18 April 2006 External T.I. 2005-0149591E5 - Right to Receive Income

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.

Principal Issues: Does our interpretation in document A (see below), that the consideration from the sale of an interest in revenue generated from certain contracts was capital in nature, contradict our interpretations in documents B, C, and D (see below), that a right to receive income, in and by itself, would not be considered capital property.

Position: No.

Reasons: The facts in the document A supported the conclusion that the sale of an interest in revenue generated from certain contracts was capital in nature.

XXXXXXXXXX 							2005-014959
								Luisa A. Majerus, CA
April 18, 2006 

Dear XXXXXXXXXX :

Re: Right to Receive Income

This is in reply to your email dated September 2, 2005, requesting a reconciliation of our interpretations with respect to the tax treatment of a right to receive income. We apologize for the delay in responding.

Specifically, it is your view that our interpretation in document A (see below), that the consideration from the sale of an interest in revenue generated from certain contracts was capital in nature contradicted our interpretations in documents B, C, and D (see below), that a right to receive income, in and by itself, would not be considered capital property.

The specific documents you referred to are as follows:

A: External Interpretation # rrrr352 - May 14, 1990 - Class 14, Schedule II of the Income Tax Regulations;

B: External Interpretation # 9300765 - July 29, 1993 - Eligible property right to income;

C: External Interpretation # 9309825 - July 30, 1993 - Eligible property right to income;

D: Revenue Canada Round Table # 9410840 - June 6, 1994 - Royalty Know-how.

Our Comments

A right to income is property within the definition of this term in subsection 248(1) of the Income Tax Act (the "Act"). Whether it is capital property or eligible capital property is a determination of fact. In our view, a right to receive income, in and by itself, would generally not be considered capital property within the meaning of capital property in section 54 of the Act. This general position is based on the cases of Gladys Evans v. Minister of National Revenue (60 DTC 1047) and Asamera Oil (Indonesia) Limited (73 DTC 5274).

A right to receive income may be regarded as an eligible capital property only where the right to receive income is in respect of a business.

The documents to which you make reference are not inconsistent with the forgoing views. Our interpretation in document A above was based on the specific facts under review. The facts involved the sale to an unrelated corporation by a partnership of a 50% net revenue interest pertaining to certain contracts and an interest in certain related facilities. It was not simply the sale of "a right to receive income, in and by itself." In document A, it was concluded for the reasons mentioned therein that, based on the facts, the corporation's acquisition was on account of capital and therefore the costs of acquisition would not be deductible.

Our interpretation in document B above was that, based on the facts under consideration, the taxpayer's transfer to a corporation of a right to receive income, which arose under an employment contract, would qualify neither as capital property nor as eligible capital property under paragraphs 85(1.1)(a) and (e), respectively, of the Act. The transfer did not include any underlying right to the properties that created the income. It was found that the right was not a capital property and also that it was not an eligible capital property as the right was in respect of employment.

The comments in documents C and D above simply clarified the general position.

We trust this information is helpful.

Yours truly,

Bob Skulski
Manager
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch