Response of Revenue Canada - customs, excise and taxation to questions posed at TEI liaison meeting on income tax issues.

• Position: Canadian Department of National Revenue, Tax Executives Institute

On December 7, 1993, representatives of Tax Executives Institute met with officials of Canada's De Revenue (Revenue Canada) to discuss pending income tax issues. (A separate meeting was held on issue and services tax.) Before the liaison meeting, the Institute submitted a series of questions, which meeting. Reprinted below are the responses TEI received from Revenue Canada. (The questions were rep January-February 1994 issue of The Tax Executive and should be reviewed in conjunction with these an

Housing Cost Reimbursements

1. Revenue Canada (RC) was asked whether a taxable benefit would arise, and if so, how the benefit would be calculated in the following examples. RC responded that all reimbursements of principal are taxable.

2. RC's general view is that cost of living should be distinguished from expenses that are directly related to the move. Accordingly, housing cost reimbursements are not considered to be moving expenses.

   RC continues to disagree with the Phillips and Lao decisions, and has appealed these decisions.

   Leasing

1. Principal Business

   The question posed by TEI concerned the amalgamation of two separate leasing companies leasing different commodities (automobiles and computers) with substantially different annual revenues ($800,000 and $200,000 per annum), and whether the amalgamated company would be subject to Regulation 1100(15) or 1100(16)(a)(ii). RC responded that it would be a question of fact whether the amalgamated company was running separate businesses or one combined business.

   RC suggested it would look to see whether the same employees carried out functions pertaining to both businesses of the amalgamated company or whether there were separate employees in each business. Another factor to be considered would be whether the businesses were run or eventually would be run from the same location or whether they were conducted at different locations. A third consideration might be whether separate accounting records continued to be maintained. RC is in the process of referring the problem to Finance.

2. Separate Class Election -- Proposed Regulation 1101(5p)

   Input and output devices such as printers that are attached to general purpose electronic data processing equipment will qualify.

   Butterfly Transactions

1. Refinancing Prior to a Divisive Corporate Reorganization

   Based on its policy regarding acquisitions of property in contemplation of butterfly transfers, RC does not feel it is necessary to promulgate regulations identifying types of refinancing activities permitted during the period a butterfly is under consideration. This policy is discussed in the following Canadian Tax Foundation Annual Tax Conference papers.

   * 1989, The Butterfly Reorganization: Revenue Canada's

   Approach, Michael A. Hiltz, at 20:32.

   * 1991, An Update of Revenue Canada's Approach to

   the Butterfly Reorganization, Ted Harris, at 14.1.

   RC's policy as set out in the above papers can be summarized, as follows: Property will not necessarily be considered to have been acquired in contemplation of a butterfly reorganization merely because it is intended to carry out the butterfly at the time the property is acquired. There must be some connection between the acquisition and the reorganization. If that property would have been acquired at that particular time whether or not a butterfly would be subsequently undertaken, the acquisition will not be considered to have occurred in contemplation of the butterfly. Where the structure or timing of the acquisition is affected by the butterfly, the acquisition will be considered to have occurred in contemplation of the butterfly.

2. Proposed Amendment To Subsection 55(3.1)

   If the other shareholders receive their dividends during the same series of transactions as the non-residential shareholder, then the proposed amendment will preclude them from using the butterfly exemption. RC recognizes there are problems with this proposal and suggested that TEI raise its concerns directly with the Department of Finance.

   Meaning of the Term...