23 November 2001 External T.I. 2001-0103535 - ELIGIBLE CAPITAL 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 CCRA.

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

Principal Issues: Application of subsection 14(3) of the Act in the case of a partial disposition of eligible capital property.

Position: Apply subsection 14(3) of the Act on a pro-rata basis where there is a partial disposition of eligible capital property.

Reasons: The Act does not specify how to apply subsection 14(3) of the Act in those situations where there is a partial disposition of eligible capital property. The pro-rata approach provides a common sense result.

2001-010353
XXXXXXXXXX A. Seidel, CMA
(613) 957-2058
November 23, 2001

Dear XXXXXXXXXX:

Re: Eligible Capital Property

This is in reply to your letter dated September 19, 2001, in which you requested our views concerning the disposition of eligible capital property which was previously acquired from a non-arm's length party and subject to the provisions of subsection 14(3) of the Income Tax Act (the "Act").

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Subsection 14(3) of the Act applies firstly, to certain acquisitions of eligible capital property from a non-arm's length party and secondly, to a subsequent disposition of eligible capital property to which subsection 14(3) of the Act applied at the time that it was acquired by the "taxpayer", as defined in subsection 14(3) of the Act. Pursuant to subsection 14(3) of the Act, a transferee's eligible capital expenditure is essentially reduced, at the time certain eligible capital property is acquired, by four/thirds of the total of all amounts that may have been claimed as a capital gains deduction under section 110.6 of the Act by the transferor in respect of that particular eligible capital property. In certain circumstances, this reduction may be reversed at the time that the particular eligible capital property is disposed of by the transferee. The provision does not specifically deal with how this reduction is to be computed in those situations where there is a partial disposition of such an eligible capital property.

In our view, in applying subsection 14(3) of the Act, the eligible capital expenditure attributable to a partial disposition of an eligible capital property should be computed on a pro rata basis. With regard to paragraphs 14(3)(b), (b.1) and (b.2) of the Act, they refer to "... amounts that can reasonably be considered to have been claimed as deductions under section 110.6 ... in respect of the disposition ...". As such, the determination required to be made in paragraphs 14(3)(b), (b.1) and (b.2) of the Act, with respect to the acquisition of an eligible capital property, would entail the attribution of a portion of the transferor's section 110.6 deduction on a pro rata basis.

The publications referred to in this letter may be obtained from your local tax services office or from our Internet web site (www.ccra-adrc.gc.ca).

Yours truly,

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

- 2 -