18 July 1995 TEI Roundtable Q. 1, 5M08860 - TEI CONFERENCE 95

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.

QUESTIONS AND RESPONSES PROVIDED

AT THE ANNUAL CONFERENCE OF THE

TAX EXECUTIVES INSTITUTE

HULL, QUEBEC MAY, 1995

Question #1

CAPITAL LOSS ON INTEREST-FREE LOAN TO FOREIGN CORPORATION

The court decision in Business Art Inc. v. MNR (86 DTC 1842), Floyd R. Glass Jr. v. MNR (92 DTC 1759) and National Developments Ltd. v. The Queen (94 DTC 1061) consistently ruled that subparagraph 40(2)(g)(ii) is not applicable to disallow taxpayers' capital losses incurred in respect of interest-free loans made to foreign corporations in which they owned shares. Will Revenue Canada now allow such capital losses ?

Department's Position

The Department has not appealed the decisions rendered by the court in each of the above cases and has accepted the decisions only in relation to the facts of each particular case. The Department's position regarding the deductibility of capital losses resulting from a loan bearing interest at less than a reasonable rate remains as stated in IT-239R2.

Similar cases were heard in 1994 and are presently awaiting a court decision or are under appeal. The Department will review its position in light of the outcome of these cases.

Question #2

BUTTERFLY REORGANIZATIONS - TRANSFERS TO PARTNERSHIPS

Revenue Canada's Income Tax Technical News No.3, dated January 30, 1995, states that the enactment of paragraph 55(3.1)(c) of the Act will prevent a transferee corporation that is not related to the distributing corporation after the butterfly from transferring butterflied property to a partnership.

The Explanatory Notes to Bill C-59, issued by the Minister of Finance on November 24, 1994, also state that new paragraph 55(3.1)(c) denies the protection of the butterfly exemption for a dividend received by a transferee corporation in circumstances where, as part of the series of transactions or events that includes the receipt of the dividend, a significant portion of the property received by the transferee corporation on a distribution becomes property of a partnership or a person who is not related to the transferee corporation. The stated intention of the restriction is to ensure that the shareholders of the distributing corporation maintain a certain continuity of interest in its underlying business and assets after the butterfly reorganization.

The following example illustrates a potential problem in respect of the above restriction which is outside the stated intention:

Corporation A owns 30% of the share capital of corporation B; the balance of B's share capital is owned by several corporations not related to A. The shareholders of B intend to liquidate B and distribute its property proportionately to its shareholders pursuant to the butterfly rules. Since substantially all of A's business is operated through a partnership it has with its wholly-owned subsidiary, A intends to transfer to that partnership the 30% undivided interest in B's property it would receive upon B's liquidation.

Would A's transfer of its interest in B's former property to the partnership be regarded as "part of the series of transactions or events" which would consequently deny A the protection of the butterfly exemption ? If this is the case, is the Department of Finance prepared to introduce an amendment to paragraph 55(3.1)(c) so that the butterfly exemption would still apply if the transferee corporation subsequently transferred the butterflied property to a partnership which is related to the transferee corporation ?

Department's Position

Whether a subsequent disposition of butterflied assets is part of a series of transactions that includes the butterfly reorganization would depend on the facts of a particular situation. However, in view of the extended meaning given to "series of transactions or events" by subsection 248(10), it seems likely that the disposition to the partnership described in the example would occur as part of the series that includes the butterfly reorganization.

( Question concerning amendment to paragraph 55(3.1)(c) to be answered by the Department of Finance )

Question #3
LARGE CORPORATION TAX

Is Revenue Canada working on an interpretation bulletin or information circular relative to the Tax on Large Corporations to clarify Revenue's position with respect to a number of issues that are not clear in the legislation.

Department's Position

Yes, we have recently started drafting a new IT bulletin covering the Tax on Large Corporations.

Question #4

RESOURCE ALLOWANCE

Is Revenue Canada working on an Information Circular concerning the calculation of resource allowance prior to July 1992 in order that a number of taxpayers not privy to the CAPP agreement are aware of the resolution of the issues?

Department's Position

The Department has no plans to issue such an information circular.

Question #5

Paragraph 2425 of the Window on Canadian Tax service states that it is Revenue Canada's view that payments made by an employer to an employee profit sharing plan as defined under subsection 144(1) are salaries or wages or other remuneration and as such are subject to deductions at source under paragraph 153(1)(a). If the plan does not call for the vesting of employer contributions with the employee until January 1 of the following year (i.e., if the employee leaves the company at any time during the year that employee's share of the employer's contributions are reallocated within the plan and that employee is not entitled to any of the employer contributions) how is the company to determine the correct amount to be withheld under paragraph 153(1)(a)?

Department's Position

Whilst the employer's contributions to an EPSP are included in the employee's income under paragraph 6(1)(d) of the Income Tax Act (ITA), there is no withholding requirement when the employer makes the contribution nor on the allocation to the employee by the trustee. Subsection 153(1) of the ITA uses the term "paying" while the amounts are "allocated" by the trustee and both Regulations 102 and 103 refer to a payment made by the employer to the employee. In the case of an EPSP, the employer does not make a payment to the employee but to the trustee.

It is the Department's stance that no withholding is required on employer contributions to an EPSP nor on allocations from an EPSP to the employee.

Question # 6

TAXATION OF SCHOLARSHIP AWARDED TO EMPLOYEE'S CHILD

Paragraph 56(1)(n) states that a taxpayer must take into income all amounts received in the year as a scholarship, fellowship or bursary to the extent that those amounts exceed $500. That same paragraph has an exclusion for amount received by virtue of an office or employment. This exclusion was added in response to The Queen v. Savage (S.C.C.) 83 DTC 5409 and has, until now, always been assumed to apply when the recipient of the scholarship etc. was also an employee of the company awarding the scholarship. At least one District Office is now taking the position that where a child of an employee receives a scholarship to attend university that scholarship is not income of the child by virtue of the exclusion under paragraph 56(1)(n). That District Office is attempting to add those amounts into the income of the parents under paragraph 6(1)(a).

How does the Department support this position in view of the fact that the exclusion is meant to apply where the recipient is also an employee? In addition it is difficult to understand how parents of children that have reached the age of majority really enjoy a benefit in view of the fact that they do not have control of the children.

Department's Position

With respect to the position taken by the particular District Office noted in your question, we can't really offer a comment since we don't have all the facts of the case, however we would be pleased to review the case if you care to make us aware of the facts in writing.

Whether an amount is income under 6(1)(a) or 56(1)(n) is a question of fact. For instance if a child is competing for one of a limited number of scholarships being offered by an employer, and is selected on the basis of his or her scholastic records and/or achievement, or is selected by a board using some other type of criteria, then the payment is considered to be income of a child, and included in their income under paragraph 56(1)(n).

If the employer provides an unlimited number of scholarships to the children of its employees conditional on the child meeting some type of scholastic record and/or achievement, or conditional on entering a certain academic field, then the amount received by the child is income of the employee "received in respect of, in the course of or by virtue of an office or employment" and included in income under paragraph 6(1)(a).

With respect to the second part of your question, we would be pleased to address such an issue if put forth to our office in writing.

Question #7

COLLECTIONS FOR AMOUNTS UNDER APPEAL OR OBJECTION

Subsection 164(1.1) requires the Minister to refund 50% of the amount of tax assessed to large corporations that is in controversy as a result of an objection or appeal. In most cases, this will require a payment by the corporation as a result of the assessment. Where a corporation is expecting a large refund, say for example, as a result of a court case such as the Gulf case, will the taxpayer be required to pay 50% of the tax for a particular reassessment when, in fact, Revenue has on hand excess corporate tax paid as result of the pending refund?

Department's Position

It is not the Department's intent to collect taxes that are not legally payable. In the situation where a court has decided a case in the taxpayer's favour, and the Department is not considering an appeal, any pertinent refunds will always be considered as a means of liquidating the amounts owing.

Question #8

REAL TIME AUDITS OF LARGE CORPORATIONS

On March 6, 1995, National Revenue Minister David Anderson announced measures to strengthen Revenue Canada's ability to audit large corporations. The department's new approach is to reduce the time large corporations spend complying with the tax law, while maintaining the public's confidence in the tax system. The Minister has announced that real time audits and combined income tax, GST, payroll, and customs audits will be available to large businesses.

1. What will Revenue Canada's expectations be of large businesses and what can large business expect of Revenue Canada in order to facilitate the process of real time and/or combined audits. Also, Revenue Canada's current audit cycle tends to be two to four years behind. What process is envisioned to bring large business case files up to date?

Department's Position

Revenue Canada's expectations of large businesses and what large businesses can expect of Revenue Canada in order to facilitate the process of real time and/or combined audits are as follows:

_ a single issue or the entire return can be audited before the return is filed and assessed:

_ each issue and/or return filed in accordance with any real time audit agreement will not be subject to further audit;

_ substantial time savings can be achieved by both parties due to the immediate availability of the records and the staff involved in their preparation;

_ a better understanding of the problems faced by each party and a more cooperative approach in working together to resolve them; and

_ will assist us in becoming and remaining current which will result in significant benefits for both of us.

In order to bring large business case files up to date Revenue Canada has implemented the following:

_ objective of becoming current by March 31, 1996 means all returns prior to 1993 should be audited;

_ real time audits:

_ trend analysis;

_ identifying contentious issues so that time can be used to best advantage:

_ describing the audit plan, timing and approach;

_ outlining how we can better work together; and

_ protocols.

2. Will the three to five year strategy agreement developed between Revenue Canada and large business be a formal process? Will this process be conducted annually? Does the new process of real time audits impact the current procedures for filing Notices of Objection or Appeals to the courts?

Department's Position

The three to five year strategy agreement developed between Revenue Canada and large business will be a formal process which we are considering calling a protocol that would guide our audit work and be tailored to your specific circumstances.

A protocol should cover a period of three to five years. An example of a five year plan would be as follows:

_ year one full audit;

_ years two and three reliance on trend analysis, compliance measures, and may require full audit of some aspects i.e. corporate restructuring;

_ year four full audit;

_ year five new agreement.

The new process of real time audits will not impact on the current procedures for filing Notices of Objection or Appeals to the courts.

3. TEI is concerned, however, that taxpayers are receiving mixed signals from Revenue Canada. The above referenced statement is not consistent with audit and assessment practices of some district offices and auditors. For example, some auditors spend a lot of time on verification of year-end expenditure accruals.

Does Revenue Canada have any plans to increase consistency of audit approach among its district offices and auditors?

Department's Position

Revenue Canada enhances consistency in the audit approach among our Tax Services Offices and our auditors by the following means:

_ All audit staff use the same reference material (i.e. communiqués, policy directive).

_ Both Headquarters and Tax Services Offices audit staff meet with various professional groups to provide and receive information (i.e. C.A. - Tax Executive Institute).

_ National Workshops are organized regularly ac a forum for disseminating information to auditors and exchanging views and ideas.

_ The Audit Technical Support Division in Headquarters is established to deliver technical assistance for both Internal and External clients.

_ Senior officials attend and speak at various conferences to inform the public of the Departments practices, interpretations and what treatment they may expect.

_ Departmental officials consult with various clients to understand their concerns and obtain their comments (i.e. advisory committees, large corporate clients).

_ The Appeals section is established to provide independent review.

_ Program Monitoring visits of our Tax Services Offices are conducted to ensure national consistency.

We invite the public to bring their concerns about consistency to our attention. However, we must be provided with actual examples so we can investigate and determine if corrective action is necessary.

Question #9

NON DEDUCTIBLE INTEREST ON REPAYMENT OF PIP GRANTS

Revenue Canada has adopted the position that interest paid with respect to a repayment of Petroleum Incentive Program grants is a satisfactory penalty which is calculated in a manner similar to interest and therefore is not deductible in accordance with paragraph 18(1)(a) or 20(1)(c) of the Act.

The interest charged is not assessed under the statutory penalty provisions of the Petroleum Incentives Program Act. The interest charged is the same as interest charged on any late or deficient payment.

What is the rationale that would preclude the taxpayer from being granted a current deduction for the interest as a general business expense pursuant to section 9 of the Income Tax Act?

Department's Position

As we have a case at Court on this issue, it would be inappropriate to respond to this question at this time.

Question #10.

T4A's re Group Term Life Insurance Benefits for Retired Employees

In late 1994 Revenue Canada amended its position regarding issuance of T4A's to require they be issued to all former employees where there is a Group Term Life Insurance taxable benefit. Previously, even if there was a Group Term Life Insurance taxable benefit, T4A's were only required if the payment made to (or on behalf of) the employee was more than $500 or tax was deducted from the payment.

A number of employers continue to provide small amounts of group life insurance to retired employees with the cost to the employer (taxable benefit to the former employee) being in many cases less than $50. As a result of the change, these former employees must now be set up and maintained in the employee database in order to issue with T4A's.

Will Revenue Canada consider reinstating what used to be a very reasonable policy since the potential for abuse (and related revenue loss) is minimal and does not justify the additional compliance burden?

Department's Position

As the taxation of the benefits arising from all Employer-Provided Group Term Life Insurance is the result of new legislation, the Department of Finance considers it necessary to have all such amounts reported on the prescribed forms. In the case of retired employees with no other income to be reported on a T4A, if the decision had not been taken to remove the $500 de minimis threshold, no taxable benefits of this type would be reported. The Department is not considering reversing this administrative position at this time.

Question # 11

WAGE LOSS REPLACEMENT PLANS - IT-428

a) In Interpretation Bulletin IT-428, the rules for "Wage Loss Replacement Plans" are outlined. Many employers have ASO (Administrative Services Only) plans whereby they provide funds to an insurance company which then pays the appropriate claims. The employer must fund any shortfall and is entitled to any surplus funds accumulated by the insurance company administering the plan. Does an ASO plan such as this qualify as an insurance plan as described in paragraph 7 of IT-428?

b) Often certain groups of employees (e.g. part-time employees) are required to make all of their own contributions to the plan. The amount of contributions required of the employees is established using prior claims history with a view to making this portion of the plan employee-funded but any shortfall or surplus is the responsibility of the employer.

As stated in paragraph 18 of IT-428, a plan to which some employees make all the required contributions will not be considered to be an employee-pay-all plan if the employer makes contributions for other members. Would Revenue Canada consider treating a plan such as that described as an employee-pay-all plan for part-time employees who are required to fund their own contributions?

c) If the answer to a) and b) are both no, is there any relief for the employee who funds his contributions out of after-tax dollars and is taxable on the full amount of benefits received out of the plan, including amounts which can be considered a return of premiums?

Department's Position

a) It is the self-insured arrangements which present the greatest challenge in determining whether there is an insurance element. The comments in paragraph 7 of Interpretation Bulletin IT-428 are intended to distinguish the situation where an employer is liable to pay an employee salary and wages during a period in which the employee is unable to work due to sickness or accident, from the situation where an employee's entitlement to benefits is only available through an insurance plan. As stated in paragraph 3 of Interpretation Bulletin IT-339R2 "Meaning of "Private Health Services Plan"", a plan which consists of the following five 5 basic elements, namely:

an undertaking by one person,
to indemnify another person,
for an agreed consideration,
from the loss or liability in respect of an event,
the happening of which is uncertain,

will be considered to be a plan of insurance. Where an ASO plan administrator has the right and obligation to collect the annual contribution required of the employer, the plan will generally qualify as a plan of insurance. The annual contribution required of the employer is typically determined on an actuarial basis. If the contribution rate is set at an amount that is greater than the amount expected to be used in the current year to provide benefits, the employer's deduction for such contributions will be limited by subsection 18(9) of the Act.

b) The Department is prepared to treat that portion of a sickness and accident insurance plan in which the employees pay the entire cost of coverage under the plan as a separate plan from that part of the plan to which the employer makes a contribution provided that there is no cross subsidization between the two plans, and the level of benefits, premium rates, qualifications for membership and other terms and conditions of each of the plans are not dependent upon the existence of the other plan. In addition, the administration of the plans must indicate that each plan can be regarded as being separate from the other. Under an administrative services only plan, this would mean that the part-time employees would be liable for any shortfall required to fund benefits provided to the part-time employees under the plan and would be entitled to any surplus that might arise from that portion of the plan. Thus the scenario set out in your question would not be considered an employee-pay-all plan.

c) If the plan is determined to be other than a plan of insurance, the plan may be an employee benefit plan or employee trust as defined in subsection 248(1) of the Act and described in Interpretation Bulletin IT-502. An employer's deduction to an employee benefit plan is determined under section 32.1 of the Act. For an employee who has contributed to the plan, the amount included in income under paragraph 6(1)(g) of the Act is the amount received out of the plan less any amount that represents a return of that employee's contributions to the plan.

Question #12.

REGISTERED PENSION PLAN COVERAGE OF EMPLOYEE EXPATRIATE SERVICE

Paragraph 147.1(11)(c) of the Income Tax Act permits the Minister to revoke the registration of a registered pension plan to the extent that it does not meet the prescribed conditions for registration as set out in Regulation 8501 of the Act. Eligible service is one of the prescribed conditions. Regulation 8503(3)(a)(vii) establishes the eligible service for an employee who is employed outside of Canada as a period acceptable to the Minister. In a Pension Reform Update (No. 93-2, October 29, 1993) Revenue Canada confirmed that a period acceptable to the Minister during which a non resident individual could accumulate eligible service under a defined benefit registered pension plan was normally 3 years per assignment. In regards to a money purchase plan no contributions are permitted unless approved in writing by the Minister.

For many multinational organizations the ability to provide foreign assignments for its employees is an invaluable aid to the technical and business training of its work force. The experience gained through these assignments cannot be duplicated through training programs or other methods. The above noted regulations will serve to restrict this valuable activity where the length of assignment is an important factor. Lastly, the reasons for Revenue Canada wishing to curtail the foreign assignments of Canadian employees is unclear as is the reason for differentiating between defined benefit and money purchase registered pension plans.

We request that the Minister review his position regarding the 3 years limit for the foreign service and either remove it or increase the acceptable time period to a more appropriate level of 10 years. Conversely, to the extent that the funding cost of expatriate employees is borne by the foreign company it would seem to be appropriate that a blanket exemption be provided with respect to the affected employees. There is, in this situation, no deduction being claimed by the Canadian company for the pension plan contributions made on behalf of the expatriate employee as these costs are fully reimbursed by the foreign employer. Lastly, the treatment of foreign service should be consistent between defined and money purchase registered pension plans

Department's Position

Registered Plans Division Pension Reform Update No.93-2, dated October 29, 1993 is the Department of Finance's stated position on the foreign service limits for Registered Pension Plans. As set out in that publication, a period of three years is the set limit.

We do not anticipate that the Department of Finance will be making any significant changes to the eligible foreign service inclusion limit for Registered Pension Plans. Any questions concerning the foreign service policy should be directed to the Department of Finance.

_ This three year period is a partial reiteration of the Department of Finance's policy as stated in paragraph 8(e)(iii) of the Revenue Canada Information Circular 72-13R8, dated December 16, 1988._

Question #13

ALLOCATION OF GROSS REVENUE - REGULATION 402

Regulation 402 of the Income Tax Act sets out general rules for the allocation of taxable income amongst various provinces in which a corporation has a permanent establishment. Revenue Canada meets with the non agreeing provinces, on an as needed basis, in an endeavour to resolve specific cases involving double taxation. At a recent meeting, the determination of destination, in paragraph 402(4)(a) of the Income Tax Regulations was discussed. Please explain the results of these discussions.

Department's Position

Revenue Canada has not changed its position but rather has clarified the determination of the of the destination of a shipment of merchandise to a customer under paragraph 402(4)(a) of the Regulations. The ordinary meaning of the Regulation must govern, requiring us to consider the merits of each case, including the documentation between the parties relating to the transactions. In other words, the facts will determine the destination of the merchandise. While the passage of title or risk may be factors which should be considered, they may not be determinant of the destination of a shipment of merchandise.

We are examining the possibility of a prospective implementation where a review of the particular facts results in a change of destination.

Question #14

INCREASE IN ARREARS INTEREST RATE

(a) Have Finance and Revenue Canada considered alternatives to higher interest rates as a means of improving compliance and collecting unpaid taxes.

(b) Does their department have any studies which demonstrate that higher interest rates increase compliance collection?

Department's position

(a) The department considers penalty and interest charges to be incentives to comply with filing and payment requirements, rather than revenue sources. The charging of interest encourages the prompt payment of tax and promotes the consistent treatment of those taxpayers who pay their taxes on time, and those representative of tax owing to the Crown.

This measure is intended to discourage delinquent taxpayers from using their arrears as a form of operating capital and ensure that tax arrears would be repaid before any other debt.

(b) Revenue Canada does not have any studies which demonstrate that higher interest rates increase compliance collection.

Question #15

PAPERLESS TRANSACTIONS

1. With the increased use of debt instruments such as Commercial Paper, which turn over frequently during the year, what level of support will Revenue Canada accept as evidence of this indebtedness? Will electronic records that outline the transaction flow be sufficient documentation for audit purposes?

Department's Position

The Department will accept the transaction detail in electronic form as an electronic file or as a document imaged in accordance with CGSB standard CAN/CGSB-72.11-93 and Special Release to IC78-10R2. The level of detail in either case must be comparable to that which is ordinarily expected of a paper document. It must be full, complete and unaltered (line by line).

2. The new electronic purchasing systems have some or all of the following characteristics, automatic ordering, payment by purchase order based upon computer receipt of goods, Electronic Funds Transfer. In the absence of traditional physical documentation, such as an invoice/cheque, being available what will Revenue Canada require as evidence to validate these transactions?

Department's Position

The Department will require the same electronic documentation described in response to the preceding question.

We will be circulating draft legislation that will address electronic books and records. The purpose of the legislation will be to clarify the law with respect to retention, access and maintenance of electronic records. In general, the legislation will require that electronic records be retained for the period set out in the Act. The electronic records will be accessible to authorized persons when required irregardless of what paper documentation exists. Failure to maintain the records or grant access to them will be subject to penalty. The Minister will have the authority to exempt a class or classes of person from the retention provisions.

Question #16

DISTRESS PREFERRED SHARES - TAX RULINGS

We are aware that favourable rulings with respect to the status of distress preferred shares have been given in circumstances where it is contemplated that some or all of the shares will ultimately be held by parties other than the existing lender or lenders to the creditor corporation which is in financial difficulty.

We understand that taxpayers have been discouraged from seeking rulings that interest paid on money borrowed by "Third Party Purchasers" to finance the acquisition of the distress preferred shares from the existing lenders will be deductible in full under paragraph 20(1)(c) if the dividend rate receivable on the shares is less than the interest rate payable on the borrowed funds. Lack of favourable rulings with respect to interest deductibility has discouraged some potential investors from entering the market for these shares, reducing demand for the shares and increasing the dividend rate that must ultimately be borne by the corporation in financial difficulty.

Can you comment on the reasons that Rulings is reluctant to give favourable rulings in these circumstances?

Department's Position

The Department's long-standing general position, as stated in response to Q. 3 of the 1979 Canadian Tax Foundation Revenue Canada Round Table, is that "interest expense resulting from a loan used by a corporation to acquire preferred shares is fully deductible only if the rate of interest expense is equal to or less than the rate of return on the preferred shares". If this is not the case, then the interest expense in a given year will be restricted to the dividends actually received in that year. This position is now reflected in draft paragraph 20(1)(qq) of the Act, outlined in the Department of Finance Information #91-141, dated December 20, 1991. The following quote from Explanatory Notes from the same document make the intent of the draft legislation clear

This paragraph would typically apply in the context of shares bearing a fixed dividend rate that is lower than the interest rate charged on the funds borrowed to acquire those shares.

Question #17

CALCULATING THE PROXY AMOUNT FOR THE R&D ITC

The Fifth Supplement to the ITA changed the relevant provision to subclause 37(8)(a)(B)(iv) and the relevant ITR to 2900(9). ITR 2900(9) appears to remove some of the ambiguity by stating "salaries or wages......does not include an amount described in section 6 or 7 of the Act" (i.e. taxable benefits) instead of excluding "related benefits", as it was previously worded. An article in Canadian Tax Highlights issued Feb. 23, 1994 states that "Revenue has taken the position that in calculating the SR&ED salary component, "related benefits" do not include the employer's share of CPP and UI, payments to a workers' compensation board, and employer health tax" as "these amounts are overhead expenditures". Could Revenue Canada and the Department of Finance clarify:

(a) In calculating the "proxy amount" for the investment tax credit on scientific research and experimental development, is the correct base "salary and wages" as defined in subsection 248(1) of the Income Tax Act less the taxable benefits in section 6 and 7 of the Act?

Department's Position

Your understanding in calculating the "proxy amount" is almost correct. In calculating the "proxy amount" the 248(1) definition for "salary and wages" may be used as a starting point. But this amount must be adjusted so as to only include amounts that can reasonably be considered to relate to SR&ED, and not include; amounts deemed under subsection 78(4), bonuses or remuneration based on profits, and section 6 and 7 amounts as you have already noted.

(b) If the answer to question (a) is answered in the affirmative, do the section 6 and 7 benefits get added to qualifying expenditures after the proxy amount has been determined or are such benefits considered to be overhead expenditures that are excluded when using the proxy method?

Department's Position

Section 6 and 7 amounts are not added to qualifying expenditures. They already are qualifying expenditures by virtue of paragraph 37(1)(a) and the definition of "qualified expenditure" as found in paragraph 127(9) and as a result receive an ITC and are included in the section 37 pool. When using the "proxy method", the notional amount arrived at represents overhead expenditures. Section 6 and 7 amounts are not considered to be overhead expenditures and must be excluded from the salary base used to calculate the proxy amount.

(c) In calculating the investment tax credit on scientific research and experimental development, does the Department of Finance agree with the position taken by Revenue Canada that the employer's share of CPP and UI, as well as payments to a workers' compensation board and employer health tax, are considered overhead expenditures which would be excluded from qualifying SR&ED expenditures under the proxy method?

Department's Position

Yes, the Department of Finance does agree with Revenue's position that the employer's share of UI, CPP, WCB, health tax, etc., are overhead expenditures. This is based on the fact that these are incremental type of expenditures that are directly related to SR&ED, and would not have been incurred had SR&ED not been done. Not to exclude them would result in a double dip since these expenditures are reflected in the proxy amount.

(d) For greater certainty, are bonuses paid to arm's length individuals who are not specified shareholders included in the salaries and wages base for calculating the proxy amount?

Department's Position

No! As noted in the first part of this question bonuses are excluded from salaries and wages when the proxy method is used. This is in accordance with Regulation 2900(7).

Question #18

ADVANCE PRICING AGREEMENT - ROLL BACK TO OPEN YEARS

Does Revenue Canada have an administrative position with respect to Advance Pricing Agreements being applied retroactively to years under audit or already audited?

Department's Position

Revenue Canada's administrative position, procedures and guidelines in respect of its Advanced Pricing Agreement service are set out in Information Circular 94-4, International Transfer Pricing: Advanced pricing Agreements (APA), released December 30, 1994.

The Department's position with respect to the application of APAs to taxation periods is addressed in the following paragraphs of Information Circular 94-4:

"3. ...An APA prospectively confirms an appropriate TPM, and its application, to specific crossborder non-arm's length transactions for a specified term."

"4. ...Usually, an APA applies to transactions completed from the beginning of the taxation year in which the Department accepted the request for an APA. However, the decision to apply an agreed-upon TPM retroactively (i.e., to non-statute-barred years) rests with the responsible district office and the taxpayer."

"5. As noted in paragraph 3 above, APAs focus on and pertain to future taxation periods ..."

An APA is based on particular prospective transactions, the underlying facts and circumstances and anticipated future events. Minimal time is spent during the discussion, evaluation and negotiation of an APA in reviewing the facts and circumstances of prior years to attempt to determine if the agreed-upon APA would be suitable for those years. In respect of taxation years not covered by an APA (either under audit or already audited) the responsible district office and the taxpayer would review the facts and circumstances of those years, determine whether the agreed-upon APA would be applicable and negotiate a settlement and raise a reassessment, if appropriate.

Question #19

FOREIGN EXCHANGE GAINS OR LOSSES - INCOME VS CAPITAL

(a) Can guidelines be provided with respect to determining whether foreign exchange gains or losses are on account of income or capital?

(b) Where a corporation's charter includes as one of its functions "making investments", does this make any gains or losses realized on investments on income account or is it still possible to argue that, given the type of investment, intention, etc., certain gains or losses are on capital account?

Department's Position

(a) The Department's general views on the characterization of foreign exchange gains and losses are set out in Interpretation Bulletin IT-95R.

(b) Whether gains or losses on investment transactions are on income or capital account is a question of fact. In general, it is the Department's view that a statement of powers in the incorporating documents, while certainly a factor, is not in itself determinative. Where the realization of investments is part of the corporation's ordinary business, the resulting gains or losses would normally be on income account.

Question # 20

DEDUCTIBILITY OF SALES TAX REASSESSMENT

What is the impact of the Johnson & Johnson Inc. case 94 DTC 6125 on the Department's policy with regard to the timing of the deductibility of sales tax reassessments for income tax purposes as enunciated in Information Circular 77-11? Does subsection 152(4.3) of the Act have any bearing on such policy.

Department's Position

Our position respecting deductibility of sales tax reassessments as described in Information Circular 77-11, will remain.

Draft amendments to the Income Tax Act released April 1995 propose to amend paragraph 12(1)(x). This amendment which adds a reference to amounts refunded, will require sales tax refunds to be included in income in the year received.

Subsection 152(4.3) would not ordinarily apply to situations involving sales tax reassessments.

Question #21

SUBSECTION 85(1) ELECTION

All of the outstanding common shares of Opco, a taxable Canadian corporation, are held by Publico, another taxable Canadian corporation. Opco files articles of amendment to authorize a class of redeemable retractable preferred shares. Publico will exchange half of the issued outstanding common shares of Opco for redeemable retractable preferred shares and one common share of Opco.

Would the Minister confirm that it is possible for Publico and Opco to file an election pursuant to subsection 85(1) of the Income Tax Act (the "Act") and that subsections 86(1) and (2) of the Act are not applicable by virtue of subsection 86(3) ?

Department's Position

For subsection 85(1) to apply to a transaction, there has to be, among other conditions, a disposition of a property by a taxpayer to a taxable Canadian corporation. As stated in the answer given to Question #20 at the 1991 Revenue Canada Round Table (Canadian Tax Foundation conference), it is the Department's view that a disposition to a corporation occurs when shares received by a taxpayer from the corporation have rights sufficiently different from the rights of the shares of the corporation given in exchange.

However, depending on the circumstances, the Department will consider the application of subsection 245(2) when the subsection 85(1) rollover is done for the purpose of creating classes of shares having adjusted cost bases that are not in proportion to their fair market values.

Question #22

TAX ON LARGE CORPORATIONS - BANK OVERDRAFT

In the reply to question VI(2) of the May 1994 T.E.I. round table, Revenue Canada explained its position on bank overdrafts with respect to the tax on large corporations.

(a) Why did the Department make a distinction between the giving of cheques by a debtor to its creditors where a cheque operates as payment and where the giving of a cheque does not operate as a payment?

If the distinction is to segregate cheques governed under common law jurisdictions from the ones which are governed under civil law, it seems that in both jurisdictions, a debtor is not discharged until the cheque is presented for payment and is honoured. In addition, the rules pertaining to bills of exchange are regulated under federal statute and, accordingly, common and civil law distinction should not apply in that regard.

(b) Revenue Canada has taken the following position which is included in question VI(2).

"It is the view of Revenue Canada that outstanding cheques do not, in themselves, constitute an indebtedness of the corporation. However, the bank indebtedness reflected in the balance sheet resulting from outstanding cheques constitutes a loan or advance to a corporation pursuant to paragraph 181.2(3)(c) of the Act where the giving of the cheques by a debtor to its creditors operates as payment."

Some taxpayers believe that Revenue Canada's position is rebuttable for the following reasons. While a loan can be gratuitous, the normal commercial and banking practice is that any bank loan or overdraft will attract interest. If no interest is charged by a bank on an outstanding cheque at year end, it is difficult to see how it could be concluded that a bank loan, advance or overdraft exists at year end. Outstanding cheques are factually and technically neither loans nor advances because there must be an acknowledgement or an agreement to set up a loan relationship which is only evidenced when the bank acknowledges an overdraft. Accordingly, the liability to the extent that there is no overdraft is not with the bank but is with the trade creditor and paragraph 181.2(3)(f) only requires accounts payable outstanding for more than 365 days to be included in taxable capital.

Can the Department provide its comments?

Department's Position

(a) Bank overdrafts are considered to have arisen to the extent that they have been utilized or drawn upon. The writing of a cheque on a bank account will be considered to constitute a draw upon that account where that cheque represents payment.

In the common law jurisdictions a conditional payment principle has been well established. In Marreco v. Richardson, (1908) 2 KB 584, at 593 (CA) Farewell, L.J. stated,

"The giving of a cheque for a debt is payment conditional on the cheque being met, that is, subject to a condition subsequent, and if the cheque is met it is an actual payment ab initio and not a conditional one."

More recently in Moody v. MNR, 57 DTC 1050, at 1054, the Exchequer Court stated,

"In the absence of some special circumstance indicating a contrary conclusion such as, for example , post-dating or an arrangement that the cheque is not to be used for a specified time, a payment made by cheque, although conditional in some respects, is nevertheless presumably made when the cheque is delivered..."

This principle is not altered by the fact that the underlying liability between the original debtor and creditor is not generally discharged until the cheque is honoured by the respective bank nor whether the bank can charge interest on the amount of the cheque between the date of delivery and the day the cheque is presented to the bank.

The common law principle establishes the payment date as the time of delivery of the cheque. The subsequent presentation of the cheque, to the bank, will not alter, in law, the payment date unless the cheque is not honoured.

In the Civil Law jurisdiction of Quebec the courts have established the principle in a different manner. Under the Civil code the date of payment is considered to be the time in which the cheque is honoured by the bank. Delivery is irrelevant to the determination.

In Pantalons Star Laurierville Lte v. The Minister of National Revenue, 92 DTC 2182, The Tax Court of Canada examined the issue of when payment by cheque could be considered, under Civil law, to have been made. The court stated, at 2189,

"Delivery of a cheque by a debtor to its creditor does not constitute payment within the meaning of the Civil Code, other than conditional payment on the cheque being cashed by the payee."

and again at 2189,

"A bill of exchange does not in itself operate as a transfer of funds, and so delivery of a cheque cannot be considered as payment. Payment therefore did not take place until the moment when the cheque was cashed."

(b) The position taken by us in reply to question VI(2) of the May 1994 T.E.I. round table is consistent with the foregoing circumstances where the issuance of a cheque constitutes payment.

Where the cheque results in indebtedness or a negative bank balance on the balance sheet the basis for our position that such amount is a loan or advance is that the bank has, by granting the taxpayer overdraft privileges, tacitly acknowledged or agreed to the overdraft.

Question #23

TAX ON LARGE CORPORATIONS - ADVANCE BILLINGS

When a corporation bills its customers in advance for services to be rendered in the coming year and the bill remains unpaid at year-end, could you please confirm that the amount of the advance billing is not included in taxable capital for tax on large corporations purposes?

Department's Position

Paragraph 181.2(3)(c) includes "the amount of all loans and advances to the corporation at the end of the year", in the "capital of a corporation", for purposes of determining tax payable under Part I.3 of the Income Tax Act.

The term "advance" often means simply "pay" or "pay money before it is due". Black's Law Dictionary (6 ed) defines the term "advance" as "moneys paid before or in advance of the proper time of payment". In the case of TransCanada Pipelines Limited v. The Minister of Revenue (Ontario), (1992) 62 O.A.C. 105, the Ontario Court of Appeal quoted with approval from the Dictionary of Business and Finance (1957) at page 9 as follows:

... the definitions of "advance"... as a "payment made beforehand or in anticipation" and a "payment made before... the completion of an obligation for which it is to be paid".

Accordingly an advance billing, that remains unpaid at year end, with respect to services to be rendered in a subsequent year would not be considered as an advance for purposes of paragraph 181.2(3)(c).

A review of the specific facts including the basis on which such amount is reflected in the balance sheet would be necessary to determine whether this amount would be included in capital by virtue of the other provisions of subsection 181.2(3).

Question #24

EMPLOYEE STOCK OPTIONS

Subsection 7(1)(e) of the Income Tax Act (the "Act") deems an employee to receive, in the year of death, a benefit from employment equal to the value of the unexercised stock option rights after the death which exceeds the amount (if any) paid by the employee to acquire the rights.

1. Does the employer have to issue a T4 in the year of death computing the 7(1)(e) benefit or is it the responsibility of the deceased's estate to compute the 7(1)(e) benefit?

2. Will the deceased be eligible to a 110(1)(d) deduction in the year of death?

3. As a result of the 7(1)(e) income inclusion in the year of death, what section of the Act provides an increase in the adjusted cost base ("ACB") of the unexercised stock option rights to the estate of the deceased?

4. Does the unexercised stock option rights become capital property to the estate of the deceased giving rise to a capital gain or loss in the future (with the exception of a 164(6.1) adjustment in the 1st year of the estate)?

Department's Position

1. Paragraph 7(1)(e) of the Act applies to an employee who holds options under an employee stock option plan at the date of death. A benefit in the year in which he dies equal to the difference between the fair market value of the option immediately before the employee's death and any amount paid by the employee to acquire the options will be included in the employee's income pursuant to that paragraph. It is the Department's position that the employer has to issue a T4 in the year of death computing the benefit under 7(1)(e).

2. Paragraph 110(1)(d) of the Act provides that when applicable, a deduction of 1/4 of the value of the benefit deemed to have been received by the taxpayer under subsection 7(1) will be allowed. It is our opinion that a deduction under paragraph 110(1)(d) of the Act may be claimed against a benefit included in income under paragraph 7(1)(e).

3. Where an estate acquires property by way of bequest or inheritance, it is deemed to acquire the property at fair market value at the time it so acquires it pursuant to paragraph 69(1)(c) of the Act. Provided that the shares acquired upon the exercise of the option are capital property to the estate, subparagraph 49(3)(b)(ii) of the Act will include the adjusted cost base of the option at the time of expiry.

4. Whether the unexercised stock option rights become capital property to the estate of the deceased is a question of fact.

Question #25:

EMPLOYEE FRINGE BENEFITS LESS THAN $100.00

Taxpayer are generally taxable on the value of all benefits (either in kind or cash) that they receive by virtue of their employment. From an administration perspective, it is cumbersome to track all gifts to employees as awards or prizes during the year.

Is the Department willing to make an administrative concession to not require gifts in kind be included in income if the value of all gifts in kind to the employee during the year does not exceed $100.00?

Department's Position

A gift (either in cash or kind) from an employer to an employee is a taxable benefit to the employee.

The Department's administrative policy as indicated in paragraph 9 of Interpretation Bulletin IT-470R is, that where the value of a gift does not exceed $100 and the employer does not claim its cost as an expense in computing taxable income the gift is not viewed as income of the employee. This will apply to one gift to an employee in a year. In the year an employee marries it will apply to two gifts.

The value of a gift in kind is to be considered its fair market value. Where the value of the gift exceeds $100. the total value is a taxable benefit and is to be reported on a T4 Supplementary.

As stated above a gift from an employer to an employee is a taxable benefit to the employee. Therefore, if our administrative position causes a tracking problem and is administratively impossible to control we would suggest that the value of such gifts be included in the employee's income and reported on a T4 Supplementary..

If the gift in question is considered to be an award; paragraph 13 of the Interpretation Bulletin IT-470R states that where an employee receives a prize or other award related to sales or other work performance from his or her employer, the fair market value of such an incentive is regarded as remuneration to be included in income under section 5 of the Act.

Question # 26

EMPLOYEE FITNESS PROGRAM REIMBURSEMENTS

Revenue Canada is of the opinion that employees who use physical facilities owned by their employer do not receive a taxable benefit. Similarly, where an employer pays to have fitness facilities made available to its employees at little or no cost to them, the arrangement does not give to a taxable benefit.

