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: Whether a reserve could be claimed on the gain realized on the sale of eligible capital property.
Position: No.
Reasons: Paragraph 37 of IT-123R6.
2007-025030
XXXXXXXXXX D. Zhang
(613) 957-2104
October 18, 2007
Dear XXXXXXXXXX,
Re: Sale of eligible capital property
We are writing in response to your electronic message of August 23, 2007, in which you describe a situation where a Canadian corporation realizes a gain on the sale of intangible property to its U.S. parent company. You would like to know whether a reserve could be claimed on proceeds from a sale to a related party that are not due in the current taxation year.
For the purpose of responding to your query, we assume that the intangible property you refer to is properly characterized as eligible capital property ("EC property") for Canadian tax purposes.
It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("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.
Generally, where property is sold in the course of a business and the terms of the sale provide that at least part of the amount due is not due for more than two years from the day on which the property was sold, a reserve may be deductible under paragraph 20(1)(n) of the Income Tax Act. However, in our view, such a reserve is not available on the sale of an EC property. Our reasons are set out in Interpretation Bulletin IT-123R6 at paragraph 37:
"Where a sale of an EC property results in an income inclusion in the year of disposition..., but some part of the sale price is not due until a later year, a reserve under paragraph 20(1)(n) is not permitted. This is because the sale of an EC property is not considered to be a sale of property 'in the course of the business' as required by paragraph 20(1)(n)."
We trust that these comments are of assistance.
Yours truly,
Daryl Boychuk
Manager
International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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