24 February 1992 Income Tax Severed Letter 9206085 - 1992 Manitoba Canadian Bar Association/CICA Roundtable

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.

Subject: 92 MANITOBA CBA/CICA ROUNDTABLE Section(s): 6]

Final version of the questions and answers as presented at the Manitoba Bar Association and CICA Round Table in Winnipeg on February 20 1992 by the Winnipeg District Taxation Office. These questions and answers were assembled by Ian Rathwell of Taxation Programs Branch, Head Office.

File no. 920608

Deductibility of GST on employee Benefits

Question 1

Is the GST paid, pursuant to the Excise Tax Act, on taxable employee benefits deductible under the Income Tax Act? If so, in which year is the deduction allowed? For example, assume that the employer's fiscal period ends on December 31 and the employer files monthly for GST purposes. Is the GST which is to be remitted on the 1991 employee benefits with February's 1992 GST return and paid in March 1992 a deduction for tax for the 1991 or 1992 taxation year?

Department's Position

The GST which is payable by the employer on taxable employee benefits is deductible for income tax purposes when it becomes payable by the employer (or When paid if the employer is using the cash method of reporting net income). Subsection 173(2) of the Excise Tax Act deems the amount of GST payable in respect of employee taxable benefits to be payable on the last day of February following the year in which the taxable benefit was received or enjoyed.

Accordingly, the GST payable in respect of 1991 benefits will be reported on the employees' 1991 T4 supplementaries and will be remitted with the February 1992 GST return in March 1992 and will be deductible for income tax purposes in 1992.

Tax Waiver Requests Under Subsection 153(1.1)

Question 2

What are the Department's present procedures regarding tax waiver request under subsection 153(1.1)? Does the Department still allow one to deduct ABILs incurred in the current year, current year's business losses, current year's RRSP contributions. What evidence would the Department like to see from a client's representative to facilitate the process?

Department's Position

A waiver requested under subsection 153(1.1) will be granted if the requesting client can provide reasonable evidence that the present tax deduction from his/her income, are in excess of those required at year end. The granting of such a waiver is also linked with the status of the client's account, that is, prior years returns have been filed and all outstanding balances have been settled. Examples of when waivers under subsection 153(1.1) will be granted are RRSP contributions, alimony or child support payments, tax shelters, charitable donations, medical expenses and ABILs.

Consideration will be given to allow subsection 153(1.1) reductions for more than one year, if the original circumstances supporting the reduction continues in future years.

The evidence required to substantiate a claim will depend upon the nature of the claim. In this regard, the District Office should be contacted as to their information requirements.

Allocation of provincial Income Tax

Question 3

What is the present procedure and whose responsibility is it to determine the accuracy of provincial taxable income allocations under Regulation 400-415? If it is the federal auditor's responsibility, what recourse does a client have if Quebec/Ontario/Alberta, were to perform an audit and disagree with the allocations? Does this response change in situations where there is no taxable income but capital tax liabilities exist in various provinces?

Department's Position

Pursuant to the Tax Collection Agreements entered into with the "agreeing provinces", the Department as part of the collection function, has the responsibility for determining the accuracy of provincial taxable income allocations under Regulations 400-415. This determination is part of normal audit and assessing procedure performed by the Department.

The collection of corporate income taxes is not included in the Tax Collection Agreements with the provinces of Ontario and Alberta and we do not have such an agreement with the Province of Quebec covering the collection of either personal or corporate taxes. Where a taxpayer allocates taxable income to an agreeing province (Collection Agreement), which is disputed by a non-agreeing province (no Collection Agreement), then the taxpayer must discuss the issue with both the federal government and the province or provinces disputing the allocation. If the federal government believes that the allocation is correct it is obligated to maintain the assessment but at the same time the Department should attempt to resolve the dispute with the non-agreeing province. Although there is no formal procedure in place, we are in contact with these provinces to resolve any differences. Under the circumstances, we attempt to ensure that there is a consistent and uniform application of the allocation regulations to the greatest extent possible.

