorganization, a "single-wing butterfly", would require Subco 1 to transfer under subsection 85(1) its shares of Subco 2 to Newco. The Department has stated on several occasions that, for purposes of ascertaining the value and types of property of a particular corporation, it will apply a "look-through" approach to examine property held by subsidiaries of the particular corporation.

With respect to the above scenario:

• (i) To the extent that the consolidated properties of Subco 1 and Subco 2 can otherwise be regarded to be properties of one "type" (i.e. business assets), will the fact that the assets of Subco 2 are employed in a different country have any bearing on their status as properties of the same type as those employed by Subco 1?
• (ii) Assuming that the requirements of paragraph 55(3)(b) are otherwise satisfied, would the butterfly described above qualify for exemption under paragraph 55(3)(b) as long as the fair market value of Newco's interest in Subco 1 is, prior to the butterfly, equal to the fair market value of the property (i.e. the shares of Subco 2) transferred by Subco 1 to Newco?

DEPARTMENT'S POSITION
(i) Not ordinarily.

• (ii) Not necessarily. In the situation described, paragraph 55(3)(b) would require that the fair market value of the Subco 2 shares received by Newco be equal to or approximate the proportion of the fair market value of all of the property of Subco 1 that the fair market value of the shares of Subco 1 is of the fair market value of all of the issued shares of Subco 1. Unless the fair market value of all of the shares of Subco 1 happened to be equal to (or approximate) the fair market value of all of the assets of Subco 1, the transactions described would not meet the requirements of paragraph 55(3)(b).

Example to illustrate:

• (a) The fair market value of all of Subco 1's shares held by Parentco is $800.
• (b) The fair market value of all the assets of Subco 1 is $1000, consisting of assets in Subco 1 of $600 and the shares of Subco 2 with a fair market value of $400.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

• (c) The fair market value of the shares of Subco 1 to be transferred to Newco to effect the butterfly must not be $400 (fair market value of Subco 2 shares), but $320.

Computed as follows:

• FMV of Subco 2 ($ 400) x FMV of Subco 1 shares ($800) FMV of all assets of Subco 1 ($1000)

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 4

For the purpose of Section 110.6(8), will shares qualify as prescribed shares under Regulation 6205 (which came into force for 1985) even though such shares have ceased to exist prior to 1985 by virtue of their redemption or conversion into other shares by virtue of a section 86 reorganization or amalgamation, etc.?

DEPARTMENT'S POSITION

Subsection 110.6(8) applies to dispositions after November 21, 1985. Nevertheless, to determine whether it applies, consideration must be given to the fact that dividends were not paid on shares in preceding taxation years, other than prescribed shares. It is necessary to consider whether the share that is no longer issued and outstanding, in respect of which dividends were not paid, would have been prescribed under Regulation 6205. If the share that is no longer issued and outstanding would have been a prescribed share if it had been outstanding after 1984, then the fact that dividends were not paid on such shares will not cause subsection 110.6(8) to apply. Also, the Department will not generally seek to apply subsection 110.6(8) to deny a capital gains deduction in circumstances where a non-prescribed share ceased to exist prior to 1985. PRAIRIE PROVINCES TAX CONFERENCE MAY 19 & 20, 1992 QUESTION 5

Does Revenue Canada consider that legal and accounting expenses incurred in responding to a proposal letter from Revenue Canada, prior to an assessment, are deductible pursuant to paragraph 60(o)?

DEPARTMENT'S POSITION

As stated in paragraph 6 of IT-99R4, it is the Department's

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

practice to allow a taxpayer to deduct amounts expended in connection with legal and accounting fees incurred for advice and assistance in making representations after having been informed that the taxpayer's income or tax for a taxation year is to be revised, whether or not a formal notice of objection or appeal is subsequently filed.

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 6

Does Revenue Canada consider that subsection 48 (1) also applies to property which is not capital property?

DEPARTMENT'S POSITION

The Department's position is stated in paragraph 2 of Interpretation Bulletin IT-451R wherein it states " Although subsections 48(1) and 48(3) refer to "any property" and "each property", they relate only to capital property since these subsections apply for the purposes of subdivision C of Division B of Part I only." PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 7

A corporation currently has a net deficit because it has suffered losses which in aggregate have exceeded its accumulated retained earnings and original paid-up capital. The corporation will issue additional common shares in such a manner that there would be no new shareholders and each shareholder will retain his or her proportionate ownership of the corporation. Will Revenue Canada apply subsection 84(1) if the issuance of additional common shares results in an increase in the paid-up capital of the original outstanding common shares? DEPARTMENT'S POSITION

Provided that the increase in the aggregate paid-up capital in respect of the common shares of the corporation does not exceed the aggregate amount paid for the newly issued common shares, the provisions of subsection 84(1) will not apply to the increase in the paid-up capital, if any, of the original common shares of the corporation held by each shareholder by virtue of the exception in paragraph 84(1)(b).

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 8

The Department of Finance's 1986 Technical Notes with respect to paragraph 96(2.5)(c) suggests that the day-to-day operations or maintenance of the activity of a partnership that was carried on by the partnership on February 25, 1986 would generally not be considered to be a significant expansion of the activity.

What are other examples of uses of substantial contributions of capital or substantial increase in indebtedness which would or which would not constitute "a significant expansion of the activity" as contemplated at paragraph 96 (2.5)(c)?

DEPARTMENT'S POSITION

The expression "a significant expansion of the activity" in paragraph 96(2.5)(c) is not defined in the Income Tax Act. Accordingly, it must be interpreted in it's ordinary meaning. It is a question of fact to be determined in each case as to whether substantial contributions of capital or substantial increases in indebtedness are used for a significant expansion of the activity of a partnership for the purpose of paragraph 96(2.5)(c). We do not have any specific examples which would or which would not constitute a significant expansion of the activity as contemplated at paragraph 96 (2.5)(c).

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 9

For a payment to be considered a retiring allowance and a deductible expense to the payer, the amount of the payment must be reasonable having regard to the length of service involved, its relationship to the remuneration received for the years of service and the value of other retirement benefits to which the employee is entitled. In order for the amount of a retiring allowance to be considered reasonable in a non-arms length situation, it should not exceed the amount that would be considered reasonable in an arm's length situation. In one private opinion letter, the Department considered that it was not likely that a reasonable arm's length allowance would exceed 2

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

1/2 times the average salary for the last five years, minus the total of any amounts the employee would be entitled to receive on retirement in respect of deferred profit sharing plans,registered pension and registered retired savings plans. As well, the Department indicated in the letter that the amount eligible for rollover under paragraph 60(j.1) to an RRSP would generally be accepted as reasonable. In such vein, one would refer to the number of years of service and for this purpose, the Department has indicated that gaps in an employee's work history with a particular employer would not disqualify the previous years, that part of a year would be counted as one year and that a year in which little, if any, remuneration was paid would count.

• (i) What is the Department's position on the characterization of a payment as a retiring allowance and its deductibility to the payer where the quantum of the payment satisfies the above criteria but it is spread over a 2 or 3 year period?
• (ii) What is the Department's position where the maximum potential amount of the payment satisfies the above guidelines but the ultimate amount of the payment is contingent on the profitability of the Payer?

DEPARTMENT'S POSITION

Generally speaking, where the amount of a payment that otherwise qualifies as a retiring allowance is considered reasonable based on the above criteria, the characterization of the payment as a retiring allowance or the deductibility of the amount will not be affected by the fact, in and of itself, that the amount is to be paid in instalments over a 2 or 3 year period. Consideration, of course, would have to be given to subsection 78(4) in determining the year in which the amount would be deductible.

The fact that an amount is contingent, and thus not deductible, at the time an individual retires does not necessarily mean that the amount cannot qualify as a retiring allowance. Although it is recognized, as evidenced by subsection 78(4), that the related expense can be incurred in a year prior to the year a retiring allowance is paid to an individual, the determination of whether or not the payment is a retiring allowance (or an instalment payment of an amount that is a retiring allowance) will normally be made at the time the payment is received by the individual, since the retiring allowance definition reads "an amount....received." Where the total of the payments made to an individual is reasonable based on the above criteria and otherwise qualifies as a retiring allowance (i.e., it is paid as a consequence or retirement or loss of office or employment and not as a consequence of an individuals participation in the

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

profits of the employer), the fact that the timing of the payments is determined on the basis of the employer's profitability would normally not of itself affect the characterization of the payments or their deductibility.

• PRAIRIE PROVINCES TAX CONFERENCE MAY 19 & 20, 1992 QUESTION 10

Paragraph 80 (1)(b) and Regulation 5400

At a particular time during a taxation year, a taxpayer sells depreciable property and subsequently during the same year a debt or other obligation of the taxpayer is settled. Paragraph 80(1)(b) requires an excess amount to be applied firstly against the capital cost of depreciable property. Does this reference to depreciable property include the property that was sold prior to the settlement?

DEPARTMENT'S POSITION

If a capital property is disposed of prior to settlement of a debt involving forgiveness of the debt, it is our view that section 80 does not normally affect the cost base of that property. As provided for in Regulation 5400 and as discussed in paragraph 5 of Interpretation Bulletin IT-293R and the Special Release thereto, any adjustment to cost base required under section 80 is made at the time during the taxation year when the debt is settled. If at that time the taxpayer does not own any capital property, in our view as a general rule no adjustment can be made to the cost of such property under section 80. However, there may be circumstances where the general anti-avoidance rule may apply to a transaction that is part of a series of transactions involving the transfer of property prior to the settlement of the debt. Examples are found in Information Circular IC 88-2 [Information Circular 88- 2] paragraph 23 and in Supplement 1 to IC 88-2, paragraph 6.

• PRAIRIE PROVINCES TAX CONFERENCE MAY 19 & 20, 1992

QUESTION 11

Does subsection 229(1) of the Income Tax Regulations ("Regulations") (Partnership Information Return - T5013) and section 233.1 of the Income Tax Act ("Act") (Information Return for Non-Arm's Length Transactions with Non-Residents - T106)

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

apply to non-resident partners of a partnership that carried on business in Canada? Would the answer be different if the partnership only had income from property or investments?

DEPARTMENT'S POSITION

Pursuant to paragraph 221 (1)(d) of the Act and subsection 229 (1) of the Regulations, every member, whether a resident or non-resident of Canada, of a partnership that carries on business in Canada at any time in a fiscal period of the partnership shall make for that period an information return in prescribed form (i.e. Form T5013) containing the information described in paragraphs 229(1)(a) through (e) of the Regulations as well as any other information required by Form T5013. Where the partnership does not carry on business in Canada, no such information return would be required to be filed unless the partnership is a Canadian partnership as defined in paragraph 102(a) of the Act. It is a question of fact whether a particular partnership is carrying on a business in Canada.

Subsection 229(4) of the Regulations gives the Minister the discretionary power to exempt the members of any partnership or any class of partnerships from filing the Partnership Information Return. The Minister has exercised this authority to those partnerships described in paragraph 11 of Information Circular IC 89-5R.

Pursuant to section 233.1 of the Act, every non-resident corporation that carried on business in Canada, through a partnership or not, shall, in respect of each non-resident person with whom it was not dealing at arm's length at any time in the year, file within 6 months from the end of the year, an annual information return (i.e. Form T106) for the year in prescribed form and containing prescribed information in respect of transactions with that person. Where the non-resident corporation does not carry on business in Canada, either directly or through a partnership, no such information return would be required. PRAIRIE PROVINCES TAX CONFERENCE MAY 19 & 20, 1992

QUESTION 12

Assume that an individual moved from Canada (severed all residential ties) to the United States in 1991. This individual continues to be employed by a Canadian corporation (not a Crown corporation) and receives a reasonable salary. The individual was in Canada for 100 days during 1991 and in the U.S. for the remainder. The salary is paid evenly throughout the year. The portion paid to the individual after he or she ceases to be a

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

resident of Canada relates to employment exercised in the U.S. and not in Canada and is subject to income tax imposed by the U.S.. Is the corporation required to withhold the maximum amount of income taxes or can the individual request a reduced withholding based on the estimated taxes payable by the individual? Would subsection 153(1.1) apply?

DEPARTMENT'S POSITION

In this case, during the period of non-resident status, pursuant to paragraphs 115(2)(c) and (d) and section 114.1, for purposes of subsection 2(3) the individual shall be deemed to have been employed in Canada in the year. However, pursuant to clause 115(2)(e)(i)(A), the remuneration in respect of those services performed in the U.S. will not be included in the computation of Taxable Income Earned in Canada (as computed under paragraph 114(b).

In addition, pursuant to paragraph 1 of Article XV of the Canada-U.S. Income Tax Convention, where the individual is liable for tax in the U.S. by reason of his residence or domicile, the U.S. will have exclusive right to tax remuneration received during that period where the services are performed in the U.S..

As the remuneration in the non-resident period in this case is not remuneration described in subparagraph 115(2)(e)(i), pursuant to subsection 104(2) of the Income Tax Regulations, the Canadian employer is not required to withhold income tax on such remuneration.

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 13

What is the Department's interpretation of paragraph 146(1)(h) and subsection 146.3(6.1), specifically as it relates to the phrase "child or grandchild", in the following example:

• • Mother has a Registered Retirement Income Fund ("RRIF").

- Mother passes away, there is no surviving spouse.
- Daughter is over the age of 18, but is financially
dependant on mother, i.e. she has no income and lives in mother's
home.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

• • Daughter is not physically or mentally infirm.
• • Daughter is the beneficiary of mother's estate.
• • Daughter is the natural child of the mother as defined in section 252(1)(a) of the Act.

On deregistration of the RRIF due to the mother's death, can the proceeds be treated as a refund of premiums to the daughter, and be included in the income on the daughter's personal tax return? DEPARTMENT'S POSITION

If at the time of death the mother had no spouse and the daughter was financially dependant on the mother, the proceeds paid out of the mother's RRIF can be treated as a refund of premiums pursuant to subsection 146.3(6.1) and paragraph 146(1)(h).

With respect to the financially dependant requirement, subparagraphs 146(1)(h)(iii) and (iv) provide that it shall be assumed, unless the contrary is established, that the Daughter was not financially dependant on the Mother at the time if:

• (i) any person other than the mother was permitted a deduction under paragraph 118(1)(d) in respect of the child in computing her tax payable under Part I for the taxation year immediately preceding the taxation year in which the mother died, or
• (ii) the income of the daughter exceeded $5,000 for the year immediately preceding the taxation year in which the Mother died.

Accordingly, in the above situation and assuming (i) is met, the daughter would be considered financially dependant on the mother and the proceeds from the mother's RRIF would be considered a refund of premiums to the daughter.

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 14

Under the proposed trust rules issued by the Department of Finance on December 20, 1991, a trust, that does not have any exempt beneficiaries or has not previously made an election under proposed subsection 104(5.3) and that is not a pre-1972 spousal trust at the end of the year and is not described in

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

proposed revised paragraph 104(4)(a), is deemed to dispose of all its capital property (other than excluded property or depreciable property) and land included in the inventory of the trust for proceeds equal to their fair market value on the 21st anniversary date of the trust. Under the definition of "accumulating income" in proposed revised paragraph 108(1)(a), income of the trust from the 21-year deemed realization (including capital gains) is not specifically excluded. Since capital gains arising as a result of the 21-year deemed realization are included in "accumulating income", can the trust allocate these capital gains to the preferred beneficiaries of the trust by making a preferred beneficiary election pursuant to subsection 104(14) in the year of the deemed realization?

DEPARTMENT'S POSITION

Yes, the trust as described above may allocate the net taxable capital gains arising as a result of the 21-year deemed realization to the preferred beneficiaries of the trust by making a preferred beneficiary election pursuant to subsection 104(14) in the year of the deemed realization and by virtue of subsection 104(21). PRAIRIE PROVINCES TAX CONFERENCE MAY 19 & 20, 1992 QUESTION 15

On a sale of shares there is an effective date and subsequent legal closing date.

Ownership of the shares does not pass to the purchaser until the legal closing date. The sales agreement obliges the purchaser to pay to the vendor in addition to the sale proceeds an additional amount. The sales agreement calls this additional amount "interest" and calculates it as the product obtained by multiplying the purchase price times a chartered bank's prime interest rate pro-rated for the number or days from the effective date to the legal closing date. No debtor/creditor relationship exists between the vendor and purchaser until the closing date.

Is the amount calculated as "interest" by the formula deductible, pursuant to subparagraph 20(1)(c)(ii), as an interest expense to the purchaser or is it an addition to the cost of the acquired shares? DEPARTMENT'S POSITION

The definition of "interest", as adopted by the Federal Court - Trial Division, in Miller v. The Queen, [[1985] 2 C.T.C. 139] 85 DTC 5354, is an amount in respect of which the following three criteria must be satisfied: (1) it must be calculated on a (day by day) accrual basis; (2) it must be calculated on a principal

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

sum or a right to a principal sum; and (3) it must be compensation for the use of the principal sum or the right to the principal sum. It would appear that the third criterion would not be satisfied in the situation described, on the assumption that there would be no principal amount owing by the purchaser until the legal closing date and as such no right to a principal amount by the vendor until that time. As such the "interest" component would be part of the purchaser price, rather than consideration for money due, owing to or belonging to the vendor. PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 16

What is the current assessing practice of Revenue Canada in respect of split- dollar life insurance policies? Specifically, would there be a taxable benefit to a shareholder-employee if the annual premium, or the portion thereof, that is paid by the corporation does not exceed the increase in the cash surrender value of the policy in that year? (In a letter from the Department dated May 21, 1991, the Director, Business and General Division suggests that there would be no benefit in this instance). DEPARTMENT'S POSITION

The letter dated May 21, 1991 from the Business and General Division may have been misleading. It is a question of fact whether or not an employee/shareholder receives a benefit, under a split-dollar life insurance plan, which is to be included in income pursuant to paragraph 6(1)(a) or subsection 15(1).

It is our view that the benefit to be included in an employee/shareholder's income in a particular taxation year from such a policy is the amount by which the premium cost for equivalent term coverage exceeds the premiums paid, if any, by the employee/shareholder under the policy.

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 17
Do funds on deposit in NISA Fund No. 1 and NISA Fund No. 2 qualify
as assets being used in a farming business for purposes of
determining whether a corporation is a family farm

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

corporation? To the best of our knowledge Revenue Canada has not made this determination as of this date. It is causing a number of clients concern as to whether they will lose their status.

DEPARTMENT'S POSITION

The draft legislation on the NISA program was issued by the Minister of Finance on December 21, 1991. It proposes a new subsection 110.6(1.1), which provides that the fair market value of a producer's NISA account is considered to be nil for purposes of determining whether a share satisfies the definitions "qualified small business corporation share" or "share of the capital stock of a family farm corporation". In effect, the value of a NISA held by a corporation will not influence the determination of whether a particular share meets the criteria set out in those definitions.

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 18

A taxpayer receives pension income of $6,000.00 in 1990 and purchases a RRSP in February 1991. The taxpayer also elects under 60(j.2) to transfer $6,000.00 to a spousal RRSP and as a consequence does not claim a pension deduction.

Can the taxpayer change the election from $6,000.00 to $5,000.00 in order to use the pension deduction and carry forward to 1992 a deduction in the amount of $1,000.00 for the contribution to a spousal RRSP?

Can the taxpayer change his election even after the Notice of Assessment has expired?

If not, will the Fairness Package permit a late amendment to the election?

DEPARTMENT'S POSITION

A deduction under paragraph 60(j.2) is permitted for registered pension and deferred profit sharing plan amounts paid on a periodic basis and brought into income in the year, transferred to a spousal R.R.S.P. for that same year, and "designated" in the taxpayer's return of income for the year. The maximum amount which may be deducted is $6,000.00.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

There is no provision in the Income Tax Act which will permit a taxpayer to change the amount contributed to a spousal RRSP and designated in return. While the Fairness Package, and in particular subsection 220(3.2), permits the Minister to grant permission to a taxpayer to amend an "election", the word "election" refers to a specific option permitted under the terms of certain provisions in the Income Tax Act and is not synonymous with the word "designation". The elections to which subsection 220(3.2) applies will be prescribed by Regulation and the current draft Regulation 600 does not include a designation under paragraph 60(j.2).

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 19

In a situation wherein land has been acquired by a taxpayer, whose ordinary business is holding land as inventory for the purpose of resale or development, interest and property taxes relating to the acquisition of the land would be capitalized and added to the cost of inventory by virtue of subsection 18(2). If a condominium project is constructed on a portion of land, interest and property taxes incurred with respect to the construction of the condominium project and to the ownership during that period of the land as described in subparagraph 18(3.1)(a)(i) or (ii) would be capitalized and added to the cost of building by virtue of subsection 18(3.1). After the construction of the condominium project is completed, subsection 18(3.1) would not have any further application. Please confirm that while the unsold completed condominium units are held by the taxpayer as inventory in the course of its land development business, the taxpayer would be required to capitalize and add to the cost of inventory only interest and property taxes relating to the acquisition of the land by virtue of subsection 18(2).

DEPARTMENT'S POSITION

In the above-noted situation wherein the unsold completed condominium units are held by the taxpayer as inventory in the course of its land development business, by virtue of subsection 18(2) and subparagraphs 18(3)(a)(i) and (iii) the taxpayer would not be required after the completion of the condominium project to capitalize and add to the cost of inventory interest and property taxes, that relate to the acquisition of the portion of the land which is subjacent to the condominium building or which is a parking area, driveway, yard, garden or similar land that is necessary for the use of the condominium building.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

However, interest and property taxes with respect to the acquisition of the other portion of the land which is not subjacent to the condominium building and is not a parking area, driveway, yard, garden nor similar land that is necessary for the use of the condominium building, would be continuously subject to the application of subsection 18(2) before, during and after the completion of thecondominium project. Furthermore, if the taxpayer developed the condominium project as an adventure in the nature of trade, any interest and property taxes incurred before, during and after the completion of the condominium project with respect to the condominium building and the related land would be capitalized as costs that would only be deducted by the taxpayer at the time when the condominium units are sold or otherwise disposed of by it.

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 20

Xco, which is owned 100% by Mr. X, owns both business assets and investment assets. In order to "purify" Xco so that it meets the definition of a "small business corporation" under subsection 248(1), Xco transfers all its investment assets to a sister corporation ("Investmentco") in a series of transactions which includes the receipt of a deemed dividend under subsection 84(3) by Xco.

Immediately after this series of transactions (and contemplated at the time the investment assets were transferred to Investmentco), the shares of Xco are frozen into preference shares. New voting common shares of Xco are issued to a family trust of Mr. X ("Trust"). The beneficiaries of the Trust are Mrs. X and their children. The trustees are Mr. X, his lawyer, and a business associate of Mr. X. The lawyer and the business associate deal at arm's length with Mr. X and a majority of the trustees are required to make any decision for the Trust. Would the exception in paragraph 55(3)(a) apply to this series of transactions so that subsection 55(2) will not apply to the deemed dividend realized by Xco? Would the answer be different if Mr. X had to be a part of the majority in making any decision for the Trust?

DEPARTMENT'S POSITION

As long as each of the beneficiaries of the Trust does not deal at arm's length with Xco, it is our view that, by virtue of

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

paragraph 55(3)(a), subsection 55(2) would not apply to the deemed dividend realized by Xco, notwithstanding that a majority of the trustees of the Trust may deal at arm's length with Xco. Our response only addresses the question of whether subsection 55(2) would or would not apply. It should not be construed that other provisions of the Act would have no application.

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

QUESTION 21

Assume a corporation has a minority interest in a joint venture. Is the corporation required to include its pro-rata share of a joint venture liability in its taxable capital for purposes of the large corporation tax provided for in Part I.3?

DEPARTMENT'S POSITION

The Department considers that a joint venture, not being a legal entity, does not itself own any property nor does it have its own liabilities. The liabilities are those of the corporate joint venturers and they may or may not be jointly liable for any particular liability related to the carrying on of the joint venture operations. Accordingly, each joint venturer must determine the proportion of each liability for which it is liable and include that amount in its taxable capital to the extent that the amount is otherwise required to be included. This proportion may not, in all cases, be equal to the joint venturer's allocated share of the revenue of the joint venture.

• PRAIRIE PROVINCES TAX CONFERENCE MAY 19 & 20, 1992

QUESTION 22

Has the Department changed its administrative position with respect to subsection 15(2) and section 80.4? Specifically, our previous understanding of the Department's policy was that where a corporation had an amount receivable from a shareholder as of its financial statement date and the amount was repaid by the next financial statement date resulting in a nil or a credit balance on the financial statement, no benefit would be assessed to the shareholder under subsection 15(2); however, section 80.4 would apply to deem an interest benefit to the shareholder based on the amount outstanding during the year. Subsection 15(2) would apply where the amount remained outstanding over two consecutive year- ends of the corporation.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

Recently, we have noticed several instances where the taxpayer has been assessed a benefit under subsection 15(2) under the above circumstances. Some assessments have included a 15(2) benefit at the beginning of the taxation year by the assessor, thus no interest benefit has been assessed for that year. Alternatively, some assessments have not included a benefit until the end of the taxation year by the assessor, resulting in both income inclusion of that amount of the debt and an interest benefit in the same taxation year.

Please clarify the Department's position relating to the above.

DEPARTMENT'S POSITION

Effective with the special release dated March 13, 1987 to Interpretation Bulletin IT-119R3, the Department's administrative practice in respect of the repayment of outstanding shareholder loans was changed in that we no longer permit a repayment in a particular taxation year to reduce the amount which would otherwise be included in a prior year on account of subsection 15(2).

Our position as stated in Interpretation Bulletins IT-119R3 "Debts of Shareholders, Certain Persons Connected with Shareholders, etc." and IT-421R "Benefits to Individuals, Corporations, and Shareholders from Loans or Debts" has not otherwise changed.

It is a question of fact as to whether a repayment constitutes a
genuine transfer of property from the debtor to the creditor. A
shareholder's loan which is repaid within one year of the end of
the taxation year in which the debt was incurred may be included in
income if it is considered to be part of a series of loans and
repayments. Subsection 80.4(3) provides the authority to exclude
the interest benefit from income where the amount of the loan or
debt has already been included in income by reason of some other
provision of Part I, such as subsection 15(2). Accordingly, no
amount will be included in a shareholder's income in respect of a
loan under subsection 80.4(2) for a taxation year if the amount of
that loan has been included in income under subsection 15(2) for
the same year or a prior year. PRAIRIE
PROVINCES TAX CONFERENCE
MAY 19 & 20, 1992
QUESTION 23

Mr. X owns 70% of all the common shares of Opco. His son, Y, owns 20% and an arm's length key employee, E, owns the remaining 10%.

Mr. X wishes to partially freeze his interest in favour of his son by reducing his common share interest in Opco from 70% to 50% Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

and increasing his son's interest from 20% to 40%. To accomplish this, each shareholder of Opco first transfers his common shares of Opco to his holding company (i.e. Xco, Yco and Eco, as the case may be). Each of Xco, Yco and Eco then exchanges the common shares of Opco that it held for redeemable and retractable preference shares of Opco having an aggregate redemption amount and fair market value equal to the fair market value of the common shares of Opco so exchanged. The holding companies then subscribe for new common shares of Opco in the following ration: 50% by Xco, 40% by Yco and 10% by Eco.

Will subsection 55(2) apply to the deemed dividends arising as a result of the retraction of any of the preference shares of Opco by either Xco or Yco? DEPARTMENT'S POSITION

If the series of transactions outlined above results in a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on the disposition at fair market value of the preference shares of Opco held by Xco or Yco immediately before the dividend and such reduction could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the commencement of the series of transactions, subsection 55(2) would apply to the taxable dividend (other than to any portion thereof which is subject to tax under Part IV). The exemption contained in paragraph 55(3)(a) would not apply to this series of transactions because the deemed dividend would be received by Xco or Yco, as part of a series of transactions or events, that resulted in

• (i) a disposition of property (i.e. the common shares of Opco) to Eco with both Xco and Yco deal at arm's length; and
• (ii) a significant increase in the interest in Opco by Eco and in Eco by E who deal at arm's length with Xco and Yco.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information