7 March 2003 External T.I. 2003-0001295 - CAPITAL GAINS RESERVE TRANSFER OF POD

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:

Whether a taxpayer may claim a capital gains reserve pursuant to subparagraph 40(1)(a)(iii) of the Act when the proceeds of disposition have been transferred to a third party?

Position: No

Reasons:

No portion of the proceeds of disposition would be considered payable after the transfer.

		2003-000129
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
March 7, 2003

Dear XXXXXXXXXX :

Re: Capital Gains Reserve

We are writing in reply to your facsimile of February 2, 2003, wherein you enquired whether a taxpayer may claim a capital gains reserve pursuant to subparagraph 40(1)(a)(iii) of the Income Tax Act (the "Act").

The relevant facts as we understand them are as follows:

1. A taxpayer ("Vendor") sells a capital property to a third party ("Purchaser") for proceeds of disposition in excess of the property's adjusted cost base. As consideration for the property, Vendor receives a note receivable ("Original Debt") from Purchaser that is payable in the following year.

2. Vendor immediately transfers the Original Debt to A Ltd. Vendor receives a note receivable ("Exchanged Debt") from A Ltd. as consideration for the transfer. The Exchanged Debt has the same terms and conditions as the Original Debt.

Our Comments

Written confirmation of the tax implications arising from proposed transactions is given by this Directorate only where the transactions are the subject matter of an advance income tax ruling request pursuant to Information Circular 70-6R5. Where the particular transactions are completed the inquiry, including all related documentation should be addressed to the relevant tax services office. However, we are prepared to provide you with the following general comments.

Where a taxpayer disposes of capital property in a taxation year, the gain otherwise determined may be reduced under subparagraph 40(1)(a)(iii) of the Act by a reasonable reserve in respect of proceeds of disposition that are payable to the taxpayer after the end of the year. The issue of whether a portion of the proceeds of disposition of a property is payable to a taxpayer after the end of the year is a question of fact that can only be resolved after a detailed review of all the facts related to a particular matter. However, in our view, for the purposes of subparagraph 40(1)(a)(iii) of the Act, no portion of the proceeds of disposition would remain payable where the vendor no longer has any enforceable claim against the purchaser in relation to the proceeds of disposition of the property.

In the situation described above, it appears that Vendor would no longer have any enforceable claim against the Purchaser in relation to the proceeds of disposition of the capital property once the Original Debt has been transferred to A Ltd. and the transfer of the Original Debt to A Ltd. results in the disposition of the Original Debt. Consequently, no portion of the proceeds of disposition would be considered payable to the Vendor after that time and no reserve would be allowed under subparagraph 40(1)(a)(iii) of the Act.

We trust that our comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch