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: What is the capital cost of a property that is won or received as a gift and then used for the purpose of gaining or producing income from a farming business.
Position: Question of fact.
Reasons: Subsection 52(4) of the Act deems the cost of the property to be its fair market value. The rules in paragraph 13(7)(b) of the Act would then apply where there is a change in use. The rules in subsection 69(1) would apply to dispositions of property to persons not dealing at arm's length.
April 23, 2003
Glen Schur, BComm, CMA HEADQUARTERS
Business Enquiries Advisor A. Seidel, CMA
Verification and Enforcement Division (613) 957-2058
Saskatoon Tax Services Office
2003-000339
Lottery Prizes/Gifts and Capital Cost Allowance
This is in response to your February 13, 2003 memorandum concerning capital cost allowance in respect of property that was acquired by way of gift or won as a prize.
Background
Situation #1 --- An individual operates a farm business.
The individual wins an extended cab pickup truck.
The individual will use the pickup truck in the farming business.
Situation #2 --- An individual operates a farming business.
A relative of the farmer wins an extended cab pickup truck.
The relative gifts the pickup truck to the farmer and the farmer will use the pickup truck in the farming business.
Issue
In the above situations, what is the capital cost of the pickup truck for purposes of paragraph 20(1)(a) of the Income Tax Act (the "Act").
In both situations, the person winning the pickup truck is deemed, pursuant to subsection 52(4) of the Act, to have acquired the property at a cost equal to its fair market value at that time. In both situations, the pickup truck would generally be "personal-use property", within the meaning thereof in section 54 of the Act, at the time that it is won by the taxpayer.
In the situation where the winner of the pickup truck subsequently begins to use the pickup truck in his/her farming business, for tax purposes this is considered to be a "change in use" at that time. Paragraph 13(7)(b) of the Act provides specific rules for determining the capital cost of a property when its use is being changed from a non-income producing purpose to an income producing purpose. Paragraph 13(7)(b) of the Act, in general terms, deems the farmer to have acquired the pickup truck at a capital cost equal to the lesser of two amounts, the fair market value of the pickup truck at the time of change in use and the amount that is one-half of the increase in the fair market value of the pickup truck since it was won. In the situation where the pickup truck is used in the farming business immediately after it is won, the fair market value and the cost would likely be the same. Therefore, the fair market value of the pickup truck would be deemed to be the capital cost thereof for purposes of paragraph 20(1)(a) of the Act.
In the situation where a person wins a pickup truck and then gifts it to a relative who will use it in the business of farming, the following sequence of events occurs for tax purposes. The cost of the pickup truck is the fair market value at the time it is won pursuant to subsection 52(4) of the Act. Pursuant to paragraph 69(1)(b) of the Act, the person who won the pickup truck is deemed to have received proceeds of disposition equal to the fair market value of the gift at the time it is made since it is a disposition to a person with whom the taxpayer is not dealing at arm's length. Since the proceeds of disposition and the cost of the pickup truck are likely the same, there would be no income tax payable by the winner of the truck when it is gifted to the farmer. The farmer receiving the pickup truck as a gift is considered to have acquired the pickup truck at its fair market value at the time it is received by virtue of paragraph 69(1)(c) of the Act. As discussed above, this fair market value would then be considered to be the capital cost of the pickup truck for purposes of paragraph 20(1)(a) of the Act.
If the farmer were to buy the pickup truck at less than fair market value, the difference between the amount paid by the farmer and the fair market value of the pickup truck when it is acquired would generally not be considered to be a gift for income tax purposes. In this scenario, the income tax consequences to the winner of the pickup truck would be the same as if the pickup truck had been gifted to the farmer. However, the provisions of subsection 69(1) of the Act would not apply to the farmer in this scenario. For purposes of paragraph 20(1)(a) of the Act, the capital cost of the pickup truck would be the actual amount that the farmer paid for the pickup truck.
We hope our comments are of assistance. If you wish to discuss any of the above further, or if we can be of any further assistance, do not hesitate to contact us at the above number.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to
Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
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