28 March 1995 Internal T.I. 9502507 - RIGHT TO ROYALTY ELIGIBLE PROPERTY

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 Department.

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

Principal Issues: - Will rights to royalty income from XXXXXXXXXX qualify as eligible property under subsection 85(1.1) of the Act?

Position TAKEN: yes

Reasons FOR POSITION TAKEN: The rights are associated with an XXXXXXXXXX business so we are of the view that the rights would either be capital property, eligible capital property or inventory (exact classification could not be determined but irrelevant since all three qualify as eligible property).

		March 29, 1995

	Halifax District Office	Income Tax Rulings
 		and Interpretations
M. Chiasson	Directorate
	Technical Advisor	M.P. Sarazin
(613) 957-2118
		950250

XXXXXXXXXX

This is further to the memorandum of January 19, 1995 from our Business and General Division which indicated that our division would respond to the issue raised in your memorandum of August 26, 1994 as to whether a right to receive income qualifies as an eligible property for purposes of subsection 85(1.1) of the Act.

In order to qualify as eligible property, a right to receive income would have to be either a capital property (paragraph 85(1.1)(a)), an eligible capital property (paragraph 85(1.1)(e)) or inventory (paragraph 85(1.1)(f)).

In the technical interpretation referred to in your memorandum, we expressed the view that a right to receive income, in and by itself, would generally not be considered capital property within the meaning of paragraph 54(b) of the Act and, as such, the right would generally not qualify as eligible property pursuant to paragraph 85(1.1)(a) of the Act. Our position was based on the decision in Gladys (Geraldine) Evans v. Minister of National Revenue 60 DTC 1047 (S.C.C.) wherein Mr. Justice Cartwright (for the Court) at 1050 stated:

"With the greatest respect for the contrary view entertained by the learned Judge, I cannot agree that the fact that a bare right to be paid income can be sold or valued on an actuarial basis at a lump sum requires or permits that right, while retained by the appellant, to be regarded as a capital asset. I do not think that in ordinary language a right to receive income such as that enjoyed by the appellant would be described as a capital asset."

A similar conclusion was reached in Asamera Oil (Indonesia) Limited 73 DTC 5274 (F.C. - T.D.) wherein it was held that the right to receive income where there was no underlying rights to any of the properties that may create this income would not be regarded as a capital asset.

We also expressed the view that a right to receive income would not generally qualify as an eligible capital property for purposes of the Act. An eligible capital property is defined, pursuant to section 54 of the Act, to be "any property, a part of the consideration for the disposition of which would, if (the taxpayer) disposed of the property, be an eligible capital amount in respect of a business" (emphasis added). As described in paragraph 4 of Interpretation Bulletin IT-386R, in order to make such a determination it would be necessary for the taxpayer to determine whether, if the taxpayer were instead purchasing the property, its cost would qualify as an eligible capital expenditure of the taxpayer's business. Unless the taxpayer was a trader in such rights to receive income, we doubted that the acquisition of such rights could be considered to be "in respect of a business." In addition, if a right to receive income is not a capital property, we doubted that a payment to acquire such a right could qualify as an eligible capital property.

Based on our understanding of the particular facts of this case, our review of the agreement between

XXXXXXXXXX

we believe that the facts in this case are distinguishable from the facts in Gladys (Geraldine) Evans v. Minister of National Revenue and Asamera Oil (Indonesia) Limited. Unlike those cases, XXXXXXXXXX also owns the underlying property which give rise to the rights. Consequently, it is arguable that the rights to income, in this case, may constitute capital property for purposes of the Act. Alternatively, since the rights to receive income relate to the XXXXXXXXXX.

an argument could be made that such rights are in respect of a business and, therefore, qualify as eligible capital property or that the rights are inventory in respect of his XXXXXXXXXX business.

We are of the view that the rights to royalty income transferred by XXXXXXXXXX would likely constitute either capital property, eligible capital property or inventory and, as such, the rights would qualify as eligible property within the meaning assigned by subsection 85(1.1) of the Act. We regret that we are not able to offer any meaningful comments regarding the exact classification of such rights because such a determination would require a review of all of the particular facts which we do not have. Also, at this point, such a classification would be merely academic.

We trust that the foregoing comments will be of assistance to you.

Chief
Corporate Reorganizations Section III
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch