2 December 1991 Income Tax Severed Letter 9206800 F - TEI Ottawa - December 2, 1991

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.

 

Text of the final questions and responses for the Tax Executives Institute Meeting in Ottawa on December 2, 1991.

Attendees at the meeting for RCT were R. Roy, D. Lefebvre, R. M. Beith, R. Read, G. Venner, S. Brown, E. Gauthier.

Responses were prepared by various Branches of RCT

File no 920680

TEI LIAISON MEETING

December 2, 1991

        Questions for Revenue Canada-Taxation

I. TIME LAG UNTIL RECEIPT OF TAX REFUND

Generally, there is a one-week lag between the time a refund cheque is issued by  Revenue Canada and the time that the cheque is received by the taxpayer. Where  substantial amounts of tax are being returned to the taxpayer, every day of delay translates  into a substantial amount of lost interest to the taxpayer. 

Would it be possible for Revenue Canada to establish a procedure whereby refund  cheques of significant dollar amounts could be received by the taxpayer on a more timely  basis? For instance, the taxpayer could arrange for the cheque to be picked up at Revenue  Canada. Alternatively, a taxpayer could arrange to have the refund deposited electronically  to its bank account.

RESPONSE

The cheque issue is normally 4-6 days after assessment of the taxpayer's return.  The interest calculation in the refund anticipates this 4-6 days.  Supply & Services currently issues all the cheques.  The cheque will probably take another 4 days or so in the mail.  The taxpayer may pick up the cheque directly and all field offices should be aware of this.  In order to arrange for a direct pick up of the cheque, the taxpayer should contact the district office.

There is also in place a system for fast track refunds where there are special circumstances.  This is for the fast filing of refunds, immediate assessment and a fast cheque where there is hardship.

An electronic deposit service for T1 Returns has been introduced as a pilot program in Manitoba.  This is being expanded country-wide.  In the near future companies will also receive refunds by electronic deposit.

II. SMALL AMOUNT OF INTEREST  OUTSTANDING IN THE TAX ACCOUNT

It usually takes at least one week between the issuance of a statement of the tax  account by Revenue Canada and the receipt of that statement by the taxpayer. By that  time, of course, additional interest has been accrued on the outstanding amount. It is very  difficult for taxpayers to determine with certainty the amount of interest accrued during the  stub period and, consequently, they end up with small outstanding balances on their  accounts. TEI recommends Revenue Canada's account statement set forth two amounts: (i)  the balance outstanding on the statement date, and (ii) a balance that will be due at a  specified due date, say, 15 days after the statement date. The taxpayer will then know  precisely how much to remit in order to eliminate the balance of the account. The adoption  of such a procedure will save both the taxpayer and Revenue Canada time and costs.

RESPONSE

This issue has been around for quite a while.  Revenue Canada - Taxation has changed its policy.  The proposal is to forgive all interest if the assessment is paid within 20 days (in one or more instalments).  Currently, practice is only to do so if the interest is less than $100.  This proposal will be effective May 1992.

III. TAX INSTALMENTS

On February 20, 1991, members of Tax Executives Institute participated in a Working  Group studying the transfer of tax instalments. The working group was formed at the  request of Scott Brown and was chaired by Kathy Turner. What is the status of the  recommendations made by the Working Group? Has a time table been established for  implementing the recommendations? 

RESPONSE

Scott Brown distributed a copy of a Background Release by Revenue Canada - Taxation which is the culmination of this study.  Provided that a request is made by the taxpayer in writing, acknowledging that the taxpayer will make up for any shortfall, Revenue Canada - Taxation will agree to make any number of transfers between accounts up to tax return filing date.

IV. R&D AUDITS

There are strong indications that Revenue Canada will decentralize its research and  development (R&D) audit programs to their district taxation offices. Since this is an area  that has been the topic of considerable debate over an extended period, can Revenue  Canada advise us of what steps will be taken to ensure consistency of application from  district to district? Where will responsibility fall for approval of R&D claims?