Does a nominal payment or reimbursement of say $250.00 that is specifically intended to cover only a portion of approved aerobics fitness programs result in a taxable benefit to the employee?

Department's Position

An employer may provide an in-house recreation facility for the use of the employees generally without the employees receiving a taxable benefit. Similarly the employer may pay a related, or unrelated, organization to provide such facilities. If the facilities or membership is available equally to all employees, no taxable benefit will accrue.

In some instances an employer will subsidize the cost to an employee of joining a facility, or pay (or reimburse) the cost of the membership for the employee. A taxable benefit will accrue to the employees even where the employer designates the facility, includes restrictions in the agreement under which the subsidy or repayment is provided, or the employee does not make use of the membership facility. The benefit will be the amount of the subsidy or the cost to the employer of the membership.

As indicated in Interpretation Bulletin IT-470R, paragraph 34, the benefit to the employee will be considered tax free only where it can be clearly shown that the benefit from the employee's membership in the facility accrued primarily to the employer.

Question #27.

WAIVER OF SOURCE DEDUCTIONS

In order to reduce administration costs, many companies are eliminating the need for filing expense reports by giving sales and service employees a car allowance based on prior year's cost experience. The allowance is included in the employees income and in the case of the commissioned employees a reduction or elimination of withholding tax at source is achieved by the filing of a TD1X. Where the employee is not in receipt of commissions, Revenue Canada's general policy is to grant a waiver of withholding if the requesting taxpayer can provide reasonable evidence that tax withheld at statutory rates will exceed tax payable for the year.

Is Revenue Canada willing to provide a blanket waiver to companies that provide a listing of those employees that are not remunerated in whole or part by commissions and for whom it can be that substantiated that the allowance is reasonable based on historical evidence? If not, can the application of the TD1X be extended to allow for its use by noncommissioned employees?

Department's Position

The Department is receptive to issuing bulk waivers to employers for automobile allowances paid to employees. Such bulk waivers will be considered provided the employer is willing to:

a) Obtain and review for reasonableness the estimate of expenses and business kilometres vs. total kilometres for the year from each employee who requests waiver relief from withholding taxes;

b) Such request will be kept on file in case of a future audit by this Department.

In either case, the full amount of such allowance must be reported on the employee's T4 Supplementary.

The TD1X form is designed specifically for use by employees in receipt of commissions and would not be appropriate for use by purely salaried employees.

Question #28

STANDBY CHARGE "AVAILABLE FOR USE"

A Quebec provincial court case, Bertrand Giles vs the Ministere du Revenue du Quebec heard June 1986 has been submitted as jurisprudence by employees requesting that their T4's be amended to reflect the definition of "available for use" as contained in the case. Therein, the judge indicated that when an automobile is used during the day for business, that same vehicle cannot be "available" to the taxpayer for his personal use. The taxable benefit originally computed was reduced to apply only to those days where the employee had the vehicle "available" for personal use, that is, vacation days, weekends and statutory holidays.

Would you please clarify the applicability of the above interpretation of "available for use" as it pertains to the standby charge computation.

Department's Position

Revenue Canada considers an automobile to be available for use by an employee as long as they have access to, or control over, the vehicle. Access ends when an employee returns the keys of the automobile to the employer.

It is the Department's view that if an employer-owned automobile is made available to an employee for any part of a day, with the mutual understanding that the employee may use the automobile for personal use (regardless of whether or not the automobile is used for personal use), that day becomes an available day for the purposes of paragraph 6(1)(e) and subsection 6(2).

Question #29

MORTGAGE INTEREST SUBSIDIES

A Tax Court case heard in 1994 (Peter Mikkelsen (Appellant) v. Her Majesty the Queen (Respondent), 95 DTC 118) involving mortgage interest subsidies paid to Confederation Life (the Lender) by the appellant's employer (Petro Canada) as a result of his relocation, was tried on the basis that the subsidies constituted paragraph 6(1)(a) benefits to the appellant. It has long been Revenue Canada's position (as enunciated in IT-421R2) that, depending on the employer's involvement in securing the loan for the employee, such subsidies could be subject to the provisions of section 80.4 and not paragraph 6(1)(a). It is stated that the subsidy was based on a specific Petro Canada policy relating to transferred employees. Although not stated, it is probable that Petro Canada has a specific program with Confederation Life involving Confederation Life providing mortgage financing and Petro Canada subsidizing interest on the loan with the taxable benefit computed by reference to the rules in section 80.4. On the assumption that this is in fact the case, is it still the Department's position that the provisions of section 80.4 and not paragraph 6(1)(a) would apply to such interest subsidies?

Department's Position

The Department's position remains unchanged. In situations where the employer has exercised its influence in support of an employee's application for a third party loan the subsequent mortgage interest subsidy would be viewed as a benefit under section 80.4. In Mikkelsen v. the Queen 95 DTC 118, it is the Department's view that the employer did not have a significant role in the granting of the loan to the employee. As a result, the benefit is considered to have been received under paragraph 6(1)(a) of the Act.

The Mikkelsen case is identical to Hoefele v. the Queen 94 DTC 1878 and Zaugg v. the Queen 94 DTC 1882. Both the latter cases involved Petro Canada employees in the same basic situation, participating in the same Mortgage Assistance Program offered by the employer. Each of the cases was tried on the basis of a taxable benefit being received under paragraph 6(1)(a) of the Act.

Section 80.4 applies in cases where there is a benefit received by the employee by virtue of employment in the form of lower or no interest cost. Where the loan is provided by a third party at fair market interest rates, for section 80.4 to apply it is important to establish the extent to which the employer influenced the granting of the loan.

The Department is seeking a judicial review in each of these cases.

Question # 30

QUALIFYING INTEREST IN A FOREIGN AFFILIATE

Proposed paragraph 95(2)(m) describes the circumstances under which a taxpayer has a "qualifying interest" in respect of a foreign affiliate. Subparagraph (iii) thereof provides that where, at any time, shares of a corporation are owned or are deemed for the purposes of that paragraph to be owned by another corporation (the "Holding Corporation"), the shares shall be deemed to be owned at that time by each shareholder of the Holding Corporation in a proportion equal to the proportion that the fair market value of the shares of the Holding Corporation owned at that time by the shareholder is of all the issued shares of the Holding Corporation outstanding at that time. Assume that a Canadian company ("Canco") owns all of the issued and outstanding shares of a foreign affiliate ("FA1") which in turn owns all of the issued and outstanding shares of another foreign affiliate ("FA2"). If FA2 holds 10% or more of all the issued and outstanding shares (having full voting rights under all circumstances and having 10% or more of the fair market value of all the issued and outstanding shares) of yet another foreign affiliate ("FA3"), would Canco have a "qualifying interest" in FA3?

Department's Position

Canco does have a qualifying interest in FA3 for the purposes of subparagraph 95(2)(m)(iii). In the above circumstances subparagraph 95(2)(m)(iii) would be applied twice. That is, on first reading, the shares of FA3 owned by FA2 would be deemed to be owned by FA1 and on second reading the shares of FA3 deemed by subparagraph 95(2)(m)(iii) to be owned by FA1 (on the first reading) would be deemed to be owned by Canco.

Question #31

EXEMPT EARNINGS OF A FOREIGN AFFILIATE - FOREIGN EXCHANGE GAINS

Assume that the only source of income of a particular foreign affiliate of a taxpayer, in respect of which the taxpayer has a qualifying interest throughout the year, is interest income in respect of a loan made to a non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year. The loan proceeds were used in the non-resident corporation's active business carried on outside Canada and both the affiliate and the non-resident corporation are resident in a "designated treaty country" within the meaning of proposed subsection 5907(11) of the Regulations. The loan is denominated in U.S. dollars and the "calculating currency" of the foreign affiliate is Dutch guilders.

Pursuant to proposed clause 95(2)(a)(ii)(A) and proposed subclause 5907(1)(b)(iv)(B)(III) of the Regulations the interest income of the foreign affiliate would be included in its "exempt earnings" for the year. If the foreign affiliate realizes foreign exchange gains in respect of principal repayments made on the loan during the year would such gains be exempt earnings of the affiliate?

Department's Position

Pursuant to subparagraph 5907(1)(b)(i) of the Regulations, exempt earnings of a foreign affiliate for a taxation year include, in general terms, the amount by which the capital gains of the affiliate for the year exceed the aggregate of (A) the amount of its taxable capital gains for the year from dispositions of property, other than "excluded property", (B) the amount of the taxable capital gains referred to in clauses 5907(1)(f)(iii)(A) and 5907(1)(f)(iv)(C) of the Regulations and, (C) the income or profits tax that reasonably relates to the amounts computed under (A) and (B).

As the loan would be considered "excluded property" of the affiliate no amount would be computed under (A), above. As well, no amount would be computed under clause 5907(1)(f)(iv)(C) of the Regulations, as that clause relates to dispositions of shares or partnership interests. Proposed clause 5907(1)(f)(iii)(A) of the Regulations relates to dispositions of property used or held by the affiliate principally for the purpose of gaining or producing income from an active business carried on by it in a country that is not a designated treaty country (other than Canada). As a result, the entire foreign exchange gain less any income or profits tax related thereto would be included in the exempt earnings of the affiliate for the year.

Question #32

INTER-PROVINCIAL ALLOCATIONS: ONTARIO'S PAYMASTER RULES

Part IV of the Income Tax Regulations describes rules for allocating taxable income among the provinces which apply for both income and capital tax purposes.

In 1993 Ontario unilaterally proposed rules (Central Paymaster Rules) that were inconsistent and which could result in double taxation.

What action can the federal government take to align Part IV Regulations with the Ontario or otherwise to prevent double taxation?

Departments' Position

It is our understanding that Ontario made the changes to its income allocation formula as an anti-avoidance mechanism, that is, to prevent perceived tax planning activities.

This issue has already been discussed at the Sub-Committee of the Corporate Taxable Income Allocation Formula. It is not clear that any change to the federal allocation rules is needed because it is not known if double taxation will result from the Ontario change.

Question #33

INCLUSION OF BANK OVERDRAFT IN LARGE CORPORATION TAX BASE

ITA Section 183.2(3)(c) requires all loans and advances owing by a corporation at year end to be included in their LCT capital base. The Department's position has been that the Bank Overdraft reported on the Financial Statements must be included into the LCT base as a loan without regard to outstanding cheques, which are allowed as an offset by the provinces. A company could therefore be adversely affected where accounts payable balances are paid just prior to, rather than just after year end. For many large corporations, the payment process is automatic and cannot be easily altered.

Does the Department have any intention of modifying its position to allow outstanding cheques to be offset against Bank Overdrafts?

Department's Position

See the answer to question #22.

Question #34

GUIDELINES ON TAX TREATMENT OF ENVIRONMENTAL EXPENDITURES

A growing area of concern for many corporate taxpayers is Revenue Canada's administrative policy related to expenditures made to comply with environmental legislation and regulations. For many taxpayers, additional tax concerns arise when these expenditures relate to prior years' activities and income.

Through the audit process, Revenue Canada may identify taxpayers' treatment of these expenditures as being inconsistent with its policies. In some cases, taxpayers have been forced to capitalize and deduct these expenditures over a specified period of time. Others have been denied the deduction of such expenditures entirely. Revenue Canada has supported this position by reference to paragraph 18(1)(a) of the Income Tax Act.

The Department of Finance has issued draft legislation on mining reclamation costs, specifically dealing with the use of a trust. However, these rules relate to a specific industry and activity. Could Revenue Canada issue guidelines on the tax treatment of environmental expenditures covering a broader range of industries? These guidelines should be more specific than those provided in its IT Bulletin 128R related to the tax treatment of repairs and maintenance expenditures on depreciable property.

Department's Position

The Department has always taken the position that when a taxpayer makes an expenditure, for the purposes of complying with environmental legislation concerning a subsequent years reclamation expense, that the amount is not deductible pursuant to 18(1)(a) or 18(1)(e). This will continue to be the Department's position in situations where amounts are set aside or set up as reserves for reclamation costs that will incur in a subsequent year.

We suggest that the industry groups affected should forge an alliance with their provincial regulators, and approach the Department of Finance to introduce tax legislation that is similar to that enacted for the mining industry.

Question #35

PERSONAL USE OF AUTOMOBILE

When an employer pays any amount of operating expenses related to personal use of an automobile supplied to an employee, the calculation of the benefit under subsection 6(2.2) is done using a charge based on a fixed rate of 12 cents per kilometre of personal use.

In the situation where the employer pays for limited operating expenses the calculation made under subsection 6(2.2) could result in a taxable benefit to the employee which is in excess of operating expenses actually paid by the employer.

Is there any administrative relief for this situation?

Department's Position

Subsection 6(2.2) is repealed for 1993 and subsequent taxation years as a consequence of the introduction of paragraph 6(1)(k).

Where an employer, or person related to an employer, provides an automobile to an employee and pays for the operating expenses related to the personal use, the payment of these expenses represents a taxable benefit to the employee.

This benefit is calculated by applying 12 cents per kilometre for each kilometre of personal use. Alternatively, a reduced operating cost benefit calculated at 1/2 of the standby charge may be available when:

a standby charge is included in the employee's income;

the employee uses the automobile more than 50% for business purposes; and

the employee notifies the employer in writing that he chooses to use this method of calculation.

No taxable benefit will accrue when an employee fully reimburses the employer for all operating expenses (including GST) attributable to personal use within 45 days after the year end. If an employee does not fully reimburse, or only partly reimburses the employer for the personal operating expenses the employer should calculate the operating cost benefit and deduct any portion of reimbursement from the benefit.