Income Tax Severed Letters - 2006-05-26

Ruling

2006 Ruling 2006-0167521R3 - Incorporation of Partnership

Unedited CRA Tags
125(7)

Principal Issues: Additional facts

Position: Does not affect rulings given.

Reasons: Does not affect rulings given. Request for 15(1) ruling withdrawn.

2006 Ruling 2006-0169911R3 - Health Spending Account

Unedited CRA Tags
6(1)(a)

Principal Issues: Under a Health Spending Account, whether the allocation of credits, which is linked to a bonus the employees may be entitled to receive, would result in employment income to the employees.

Position: The allocation of credits will not result in taxable employment income for the employees.

Reasons: Consistent with IT-529 and previous rulings.

2006 Ruling 2006-0181061R3 - Butterfly Distribution - XXXXXXXXXX

Unedited CRA Tags
55(3)(b)

Principal Issues: Supplemental ruling to 2006-016566 to incorporate minor revisions to facts and proposed transactions.

Position: Changes accepted.

Reasons: No impact on any of the rulings given.

2006 Ruling 2006-0176341R3 - Structured Settlement

Unedited CRA Tags
56(1)(d) 60(a)

Principal Issues: Whether payments received under a structured settlement arrangement that is an out-of-court settlement would be taxed in the hands of the recipient?

Position: No

Reasons: The terms of the structured settlement arrangement are consistent with the CRA's position as set out in Interpretation Bulletin IT-365R2

2006 Ruling 2005-0135751R3 - Advance Tax Ruling

Unedited CRA Tags
54 37(6) 127(29)

Principal Issues: 1) Determine whether the sale of XXXXXXXXXX will be a disposition of capital property.
2) Determine whether the sale will result in an income inclusion under subsection 13(1) in respect of recaptured depreciation in relation to any of the salaries and wages deducted as SR&ED.
3) Determine whether the sale will result in the recapture of investment tax credits earned in relation to any of the salaries and wages deducted as SR&ED pursuant to subsection 127(29).

Position: 1) Yes.
2) No.
3) No.

Reasons: 1)The sale of the XXXXXXXXXX will be a disposition of a capital property as defined in section 54 of the Act, with a nil adjusted cost base, and will result in a taxable capital gain as calculated under subdivision c, division B of the Act.
2)The sale of the XXXXXXXXXX will not, as a result of subsection 37(6) of the Act, result in an income inclusion under subsection 13(1) in respect of recaptured depreciation as the salaries and wages were deducted pursuant to 37(1)(a) of the Act.
3)The sale of the XXXXXXXXXX will not, as a result of subsection 127(29) of the Act, result in the recapture of investment tax credits earned in relation to any of the salaries and wages deducted as SR&ED in respect of the XXXXXXXXXX . This position is confirmed in the SR&ED policy statement number 2000-04R2.

2006 Ruling 2005-0146391R3 - Sale of assets; shareholder/key employee bonuses

Unedited CRA Tags
67 18(1)(a) 5(1) 78(4)

Principal Issues: Whether the proceeds from the sale of eligible capital property can be paid to shareholder/managers as a deductible bonus.

Position: Yes.

Reasons: The company is a CCPC paying bonuses to active shareholder/key employees who are residents of Canada to reduce the CCPC's income from the Business and the asset sale to a nominal amount.

2006 Ruling 2005-0161681R3 - 88(1)(c) and (d)

Unedited CRA Tags
88(1)(c) and (d)

Principal Issues: Where Acquisition Subco entered into an arrangement agreement ("Arrangement Agreement") to purchase all of the shares of Targetco, whether Targetco's subsidiary Lender Subco would be a specified shareholder of Targetco because of the Arrangement Agreement?

Position: No.

Reasons: Acquisition Subco would not be considered to have a significant direct or indirect interest in any of the Targetco shares because of the Arrangement Agreement under subparagraph 88(1)(c.2)(iii). Consequently, Lender Subco would not be a specified shareholder of Targetco.

2005 Ruling 2005-0147131R3 - Continuance from XXXXXXXXXX to XXXXXXXXXX

Unedited CRA Tags
Subdivision i

Principal Issues: Whether the continuance of a corporation from XXXXXXXXXX to XXXXXXXXXX is a disposition of the shares or the underlying assets & liabilities.

Position: No

Reasons: The governing legislation of the two jurisdictions provides for this.

Technical Interpretation - External

19 May 2006 External T.I. 2006-0172051E5 - Shareholder Manager Remuneration

Unedited CRA Tags
67

Principal Issues: Whether a bonus paid to the principal shareholder of a holding company from the proceeds of disposition of shares in an operating company would be considered a reasonable expense of the holding company under the CRA's policy on the reasonableness of shareholder/manager remuneration?

Position: The policy does not apply. The reasonableness of the amount will be a question of fact.

Reasons: The administrative policy does not apply to the deductibility of remuneration paid by a holding company or paid out of the proceeds from the sale of shares.

19 May 2006 External T.I. 2006-0168291E5 - CRCE - small hydro installation

Unedited CRA Tags
Reg 1219

Principal Issues: Whether certain expenditures relating to a small hydro installation would constitute CRCE.

Position: General comments provided.

Reasons: In accordance with the practice outlined in paragraph 22 of IC 70-6R5.

17 May 2006 External T.I. 2006-0169361E5 - photovoltaic system - Class 43.1

Unedited CRA Tags
Class 43.1, Class 1 Reg. 1100(24) to (26)

Principal Issues: whether a photovoltaic array on the roof of a building that generates electrical energy to be sold to the provincial power company would be eligible for inclusion in Class 43.1

Position: Where the photovoltaic array is removable and remains a separate asset from that of the building, it will qualify for inclusion in Class 43.1. Where there is a building integrated photovoltaics system installed at the time a building is constructed such that the solar cells become an integral and component part of the roof, it is our opinion that it would not be eligible for inclusion in Class 43.1 because it would be considered to be a part of the building (Class 1(q)) which is excluded from Class 43.1(d)(vi). Also indicated the requirements of Class 43.1(d)(vi) and the restrictions under Reg. 1100(24) to (26) on CCA that can be claimed.

Reasons: As per the law.

17 May 2006 External T.I. 2006-0168591E5 - Value of an insurance policy donated to a charity

Unedited CRA Tags
148(7) 118.1 148(9)

Principal Issues:
Value of a term to 100 life insurance policy donated by a policyholder to a charity.

Position:
The value is based on the amount by which the cash surrender value of the policy at the time of the donation exceeds any policy loans outstanding and any accumulated dividends and interest assigned at the time of the donation as described in paragraph 3 of IT-244R3 Gifts by Individuals of Life Insurance Policies as Charitable Donations.

Reasons:
Paragraph 3 of IT-244R3.

10 May 2006 External T.I. 2005-0162591E5 F - Renonciation à une succession: REER

Unedited CRA Tags
248(8)b) 248(9) 146(8.1) 146(8.9)
renunciation by two children for the benefit of the other heir did not give rise to a transfer as a consequence of death
renunciation by two children for the benefit of the other heir would not qualify

Principales Questions: Est-ce que le paragraphe 146(8.1) est applicable si un héritier ab intestat renonce à une succession en faveur d'une autre personne?

Position Adoptée: Non.

Raisons: La renonciation en faveur d'une personne est un transfert de biens entre l'héritier ab intestat et le bénéficiaire de la renonciation et non un transfert par suite du décès du rentier décédé.

2005-016259
XXXXXXXXXX Guy Goulet, CA, M.Fisc.
(819) 986-8098
Le 10 mai 2006

9 May 2006 External T.I. 2005-0161941E5 F - REER: Legs à une fiducie exclusive au conjoint

Unedited CRA Tags
146(8.1)
election could be made regarding encroachment of capital to beneficiary of spousal trust

Principales Questions: Dans une Situation Donnée, est-ce que le liquidateur de la succession du conjoint décédé (M. A) et la conjointe survivante (Mme A) pourraient exercer le choix prévu au paragraphe 146(8.1) tel que modifié par les Propositions législatives concernant l'impôt sur le revenu du 18 juillet 2005 (" les Propositions ") relativement à la somme versée dans le cadre du REER de M.A au liquidateur de la succession de M. A.

Position Adoptée: Oui.

Raisons: Le paragraphe 146(8.1) tel que modifié par les Propositions s'appliquerait à un particulier qui a un " droit de bénéficiaire ", au sens du paragraphe 248(25), dans la succession d'un rentier de REER décédé qui n'est pas un bénéficiaire direct de la succession, tel que c'est le cas dans la Situation Donnée, Mme A ne détenant qu'une participation indirecte dans la succession de M.A du fait qu'elle est bénéficiaire d'une fiducie qui, elle, est bénéficiaire de la succession.

2005-016194
XXXXXXXXXX Guy Goulet, CA, M.Fisc.
(819) 986-8098
Le 9 mai 2006

18 January 2006 External T.I. 2005-0145111E5 - Stop loss rules - grandfathering

Unedited CRA Tags
112(3) (grandfathering rules 131(11) & (12)

Principal Issues: 1. Whether an amendment to an agreement in writing, which was in existence on April 26, 1995, by the addition of a new shareholder, is significant enough to result in loss of grandfathering?
2. Whether the original shareholder agreement would satisfy the "reasonable to conclude test" in subparagraph 131(11)(b)(iii) of the grandfathering legislation?
3. Whether the grandfathering rules will continue to apply if there is a transfer of the individual's share to his holding company?

Position: 1. The amendment is significant enough to lose grandfathering under paragraph 131(11)(a) of the grandfathering legislation however, if the conditions in paragraph 131(11)(b) of the grandfathering legislation are otherwise met, the shares will continue to be grandfathered.
2. Question of fact, which needs a review of the agreement. However, if the shareholder's agreement provides that the insurance would be used to fund the acquisition of the shares upon the shareholder's death, it would be relevant information that the "reasonable to conclude" phrase is met.
3. Probably, if it is a share grandfathered under paragraph 131(11)(b) of the grandfathering legislation and a transaction to which section 51, 85, 86 or 87 would apply.

Reasons: 1. See Question #2, 1996 Ontario Tax Conference. Either paragraphs 131(11)(a) or 131(11)(b) can provide grandfathering status.
2. Question 28 of the 1998 APFF Congress, Question 8 of the CALU 1997, Technical News #12.
3. Wording of paragraph 131(12) of the grandfathering legislation.

Conference

4 May 2006 Roundtable, 2005-0161541C6 F - Placements admissibles - dépôts

Unedited CRA Tags
204 a), c) et f) de la définition de "placement admissible" 146(1) b) de la définition de "placement admissible"
GIC or term deposit is a similar obligation
GIC could qualify under para. (b) or (f)
not a qualifying deposit if payable outside Canada or in foreign currency

Principales Questions: Est-ce qu'un certificat de placement garanti ou un dépôt à terme, libellé en devises canadiennes ou étrangères, émis par une banque au Canada ou par une société de fiducie est un placement admissible pour un REER?

Position Adoptée: Lorsqu'il est émis par une banque, il pourrait être considéré comme un placement admissible décrit spécifiquement à l'alinéa b) de la définition de placement admissible au paragraphe 146(1). Un certificat de placement garanti, libellé en devises canadiennes ou étrangères, émis par une société de fiducie, constituée en société selon les lois fédérales ou provinciales, pourrait être un placement admissible prévu à l'alinéa f) de l'article 204. Un dépôt à terme, libellé en devises canadiennes ou en devises étrangères, émis par une société de fiducie, pourrait être un " dépôt " au sens de la LSADC et pourrait constituer un placement admissible aux fins de l'alinéa a) à l'article 204. Par ailleurs, dans certains cas, un dépôt à terme ne constituerait pas un placement admissible, s'il s'agit de sommes reçues pour lesquelles l'institution membre de la LSADC a délivré ou est obligée de délivrer un document qui est payable à l'étranger ou en devises étrangères.

Raisons: En général un certificat de placement garanti ou un dépôt à terme émis par une banque au Canada, est considéré comme " une obligation, un billet ou un titre similaire ".
Un dépôt à terme, émis par une société de fiducie, libellé en devises étrangères, pourrait ne pas être un dépôt au sens de la LSADC en raison du paragraphe 2(6) de l'annexe de la LSADC qui stipule que les sommes reçues par une institution membre de la LSADC auxquelles elle a délivré ou est obligée de délivrer un document qui est payable à l'étranger ou en devises étrangères ne constituent pas un dépôt.

Technical Interpretation - Internal

18 May 2006 Internal T.I. 2006-0182321I7 F - Déduction des intérêts

Unedited CRA Tags
20(1)c)
refinancing dividend-payment notes with interest-bearing shareholder loans did not cure the interest-deductibility problem

Principales Questions: Les intérêts sur des montants dus aux actionnaires d'une société sont-ils déductibles du revenu de la société

Position Adoptée: non

Raisons: Les conditions d'application de l'alinéa 20(1)c) ne sont pas respectées.

11 May 2006 Internal T.I. 2006-0178781I7 F - Résidence des membres du clergé

Unedited CRA Tags
8(1)c)
pastoral worker not entitled to deduction
Words and Phrases
regular minister

Principales Questions:
Le contribuable qui est un agent de pastorale est-il admissible à la déduction pour résidence des membres du clergé en vertu de l'alinéa 8(1)c)?

Position Adoptée:
Généralement non.

Raisons:
Un agent de pastorale ne rencontre généralement pas le test de statut au sous-alinéa 8(1)c)(i) car il n'est pas un ministre régulier d'une confession religieuse. Donc, il n'est pas admissible à la déduction relative à la résidence des membres du clergé.

28 April 2006 Internal T.I. 2005-0161611I7 - entitlement to refundable investment tax credits

Unedited CRA Tags
125(5.1) 127 127.1

Principal Issues: (1) whether the formula in subsection 125(5.1) acts to reduce the business limit of a corporation who has taxable capital in excess of $10 million employed in Canada; (2) whether a CCPC which had taxable income in the preceding year of zero and a business limit of zero is a qualifying corporation for the purposes of refundable ITCs.

Position: (1) yes; (2) no.

Reasons: (1) Subsection 125(5.1) provides a formula which reduces the business limit of a corporation when taxable capital in excess of $10 million is employed in Canada. Paragraph 87 of IT-151R5, and Finance's Technical Notes support this position. (2) When taxable capital is employed in Canada in excess of $15 million the formula in subsection 125(5.1) acts to eliminate the corporation's business limit.
April 28, 2006