23 February 1988 Income Tax Severed Letter

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.

R.A. Primeau (613)957-2073 HBW 4131-G1

February 23, 1988

XXXX

Re: Deductibility of German Social Security Contributions

This is in reply to your letter of November 5, 1987. We apologize for the delay in our response.

You have outlined a hypothetical situation in which a German national is on a two-year temporary assignment in Canada and receives a salary of $2,000 per month. In addition, his employer pays an amount equal to 20% of his monthly salary directly into the German social security system (the system). Fifty per cent of such amount constitutes the employer's mandatory contribution and the other half represents the employee's mandatory contribution to the system.

In the above situation, we confirm that during the period of his Canadian residency, the German national is subject to Canadian taxation on his world income. His gross employment income for Canadian taxation purposes is $2,200 per month even though his take home pay is only $2,000 per month, because the $200 per month paid into the system on his behalf by his employer must be included in his income by virtue of paragraph 6(1)(a) of the Income Tax Act of Canada (the Canadian Act). He will not, however, be subject to Canadian tax on his employer's mandatory contribution to the system of $200 per month.

We also confirm that the $200 per month paid on the German national's behalf into the system is considered to be a non-business-income tax paid by him to Germany for purposes of claiming a foreign tax deduction under subsection 126(1) of the Canadian Act. That is, he can claim against his Canadian tax otherwise payable a foreign tax credit in respect of all or a portion of the $200 per month so paid, depending on the amount of non-business income he has from sources in Germany. As indicated above, the salary paid to him during his assignment in Canada is considered to have a source in Canada where his duties are carried out, and not in Germany, even if paid by a German employer.

We hope that you will find the above satisfactory.

Yours sincerely,

Director Provincial and International Relations Division

Tax Executive Institute Meeting, 1988 Question #12

Issue

Dividend reinvestment plans are generally operated by large corporations and allow the participant to reinvest cash dividends in new common shares of the corporation. On the termination of their participation in the plan, former participants often receive a certificate for the number of whole new common shares standing to their credit and a cash payment in lieu of any entitlement to a fraction of a share.

Will the Department provide administrative relief by considering that a dividend will not be deemed by subsection 84(3) to have been paid by the corporation to the former plan participant in respect of the cash received in lieu of a fraction of a share, and allow capital gain treatment?

Law

Where a corporation resident in Canada acquires any of its shares (or a fraction of a share) the provisions of subsection 84(3) of the Act deem a dividend to have been paid by the corporation, and received by the shareholder equal to the amount, if any, by which the amount paid for the share (or a fraction of a share) exceeds the paid-up capital in respect thereof immediately before such acquisition.

The provisions of subsection 84(8) of the Act, as it read prior to May 24, 1985, exempted certain shareholders of public corporations from the application of subsection 84(3) of the Act. This subsection was amended applicable to transactions occurring after May 23, 1985 as a result of the introduction of the capital gains exemption and will no longer provide an exemption in the above situation.

Discussion

The wording of subsection 84(3) of the Act is clear and unambiguous such that there are no grounds for alternative interpretations of that provision.

The Technical Notes released by the Department of Finance in November of 1985 indicated that the provisions of former subsection 84(8) of the Act were "... repealed, as a consequence of the introduction of the new lifetime capital gain exemption, so that dividend treatment will apply."

Other situations where the Department has adopted administrative positions concerning fractional interests in shares, (e.g. concerning sections 51 and 85.1, as detailed, respectively, in Interpretation Bulletins IT-115R and IT-450 ) have not been used as support for relief, but can be differentiated as they involve provisions which were intended to yield "rollover" treatment provided certain conditions are met, and these positions were established before the introduction of the capital gains exemption.

Conclusion:

There is no basis in law to allow the Department to ignore the operation of the provisions of 84(3) in the above-mentioned situations.

It would also appear that other solutions may be available for these problems (e.g. amendments to such plans to allow the issuance of a certificate upon termination of participation which includes fractional interests as well as whole shares).

A.A. Cameron 957-2116