Capital taxes are not covered by the tax collection agreements and, as a result, the Department is not directly involved in any disputes. Normally, the settlement of such a dispute would involve the participation of the particular provinces involved.

Regeneration of Non-Capital Losses

Question 4

What is the Department's position regarding the ability of a client to "preserve" non-capital losses that have been previously applied in the determination of income of a subsequent year? As an example, a client who has a non-capital loss in Year 1 applies that loss against a taxable capital gain in Year 2. In Year 3 the client realizes a net capital loss which the taxpayer proposes to carry back to Year 2 and by doing so would preserve all or a portion of the Year 1 non-capital loss for application in future years.

Department's Position

Provided that Year 2 is still open for reassessment pursuant to subsection 152(4) of the Act, it is our opinion that the non-capital loss from Year 1 could be preserved for application to future years in the situation described above.

Shareholder Benefit - Mortgage of Property

Question 5

A corporation grants a mortgage on property it owns to secure a loan taken out by a shareholder. The shareholder makes all payments (principal and interest) on the debt personally. Does the granting of the mortgage create a taxable benefit to the shareholder? Does the answer differ if the shareholder pays a reasonable fee to the corporation for its granting the mortgage?

Department's Position

The facts in each case will determine whether or not a shareholder receives a benefit when a corporation's property is used as collateral security for a shareholder's debt. The benefit could be the difference in rates charged with and without the corporation's guarantee or what the borrower would have to pay a third party to provide a similar guarantee. This benefit should be included in the shareholder's income pursuant to subsection 15(1) of the Act. For further comments see question 41 of the 1991 and question 62 of the 1986 Canadian Tax Foundation Revenue Canada Round Table.

Deductibility of Expenses Incurred by a Receiver

Question 6

Control of a corporation was in the hands of a receiver for a number of years during which time the receiver liquidated the corporation's assets and incurred significant expenditures, including receiver's fees, legal fee, storage fees and building costs. The receiver did not carry on the business of the corporation at any time. Control of the corporation was eventually returned to its shareholders and the business was restarted. In computing the income of the corporation from the business for the years when it was controlled by the receiver would the expenditures incurred by the receiver during that period be deductible?

Department's Position

With respect to the deductibility of business expenses, subsection 18(1)(a) of the Act prohibits the deduction of certain outlays or expenses in computing a taxpayer's income from a business except to the extent that they are incurred for the purposes of gaining or producing income from the business. In the situation described, we would consider the purpose test as not having been met since the business of the corporation was discontinued during the relevant period. Accordingly, such expenditures incurred by the receiver are not deductible in computing the income of the corporation from a business.

It is a question of fact whether a receiver continues to carry on a corporation's business in the course of liquidating its assets, or whether certain expenditures are incurred for the purpose of gaining or producing income from a business.

Electronic Filing System

Question 7

As a consequence of the Electronic Filing System (EFILE) and a reduction in the requirement to submit paper documentation:

• (a) Will more clients who in the past filed their tax returns and received Notices of Assessment with no request for additional information or other contact with the Department, now find themselves having to submit additional documents for a prior year's T1 filing.
• (b) Does the Department foresee a problem with individuals losing documents over a period of time. Documents which would have ordinarily been filed with the T1s. Will there be a need for more reassessment, as documents required for review by the Department will be lost or misplaced.

Department's Position

• (a) In view of the paperless aspect of the initiative, part of the EFILE process involves our contacting selected individuals after the Notice of Assessment has been issued to request substantiation of one or more claims that were made on the electronic return.
• (b) We do not expect a problem with the loss of documents normally filed with the paper T1. Tax filers have always had responsibility for retention of receipts and other documents not required as attachments to their return. Nevertheless, the concept of a paperless tax return is new to our clients and will be supported by a communications and awareness plan. Public education about the need to retain supporting documents and the Department's need to maintain the integrity of Canada's self assessing tax system through periodic review of claims made, form part of this communication strategy.

Employers Guide to Source Deductions

Question 8

The employers guide to source deductions for 1991 is not available until the end of 1991 or the beginning of 1992. Why is this so? Should it not be made available at the beginning of the applicable year rather than at the end of the year?

Department's Position

The 1991-1992 Employers' Guide to payroll Deductions as it is now known, was available in December 1991. This allowed us to mail both the Guide and the 1991 T4-T4A slips together in one mailing. This guide is meant for use in 1992 and includes instructions on the completion of the 1991 T4/T4A summaries and supplementaries. Therefore, the Guide is available for employers at the beginning rather than the end of the year.

Manitoba Property Tax Credits

Question 9

In connection with Manitoba property tax credits, there have been instances where clients have paid property taxes but have not received the homeowners assistance. Can the Department review its assessing procedures to determine if changes are required.

Department's Position

Two possible reasons for clients not receiving their Manitoba property tax credit have been identified. The first involves filing errors and omissions and the second may be due to confusing instructions regarding the preparation of the T1C Manitoba form itself. The Winnipeg Taxation Centre has advised their assessors about the correct procedures to be followed when reviewing a client's claim for this tax credit. Furthermore, the form itself is under review to see if it can be modified to alleviate filing errors.

Section 85 - Negative ACB of Partnership Interest

Question 10

If a person wishes to transfer a partnership interest having a negative adjusted cost base to a corporation using a subsection 85(1) election, does the Department take the position that the minimum transfer value is $1.00, thereby triggering a capital gain to the transferor equal to the negative adjusted base?

Department's Position

The Department does not take the position that the minimum transfer value in the situation described is $1.00. paragraph 85(1)(c.1) provides that the elected amount on subsection 85(1) rollover in respect of a partnership interest having a "negative adjusted cost base" cannot be less than the lesser of its fair market value and its cost amount. By virtue of subparagraph 54(a)(iv) and the definitions of "amount" and "cost amount" under subsection 248(1), the elected amount cannot be less than nil. Accordingly, the minimum transfer value in the situation described is nil. Pursuant to subsection 100(2), the rollover of the partnership interest will trigger a capital gain to the transferor equal to the "negative adjusted cost base".

RRSP Earned Income - Rental Loss from Limited partnership

Question 11

If an individual owns units in a limited partnership owning a rental property, for the purposes of calculating the earned income limit for RRSP contributions, is his share of the rental loss deducted from earned income pursuant to clause 146(1)(c)(v)(B) or not deducted pursuant to clause 146(1)(c)(v)(A) because the partner is not actively engaged in the partnership's business? What line on the T1 return should be used to record the rental loss?

Department's Position

If an individual owns units in a limited partnership owning a rental property, the limited partner's share of the partnership's rental income or loss from real property would be included in the calculation of earned income limit for RRSP contributions pursuant to paragraphs 146(1)(c)(i)(c) and 146(1)(c)(v)(B) of the Income Tax Act respectively.

The limited partner's share of the partnership's rental income or loss would be recorded on line 126 (Rental Income) of the T1 return.

Carryforward Numbers

Question 12

Recent changes to the Income Tax Act have made the calculation of carryforward numbers on the T1 return increasingly important. Will the Department list the following carryforward numbers on the notices of assessment and reassessment,

• cumulative net investment account, available capital gains exemption, capital and non-capital loss carryforwards, forwarding averaging balance, alternative minimum tax carryforward, investment tax credits.

Department's Position

The Department has recently completed a study of the feasibility of expanding the content of the notices of assessment and reassessment. The results of this study indicated that the items listed above should be included on future notices of assessment and reassessment. It is anticipated that these changes will be implemented for the 1992 tax filing accordingly, notices of assessment and reassessment issued in 1993 will contain this information.

Corporate Income Tax Refunds

Question 13

It is our experience that there is a considerable delay in the forwarding of corporate income tax refunds following the assessment of reassessment of a taxation year.

• (a) Would you please advise us as to the steps that are being taken to eliminate these delays?
• (b) Due to the above delays, some corporate taxpayers are requesting that the corporate income tax refunds be applied to their employer source deductions account. Please advise as to the steps required to expedite the timely transfer of the income tax refund balances.

Department's Position

• (a) We are currently working on a project, to be implemented in the Spring of 1993, which will eliminate these delays. Corporate refund cheques will be issued as part of the notice of assessment or reassessment similar to what is currently done for the individual taxpayers. This new facility will be used for all computer generated notices which account for approximately 80% of all corporate notices issued by the Department. This percentage will probably be higher by 1993 as we are also working on other initiatives to reduce the need for manual assessments and reassessments.
• (b) At any time prior to filing its corporate income tax return, corporations can submit a written request to the Chief of Accounts in the taxation centre asking that specific instalment payments be transferred from the corporate tax account to the employer account. Since these transferred payments will retain their original effective interest dates, they will not be included in the calculation of instalment interest when the tax return for that year is assessed. Corporations are required to acknowledge in writing that they accept liability for interest and penalties that may be assessed as a result of the transfers.
• When a return is filed, the corporation can request that its overpayment be applied to its employer remittance account. Once the corporate income tax return for the year has been assessed, the credit will be transferred to the employer remittance account. The employer remittance account will be credited interest from the date of the assessment of the corporate income tax return. If the request for the transfer is not made at the time the corporate income tax return is filed the Chief of Accounts in the taxation centre should be contacted.

Housing Loans

Question 14

In the March, 1991 Access Letter, the Department's Business and General Division was reported as stating that a housing loan amortized over 25 years, renewable every five years at the prescribed rate of interest, would likely be acceptable as a reasonable period of time for the repayment while a noninterest bearing housing loan with a 15 year term would not appear reasonable.

• (a) What is the Department's position as to a reasonable period of time for repayment with respect to a non-interest bearing housing loan?
• (b) Would a 10 year principal repayment based upon 1/25th total principal outstanding and a balloon payment of the remaining balance of the loan at the end of the tenth year constitute a reasonable period of time for the repayment?

Department's Position

• (a) Whether bona fide arrangements are made for the repayment of a housing loan within a reasonable period of time at the time the loan is made is a question of fact which can only be determined upon consideration of all the circumstances of a particular situation. The Department generally considers that a bona fide loan arrangement is one that is consistent with the normal commercial practice that would prevail for the type and amount of loan involved. It follows therefore, that the closer a repayment schedule resembles one that is available in normal commercial practice, the more likely it is that it will be considered a reasonable time frame for repayment. While we recognize that noninterest bearing loans are not available commercially, the terms of repayment for a non-interest bearing loan should be based on the same factors that might be considered in a commercial transaction (i.e. security of the loan, ability of the creditor to repay the loan, etc.).
• (b) As stated above, it is a question of fact as to whether a particular repayment schedule is reasonable in the circumstances. However, provided that the terms and conditions of a loan are otherwise reasonable in the circumstances and the borrower can reasonably be expected to be able to make the payments as they become due without refinancing, a repayment schedule such as that you describe would likely be considered reasonable.

Subsection 98(3)

Question 15

It has been the Department's position, as stated at the 1984 and the 1988 Canadian Tax Foundation Revenue Canada Round Table, that subsection 98(3) would require each partner to receive an undivided interest in each property of the partnership and that a pro-rata distribution of such property is unacceptable. Does subsection 248(20) now provide the mechanism for pro-rata distributions in those situations?

Department's Position

It is our position that subsection 248(20) does not provide a mechanism for pro-rata distributions of partnership property. Subsection 248(20) clarifies the tax consequences of the partition of property previously owned jointly by two or more persons. For certain tax purposes including the computation of income, it is the Department's view that a partnership and not its partners is the owner of property used in the partnership. Accordingly, the joint ownership test in subsection 248(20) would not be met on a distribution of partnership property. On the other hand, subsection 98(3) requires that each partner be distributed an undivided interest in each property of a Canadian partnership which has ceased to exist. Any partition of such property which becomes jointly owned by the former partners after the distribution will be subject to the application of subsection 248(20).

Section 80 - Application to Partnerships

Question 16

It appears that the Department considers a partnership to be a taxpayer for the purposes of section 80 given the comments in paragraph 17 of Interpretation Bulletin IT-138R and the responses to questions 14 and 9 of the 1988 Canadian Tax Foundation Conference and the 1989 Corporate Management Tax Conference, Revenue Canada Round Table discussions, respectively. Is it the Department's view that section 80 will apply to reduce the losses of a general partner where the debts of a partnership have been settled given that under the partnership laws of most jurisdictions a general partner is jointly and severally liable for all debts and obligations of the partnership?

Department's Position

It is the Department's view that the provisions of section 80 will only apply to a partnership and not to its partners in situations where the partnership settles a partnership debt for less than the amount of the obligation notwithstanding that a general partner may also be liable for that debt. As indicated in paragraph 17 of IT-138R, a partnership's gain on the settlement of debts within the meaning of section 80 is to be applied to reduce, as prescribed by regulation 5400, the partnership's capital cost of depreciable property and adjusted cost base of capital property. If any part of the gain remains, there are no provisions in the Act that specifically deal with the treatment of that excess. However, it is possible that either the general anti-avoidance rule in subsection 245(2) or subsection 246(1) regarding benefits conferred on a person may have application depending on the facts of each case.

Subsection 84.1(2)(a.1)(ii)

Question 17

This provision reduces a transferor's (Transferor's) adjusted cost base of a share, for the purposes of section 84.1, by the amount of the capital gains exemption claimed by a non-arm's length vendor (Vendor) with respect to a previous disposition of the share. Assume that the Vendor claimed a reserve under subparagraph 40(1)(a)(iii) in respect of the gain realized on the nonarm's length transfer and that the Vendor intends to claim a deduction under section 110.6 in respect of the reserve when it is brought into income.

Is it the Department's view, having regard to subsection 84.1(2.1) that if:

• (i) the Vendor transferred the share prior to July 13, 1990, and the Transferor transferred the share in a transaction to which section 84.1 applied after that date; or
• (ii) both transfers took place prior to July 13, 1990; the adjusted cost base of the share to the Transferor is reduced by the amount of the capital gains exemption not yet claimed by the Vendor? In the second situation would subsection 245(2) apply?

Department's Position

• (i) Yes. New subsection 84.1(2.1) is applicable with respect to dispositions occurring after July 13, 1990. If the Transferor disposes of the shares to a corporation after that day in a transaction to which section 84.1 applies, subsection 84.1(2.1) applies in determining the Transferor's adjusted cost base of the share calculated pursuant to subparagraph 84.1(2)(a.1)(ii).
• (ii) The position taken by the Department would depend upon the facts of each particular case. The Department is of the view that the scheme of the Act is (and was) to reduce the Transferor's adjusted cost base of the share by the total amount of the Vendor's sheltered and/or deferred capital gain. The Department may apply subsection 245(2) if each transaction in the series which sheltered and/or deferred the capital gain was not arranged primarily for bona fide purposes.

Application of Kieboom Case

Question 18

Spouse B owns all of the common shares of a private corporation (PC) having a substantial fair market value. Spouse A, a child or a trust for the benefit of Spouse A and the child subscribes for common shares of PC for a nominal amount. The common shares of PC so subscribed for will have a fair market value equal to, say, 25% to 50% of the total fair market value of all of the shares of PC.

What is the Department's assessing policy in light of the decision reached in The Queen v. Albert Kieboom [[1991] 2 C.T.C. 106] (91 DTC 5478) case, regarding the above-noted situation if the shares subscribed for are issued? In particular, in the Department's view:

• (a) Would there be a taxable disposition of an "economic interest" by Spouse B?
• (b) Would subsection 73(1) of the Income Tax Act apply to the "disposition" of such economic interest to Spouse A?
• (c) Would the attribution rules apply to attribute back to Spouse B any income or loss arising on those shares issued to Spouse A and any taxable capital gain or allowable capital loss on a subsequent disposition of those shares by Spouse A?
• (d) Would PC be considered to have conferred a benefit on Spouse A, the child or the trust pursuant to subsection 15(1) of the Act?

Department's Position

The Department has appealed the decision of the Federal Court - Trial Division concerning the application of subsection 73(1) and the attribution rules to the Federal Court of Appeal.

• (a) Yes, in our opinion, the situation described above results in a disposition of an economic interest.
• (b) Yes, the provisions of subsection 73(1) of the Act will apply unless the taxpayer elects not to have those provisions apply.
• (c) Yes, in our view the attributions rules (i.e. sections 74.1,74.2 and 74.3 of the Act) will apply.
• (d) A subsection 15(1) argument was not advanced in this case, however, we agree that PC could be considered to have conferred a benefit on Spouse A, the child or the trust for the benefit of Spouse A and the child, as the case may be, such that subsection 15(1) of the Act may apply.

Application of Section 245 to Subsections 81(1) and 149(1)

Question 19

Does a "tax benefit" under section 245 of the Act include an exclusion from income pursuant to subsection 81(1), or an exemption from Part I tax pursuant to subsection 149(1)?

Department's Position

The phrase "tax benefit" is defined in subsection 245(1) of the Act and contains specific references to a number of items including a "reduction" of tax payable under the Act. Excluding an amount from the calculation of a client's income, pursuant to subsection 81(1), or exempting the taxable income of a person from tax under part I, pursuant to subsection 149(1), may be a reduction of tax payable under the Act. Therefore, a "tax benefit" could possibly result from transactions involving the application of either of subsections 81(1) or 149(1).

It should be remembered, however, that the application of subsections 81(1) or 149(1) would first have to be an "avoidance transaction" within the meaning given in subsection 245(3) in order for the provisions of subsection 245(2) thereof to be relevant. Subsection 245(2) would also not apply unless the transactions could reasonably be considered to result directly or indirectly in a "misuse" or an "abuses" of the type described in subsection 245(4).

Application of the Leung Case

Question 20

Has the Department's assessing policy with respect to section 227.1 of the Act changed in light of the number of recent cases in favour of the client, including, for example, Leung?

Department's Position

The case of Joseph Leung v. M.N.R. [[1991] 2 C.T.C. 2268] has been appealed by the Department to the Federal Court - Trial Division.

The Department's section 227.1 assessment procedures in respect of unremitted corporate source deductions were recently modified to provide for the disclosure of supplementary details to directors at the time of assessment, in respect of the corporate indebtedness which gave rise to their liability. Additional information being provided includes the details of the original corporate assessments issued, remittance periods involved, corporate payments received and details of amounts assessed under the federal and provincial income tax legislation, Canada Pension Plan and Unemployment Insurance Act as applicable.

It is noted that there have been cases where information or documentation has come to light during the Notice of Objection or Appeal stages and, had this information been made available to the Department earlier, no section 227.1 assessment would have been issued.

The Department remains committed to giving directors a full opportunity to present a due diligence defence or other pertinent information as applicable, prior to the issuance of a section 227.1 assessment.

Paragraph 55(3)(a) and a "phantom Stock Plan"

Question 21

Would participation under a phantom stock plan, pursuant to which an employee is entitled to payments from a company based on a number of factors, including the profitability of that company be considered to be an interest in a corporation pursuant to paragraph 55(3)(a) of the Income Tax Act.

Department's Position"

The determination of whether or not there has been a significant increase in the "interest" in any corporation by a person for the purposes of subparagraph 55(3)(a)(ii) of the Act must be made based upon a review of all the relevant facts of a particular situation. The Department's position remains that the term interest as utilized in this provision is not restricted solely to interests represented by shares in the capital stock of a corporation. In our view, therefore, participation in a phantom stock plan could potentially represent an interest in a corporation for purposes of subparagraph 55(3)(a)(ii).

Waived or Discretionary Dividends

Question 22

What is the Department's assessing policy with regard to:

• (a) dividends payable at the discretion of the directors on different classes of common shares; and
• (b) the waiver of dividends;

where all of the shareholders are not dealing at arm's length with one another?

Would the Department's position be different if the shareholders are dealing at arm's length with one another?

Department's Position

• (a) In the Department's view the Supreme Court decision in The Queen v. Jim A. McClurg [[1991] 1 C.T.C. 169] (91 DTC 5001) is limited to the particular facts and situation which the Court addressed in that case. In non-arm's length situations the Department will, therefore, invoke the provisions of subsection 56(2) of the Income Tax Act where the shareholders receiving the discretionary dividends did not make adequate contributions, financial or otherwise, to the corporation.
• (b) It is the Department's view that subsection 56(2) will ordinarily be applicable if the waiver of dividends in a closely held corporation is undertaken for the purpose of transferring income to other shareholders. This position was previously set out in question 26 of the 1981 and question 24 of the 1984 Canadian Tax Foundation Revenue Canada Round Table.

As indicated in our response to the Round Table questions referred to above, the provisions of subsection 56(2) of the Act will not generally be applied Where the shareholders of a corporation deal at arm's length with one another. However, the final determination will depend upon the facts of each case.

Retiring Allowance

Question 23

Given the definition of retiring allowance in subsection 248(1) of the Act, it appears that someone other than the employer could pay a retiring allowance provided the payment is made in circumstances described in the definition. However, for the purpose of the rollover in paragraph 60(j.1) of the Act, it appears that the retiring allowance must be paid by the individuals's employer to qualify for the rollover.

Is it the Department's position that a rollover under paragraph 60(j.1) is available only where the retiring allowance has been received from the individual's employer?

Department's Position

The wording of paragraph 60(j.1) refers to "an employer" and in clause 60(j.1)(ii)(a) to "... years ... employed by the employer or a person related to the employer ...". Consequently, the rollover available under paragraph 60(j.1) applies only to a retiring allowance received from an employer, or former employer, of the individual in respect to whom the retiring allowance was paid.

Paragraph 55(5)(f)

Question 24

In light of the fairness package, has the Department changed its position regarding the acceptance of late filed paragraph 55(5)(f) elections.

Department's Position

There are no provisions in the Act that allow for a late filed paragraph 55(5)(f) designation. Nor will the fairness package allow discretion to accept late filed designations (see subsection 220(3.2)).

Although the Act does not provide for a designation to be filed after a return of income has been filed for a particular taxation year, the Department is prepared to consider a reassessment of only the excess (deemed proceeds over safe income) if all of the following conditions are met:

• • the client made a reasonable attempt to calculate the safe income amount at the beginning of the series of transactions, -the transaction has been reported, - the residual amount (the excess of the proceeds over the client,s safe income) has been reported as a capital gain in the client's return of income when filed, and - the client requests in writing that the Department reassess only the excess.

Large Corporation Tax

Question 25

Corporations are able to reduce their part 1.3 tax by switching their debt from commercial paper to bankers' acceptance at their year end and then switching back to commercial paper after the year end. Bankers' acceptance is not defined as indebtedness and is therefore not included in the calculation of capital for purposes of subsection 181.2(3).

Does the department agree with this interpretation?

Department's Position

The Department is aware of this interpretation and acknowledges that banker's acceptance is not defined as indebtedness. However on December 20, 1991, the Honourable Don Mazankowski, Minister of Finance issued a proposed amendment to the Income Tax Act which will require that bankers' acceptance, drawn by a corporation, be included in the calculation of that corporation's capital for purposes of the Part 1.3 tax. This amendment is to be applicable with respect to taxation years ending after December 20, 1991.

In addition, Department will, to the extent possible, utilize the general anti-avoidance rules in the Income Tax Act to challenge transactions whose primary purpose was to obtain a tax advantage through a temporary shift of indebtedness to bankers' acceptance.