RESPONSE

R & D quality of audits have always been a district office responsibility.  Consistency of application of R & D audit policies from district to district is ensured by Head Office through:

    i)   Development and communication of audit policies and procedures;

    ii)  staff training;

    iii) technical support and assistance.

The responsibility for resolution of whether something qualifies as R & D will remain with the R & D advisor in Ottawa.

V. LOSS ON A SHARE THAT IS CAPITAL PROPERTY

The preamble to subsection 112(3) makes reference to ".

. . the amount of any loss  of the corporation arising from transactions with reference to the share on which the dividend  was received ...." These words could encompass situations that may not necessarily have  been intended to be captured under subsection 112(3). For instance, shares denominated  in a foreign currency are acquired by a corporation at their stated value and are  subsequently redeemed by the issuer at a price equal to the stated value. A capital loss may  be incurred by the shareholder because of a decrease in the value of the foreign currency  from its value at the time of the purchase. 

Would it be Revenue (Canada's position that such a capital loss would be reduced by  any dividends received on such shares by applying subsection 112(3)? Alternatively, would  Revenue Canada consider the loss as one arising from foreign exchange under subsection  39(2) and to which subsection 112(3) would not apply?

RESPONSE

Revenue Canada - Taxation does not consider it possible to separate the foreign currency gain or loss and the gain or loss on the share.

While our point is logical, they would have to take a strict interpretation of what the Income Tax Act says; accordingly, to obtain a different result, there would have to be an amendment.  It was noted that Revenue Canada - Taxation has noted a similar situation with the section 39"stop-loss" rule, and they have already drawn that to the attention of the Department of Finance.

"T.E.I.'s concern was subsequently passed on to the Department of Finance.  Finance indicated that they do not regard subsection 112(3) as an anti-avoidance rule.  Rather, they regard it as a rule designed to assist in the calculation of the true economic loss realised on the disposition of a share.  Subsection 112(3) was enacted because it is necessary in order to prevent the overstatement of the true economic loss on a share to take into account dividends received on that share that have not been previously subject to tax.  For example, if a corporation purchased a share for C$100, received a C$25 dividend, which was not subject to tax, and then sold the share, and because of a foreign currency fluctuation only received C$75, there would not be a true economic loss on the disposition of the share since the total economic benefit, that was not previously subject to tax, arising from the holding and disposing of that share is C$100 (proceeds of $75 and a dividend of C$25)."

VI. CONSOLIDATION OF PROFlTS AND LOSSES IN A CORPORATE GROUP

Information Circular IC88-2 states that the transfer of property with an accrued gain  to a related corporation in order to permit the related corporation to offset such gain against non-capital or net capital losses will not run afoul of the General Anti-Avoidance  Rule (GAAR). The Information Circular, however, does not address the question of the effect of subsection 55(2) on the deemed dividend that would arise on the redemption of  the intercorporate shareholding using subsection 85(1) to put the transaction into place. In a paper to the 1988 (Canadian Tax Foundation) Conference entitled "Section 55: A Review  of Current Issues," Mr. Robert Read said Revenue Canada believed subsection 55(2) would  apply to the deemed dividend in such a case. 

Will Revenue Canada take the view that the exemption in section 55(3)(a) applies  to such a redemption so long as the redemption does not occur for a specified period of  time, say, 6 or 12 months?

RESPONSE

Revenue Canada - Taxation advised that they do not take the view that the exemption in subsection 55(3)(a) applies on the basis that you do not escape the specifics of the law.  In effect, Revenue Canada - Taxation confirmed the application of subsection 55(2) on the deemed dividend arising on the redemption of the intercorporate shareholding using subsection 85(1) to put the transaction into place.

VII. WRITE-DOWN OF CERTAIN ASSETS AND THE PART I.3 TAX

What is Revenue Canada's position on the following types of accounting write-downs concerning the computation of a corporate taxpayer's capital under subsection 181.2(3):

    --        The write-down of deferred exploration expenses where the expenditures are added to the company's cumulative Canadian exploration expenditures account for income tax purposes.

