Income Tax Severed Letters - 2004-06-11

Principal Issues: Whether management fees paid by an operating company to a personal services business are reasonable by reason of the CRA's policy on when shareholder/manager remuneration will be considered reasonable for purposes of section 67 of the Income Tax Act.

Position: No.

Reasons: The determination of the reasonableness of an amount for purposes of section 67 of the Act will always be a question of fact. The CRA's administrative policy of not challenging the reasonableness of shareholder/manager remuneration under section 67 of the Act is outlined in Income Tax Technical News No. 22. As noted in our response to Question 6 under the topic "Shareholder/Manager Remuneration", the policy is "limited to salaries and bonuses paid directly to individuals resident in Canada who are active shareholder/managers of a CCPC. We therefore reserve the right to challenge the reasonableness of any inter-corporate management fees." As a result, this situation would not fall within the scope of the policy.

Principal Issues: Whether an individual is a first-time homebuyer if the individual's spouse has an owner-occupied home?

Position: No, if the individual's spouse owned a home that was the spouse's principal place of residence and that was inhabited during the marriage at any time in the 4-year period.

Reasons: Paragraphs e) and f) of the definition of "regular eligible amount" in subsection 146.01(1).

Principal Issues: A Canadian resident originally from the U.K. is allowed to make additional contributions to the U.K. Pension Department in order to increase the pension he will receive from the U.K. when he reaches 65 years of age. Can he deduct these additional contributions in computing his Canadian income taxes?

Position: No.

Reasons: There is no provision under the Act that provides for a deduction. Furthermore, there is no relief provided under the Canada-U.K. Convention currently in effect.

Principal Issues: Is rental income from a property located off-reserve income from "activities carried on outside the geographical boundaries" for purposes of paragraph 149(1)(d.5) of the Act?

Position: Question of Fact, but generally yes.

Reasons: Income from an activity includes passive income.

Principal Issues: Whether a "placement fee" charged by a university to cover the cost of staffing and other resources required to identify placement opportunities for a student's required fieldwork can be considered ancillary fees and charges.

Position: Question of fact.

Reasons: Ancillary fees and charges do not include any fee or charge to the extent that it is levied for services not ordinarily provided at educational institutions in Canada that offer courses at a post-secondary school level.

XXXXXXXXXX 2004-005476
J. Gibbons, CGA
June 2, 2004

Principal Issues: Whether, in a particular fact situation, legal fees and payments incurred or made by a taxpayer can be added to the cost of property inherited by such taxpayer.

Position: General comments provided.

Reasons: The situation described appears to involve specific taxpayers and completed transactions. Consequently, it was suggested to submit all relevant facts and documentation to the appropriate tax services office for their views. First, it should be determined whether a usufruct, right of use or habitation was established, pursuant to a will or otherwise. In such a case, the impact of subsection 248(3) should be considered. Secondly, it should be determined whether or not, for legal purposes, the taxpayer was truly the legatee by particular title of the property. The answer to this question would in turn determine whether subsections 70(5) and 107(2) would have applied to establish a cost, to the taxpayer, of the property. Finally, a portion of the expenses incurred and the payment made by the taxpayer could be part of the cost of the property if such expenses and payment were directly incurred or made to acquire the property. However, not enough information given in the particular situation to be able to make a final determination. The portion of the legal expenses that would simply be part of the cost of administering or settling the estate would neither be deductible nor added to the adjusted cost base of the property. Finally, none of the outlays or expenses would be deductible under paragraph 40(1)(a) (not incurred for the purpose of disposing of the property).