Income Tax Severed Letters - 2000-04-28

Principal Issues: Are shares of a particular corporation qualified investments for an RRSP?

Position: We can't provide an opinion.

Reasons: Must be submitted as an advance ruling request; or if not a proposed transaction, would be a question of fact to be determined by the TSO.

Principal Issues: Is interest incurred by a non-resident partner deductible by the non-resident for the purpose of computing income from a business carried on by the non-resident partner in Canada under subparagraph 115(1)(a)(ii) of the Act.

Position: Question of fact that must be considered on a case by case basis. However, assuming the all tests of paragraph 20(1)(c) are met and based on the facts since the partnership only carries on a business in Canada the deduction is against a source that is income from a business income and not income from another source such as property.

Reasons: The law - the main facts in this situation are that the funds are contributed to the partnership as equity and such funds are used by the partnership in its business carried on in Canada.

Principal Issues: Follow-up to 2000-000733. Whether a person can make a gift and transfer the related credit/deduction to a retailer in exchange for a discount.

Position: No

Reasons: Even right to direct is property the amount that a third party is willing to pay the right to transfer (assuming no tax receipt) is likely nominal. Again, charitable credits are not transferable under the Act.

Principal Issues: Can members of a family that controls a Canadian-controlled private corporation invest up to $25,000 of their RRSPs in shares of the CCPC?

Position: No.

Reasons: The exemption from the 10% limit where cost amount of the shares is less than $25,000 does not apply where there is a non-arm's length relationship between the CCPC and the annuitant.

Principal Issues: Can a minor child or infirm child be named as a successor annuitant under a RRIF contract?

Position: No.

Reasons: The terms of a RRIF contract can only allow a surviving spouse to become a successor annuitant.

Principal Issues: Whether an individual who declared bankruptcy during the year
is entitled to claim the equivalent-to-spouse tax credit pursuant to paragraph 118(1)(b) of the Act

Position: Question of fact

Reasons: Pursuant to subsection 118.95 of the Act, for bankruptcies that occur after April 26, 1995, when an individual becomes bankrupt, the calendar year in which the bankruptcy occurs is divided into two taxation years. One taxation year runs from January 1 to the day before the bankruptcy (pre-bankruptcy period), and the other begins on the day of bankruptcy and runs to December 31 (post-bankruptcy period). When an individual becomes bankrupt in a calendar year, the total of the amounts claimed in respect of the equivalent-to-spouse tax credit for both the pre- and post-bankruptcy periods cannot be greater than the amount that could have been claimed had the individual not become bankrupt in the year. See 9900175, 52897 and paragraph 40 of IT-513R, Personal Tax Credits.

Principal Issues: Can financial planning fees be paid from an RRSP?

Position: No

Reasons: These are expenses of the annuitant, and will be a benefit taxable under 146(8) and 56(2).

Principal Issues: How are allocated annuity/pension payments from Australia taxed in Canada

Position: Question of Fact

Reasons: A very general letter was written giving a general overview of taxation in Canada with a request for additional information so that an accurate determination as to the nature of the income can be made.

Principal Issues: Will the payment of dividends by a mutual fund trust in the form of additional units of the mutual fund trust result in a change in the adjusted cost base of the units of the mutual fund trust?

Position: Usually.

Reasons: Where subsection 47(1) applies because of the acquisition of identical properties, the ACB of the identical properties will be averaged.

Principales Questions:

Un contribuable propriétaire d'une maison et d'un chalet depuis 1975 transfert le chalet à sa conjointe en 1999 selon les dispositions du paragraphe 73(1) de la Loi. Est-ce que la conjointe pourra désigner le chalet lors de sa disposition comme sa résidence principale pour les années 1975 à 1981 inclusivement même si le contribuable désigne la maison comme sa résidence principale pour la même période ?

Position Adoptée:

Principal Issues: The implications of extending PHSP benefits to retirees, in situations where the employer is a corporation and where it is a sole proprietor.

Position: It is our general view that the income tax status of a plan as a "private health services plan" will be unaffected as a result of extending coverage to retired employees.

Reasons: Based on previous interpretations. However, a plan that extends coverage to a retired sole proprietor (if such an arrangement were possible) would not, in our view, qualify for the income tax treatment set out in IT-339R2, since the exemption in paragraph 6(1)(a)(i) applies only to employees and retired employees.

Principal Issues: Does debt of a registered charity (represented by investment certificates) qualify as an investment for an RRSP?

Position: No

Reasons: Does not meet the requirements of any of the provisions in subsection 146(1) or section 4900.

Principal Issues: Can taxpayer consider years of service with former employer when calculating the formula in subparagraph 60(j.1)(ii)?

Position: Question of fact

Reasons: Must meet the requirements of 60(j.1)(ii)- former employer must be the same employer (i.e. all federal departments for whom Treasury Board is considered the employer) or related by virtue of 251, 60(j.1)(iv) or (v)

Principal Issues: Would we reconsider our long-standing position regarding the application of clause 60(j.1)(ii)(B) to the buy-back of past service where the employee pays both the employee and employer portions of the cost?

Position: No.

Reasons: The position reflects our interpretation of the application of the provision based on the intent of the legislation.

Principal Issues: Where the fair market value of the shares that a corporation issues to a shareholder as consideration for property transferred to it is greater than the fair market value of the transferred property what are the income tax implications to the shareholder.

Position: Question of fact - but in the example provided there appears to be no benefit.

Reasons: The law.

Principal Issues: Whether a particular property is qualified farm property as defined in subsection 110.6(1) of the Act.

Position: Question of fact.

Reasons: See 9618765, 9628495, 9919475, 992378, 9821269, 9822875, 9832245, 9900153, 9919475, 9709285, 9709965, 9715205, 9802093, 9811605, 9818025.

Principal Issues: When does a seller include in income the proceeds from the sale of livestock, when the sale is done through an auction mart.

Position: When the auctioneer holds the proceeds in trust for the vendor, the proceeds should be included in income at the time the auction mart receives the payment from the purchaser. Where the proceeds are not held in trust, it depends on whether the vendor has received the auctioneers cheque in absolute payment of the debt.

Reasons: The auction mart is acting as an agent for the vendor. If provincial legislation deems the auction mart to hold the proceeds in trust for the vendor, the funds will belong to the vendor when the purchaser pays the auctioneer. The auctioneer's trust account is property of the vendor and the cheque by the auctioneer to the vendor only releases funds already owned by the vendor. The vendor is deemed to have received payment on the date of the purchaser's cheque. If there is no trust arrangement, and the vendor accepts a postdated cheque from the auctioneer, it is income at the time the cheque is received if the cheque was accepted as absolute payment of debt, otherwise it is income at the earlier of the date when the cheque is negotiated and the date the cheque is payable.

Principal Issues: Whether the audit policy set out in our answer to question 42 at the Revenue Canada Roundtable at the 1981 Canadian Tax Foundation's Annual Conference will apply to managers who own their shares through a holding company. In our answer to question 42 we stated that, in general, we will not challenge the reasonableness of salaries and bonuses paid to the principal shareholders-managers of a corporation when:
a) the general practice of the corporation is to distribute the profits of the company to its shareholders-managers in the form of bonuses or additional salaries; or
b) the company has adopted a policy of declaring bonuses to the shareholders to remunerate them for the profits the company has earned that are, in fact, attributable to the special know-how, connections, or entrepreneurial skills of the shareholders.

Position: No, the normal test of reasonableness will apply.

Reasons: The policy in question 42 applies to "principal shareholder-managers" only.

Principal Issues: (1) What are the tax implications for canadian resident shareholders to whom a USco distributed shares of a subsidiary prorata ? (2) Do the November 1999 proposed changes to section 85.1 modify the Agency's position on spin-off transactions ?

Position: (1) As described in the position on spin-off transactions in Technical News # 11 (2) No

Reasons: (1) The transaction is a spin-off (2) No shares were exchanged.

Principal Issues: Whether payments made to Inuit elders by a trust are taxable?

Position: There will be no net income inclusion unless the elders receive trust income.

Reasons: Trust income would be included in income under 104(13)(a).