7 September 1995 Income Tax Severed Letter - BULLETIN BOARD

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.

Welcome to the Income Tax Rulings & Interpretations Directorate Bulletin Board. The bulletin board contains commentary and announcements on current issues and information on the Directorate. You can scroll through the board or go directly to a topic by sub-searching on a keyword (eg DOCP) in the following index:

DOCF	95/8/31	PART I.3 TAX - DEFERRED REVENUE
DOCB	95/7/3		Tax Convention - Resident of a Contracting State
DOCC	95/6/30	Incestuous share purchases
DOCD	95/6/28	Payments to foster homes
DOCE	95/6/28	Medical expenses
			Directorate Information
DOCM			Mandate
DOCN			Mailing Address & General Phone Numbers
DOCP			Work Section Phone Numbers

DOC F PART I.3 TAX - DEFERRED REVENUE

July 20, 1995

MEMORANDUM TO FILE Financial Institutions
Section

951794

PART 1.3 - TAX ON LARGE CORPORATIONS & DEFERRED REVENUE - NON FINANCIAL INSTITUTIONS

The following sets out the Department's position for purposes of Part 1.3 tax with respect to deferred revenue recorded on the balance sheet of a corporation. Such deferred revenue may be recorded to reflect cash advances received in respect of either earned or unearned revenue, unrealized foreign exchange gains and losses, advance billings, or other accounting adjustments.

DEFERRED REVENUE REPRESENTED BY CASH

Where the deferred revenue is represented by cash we are of the view that it is an advance which is included in capital pursuant to paragraph 181.2(3)(c) of the Income Tax Act ("Act").

DEFERRED REVENUE NOT REPRESENTED BY CASH

We note that deferred revenue not represented by cash may or may not be included in the capital of a corporation either as an "other surplus" or as a "reserve" pursuant to paragraph 181.2(3)(a) or (b) of the Act respectively. This determination can only be made upon review of the particular facts of a specific situation.

We are also of the view that when dealing with unearned income which is reflected in the balance sheet as a deferred revenue account, such as income that is required to be reported in the balance sheet for regulatory purposes in advance of being earned or billed, the deferred revenue amount would not be included in the capital of the corporation. In our view as such amounts have not been earned at balance sheet date there is no basis to treat them as either "reserves" or "other surpluses".

UNREALIZED FOREIGN EXCHANGE GAINS OR LOSSES

We note that new measures were introduced in the April 1995 technical bill to deal with the issue of the unrealized foreign exchange gains or losses and Part 1.3 tax. Such gains and losses may be required to be deferred under generally accepted accounting principles. The deferred unrealized foreign exchange gains will be specifically included in the capital of the corporation pursuant to proposed paragraph 181.2(3)(b.1) of the Act and the deferred unrealized foreign exchange losses will be specifically deducted from a corporation's capital pursuant to proposed paragraph 181.2(3)(k) of the Act. An amendment to paragraph 181.2(3)(g) of the Act will provide a similar treatment of a corporation's share of any deferred unrealized foreign exchange gains and losses of a partnership of which it is a member. These proposed measures are to be applicable with respect to 1995 and subsequent taxation years.

It has been the Department's position, prior to these proposed amendments, to consider that the unrealized foreign exchange gains were included in the capital of a corporation either as "other surpluses" or as "reserves" but that there was no provision in the Act permitting an adjustment to take into account unrealized deferred foreign exchange losses for purposes of Part 1.3 tax since they do not represent a deficit deducted in computing the shareholders' equity pursuant to paragraph 181.2(3)(i) of the Act. We were of the view that a technical amendment to the Act was required to correct this anomaly and the above proposed measures will correct the anomaly with respect to the unrealized foreign exchange losses.

XXXXXXXXXX

ADVANCE BILLINGS

A corporation may bill its customers in advance of services to be rendered in the coming year and the bills may remain unpaid at year-end. The question usually raised in respect of such billings is whether or not the deferred revenue account has to be taken into account in computing the capital of a corporation. A review of the specific facts including the basis on which an amount in respect of advance billings is reflected in the balance sheet would be necessary to determine whether this amount would be included in capital by virtue of paragraph 181.2(3)(a) and/or (b) of the Act as an "other surplus" or as a "reserve". Unless it can be argued that the deferred revenue account represents earned revenue we are of the view that it would generally not be included in the capital of the corporation.

UNFUNDED PENSION LIABILITIES & UNFUNDED HEALTH & WELFARE PLANS

We refer to document 951517 for a discussion on this issue.

RATIONALE

Department's Rationale for including a deferred revenue amount in the capital of a corporation either as a "reserve" or as an "other surplus" is as follows:

The definition of "reserves" in subsection 181(1) of the Act certainly allows us to take a broad view as to what could be included therein. The broad definition of "reserves" in subsection 181(1) of the Act extends the concept of reserve beyond the accounting meaning. In our view the deferral for accounting purposes of earned income, realized amounts or amounts that have accrued but are unrealized constitutes a provision or allowance that is required to be included in the capital of a corporation except to the extent such reserves were deducted in computing its income under Part I.

We are also of the view that a reasonable argument can be made that such amounts could be included in the capital of a corporation as "other surpluses" pursuant to paragraph 181.2(3)(a) of the Act. Where the deferred revenue amount represents earned revenue, realized amounts or amounts that have accrued but are unrealized we are of the view that it may constitute an "other surplus" referred to in that paragraph. The basis for this position is generally that the deferred revenue or gains even if unrealized represent part of the capital and assets of the corporation at balance sheet date and as such constitute "other surpluses" of the corporation.

DOCB TAX CONVENTION - RESIDENT OF A CONTRACTING STATE

XXXXXXXXXX

XXXXXXXXXX

DOCC		Incestuous Share Purchases

XXXXXXXXXX

XXXXXXXXXX

DOCD		PAYMENTS TO FOSTER HOMES

Principal Issues: emergency home fees: are they exempt under para 81(1)(h)?

Position TAKEN: fees for operating a foster child emergency home in the taxpayer's home is exempt from income even though there are periods during which no child is in the taxpayer's home

Reasons FOR POSITION TAKEN:

-notwithstanding the quantum paid in BC, such fees are the fees envisioned as bed reservation fees described in the Finance Department technical notes. Therefore the amount can be considered to be an amount which would ordinarily be paid to the caregiver on account of social assistance if the child were in her home. Her home is maintained for the use of foster children & thus the income is exempt

DOCE			Medical Expenses -  House Renovations

Principal Issues:

Whether the reasonable costs of constructing an addition to the house to accommodate the needs of a wheelchair bound spouse are deductible as a medical expense under paragraph 118.2(2)(l.2) of the Act.

Position TAKEN:

Yes.

Reasons FOR POSITION TAKEN:

The expense was laid out to allow the patient to be functional within the dwelling.

June 8, 1995

XXXXXXXXXX Tax Services HEADQUARTERS
Attention: XXXXXXXXXX J.A. Szeszycki
Audit Services (613) 957-8953

950228

Home Renovations and Additions As Medical Expenses

This is in reply to your memorandum of January 20, 1995 in which you requested our views on the acceptability, as a medical expense under the provisions of subsection 118.2(2) of the Income Tax Act (the Act), of costs incurred by a taxpayer in building an addition to his home to accommodate the special needs resulting from confinement to a wheelchair. We apologize for the delay in providing you with a response.

Our understanding of the circumstances, as represented in the taxpayer's letter of November 15, 1994, are that the taxpayer's wife became paralysed in 1992 resulting from a condition known as osteo mylitis. The taxpayer himself is suffering from the ongoing effects of multiple sclerosis that have occasionally confined him to a wheelchair as well. As a consequence of his wife's special needs, it became clear to the taxpayer that in order to continue to reside in their home modifications would have to be made to accommodate those needs.

In addition to the expected renovations that permit persons in wheelchairs to be functional within their homes, such as the widening of doorways or the installation of ramps, it was concluded that the space within the rooms of the house was inadequate to accommodate the special equipment needs of the patient. The taxpayer opted to build an addition to his house that would add 800 square feet (20 ft. X 40 ft.) of space to the house, providing his wife with a larger bedroom and kitchen.

You have made reference to an opinion that was issued by this Directorate in 1991 with respect to a case that has many similarities to the case at hand. In that opinion we had stated our view that the word "modifications", as found in subparagraph 118.2(2)(l.2) of the Act prior to its amendment in 1994, did not include additions to a home, nor was it intended to include such additions. As you noted, we had indicated within that opinion that had the words in the provision been "alterations" or "renovations" we would have to recognize a strong argument in favour of accepting the claim of a house addition as a medical expense where all the other basic criteria of section 118.2 of the Act are met. The 1994 amendment to the medical expense credit provision did in fact incorporate the phrase "alterations and renovations" in place of "modifications", an amendment which has effect with respect to expenses incurred after 1990.

For your information, the case which was the subject of the 1991 opinion was eventually appealed and, with the support of a legal opinion on the interpretation of the use of the word "modification" in this context, the claim in respect of the cost of the addition to the house was (re)considered to be acceptable as a medical expense. In this case, therefore, to the extent that the addition to the house was considered necessary in order for the patient to be mobile and functional within the dwelling, reasonable costs incurred to construct the addition would be eligible for the medical expense tax credit.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

June 7, 1995

VANCOUVER TAX SERVICES HEADQUARTERS
Audit Division A. Humenuk
957-8953
Attention: George Press
941301

Emergency Homes and Bed Reservation Fees
XXXXXXXXXX

We are replying to the memorandum from J.E. Thatcher of your Division dated May 12, 1994 concerning the issue of whether the payment from the British Columbia Ministry of Social Services (the Ministry) to the above noted taxpayer is exempt from income by reason of paragraph 81(1)(h) of the Act. We apologize for the delay in our response.

XXXXXXXXXX operates an emergency home in her principal of residence. She is under a contract with the Ministry to provide emergency care for up to four children in her home for an annual fee ($XXXXXXXXXX in 1992). The children typically stay in her home for one to three days and in 1992 there were 170 days during which no children were placed in her home.

You have asked whether such payments are to be excluded from income by reason of paragraph 81(1)(h) of the Act and whether XXXXXXXXXX could be considered a foster parent. You also ask for clarification on the taxation of payments made by XXXXXXXXXX to individuals assisting her in her home with the care of the children.

As the term "foster parent" or "foster child" is not found in the legislation, it is our view that the second issue raised is not necessarily relevant for the purpose of determining whether the amount should be excluded from income. As indicated in your submission, the explanatory notes released by the Department of Finance in July 1990 concerning the introduction of paragraph 81(1)(h) of the Act clearly state that bed reservation fees for foster children are to be excluded from income by reason of this provision. This is accomplished by the use of the word "ordinarily" and subparagraph 81(1)(h)(ii) of the Act. Paragraph 81(1)(h) of the Act excludes from income, social assistance payments which are received by a person other than the individual in need where such payment is

(i)ordinarily made on the basis of a means, needs or income test under a program provided for by an Act of Parliament or a law of a province, to the extent that it is received directly or indirectly by the taxpayer for the benefit of another individual (other than the taxpayer's spouse or a person who is related to the taxpayer or to the taxpayer's spouse), if ...

(ii)the other individual resides in the taxpayer's principal place of residence, or the taxpayer's principal place of residence is maintained for use as the residence of that other individual, throughout the period ..." (underlining added)

While the fees paid to XXXXXXXXXX do not, at first glance, have the appearance of "social assistance payments", payments by the Ministry for the care of foster children or severely disabled adults who cannot care for themselves can be considered social assistance payments as they are paid under the authority of the relevant Provincial Act (in British Columbia, the Guaranteed Available Income for Need Act). The basis upon which the Ministry makes payments to a foster parent or caregiver of a disabled adult is that the foster child or disabled adult qualifies for social assistance under the criteria set up in the relevant provincial legislation. In the case of an emergency home, the purpose of the fee (to provide social assistance to a foster child in need) is the same even though the payment is made regardless of whether or not a child is placed in the home. Thus, a bed reservation fee can be seen as an amount which would ordinarily be made on the basis of a means, needs or income test if the child were present in the home. We have confirmed with the Department of Finance that it is within tax policy to exempt the type of payment received by XXXXXXXXXX for the operation of her emergency home from income.

With respect to the issue of payments by an emergency home operator to an assistant, it is our view that such payment would ordinarily be considered employment income to the assistant and would not be excluded from the assistant's income by reason of paragraph 81(1)(h) of the Act. For further clarification as to whether a particular assistant is under a "contract of service" or a "contract for services", we refer you to the CPP-UI rulings section of your office.

As requested, we are returning the binder of information submitted with your request.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Legislative Policy Division

DOCM

INCOME TAX RULINGS AND
INTERPRETATIONS DIRECTORATE
MANDATE

The primary role of the Income Tax Rulings and Interpretations Directorate is to interpret the provisions of the Income Tax Act and related statutes, to establish Revenue Canada's interpretative policy relating to this statute and to ensure that this policy is both applied throughout Revenue Canada and provided to external clients in a consistent manner. In this regard, the Directorate is mandated to provide:

Major Lines of Business

?advance income tax rulings directly to clients in the private sector (for a fee) in respect of proposed business transactions;

?written and verbal technical interpretations to tax practitioners and the public on income tax matters;

?technical advice and support to field offices, headquarters areas, and other departments and governments; and

?specialized technical assistance, when requested, to the Department of Finance with respect to the formulation of new income tax legislation.

These activities will, through the provision of accurate and consistent interpretations, foster a high degree of public confidence and encourage self-assessment compliance.

DOCN

INCOME TAX RULINGS AND

INTERPRETATIONS DIRECTORATE

MAILING ADDRESS

AND COURIER SERVICE:

25 NICHOLAS STREET

15TH FLOOR, ALBION TOWER

OTTAWA, ONTARIO

K1A 0L8
TAX SERVICES OFFICES HOTLINE: (613)957-8964

GENERAL ENQUIRY: (613)957-8953

FAX NUMBER: (613) 957-2088

SECURE FAX NUMBER: (613) 957-8946
DOCP

INCOME TAX RULINGS & INTERPRETATIONS DIRECTORATE
REVISED JUNE 5, 1995

TECHNOLOGY SECTION

Roy C. Shultis Peggy O'Reilley
A/Director General 957-2132 ITS Man. 952-9832
Lyne Charlebois, Terry Mallory
Adm Sup.Officer 957-2131 P. Leader 957-2110

Micheline Régimbald, Diane Lefebvre
Adm Officer 952-8108 Admin. 954-0649
James Kingsley Nguyen CAO
Receptionist 957-8953 Analysist 957-2109
Maxine Bell
(10th Mac) 952-5804
INVENTORY UNIT Debbie Couture 957-2142
Céline Garneau 952-5398
Sylvie Daoust 957-8958 15th floor 952-0245
Vacant 957-8959 16th floor 941-0556
Training Room 952-9699
Stock Room 941-6547

ACCESS TO INFORMATION

Shirley Sarrazin 957-2137
Jackie Page 957-0682

FINANCIAL INDUSTRIES DIVISION BUSINESS AND GENERAL DIVISION

Brian Darling, Bryan Dath,
Director 957-9767 Director 957-2089
C. Lebel, D. Hooley,

A/Div Sup.Clerk 957-8586 Div. Sup. Clerk 957-2090

FINANCIAL INSTITUTIONS SECTION           SECTION DES PARTICULIERS                                           ET DES ENTREPRISES DE 		                                             SERVICE

Lee Workman, Chief 957-3497 Maurice Bisson,
Bruce Dodd 957-3495 Chief 957-2099
Gary Donell 957-3496 Clermont Dubé 957-2096
Michèle Trotier 957-3494 Sylvie Labarre 957-2121
Michael Cooke 957-3498 Phil Diguer 957-2130
Vacant (D. Bouffard)

LEASING & FINANCING SECTION BUSINESS & PROPERTY INCOME AND EXEMPT ORGANIZATIONS SECTION

Wayne Douglas, Chief 957-8957 Roberta Albert,
A/Chief 957-2100
Fiona Francis 957-8971 Murray Brake 957-2133
Peter Dunn 957-2747 John Brooks 957-2103
Steve Tevlin 957-2746 Bill Guglich 957-2102

Claude Tremblay 957-2744 Carole Chouinard 957-2098
Mary Pat Baldwin 957-2745 Bill Kerr 957-2139
Les Barrows 952-1361
Milled Azzi 957-8972

DEFERRED INCOME PLANS SECTION PERSONAL & GENERAL SECTION

Vacant 957-8979 Paul Fuoco, Chief 957-2141
Wayne Harding 957-9769 Danielle Zion 957-2140
David Duff 957-8968 Marv Eisner 957-2138
Patricia Spice 952-8984 Annemarie Humenuk 957-2134
Mickey Sarazin 957-3499 Jack Szeszycki 957-2135
F. Gillman 952-9853 Sandra Short 957-2136
Vacant 952-1361

SECTION DE FINANCEMENT,
LOCATION ET DES RÉGIMES

Jean-Guy Aubé, Chief 957-8963
Ghislain Martineau 957-8962
Robert Gagnon 957-8960
Maureen-Shea-DesRosiers 957-8961
Adèle St-Amour 952-1764
Louise Roy 957-2092

MANUFACTURING INDUSTRIES, REORGANIZATIONS AND PARTNERSHIPS AND TRUSTS DIVISION FOREIGN DIVISION

R. Biscaro, Mike Hiltz,
Director 957-8970 Director 957-2113
Celine Charbonneau N. Murdock,

A/Div.Sup.Clerk 957-8969 Div.Sup.Clerk 957-2112

MERCHANDISING, MANUFACTURING CORPORATE REORGANIZATIONS PARTNERSHIPS SECTION SECTION 1

Dave Holtz, Chief 957-3493 Mark Symes, Chief 957-2091
Cal Brown 957-8980 Marc Ton-That 957-2093
Frank Fontaine 957-4364 Jorge Teixeira 957-2095
Allan Nelson 957-9768 Dave Palamar 957-2127
James Thompson 957-8954 Dan Yuen 957-8967

SECTION DES INDUSTRIES FOREIGN SECTION MANUFACTURIERES,SOCIÉTÉS
ET FIDUCIES

Marc Vanasse, A/Chief 957-8978 Ken Major, Chief 957-2124
Alain Marchand 957-8981 Olli Laurikainen 957-2116
Johanne Desparois 957-8982 Greg Middleton 957-2122
Vacant 957-8284 Simon Leung 957-2115
Michel Lambert 957-2097 David Senécal 957-9796
Vacant 957-8973
Jane Stalker 957-2118

RESOURCE INDUSTRIES SECTION SECTION II DES RÉORGANISATION
DES CORPORATIONS

John Chan, A/Chief 957-8976 Alain Godin, Chief 957-2128
Al Cameron 957-8975 Marc Séguin 957-2129
Peter Lee 957-8977 Carole Pronovost 957-2126
Bruce Rankin 957-8974 M.D. Gervais 957-2127
Vacant 957-2111 Vacant 957-2108

TRUSTS SECTION CORPORATEREORGANIZATIONS
111 SECTION

Theresa Murphy, A/Chief 957-8283 Ted Harris, Chief 957-2114
Catherine Bowen 957-8585 Jim Wilson 957-2123
Gord Kauppinen 957-4363 Tim Kuss 957-2117
Lena Holloway 957-2104 Art Seidel 957-2120
Vacant 957-4796 V. Plant 957-2119
Vacant 957-3500