     --    The write-down of the plant, machinery, and equipment because of a reduction of the economic value of those depreciable assets.

RESPONSE

One must look to GAAP to determine if something is a reserve.  The write-down of deferred exploration expenses is not a reserve and does not have to be added to the base for LCT.

Similarly, the write-down of plant, machinery and equipment because of a reduction of the economic value of those depreciable assets is not a reserve and does not have to be included in the capital of a pursuant to subsection 181.2(3) of the Income Tax Act.

VIII. PARTNERSHIPS     

Paragraph 1 of IT-138R states that income flowing through a partnership retains its character. Does a partner's share of production income from a partnership also retain its character as production income for purposes of the section 66.7 successor rules?

RESPONSE

Yes!  Paragraph 96(1)(f) applies.

IX. TRANSFER OF PROPERTY--TIMING OF INCOME

A taxpayer purchases the assets of a business from an arm's-length vendor and the  completion of the transaction is subject to a condition precedent. In response to Question 70 at the 1987 Revenue Canada Round Table, Revenue Canada stated that, in this situation, income earned between the effective date and the closing date would be income of the vendor. 

Would Revenue Canada's response be different if the vendor and purchaser enter  into a legally binding agency agreement for the period appointing the vendor as the purchaser's agent? Would the answer be the same if no condition precedent existed?

RESPONSE

Revenue Canada - Taxation indicated this is a question of law.  Their position is set out in IT 170-R.  Generally, no transfer occurs until the condition precedent is satisfied.  If a transfer has not occurred, the purchaser cannot appoint the vendor as his agent during the interim period.  Revenue Canada - Taxation indicated there would be no difference in their answer if the transaction is subject to a condition subsequent as opposed to a condition precedent.

X. BUTTERFLY TRANSACTIONS

Subsection 69(11) provides that the taxpayer may be deemed to have received fair  market value for property where (a) at any time in a series of transactions, a taxpayer  disposes of property for less than fair market value, (b) one of the main purposes of the  series of transactions is to obtain the benefit of a tax deduction on a subsequent disposition, and (c) the purchaser disposes of the property within three years. 

What is Revenue Canada's policy on the application of section 69(11) in a purchase  butterfly transaction where the vendor is not aware of the purchaser's plans for the assets? 

RESPONSE

The discussion focused on whether the butterfly transaction was "part of a series of transactions ... one of the main purposes (of which) was to obtain the benefit of ...".  On this point, Revenue Canada - Taxation concluded that the issue was a question of fact and therefore it could not answer the question.  It also was observed that Revenue Canada - Taxation would be careful if a ruling was requested in these circumstances as this would suggest that there was some concern on the part of the taxpayers that there was indeed a series of transactions of the kind contemplated by this subsection. 

Furthermore, the subsection does not appear to require the vendor to be aware of the series of transactions in order for the subsection to apply.

XI. RESEARCH OUTSIDE CANADA

Where a nonresident person provides services on a fee basis in respect of a Canadian  research project, the entire fee qualifies as research outside Canada, thereby enabling the  Canadian company to obtain a tax deduction under subsection 37(2). Would cost-sharing  research costs of an identical nature and cost qualify as foreign research where a portion  of the costs relate to depreciation?

RESPONSE

A reasonable allocation of research costs, including depreciation, charged by a non-resident to a Canadian resident pursuant to a cost-sharing arrangement would be deductible to the Canadian corporation.  Reference was made to paragraphs 29-32 of Interpretation Bulletin IT-303, "Know-how and Similar Payments to Non-Residents".

XII. STRUCTURES

In a May 1991 revision to paragraph 1 of IT-79R2, Revenue Canada accepted the meaning of "structures" as set out in British Columbia Forest Products v. MNR, ~JL:Jump,"

RESPONSE

The meaning of "structures" as set out in British Columbia Forest Products v. MNR, ~JL:Jump,"