29 July 2019 Finance Comfort Letter respecting Eligible Capital Property (ECP) Transitional Issue

XXXXX

Dear XXXXX

Eligible Capital Property (ECP) Transitional Issue

l am writing in response to your correspondence and discussions with officials of the Tax Legislation Division regarding the tax treatment of dispositions of ECP. Specifically, you have raised a transitional issue regarding the changes to the tax treatment of ECP included in Budget 2016.

In Budget 2016 (March 22, 2016), the Government announced the replacement of the existing ECP regime and released draft legislative proposals. Legislative amendments were included in Budget Implementation Act, 2016, No. 2, and, beginning January 1, 2017, ECP became a new class of depreciable property (i.e., Class 14.1 of Schedule II of the Income Tax Regulations).

Pursuant to an agreement entered into in XXXXX disposed of assets of the company, including ECP, to an arm's-length party. The disposition occurred before March 22, 2016 and a portion of the purchase price (the "Base Amount") was paid at the time of the disposition. However, under the agreement, additional amounts (the "Additional Amounts") would become payable as part of the purchase price upon the grant of certain regulatory approvals by government bodies. It is expected that any relevant approvals will be received, if at all, before XXXXX.

One of these approvals, from the XXXXX has XXXXX been received and it will trigger the payment of an Additional Amount to your client Under the rules now applicable, half of the Additional Amount, as a taxable capital gain from the disposition of depreciable property, will be included in income and will be subject to the refundable tax regime. In contrast, under the rules applicable prior to 2017, half of the Additional Amount would have been included in business income and would not have been subject to the refundable tax regime.

In both cases, however, the non-taxable portion would be added to the corporation’s capital dividend account.

Your view is that your client should be able to avail itself of the same income tax treatment for the Additional Amount as applied to the Base Amount since the relevant disposition occurred prior to Budget 2016.

Our Comments

We agree that as a transitional matter it would be appropriate to preserve the tax treatment afforded under the ECP regime in circumstances where a disposition of ECP occurred before March 22, 2016 and one or more amounts in respect of the disposition become receivable after 2016 as a result of the satisfaction of a condition included in the relevant agreement.

We are therefore prepared to recommend to the Minister of Finance that the Income Tax Act be emended to provide that, in the circumstances described above, a taxpayer may elect in respect of a disposition of ECP that occurred before March 22, 2016. Where an election is made, if an amount becomes receivable after 2016 as proceeds of disposition upon the satisfaction of a condition that was part of the agreement under which the disposition was made and the amount would otherwise result in a capital gain for the taxpayer, the amount would under the proposed amendment instead be taxed as it would have been under the ECP regime, with one-half of the gain included in computing the taxpayer's income from a business for a taxation year and the other half of the gain included in the taxpayer's capital dividend account

We will also recommend that a taxpayer be required to file an election with the Minister of National Revenue to have the proposed amendment apply in respect of a disposition. The taxpayer would need to file this election no later than the filing-due date for the taxpayer's first taxation year that ends after September 30, 2019.

We will also recommend that this amendment apply as of January 1, 2017 in respect of amounts that become receivable before 2024.

While we cannot offer any assurances that either the Minister of Finance or Parliament will agree with our recommendation, we hope that this statement of our Intention is helpful.

Yours sincerely,

Brian Ernewein
Assistant Deputy Minister
Legislation
Tax Policy Branch