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18 April 2006 External T.I. 2005-0149591E5- Right to Receive Income Unedited CRA Tags 54 248(1) Principal Issues: Does our interpretation in document A (see below), that the consideration from the sale of an interest in revenue generated from certain contracts was capital in nature, contradict our interpretations in documents B, C, and D (see below), that a right to receive income, in and by itself, would not be considered capital property. ... Specifically, it is your view that our interpretation in document A (see below), that the consideration from the sale of an interest in revenue generated from certain contracts was capital in nature contradicted our interpretations in documents B, C, and D (see below), that a right to receive income, in and by itself, would not be considered capital property. ... Our interpretation in document B above was that, based on the facts under consideration, the taxpayer's transfer to a corporation of a right to receive income, which arose under an employment contract, would qualify neither as capital property nor as eligible capital property under paragraphs 85(1.1)(a) and (e), respectively, of the Act. ...

Where an amount is paid up-front in respect of an investment in a timeshare, the tax consequences will depend on whether the payment is in consideration for leasing or for purchasing an interest in the real property. ... On the other hand, where the up-front payment is consideration for the purchase of an interest in the property, the cost of this property would be included in Class 1 and capital cost allowance could be deducted over time. Whether the up-front payment is consideration for a lease as opposed to a purchase of an interest in the property is a question that will have to be determined after a careful review of the documentation and circumstances surrounding the payment. ...

Principal Issues: Surrenders for no consideration of an income interest in a pre-1972 spousal trust and the application of subsections 106(2) and 107(4) of the Act. ... XXXXXXXXXX 5-940219 Attention: XXXXXXXXXX April 18, 1994 Dear Sirs: Re: Subsections 106(2) and 107(2) of the Income Tax Act ("the Act") This is in reply to your letter dated January 21, 1994 wherein you requested an interpretation regarding the application of the above mentioned subsections of the Act where a spouse renounces or releases his/her income interest in a pre-1972 spousal trust for no consideration and where he/she does not direct the manner in which the income interest is to be distributed. ... We concur your views that according to paragraph 9 of Interpretation Bulletin IT-385R2, where a taxpayer for no consideration validly surrenders his/her income interest in a trust and does not direct the manner in which the income interest is to be distributed, he/she will not be considered to have received any proceeds of disposition for the purposes of subsection 106(2) of the Act. ...

On April 1 USco acquires from Canco a $1,000,000 Government of Canada 90 day T-bill due on June 30 for fair market value consideration of $990,000. On April 20 USco sells the T-bill back to Canco for fair market value consideration of $993,500. ... Consideration would be given to, among other things, the definition of "investment business" in subsection 95(1) and the provisions of paragraphs 95(2)(a.1), 95(2)(a.3) and 95(2)(l) and subsections 95(2.3) and 95(2.4). ...

Principal Issues: How a loan from a corporate partner to its partnership should be taken into consideration in determining whether the shares of the corporate partner qualify as QSBCS. ... Your concern focused on how a loan from a corporate partner to its partnership would be taken into consideration in determining whether the shares of the corporate partner qualify as QSBCSs to its shareholder. ... These comments are general in nature and do not specifically take into consideration the facts in the hypothetical situation which you outlined. ...

If the decrease in the adjusted cost base of the partnership interest is a result of losses of the partnership, the amount of borrowed money used to acquire the consideration, for purposes of subsection 20.1(1) of the Act, will be based on the fair market value of the property received in satisfaction of the partnership interest and the original cost of the partnership interest. Generally, the amount of borrowed money to which subsection 20.1(1) of the Act applies is the total amount of borrowed money outstanding just before it ceases to be used to earn income from the property minus the amount of borrowed money that is not considered to have been lost determined as follows:-money that is traceable to an ineligible use such as a drawdown of capital-where the property has been disposed of for an amount of consideration at least equal to the fair market value of the property, the amount of the borrowed money that, under the existing rules, is traceable to the consideration, and-otherwise, the amount of the borrowed money that would, under existing rules, be traceable to the money received by the taxpayer if the taxpayer had disposed of the property for an amount of money equal to the fair market value of the property. ...

At question 33 of the 1987 Revenue Canada Round Table, in Report of Proceedings of the Thirty-Ninth Tax Conference, 1987 Conference Report (Toronto: Canadian Tax Foundation, 1988), the Department's position on what factors would be considered in determining the amount of a benefit when a corporation's property is made available to a shareholder was stated as follows: "When a corporate property, for which there is a commercial rental market, is made available to a shareholder, the Department usually considers that the benefit is equal to the fair market rental for the property less any consideration paid. ... In such cases, the amount or value of the benefit will usually be determined by the Department taking into account a normal rate of return on the greater of the cost or fair market value of the property, plus the related operating costs (the "imputed amount"), less any consideration paid to the corporation by the shareholder. ... However, the Department also stated that in cases where the circumstances are the same as those in the Youngman case, the Department accepts that in determining the amount of the benefit, the shareholder's interest-free loan to a corporation to enable it to purchase the property should be taken into consideration. ...

PharmcoA purchased 100% of PharmcoB for consideration consisting of loans from the vendor and from another party. ... In a situation such as the one you have described, where a transfer of property is made by a corporation to its shareholders for no consideration, then the value of such property would be included in the income of the shareholders pursuant to subsection 15(1) of the Income Tax Act (the "Act"). ... We have enclosed Interpretation Bulletin IT-405, Inadequate Considerations- Acquisitions and Dispositions, for additional information on such transactions. ...

Reasons: The discount rate must take the risk element inherent in investments into consideration. 5-960388 XXXXXXXXXX C. ... The general approach is to value the various interests taking into consideration the fair market value of the property itself, the current interest rates, the life expectancy of any life tenants, and any other factors relevant to the specific case. ... In our view, the prescribed interest rate would not be an appropriate discount rate in all cases, since it does not take the risk element inherent in certain investments into consideration. ...

At the 2000 Canadian Tax Foundation Conference, the Canada Customs and Revenue Agency announced a change in the administrative position relating to the application of paragraph 85(1)(b) in a situation where there is a transfer of property with liabilities in excess of cost amount and the excess is allocated to another property or is assumed by the purchaser in consideration for the delivery by the vendor of a promissory note in the amount of the excess. It is our position that, if the total non-share consideration so considered to have been given by the purchaser for the property exceeds the amount agreed upon by the vendor and purchaser in their election under subsection 85(1), paragraph 85(1)(b) will apply to increase the amount agreed upon. ... C would issue shares to S for the balance of the consideration. In view of the fact that C is assuming $75 of the debt as a partial repayment of the amount owing to S, you submit that paragraph 85(1)(b) should not apply to increase the elected amount in respect of the subsequent transfer of the property. ...