31 October 2001 External T.I. 2001-0104595 - ELIGIBLE CAPITAL EXPENDITURE

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: We were asked to rule that certain dispositions in XXXXXXXXXX would dispositions of eligible capital property.

Position: Cannot rule. Provided general comments.

Reasons: The transactions upon which we were asked to rule are already completed. Provided general comments only, an audit of the XXXXXXXXXX property transfers from the Partnership to the Corporation is required to confirm whether the Corporation or the Partnership has beneficial ownership of certain properties at the time of their disposition to an arm's length purchaser.

		2001-010459
XXXXXXXXXX 	A. Seidel, CMA
(613) 957-2058
October 31, 2001

Dear XXXXXXXXXX:

Re: Request for an Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation")
XXXXXXXXXX (the "Partnership")

This is in reply to your request for an advance income tax ruling (the "Ruling"), dated September 19, 2001, regarding the disposition of certain property, referred to by you as "Progeny".

The particular circumstances described in your letter involve completed transactions. Information Circular IC 70-6R4 (IC 70-6R4"), "Advance Income Tax Rulings", issued January 29, 2001, discusses, amongst other things, the scope of advance income tax rulings. As indicated in paragraph 7 of IC 70-6R4, an advance income tax ruling will only be provided on proposed transactions. An advance income tax ruling will not be issued in respect of transactions that are already completed or on a series of transactions that are significantly advanced. Furthermore, completed transactions include transactions that are closed, subject to certain conditions being met, and have an effective date that would be prior to the issuance of the requested advance income tax ruling. The agreements entered into in respect of the sale of the farm and the cattle were substantially completed by the end of XXXXXXXXXX. Your deposit will therefore be refunded under separate cover.

The following general comments may be of assistance.

It is the responsibility of the local tax services office to deal with specific taxpayers on completed transactions. You should therefore submit all relevant facts and documentation to your local tax services office for their views.

You have raised two issues in respect of the disposition of the "Progeny". The first issue is whether or not the "Progeny" is considered, for tax purposes, to be a disposition of "eligible capital property", as defined in section 54 of the Income Tax Act (the "Act"). The second issue is whether the disposition of the "Progeny" related to the disposition of the cattle owned by the Corporation is a disposition by the Partnership that owned the cattle prior to their transfer in XXXXXXXXXX. A "valuation" issue may also need to be addressed.

Whether a disposition of property is a disposition of an eligible capital property is a question of fact which can only be determined after reviewing all of the circumstances and documentation related to the disposition. Paragraph XXXXXXXXXX of the XXXXXXXXXX agreement between the Corporation, the purchaser of the cattle and "Progeny", the shareholders of the Corporation/partners of the Partnership and the Partnership provides that "Progeny" "shall include all existing records of the breeding history of the cattle, all letters of registration as well as the herd name and tattoo". Section 54 of the Act defines "eligible capital property" as "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". The expression "eligible capital amount" is defined in subsection 14(1) of the Act by reference to E in the definition of "cumulative eligible capital" in subsection 14(5) of the Act, which then makes reference to a "payment that would have been an eligible capital expenditure of the taxpayer in respect of the business". (For a further discussion of the expression "eligible capital amount", see Interpretation Bulletin IT-386R.) Paragraph (c) of the definition of "eligible capital expenditure" in subsection 14(5) of the Act provides that any outlay or expense that is the cost of, or any part of the cost of, tangible property of the taxpayer, is not an eligible capital expenditure. Therefore, to the extent that any of the dispositions included in the expression "Progeny" are tangible property, which would include bull semen, such dispositions would not qualify as dispositions of eligible capital property.

In any situation where a taxpayer has disposed of more than one property to a purchaser, the issue of valuation of each of the properties disposed of needs to be addressed so that the proceeds of disposition can be allocated to each of the properties on a reasonable basis. This may require the assistance of professional valuators. We do not have sufficient information to comment on the reasonableness of the amounts allocated as proceeds of disposition for the cattle and for the "Progeny".

As discussed in paragraph 8 of Interpretation Bulletin IT-170R (IT-170R"), the primary attributes of beneficial ownership are possession, use and risk. These attributes have been considered by the courts in determining ownership of assets and when making a determination at which point in time assets have been transferred from one party to another. As outlined in IT-170R, there are four factors that are considered to be strong indicators that ownership has passed from one person to another. They are:

(a) physical or constructive possession;

(b) entitlement to income from the property;

(c) assumption of responsibility for insurance coverage; and

(d) commencement of liability for interest on purchaser's debt that forms a part of the sale price.

Pursuant to the agreements entered into on XXXXXXXXXX, it would appear that the entire farming operation was transferred to the Corporation, including all of the cattle inventory. Although none of the agreements entered into in XXXXXXXXXX indicate that any portion of the land or cattle inventory was left in the Partnership, this can only be verified by an audit. We are therefore unable to confirm whether the beneficial ownership of the property disposed of in XXXXXXXXXX was with the Corporation or with the Partnership.

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

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