16 January 2007 External T.I. 2006-0197401E5 - Subsection 14(1.01) Election - Quota

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: Where a taxpayer has a partial disposition of farm quota, which are essentially identical properties, that may be qualified or unqualified as a consequence of subsection 14(1.03), can the taxpayer determine the extent of qualified property disposed using a pro-rata calculation?

Position: Yes.

Reasons: The Act provides for the election in respect of the disposition of certain ECP. A pro-rata calculation in the circumstances of identical properties provides a reasonable approach to determine relevant amounts.

2006-019740
XXXXXXXXXX James Atkinson CGA
(519) 457-4832
January 16, 2007

Dear XXXXXXXXXX:

Re: Subsection 14(1.01) Election - Quota

This is in response to your e-mail of July 20, 2006 inquiring about the application of subsection 14(1.01) of the Income Tax Act ("Act") as it relates to the disposition of eligible capital property ("ECP").

In your correspondence, you describe a hypothetical situation where the cumulative eligible capital ("CEC") pool of a taxpayer includes:

? ECP that is quota purchased from an arm's length party for a cost that is determinable and therefore eligible for the election under subsection 14(1.01), and,

? ECP that is quota purchased that would not be eligible for the subsection 14(1.01) election due to the application of subsection 14(1.03) of the Act.

In the situation described, the business will have one CEC pool consisting of additions made as a consequence of quota acquisitions qualified ("qualified units") for the subsection 14(1.01) election and quota acquisitions ("unqualified units") for which this election is not permissible because of subsection 14(1.03). It is our understanding that quotas are acquired in the form of units. These units are identical in terms of rights and conditions granted to the quota-holder by the particular body that governs their issuance and resale.

Your question concerns how subsection 14(1.01) of the Act might apply to a part disposition of the quota, as it is not possible to distinguish which particular units of quota are disposed of. Specifically, your question is whether a pro-rata calculation may be used to determine amounts for which a subsection 14(1.01) election could be made.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. 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 ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Subsection 14(1.01) of the Act permits a taxpayer to elect to report a capital gain on the disposition of an ECP, if certain conditions are met. In order to make a valid election, one of the conditions requires that the cost of the property, so disposed of, can be determined. In respect of this condition, we note that proposed legislation contained in Bill C-28 (third reading December 11, 2006), if enacted, would amend subsection 14(1.01) to clarify that it is the eligible capital expenditure ("ECE") made by the taxpayer to acquire the ECP that must be verifiable.

In the case of a partial disposition of quota, in the circumstances provided, one cannot identify whether the particular quota units disposed of were qualified or unqualified units when acquired. So, where one has a pool of identical properties, which cannot be distinguished, some qualified and others not, a pro-rata calculation is a reasonable approach to determine the nature of the units disposed of. For example, a taxpayer who holds 100 units of quota (50 units are qualified quota and 50 units are unqualified) subsequently disposes of 10 units. Using a pro-rata approach, the taxpayer would have disposed of 5 units qualified for the subsection 14(1.01) election ((i.e., total qualified units held/total units held) x total units disposed of). Thus, an election under subsection 14(1.01) would be permissible on 5 units, providing that the ECE made by the taxpayer to acquire those properties is verifiable.

With respect to the requirement that the ECE made to acquire the ECP must be verifiable, the Agency has previously expressed the view in Rulings Document 2002-0122675 that, in the case of identical properties, average costing is appropriate. However, in these circumstances some of the identical properties are not qualified. In this situation, it is our view that average costing is appropriate only on a separate pool basis in respect of qualified properties acquired. In the example above, the amount referred to in the wording "the cost of the property to the taxpayer can be determined" (or proposed wording "that eligible capital expenditure can be determined") in subsection 14(1.01) would be the amount determined by multiplying the acquisition cost per qualified unit by the number of qualified units sold.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch