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: When is a disposition of a rental property, destroyed by fire, reportable?
Position: Generally, the earliest of (1) date full compensation agreed to under an insurance policy (2) when two years have elapsed after the destruction of the property if no proceeding before a tribunal or court has been taken before that time.
Reasons: Subsection 44(2) of the Act provides detailed rules deeming the timing of the disposition and receipt of proceeds of disposition.
2007-022114
XXXXXXXXXX James Atkinson CGA
(519) 457-4832
February 13, 2007
Dear XXXXXXXXXX:
Re: Involuntary Disposition - Rental Property
This is in response to your letter of January 18, 2007 and is further to our subsequent telephone conversation of January 26, 2007, concerning the tax implications arising from an involuntary disposition.
Our understanding of the facts is as follows:
1. A rental property was totally destroyed due to fire in 2006. No claim, suit, appeal or other proceeding has been taken before a tribunal or court of competent jurisdiction in respect of compensation for the property
2. The insurance company insuring the property has made an offer of compensation to settle all claims in 2007.
3. No capital cost allowance has been claimed in respect of the property while owned.
4. The offer of compensation made by the insurance company in respect of the building destroyed exceeds the capital cost of the building.
5. You do not plan to rebuild or replace the destroyed building in the immediate future.
Your question concerns the year (2006 or 2007) in which it is considered that the disposition of the rental property takes place and the proceeds of disposition become receivable for the purpose of computing any capital gains.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to 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.
A "disposition", as defined in subsection 248(1) of the Income Tax Act (Act), includes any transaction or event entitling a taxpayer to proceeds of disposition. The term "proceeds of disposition" (proceeds), as defined in section 54 of the Act, includes compensation for property destroyed, and any amount payable under a policy of insurance in respect of loss or destruction of property. Generally speaking, an amount will become payable under a policy of insurance when a settlement is reached with the insurance company. Where a depreciable property is disposed of for proceeds in excess of the capital cost to the taxpayer, that disposition will generally give rise to a capital gain as determined by paragraph 39(1)(a) of the Act.
Subsection 44(2) of the Act provides a rule to establish the date of "disposition" of a property and the date at which time an amount in respect of the proceeds are receivable where proceeds have arisen in certain circumstances. These circumstances include the situation where proceeds are received, or are receivable, as compensation for property destroyed, payable under a policy of insurance in respect of loss or destruction of property. Subsection 44(2) deems the disposition of a property to occur and the proceeds to be receivable at the particular day or time in which the earliest of certain events enumerated in paragraphs (a) to (e) of the subsection occurs. Only paragraphs 44(2)(a) and (c) are relevant in the situation you described. Based on the application of paragraphs 44(2)(a) and (c), the particular time is the earlier of:
- the day the taxpayer agrees to the full amount of compensation for the property; and
- the day that is two years following the day of the loss or destruction of the property if no proceedings before a tribunal or court of competent jurisdiction have been taken before that time.
In the situation you described, there has been an involuntary loss of the rental property by fire in 2006. Compensation received and any amount payable under the insurance policy will represent proceeds of disposition. Providing settlement with the insurance company is reached in 2007, the disposition of the rental property will be deemed by subsection 44(2) of the Act to have occurred, and proceeds to have become receivable, in 2007.
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
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007