Income tax questions for Revenue Canada: December 10, 1996

Tax Executive, The, Jan-Feb, 1997

Employer CPP & UI

Employer provides a short-term disability program for the benefit of its employees. In order to facilitate the expeditious delivery of cheques to the employee, the Employer will occasionally pay the short-term disability benefit directly to the employee and then seek reimbursement from Employer's Insurer. Under such circumstances --

1. Is Employer required to pay the employer portion of Canadian Pension Plan and Unemployment Insurance (CPP & UI) on these benefits?

2. If the Insurer provides the T4 slip for the earnings to the employee, is the Employer required to pay the employer portion of CPP & UI?

Transfer of Pay by Employer to RRSP

Where an employer makes a lump-sum payment, such as a bonus or payment in lieu of notice, please confirm that the employer is not required to withhold income tax on amounts that are transferred directly to a registered retirement savings plan (RRSP).

Offshore Finance Companies

Comments made by representatives of Revenue Canada at the 1995 Canadian Tax Foundation Conference implied that a Canadian corporation that is controlled by non-residents, will be subject to a "GAAR attack" should the corporation establish an offshore finance company. In this respect, we would appreciate your commenting on the following questions:

1. What is the technical support for this position?

2. Are there any circumstances under which a non-resident controlled Canadian corporation will be permitted to establish an offshore finance company?

Paragraph 85(1)(e.2) Issues

Consider the following situation. Company A owns 75 percent of the issued and outstanding share capital of Company B and 80 percent of the issued and outstanding share capital of Company C. Company C owns the remaining 25 percent of the share capital of Company B. Company B owns the remaining 20 percent of the issued and outstanding share capital of Company C.

Company A transfers to Company B a capital property in exchange for Company B common shares. The fair market value of the capital property of $1 million significantly exceeds the adjusted cost base of $100. Company A and B intend that the property be transferred at fair value. Hence, a valuation of Company B is undertaken to determine the proper number of shares to issue to A in the exchange. Moreover, the asset transfer agreement between A and B includes a provision requiring an adjustment of the number of shares to be issued to A should the fair value of the contributed property vary significantly (up or down) from the appraised value determined by A and B. Company A and B jointly elect to have the provisions of subsection 85(1) of the Act apply to the transfer. The agreed amount of the joint election is the adjusted cost base of the property at the time of the transfer.

Please comment on the following questions concerning the transaction:

1. Does Revenue Canada consider Company B to be a "wholly-owned corporation" of Company A so that paragraph 85(1)(e.2) will not apply?

2. If Company B is not considered a "wholly-owned corporation" within the meaning of subsection 85(1.3) and Revenue Canada subsequently determines that Company B did not issue enough common shares on the initial transfer of the property, would Revenue Canada consider that a benefit has not been conferred on a related person (as contemplated in paragraph 85(1)(e.2)) solely on the basis of the companies' intentions in undertaking the transaction?