12 April 1994 IFA Roundtable Q. 11, 4M00680 - HALIFAX ROUND TABLE QUESTIONS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

	HALIFAX ROUND TABLE QUESTIONS	February 1994

 Q.#	SUBJECT	RESPONSIBLE 	PREPARED BY

1. A.B.I.L.	RULINGS	V. PLANT
2. LOSSES: CHANGE OF CONTROL	RULINGS	M. SARAZIN
3. AUDIT POLICY: VALUATION REFERRALS	AUDIT	A. JONES
4. MEDICAL EXPENSE	RULINGS	A. HUMENUK
5. CANADA/US INCOME TAX CONVENTION	RULINGS	T. KUSS
6. DISCOUNTS REALIZED BY INVESTORS	RULINGS	M. COOKE
7. DISCOUNTS REALIZED	RULINGS	B. KERR
8. ALLOCATING RESOURCES OBJECTIVES:
	  UNDERGROUND ECONOMY	AUDIT	T. GAHAGAN
9. LLOYDS OF NAMES	AUDIT	B. CHISHOLM
10. DECENTRALIZATION: FUNCTION CHANGES	AUDIT	GAS
11. INTEGRATION (ADMINISTRATIVE CONSOLIDATION):
	  TIMELINE	AUDIT	B. RIVERSO
12. SECTION 80 EXCESS	RULINGS	R. GAGNON
13. FORECLOSURE: DEBT NOT EXTINGUISHED	RULINGS	R. GAGNON
14. FAIRNESS: INTEREST AND PENALTIES REFUNDED
	  WHERE PAID 	AUDIT	GAS
15. APPEAL PROCESS APPEALS	 N/A
16. GAAR: NUMBER OF APPLICATIONS AND COMMON
	  SITUATIONS	AUDIT	J. PEARSON
17. FAIRNESS: STATISTICS	AUDIT	GAS
18. TPR: RESPONSE DELAYS	AUDIT	GAS
19. CRYSTALIZE CAP.GAIN: CHANGE TO FMV ESTIMATES
	  ON SECT 85	AUDIT	GAS
20. ASSESSMENTS: PROVIDING CARRY FORWARD BALANCES
	  ASSM'T OF RETURNS	N/A
21. R & D: OPENING PRIOR YEARS TO ESTABLISH ITC'S	AUDIT	M. PRAULINS
22. SEE QUESTION 11	AUDIT	B. RIVERSO
23. SS. 12(1)(b) ACCOUNTS RECEIVABLE RECOGNITION	RULINGS	C. CHOUINARD
24. E-FILE: FIRST YEAR EXPERIENCE, COMMON
	  PROBLEMS ASSM'T OF RETURNS	N/A
25. FAIRNESS: ELECTION - SS.104(5.1)	AUDIT	GAS
26. FMV ESTIMATE: EFFECT ON SUBSEQUENT ARM'S
	  LENGTH SALE	AUDIT	GAS
27. AMENDMENTS TO DATE OF DEATH T1 RETURN	AUDIT	GAS
28. E-FILE: INFORMATION NOT PROVIDED, RAP
	  ON 30TH DAY ASSM'T OF RETURNS	N/A
29. DATE OF DEATH RETURN: SS.164(6) ELECTION	RULINGS	N/A
30. QUESTIONABLE COLLECTION ACTION	COLLECTIONS	N/A

Question 1

NON-INTEREST BEARING LOAN AND CAPITAL LOSS

Would a capital loss and, assuming the appropriate criteria are met, an allowable business investment loss be granted in the following situations:

a)Where a non-interest bearing loan, together with the shares of a small business corporation, was sold by a shareholder at a loss to an arm's length party.

b)Where a non-interest bearing loan was sold by a shareholder at a loss to an arm's length party without the shares being sold.

c)Where there is no sale of the loan but the shareholder feels the loan is uncollectible despite the fact that the business continues. The loss could be triggered pursuant to paragraph 50(1)(a). For this purpose, would the loan have to be formally written off?

We are to assume that in each of the above circumstances, the business would continue so the company does not cease permanently to carry on a business.

Department's Position

Pursuant to subparagraph 40(2)(g)(ii) of the Act, a taxpayer's loss arising from the disposition of a debt is deemed to be nil unless the debt had been acquired for the purpose of gaining or producing income from a business or property. Subsection 50(1) deems a debt which has become a bad debt in a taxation year to have been disposed of at the end of that year. A loss resulting from that deemed disposition may also be deemed to be nil by virtue of the provisions of subparagraph 40(2)(g)(ii) of the Act.

It is the Department's general position, as described in paragraph 6 of IT-239R2, that where a taxpayer has loaned money at less than a reasonable rate of interest to a Canadian corporation of which he is a shareholder, subparagraph 40(2)(g)(ii) will not be applied to any subsequent loss arising to him from the inability of the corporation to discharge its obligations to him if the following conditions are satisfied:

(a) the corporation to whom the loan was made used the borrowed funds in order to produce income from a business or property, or used the borrowed funds to lend money at less than a reasonable rate of interest to its Canadian subsidiary in turn to be used to produce income from a business or property,

(b) the corporation has made every effort to borrow the necessary funds through the usual commercial money markets but cannot obtain financing without the guarantee of the shareholder at interest rates at which the shareholder could borrow.

(c) the corporation has ceased permanently to carry on its business, and

(d) the loan from the shareholder to the corporation at less than a reasonable rate of interest (or at no interest) does not result in any undue tax advantage to either the shareholder or the corporation.

In a situation in which the requirement in (c) above is not met, such as in the case when a shareholder sells his shares of the Canadian corporation to persons who intend to continue operating the corporation's business, and, as a result, also transfers to the purchasers, or settles, his loan at less than face value, the amount by which the adjusted cost base of the shareholder's debt exceeds the proceeds therefor will be a deductible capital loss if the following conditions as outlined in paragraph 10 of IT-239R2 are met:

(a) the sale of shares is at arm's length,

(b) the agreement of the shareholder to accept an amount less than the amount of the debt owing to him must be a condition of the sale of shares (or antecedent thereto), and

(c) the conditions specified in paragraphs 6(a), (b) and (d) of IT-239R2, as described above, are also applicable to the loan.

Whether a debt is a "bad debt", subject to the provisions of subsection 50(1) of the Act, is a question of fact which can only be determined upon an examination of all relevant facts in the situation. In this regard, we refer you to paragraph 10 of Interpretation Bulletin IT-159R3 and to paragraph 6 of Interpretation Bulletin IT-442R.

In reference to your specific questions, depending on all of the facts of each particular situation, it would appear that the loss on the loan in situation (a) described above may qualify as a capital loss and, provided the requirements of subparagraph 39(1)(c)(iv) are met, a business investment loss. However, the loss in situations (b) and (c) would not.

Question 2

LOSS CARRY-FORWARDS SUBSEQUENT TO CHANGE OF CONTROL AND WIND UP

Assume a situation where Company A acquires all of the shares of Company B from a person with whom it deals at arm's length thereby resulting in an acquisition of control of Company B for purposes of the Act. Prior to this acquisition of control by Company A, Company B had incurred losses from its business operations and, as a result, has non-capital losses available for carry-forward (the "Pre-Acquisition Losses"). Subsequent to its acquisition of the shares of Company B, Company A commences to operate the business (the "Acquired Business") which was previously carried on by Company B. Some months later, an inactive Company B is wound up into Company A. Would the fact that Company B was not carrying on the Acquired Business for profit or with a reasonable expectation of profit for the short period while it was inactive disqualify Company A from deducting Company B's Pre-Acquisition Losses subsequent to the wind up of Company B?

Department's Position

Subparagraph 88(1.1)(e)(i) provides that where control of a subsidiary corporation has been acquired, any non-capital losses incurred by the subsidiary from carrying on a business before the acquisition of control may be deducted by the parent following the winding-up of the subsidiary only if the business which gave rise to such non-capital losses of the subsidiary is "... carried on by the subsidiary or the parent for profit or with a reasonable expectation of profit throughout the particular year" in which the loss is sought to be deducted.

In the situation described above, provided that the Acquired Business is carried on throughout the particular taxation year of Company A for profit or with a reasonable expectation of profit by either Company B or Company A, Company A would be entitled to claim Company B's Pre-Acquisition Losses, subject to the normal time limitations found in paragraph 111(1)(a) of the Act. However, such Pre-Acquisition Losses would only be deductible by Company A to the extent of any income derived by it in that year from carrying on the Acquired Business or from a business which is similar to the Acquired Business.

Question 3

Question

On two occasions, a client has been asked to respond to a valuation question by the Department when the results of the valuation had absolutely no material impact on the transactions in question. Once the valuation issues were debated and resolved, even if the Department's valuation held up, there was no adjustment to income tax payable for the taxpayer.

My question is what is the policy of the Department's audit group for involving the valuation group? Particularly, I would like to know if the audit staff will only involve valuations when there is an issue on the transaction which would be affected by a change to a valuation.

Answer

It is important to our Department that the client has an understanding of the audit process. We encourage clients to ask questions if the significance of a request by an auditor is not understood.

Whenever a transaction is reviewed by an auditor the value or FMV will be an audit consideration. The auditor is required to refer the issue to the valuation section if the value or FMV might be challenged.

Some transactions may not have immediate tax consequences, however a valuation appraisal may be necessary to establish the value or FMV (ie., adjusted cost base) that will have tax consequences in the future.

Question 4

DISABILITY TAX CREDIT

Under subsection 118.2(2)(e), a person may claim, as a medical expense, an amount paid for the care at an institution provided that the patient is a qualified person and requires the equipment, facilities or personnel specially provided by that institution.

Assume that implicit in the cost of residing at such an institution is rent, personnel and other related costs. The Department's position, as outlined in IT-519, paragraph 5, is that the disability tax credit will not be allowed in the case where a taxpayer makes a claim for an attendant or nursing home care under the provisions of medical expenses. In this case, is it the Department's position that because implicit in the cost of residing at such an institution are personnel costs, the taxpayer would be denied the disability credit as these personnel costs would be characterized as "attendant" costs?

Secondly, the Department has indicated (Technical Interpretations, Business and General Division - November 14, 1991) that a facility could be characterized as a nursing home even if it was not licensed as such. This is the case where "it has qualified medical personnel in attendance of a calibre and in sufficient numbers to provide care to resident patients on a 24-hour basis". Is it the Department's opinion that an institution described above which provides such personnel would qualify as a "nursing home" and therefore a taxpayer claiming such amounts as medical expenses would be disallowed the disability credit on the grounds that the amounts have been paid for nursing home care?

Department's Position

The reference in paragraph 5 of Interpretation Bulletin IT-519 to "attendant care" is based on the restriction in paragraph 118.3(1)(c) of the Act which denies a disability tax credit where the remuneration paid for an attendant is used in computing the amount of the medical expense tax credit claimed for that year. In our view an amount paid to a school, institution or other place for residential care would not be considered "remuneration" and thus would not be "remuneration for an attendant" even though the fees paid may be used by that school, institution or other place to pay the remuneration of its staff. Consequently a claim for a disability tax credit will not be denied solely on account of attendant care costs which are included in the fees paid to a school, institution or other place (other than a nursing home) for residential care or care and training which were claimed by the taxpayer as a medical expense under paragraph 118.2(2)(e) of the Act for that year.

With respect to the restriction in paragraph 118.3(1)(c) of the Act which denies a disability tax credit where the cost of care in a nursing home has been claimed as a medical expense (otherwise than by reason of paragraph 118.2(2)(b.1) of the Act), it is our view that a claim for a medical tax credit for care in a nursing home will preclude a claim for the disability tax credit in the same year regardless of whether the claim is made under paragraph 118.2(2)(d) or (e) of the Act. However, it is a question of fact as to whether or not any particular place is a nursing home which can only be determined with reference to all relevant factors. The commentary in the November 14, 1991 technical interpretation was not intended to be a definition of a nursing home but rather was intended to point out the difficulties in establishing a place to be a nursing home where the place had insufficient staff to operate as such. As stated in paragraph 24 of Interpretation Bulletin IT-519, the use of the word "school" or "nursery" will not affect the determination of whether the place qualifies as a nursing home.

Question 5

U. S. ALTERNATIVE MINIMUM TAX

Article II, paragraph 2, of the Canada-U.S. Income Tax Convention (the "Convention") states that the Convention applies to the taxes imposed by the Government of Canada (Parts I, XIII and XIV of the Income Tax Act (the "Act")) and, in the case of the U.S., taxes imposed by the Internal Revenue Code (the "Code").

It has been our experience that a U.S. citizen who is resident in Canada and earning only "Canadian source" investment income can be subject, under the Code, to U.S. alternative minimum tax ("AMT") for which no foreign tax credit is allowed in the U.S. for Canadian tax paid. This is due to the "90% limitation" on the foreign tax credit for AMT purposes. This U.S. AMT does not appear to be a creditable tax under the Act.

Does the Convention override U.S. domestic tax law thereby allowing a full foreign tax credit in the U.S. as opposed to the 90% limitation imposed under the Code? Alternatively, will Revenue Canada allow a foreign tax credit for the U.S AMT paid?

Department's Position

Pursuant to subparagraph 126(7)(c)(iv) of the Act, this U.S. AMT is not a non-business-income tax and is therefore not a creditable tax for foreign tax credit purposes in Canada under the Act. Under the Convention, Canada has the right to tax this income and the U.S., not Canada, should be granting credit in respect of the Canadian tax.

Paragraph 2 of Article XXIX of the Convention states that, except as provided in paragraph 3, nothing in the Convention shall be construed as preventing Canada from taxing its residents and, in the case of the U.S., its citizens, as if the Convention did not exist.

Paragraph 3 of Article XXIX provides that paragraph 2 shall not affect the obligations undertaken by a Contracting State under, inter alia, Article XXIV (Elimination of Double Taxation)

Paragraph 3 of Article XXIV, states that, for purposes of that Article, income of a resident of Canada which may not be taxed in the U.S. in accordance with the Convention (without regard to paragraph 2 of Article XXIX) shall be deemed to arise in Canada. If the Convention is read without regard to paragraph 2 of Article XXIX, "Canadian source" investment income received by a resident of Canada would not be subject to tax in the U.S. by virtue of paragraph 1 of Article XXII of the Convention and such income would therefore be deemed to arise in Canada for purposes of Article XXIV.

Paragraphs 1 and 2 of Article XXIV are subject to paragraphs 4, 5 and 6 of that Article. Paragraphs 4, 5 and 6 provide special rules for U.S. citizens who are resident in Canada. Under subparagraph 4(a), Canada would not have to allow a credit in respect of U.S. tax paid on the above income as such income does not arise in the U.S. for purposes of that Article. Under subparagraph 4(b), the U.S. shall allow as a credit against U.S. tax the income tax paid or accrued to Canada after the deduction (in this case nil) computed under subparagraph 4(a). Paragraphs 5 and 6 do not apply to this situation as they only deal with income that otherwise arises in the U.S. under Article XXIV.

As paragraph 1 of Article XXIV is subject to paragraphs 4, 5 and 6, and these paragraphs are not subject to U.S. domestic tax law, the credit to be allowed by the U.S. under the Convention should not be affected by the 90% limitation in the U.S. AMT rules.

It is our understanding, however, that the U.S. has, through the enactment of the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), legislated in their domestic tax law a specific treaty override with respect to the foreign tax credit under the AMT rules. It is our understanding that the U.S. tax authorities consider the treaty override in TAMRA to take precedence over treaties that were in effect at that time. Revenue Canada does not share that view. The Department of Finance as well as the Competent Authority of Revenue Canada have had ongoing discussions with the U.S. authorities on this matter, but without any success to date.

Question 6

DISCOUNTS ON DEBT OBLIGATIONS

Interpretation Bulletin IT-479R states that, "Although a taxpayer may be classified as an "investor" ... where the rate of interest that is specified in the obligation is substantially below the market rate at the date of issue, any realization of the discount on the repayment of all or part of such a debt obligation may be classed as interest and as such included in income under paragraph 12(1)(c).". This position is also reflected in Interpretation Bulletin IT-114 at paragraphs 3 an 4.

However, there is considerable uncertainty in the courts as to whether discounts legally constitute interest. At the 1991 Canadian Tax Foundation Annual Conference, the Department indicated (Roundtable Q.53) that, "The review of IT-114 has been deferred pending the outcome of the Department of Finance study relating to the deductibility of interest.". Given this uncertainty and the Department's public comments on IT-114, what is the Department's current position with respect to original issue discounts in the following hypothetical fact situation.

An individual "investor" (not a securities trader or dealer) purchases a 10 year bond with a stated interest rate of 1% from an arm's length securities dealer. The market rate of interest at the time of issue and purchase is 5%. The 1% interest will be paid annually. Specifically, is any amount other than 1% stated interest required to be included in the investor's income and if so, is it required to be included on an accrual basis?

Department's Position

With respect to the above situation, it is the Department's view that the discount probably represents interest, therefore, the "investor" would be required to follow the accrual rules of sections 12(4), 12(9) and Regulation 7000 of the Act, and include a portion of the discount into income on an annual basis.

Question 7

ANNUITIES PURCHASED FROM CHARITABLE ORGANIZATIONS

The Department's position as outlined in Interpretation Bulletin IT-111R allows a charity to pay an amount as an annuity back to a donor who has made a contribution to the charity. To the extent that the annuity payments during the lifetime of the donor are not expected to exceed the amount of the contribution, the difference will be considered to be a gift and the payments to the donor from the charity will be considered to be capital payments. A problem arises, however, in certain provinces through their statutes on insurance and annuities which limit the issuing of annuities to insurance companies. This problem exists in Nova Scotia. A solution may be to have the donor make his contribution to the charity, which the charity then uses to purchase an annuity from a life insurance company. The annuity amount is paid to the charity and then distributed to the donor. The question becomes, is the annuity taxable in part?

DEPARTMENT'S POSITION

As set out in paragraph 1 of Interpretation Bulletin IT-111R, certain registered charities solicit interested individuals to make an irrevocable contribution of capital to the charity in exchange for immediate guaranteed payments to the individual for life at a specified rate depending on life expectancy. As this type of an arrangement is considered to be an annuity for income tax purposes it is subject to tax under the rules relating to annuities except in the very narrow circumstances of paragraph 3 of Interpretation Bulletin IT-111R. Revenue Canada, does not control who can or cannot issue annuities. We presume that the relevant authorities would consider exercising control over the unauthorized issue of annuities.

A charity is not restricted as to the steps it may take to facilitate payment of an annuity. The charity may simply make payments from its resources or it may purchase an annuity from a recognized annuity issuer, either in the name of the donor or in its own name with a direction to pay in favour of the donor. The amount of the gift to the registered charity will, in accordance with paragraph 3 of the bulletin, equal the amount, if any, by which the amount of the payment to the charity exceeds the total of the annuity payments expected to be received by the donor pursuant to the life expectancy tables provided in the bulletin. In the circumstances of paragraph 3 of the bulletin, no portion of the annuity payments received by a donor will be subject to tax.

Question 8

Question

What are the Department's objectives with respect to allocating resources to policing the underground economy?

Answer

The objective of the program is to protect the interest of honest taxpayers by encouraging voluntary compliance. We have to make it clear to those who evade taxes that their actions compromise the achievement of those objectives we all want to see attained -- economic renewal and job creation, responsible social programs and holding the line on taxes. The Department will pursue working relationships with the provinces including the exchange of information. We are consulting with the private sector at both the national and local levels to obtain their support and advice. We will build on the joint initiatives already underway between Taxation and GST and other federal departments where appropriate. In the end we want to provide a level playing field where everyone feels comfortable paying their fair share of taxes.

Question 9

We suggest that the question not be included in the Round Table for the following reasons:

1.There are a number of issues concerning the Canadian Names that are presently being reviewed by the Department. At this time, many of the issues are client specific. Consequently, we are not able to comment on them.

2.The issues concerning the Canadian Names will only affect between 200-400 clients in Canada. As a consequence, there is likely limited interest in these issues.

3.There are issues affecting Canadian Names that are presently under litigation.

4.The submission is not a question, but is a specific concern on assessing practices, some of which are under consideration. The concerns of the author are better addressed by a written submission to the District Office in the writer's jurisdiction.

Question 10

Question

Ottawa recently announced a policy of "decentralization". That is, certain functions previously done at Head Office would now be done at the District Office level. To date, what functions previously done at Head Office are now done in Halifax? Are more functions planned for "moving" to Halifax District Office in the future? If so, what?

Answer

Previously the District Offices would require Head Office authorization to proceed with various audit issues (ie. Tax Avoidance provisions, Special Investigations procedures). Decentralization eliminated most of the mandatory referrals. The District Offices may consult with Head Office, however the ultimate decision on issues will be determined by the District Office. An exception, is the application of the GAAR, which will still require Head Office approval.

Decentralization also allowed the District Offices to determine their own audit programs and utilization of resources.

Question 11

Question

DNR letterhead now says "Customs, Excise and Taxation" What is the time line for the actual integrations of the two Divisions or branches of Revenue Canada? That is when can a taxpayer expect to have a GST and income tax audit all at the same time?

Answer

Currently, Customs & Excise, and Taxation are still two separate Branches under the Department of National Revenue. Bill C-2, which received first reading in the House of Commons on January 24, 1994, is an Act to amend the Department of National Revenue Act (NRA). The proposed amendments to the NRA will allow for the total integration of the two branches but cannot occur until the Bill receives Royal Assent. The administrative consolidation of Revenue operations will not be immediate. The Integration process will occur at a rate that will allow the Department the opportunity to best service our clients and to use our resources in an efficient manner.

Some of our larger clients, with their approval, are already being audited on a joint basis by representatives from both Taxation, and Customs and Excise. These audits are known as team audits. With the passage of Bill C-2, there will be a gradual increase in the number of team audits, as well as the phasing in of generalist audits. A generalist audit will consist of one auditor performing both a Taxation and GST audit, usually on less complex files. It is expected that the complete phasing in of team and generalist audits through out the country will take about two years. Large sized clients should expect to be audited by a team of auditors. Small and medium sized clients could be audited by either a team or individual auditor depending on the complexity of the file.

Question 12

Gain from Forgiveness of Debt

How is the excess of a section 80 adjustment treated? Is it considered a nothing for tax purposes?

Department's position

There are no provisions in the Act which deal specifically with any part of a gain from the forgiveness of a debt remaining after the procedure provided in paragraphs 80(1)(a) and (b) is followed. Depending on the circumstances, the Department could consider whether section 245 or subsection 246(1) of the Act might apply.

Question 13

Foreclosure

What happens where a creditor has a right to sue a debtor for any shortfall when an asset is foreclosed? In this case, the debt is not extinguished on foreclosure and possibly section 80 might apply.

Department's position

Paragraph 80(1) of the Act does not apply where a debt is not settled nor extinguished; neither does it apply where section 79 is applicable in respect of a debt. Section 79 of the Act applies where a mortgagee or similar creditor acquires the beneficial ownership of a property in consequence of a failure of a mortgagor or other debtor to pay all or any part of an amount owed to the creditor. Interpretation bulletin IT-505 deals with the rules provided in section 79 of the Act.

Question 14

Question

Will the Fairness Package apply to recoup the interest and penalties paid by the taxpayer? In the case where the taxpayer is in financial difficulty but is able to borrow to pay off Revenue Canada, is it possible to obtain a refund?

Answer

Fairness legislation regarding the waiver or cancellation of interest and penalties is independent of whether those amounts have as yet been assessed or paid.

Under existing legislation, consideration may be given to waiving interest in those instances where an individual is experiencing financial hardship and has no ability to pay the liability in full. This is determined after a careful review of factors such as income, expenses, and capacity to borrow. Although each case is reviewed individually, an individual would not qualify for interest and penalty relief due to hardship if he or she has the ability to arrange his or her financial affairs in order to discharge the amount owing.

Question 16

Question

How often is GAAR being utilized by the department? What are some common situations in which the local office has applied the GAAR?

Answer

To January 31, 1994, audit has referred 42 cases to the GAAR Committee. The GAAR has been recommended for consideration in 26 of these cases. Of the remaining 16 cases, 7 had other more specific anti-avoidance provisions applied.

The Halifax District Office has considered the GAAR in a number of cases. The cases are quite diverse. It is not possible to draw any broad generalizations.

Question 17

Question

How is the Fairness Package being administered in the local offices? Have there been many applications under the Fairness Package and what are the results of these applications? Which of the Fairness Package provisions have been most common since its introduction?

Answer

A project is being conducted on a national level to analyze the administration and the application of the Fairness Package, however the project has not yet been finalized.

Question 18

Question

It appears as if the turn around time for everything from corporate to personal income tax requests, audit decisions etc. has slowed down significantly in the past year and a half. Are there any particular reasons for the longer turn around time and can we expect any improvement in the near future? It appears as if the turn around time on all but R&D related matters has significantly increased over the past year.

Answer

Overall, the response time in our office is maintaining the same level as in prior years. Of course, any individual request may take more time than the average due to its complexity or the necessity to gather extensive or specialized information.

Many times delays are attributable to the complexity of the problem. We are working on ways to decrease delays. District Offices have introduced general and business inquiries lines. Audit sections have identified individuals who are available to provide technical support to audit and inquiries personnel. Head Office has set aside people who provide telephone support as well as a written referral service. We expect these steps will help to reduce delays.

Question 19

Question

Regarding crystallizing capital gains using Section 85 elections, will Revenue Canada allow a change in the elected amount where the value of the company's shares is different per Revenue Canada than that used by the taxpayer in his/her election form? For example, it is very common for a company not to want to incur the costs of a full valuation of its shares. Therefore, the shareholder will use a best guess at the value. In this case, Revenue Canada may dispute the value to be used in the election.

Answer

We are pleased to advise you that as long as a reasonable effort was made to estimate fair market value, the Department will normally accept an amended election in cases where the estimate proves to be inaccurate. Amended elections are to be filed pursuant to the provisions of subsection 85(7.1), together with an estimate of the penalty provided for in subsection 85(8).

Question 20

Providing carry-forward balances on assessment notices

When providing a tax assessment, will Revenue Canada automatically provide information on carry-forward balances such as CNIL balance, capital gains exemption utilized to date, any RRSP carry-forward and the forward averaging amounts? Since there are so many carry-forward balances now, which must be kept track of, it is important to ensure that the balances are correct for purposes of tax planning.

Department's position

Currently, many carry-over amounts are provided on assessment notices as explanation verses. Examples are: balance for Cumulative Net Investment Loss (when the investment expenses exceed the investment income), carry-over amount for limited partnership losses, restricted farm losses, farm or fishing losses, other non-capital losses, investment tax credit, minimum tax and those provincial tax credits with carry-over provision.

For capital losses and capital gains exemption, a message to contact the district taxation office for details is provided when the Department's records show there is an amount of capital loss available for carry over or when a capital gains deduction was allowed in the current or prior years. The actual amount of capital loss available is not provided due to the different inclusion rates for different years. The capital gains exemption used is also not provided as the amount alone would be insufficient for clients to calculate the allowable deduction on a certain type of property, for a particular year.

The Department is unable to provide the RRSP carry-forward amount on the notices as this amount is currently manually verified and is not captured in the computer.

Forward averaging amounts will be provided on the 1995 and 1996 tax year notices for those clients who have not withdrawn all their elected amount.

Question 21

Question

What is Revenue Canada's administrative policy with respect to opening up a prior year's return for purposes of claiming eligible scientific research and experimental development (SR&ED) expenditures? It is our understanding that a taxpayer can go beyond the statute-barred years to establish SR&ED investment tax credits (ITC) but not to obtain SR&ED cash refunds.

Answer

The Department does not issue reassessments to allow taxpayers SR&ED incentives that are beyond the normal 3-4 year reassessment period. However, subject to the taxpayer being able to establish entitlement to the SR&ED ITCs and the restrictions on ITC carry-forwards, the Department will allow a taxpayer to carry-forward SR&ED tax credits in respect of the taxation years that are statute barred to offset federal taxes payable in open taxation years.

On February 22, 1994, the Minister of Finance Canada announced a change affecting the period during which taxpayers can request adjustments for SR&ED ITCs.

It is proposed that for taxation years ending before February 22, 1994, corporations must identify expenditures within 18 months from the end of the taxation year in which the expenditures were incurred or 90 days after the proposed legislation receives Royal Assent, whichever is later. Short taxation years can reduce the 18 month period.

The 18 month limit is applicable for taxation years ending after February 22, 1994.

Question 22

Question

What is the process of the amalgamation between Revenue Canada Taxation, Customs, and Excise. Can we expect a full amalgamation of all three departments within the next year? If, so will taxpayers be audited by one individual covering the GST and Income Tax or a team of Revenue Canada auditors?

Answer

See answer to question eleven. Question 23

AMOUNTS RECEIVABLE

Subsection 12(1)(b) states that an amount must be included in income when it is considered receivable. Where a taxpayer accrues in its financial statements a portion of an invoice which is not released until after year end, can it exclude that portion from its taxable income because it is not truly receivable until the full amount of the invoice has been issued?

Department's Position

It is the Department's view that generally accepted accounting principles must be used in calculating income for purposes of section 9, unless the Act specifically provides otherwise. The recent decision in West Kootenay Power and Light Company Limited v. The Queen, 92 DTC 6023; (1992) 1 CTC 15 (FCA) confirms that income for tax purposes, must be computed in accordance with a method within GAAP that produces the "truer picture" and when there is only one acceptable method within GAAP and that method is reflected in the financial statements, the income for tax purposes, absent a specific provision of the Act, should not be different.

Paragraph 12(1)(b) of the Act does not set out an alternative method of computing income from a business or property. It was added for greater certainty and to ensure that certain amounts that were invoiced (or should have been invoiced) are included in income, a purpose reinforced by the special rule of interpretation for paragraph 12(1)(b) contained in subsection 12(2). As subsection 12(2) makes clear, paragraph 12(1)(b) is not to be regarded as an all inclusive method of computing income.

Question 24

How was the local office's experience with EFILE first introduced last year? What were some of the common problems encountered with tax returns that were Efiled and what are some suggestions which tax preparers may find useful for this year?

Department's position

EFILE went very well for tax preparers in Nova Scotia during the 1993 program. Nova Scotia tax preparers experienced the same types of problems that all new Efilers encounter their first year. For example, not keying the identification information exactly as our master files causes an error. Another common error was transmitting duplicate returns. The first problem was eliminated by understanding that an exact match is required for our system and the second problem was eliminated as tax preparers became more familiar with their new environment. One suggestion would be to ask tax preparers to become more familiar with all chapters of the Electronic Filers Manual.

Question 25

Question

At present, the Fairness Package does not identify the election under subsection 104(5.3) with respect to deferring the deemed disposition in a trust as one of the eligible elections which may be filed late. Is it the Department's intention to exclude this election from the Fairness Package?

Answer

The process of determining which elections should be included in section 600 of the Regulations is an ongoing one. The responsibility for this section rests with the Department of Finance, and is exercised based on a number of factors, including recommendations from this Department and others.

Question 26

Question

Given the high price of a formal valuation, a shareholder may estimate the value of his/her company's shares for purposes of a Section 85 election. This fair market estimate will be used as one of the limits to select the elected amount for purposes of the Section 85 election. How much weight does Revenue Canada place on this estimate for purposes of determining fair market value on a subsequent non arms-length transaction?

Answer

In circumstances where the estimated FMV has no tax effects at the time of the Section 85 rollover, the Department will not be concerned with the FMV estimated. Due to the insignificance of the FMV estimate the Department would not place any weight on the estimate with respect to future transactions.

Question 27

Question

Will Revenue Canada accept a T1 Adjustment Request to amend the Date of Death T1 Income Tax return in order to deduct a capital loss incurred by the deceased taxpayer's estate within one year of death pursuant to subsection 164(6)? It is our view that a T1 Adjustment Request has the effect of amending the original T1 return filed.

Answer

The Department would be pleased to accept a T1 Adjustment Request to effect an 164(6) election.

Question 28

EFILE Verification Program

For individuals who EFILE'D their 1992 T1 income tax return and were subsequently chosen to provide information slips to Revenue Canada to support their claims, Revenue Canada began their thirty day assessment appeal process the day the request for information slips was made. If a taxpayer mailed in the slips on the twenty-ninth day after the request letter and one of the slips was not acceptable, Revenue Canada would automatically send a Notice of Assessment before the taxpayer had an opportunity to provide a more acceptable information slip. This practice is not consistent with a situation where a manual return had been filed. What is Revenue Canada's policy in this regard?

Department's position

It is department policy to allow a client 30 days in which to respond to a request for supporting documentation and this was true for both EFILE'D and paper filed 1992 returns. However, all files are held beyond the 30 day period in order to allow for delays in mail processing.

Question 29

Election under subsection 164(6)

In a situation where a taxpayer dies in the first ten months of the year, and therefore the Date of Death return would be due April 30th of the following calendar year, and the taxpayer's estate chooses a calendar year end, the estate return would be due March 31st of the following calendar year. In a situation where the estate would have realized a capital loss in its first taxation year, this loss may be applied to the taxpayer's Date of Death return pursuant to subsection 164(6). Since the amount of the capital loss to be applied to the Final Return is known before the Final return is due, is it necessary to file both a Final return without the subsection 164(6) election as well as an amended return or can the executors simply file the subsection 164(6) Final return? There appears to be an inconsistency between a Halifax District Office and the St. John's Taxation Centre requirements. Would you clarify the policy in this regard?

Department's position

Technically, to claim the 164(6) election, the legal representative shall file an amended return of income for the deceased taxpayer. Based on this, the Department's procedures are established such that the 164(6) election is processed at the reassessment stage only. An amended return is usually necessary as losses from the disposition of properties of an estate are mostly realized after the final Return is assessed. However, considering the special situation described, the Department will administratively accept a claim for 164(6) election when the final return is initially filed. The 164(6) election, however, should be clearly identified by the representative.