1 May 2002 External T.I. 2002-0122675 - ELECTION QUOTAS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1) With respect to the application of subsection 14(1.01):

(a) Is it possible to satisfy the condition in this provision, which requires that "the cost of the property to the taxpayer can be determined", by averaging the total cost of the quotas by the total number of units held?

(b) Since the election under the provision results in a disposition of a capital property, "could alternative minimum tax apply"?

(c) Could the resulting capital gain "qualify for the capital gains reserve"?

2) Whether a certain building is class 1 or class 6.

Position:

1) For each question:

(a) Yes.

(b) Yes.

(c) Yes.

2) Class 1.

Reasons:

1) For each question:

(a) Since the individual quota units are unidentifiable, it is reasonable to average the total cost of the quotas by the number of units to determine the cost of the properties for the purposes of subsection 14(1.01) of the Act.

(b) Because paragraph 14(1.01)(b) of the Act deems the taxpayer to have disposed at that time of a capital property, alternative minimum tax under section 127.52 may be applicable.

(c) For the same reason as b, the taxpayer may be entitled to a reserve for proceeds of disposition not received during the taxation year under subparagraph 40(1)(a)(iii) of the Act.

2) Class 6 includes buildings of frame, log, stucco on frame, galvanized iron, or corrugated metal construction. The building described by the taxpayer has walls made of concrete, therefore more appropriately included in class 1.

XXXXXXXXXX 						2002-012267
							Randy Hewlett, B.Comm.
May 1, 2002

Dear XXXXXXXXXX:

Re: Subsection 14(1.01) & Class 1 versus 6 Buildings

We are writing in response to your letter dated February 1, 2002, wherein you requested our opinion on the above noted issues. We also acknowledge the additional information submitted in your letters of March 26 and 27, 2002.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following comments on each of the issues identified in your correspondence.

1. Subsection 14(1.01) of the Income Tax Act (the Act)

In your correspondence, you describe a hypothetical situation in which an individual engaged in farming, purchases units of dairy quotas at varying prices. These quotas are identical in terms of the rights and conditions granted to the quota-holder by the particular body that governs their issuance and resale. It is not possible to distinguish which particular unit (or part thereof) is disposed of to a third party. For example, a farmer could purchase 100 units of a dairy quota, buy another 50 units at another time, and then dispose of 125 units at a later time - a farmer could dispose of as little as 0.1 units of a quota. Your inquiries with respect to the application of subsection 14(1.01) of the Act for this type of quota are as follows:

a. Is it possible to satisfy the condition in this provision, which requires that "the cost of the property to the taxpayer can be determined", by averaging the total cost of the quotas by the number of units held?

b. Since the election under the provision results in a disposition of a capital property, "could alternative minimum tax apply"?

c. Could the resulting capital gain "qualify for the capital gains reserve"?

In our view, since the individual quota units are unidentifiable, it is reasonable to average the total cost of the quotas by the total number of units held at the time of the disposition to determine the cost of the properties for the purposes of subsection 14(1.01) of the Act. Further, because paragraph 14(1.01)(b) of the Act deems the taxpayer to have disposed at that time of a capital property, alternative minimum tax under section 127.52 may be applicable. As well, the taxpayer may be entitled to a reserve for proceeds of disposition not received during the taxation year under subparagraph 40(1)(a)(iii) of the Act.

2. Class 1 versus Class 6 Classification for Farm Buildings

You also inquire whether a "new hog barn" would be included in class 1 or class 6 for capital cost allowance purposes, when it has the following characteristics:

• a concrete holding tank below ground that is two to four feet deep, which is used for liquid manure storage;
• concrete walls above ground, which are 8 feet high (there are no wooden walls);
• wooden roof trusses mounted directly on top of the concrete walls; and
• a roof made of sheet metal.

We agree with your view that Schedule II of the Income Tax Regulations would require this building to be included in class 1. Paragraph (q) of class 1 describes property not included in any other class that is a building or other structure, or part thereof, including component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures. The building you describe (with walls of concrete) would not be included in any other class, such as class 6, which includes buildings of frame, log, stucco on frame, galvanized iron, or corrugated metal construction. For more information, see Interpretation Bulletin IT-79R3, Capital Cost Allowance - Buildings or Other Structures, dated May 24, 1991.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch