Income Tax Severed Letters - 2002-03-15

Principal Issues: Where the terms of a trust permit the property of a trust to be loaned to a person other than the income beneficiary described in 73(1.01)(c) or 70(6), would such a loan taint the trust such that 73(1) or 70(6) did not apply to the property transferred to the trust?

Position: lending or investment of trust property to a non-spouse on "commercial" terms does not taint a spousal trust (or any other trust described in 104(4)(a)) but if the terms of the trust permit the lending of trust property to a person other than the spouse on terms more favourable than that which would otherwise be available to that person commercially, the trust would not be a spousal trust.

Reasons: Whether trust property is invested in a financial institution, used in a business, or loaned to a third party, someone other than the spouse "uses" the property, but for a fee. Such use does not result in encroachment of the trust's income or capital nor does the user obtain a benefit - thus, it is our view, as supported by the case of Peardon v MNR, 86 DTC 1045, that use of trust property acquired thru a commercially-based transaction (with regard to terms and conditions under which property was lent, invested or rented) does not taint a spousal trust.

Principal Issues: Does the expression "société canadienne imposable" used in subparagraph b)ii) of the definition of "dépense de main-d'œuvre" (Labour Expenditure) in subsection 125.4(1) of the French version of the Act refers to the expression defined in subsection 89(1) of the Act or to the one defined in subsection 1106(2) of the proposed Income Tax Regulations?

Position: The expression "société canadienne imposable" has the meaning assigned by subsection 89(1).

Reasons: In the French version of the Act, the definition of "société canadienne imposable" in subsection 1106(2) of the proposed Income Tax Regulations is applicable only for the purposes of the definition of "société admissible" (qualified corporation) in subsection 125.4(1) of the Act and for section 1106 of the proposed Regulations. Therefore, for the purposes of the definition of "dépense de main-d'oeuvre", the expression "société canadienne imposable" can only refer to the expression defined in subsection 248(1) which refers to subsection 89(1) of the Act.

Principales Questions: Est-ce que les montants de rente viagère ou d'indemnité au capital versés par le gouvernement français à des résidents canadiens en leur qualité d'orphelins de victimes de persécutions antisémites sont imposables au Canada?

Est-ce que les indemnités reçues du gouvernement français par ces mêmes orphelins ou leurs parents, s'ils sont toujours vivants, à titre de compensation pour la spoliation de leurs biens sont imposables au Canada?

Position Adoptée: Non dans les deux cas.

Principal Issues: Whether amounts paid to a beneficiary for performing certain trustee duties are deductible by the trust under 104(6)?

Position: No.

Reasons: Amounts paid for performing duties constitute an expense to the trust, not an allocation of its income. As to whether payment for various types of service provided are deductible, refer to published documents.

Principal Issues: Could paragraph 118.2(2)(l.2) include the cost of a hot tub or just alteration costs to a dwelling to install the hot tub?

Position: Paragraph 118.2(2)(l.2) could include the alteration costs to a dwelling to install the hot tub but not the cost of the hot tub itself

Reasons: It is our long-standing position that since a hot tub is not a prescribed medical device or equipment pursuant to Income Tax Regulation 5700, the cost a hot tub is not considered a medical expense for the purposes of the medical expense credit in subsection 118.2(1) of the Act. It is our opinion that the "costs of the alterations" should not be extended to include the cost of the hot tub for the purpose of paragraph 118.2(2)(l.2) of the Act.

Principal Issues: Follow-up inquiry to 2001-010064, 2001-010174, 2001-008535 and 2001-010749 regarding the interpretation of the definition of "qualifying amount" in subsection 110.2(1) of the Act. Specifically, whether the process in this case is arbitration.

Position: Question of fact.

Reasons: XXXXXXXXXX the determination of whether a process is arbitration, and hence the award is an "arbitration award", must be made based on the ordinary meaning of the words in section 110.2, since they are not defined in the Act - XXXXXXXXXX , this is how the courts would make the legal determination. The court would rely upon the dictionary definition of the word "arbitration" and may consult, among others, Blacks Law Dictionary or the Canadian Law Dictionary.

Principal Issues: Whether it is possible for a fully discretionary trust to pay income from one source to one beneficiary and to pay income from another source to another beneficiary.

Position: Yes.

Reasons: Where a trust is fully discretionary, the trustee can choose the amount, type and source of income that it wishes to distribute to the beneficiaries. Where the taxable dividends received from a corporation are distributed by the trust to a beneficiary, subsection 104(19) enables the trustee to designate that the distributed taxable dividends are deemed to have been received by the beneficiary from the corporation.