16 January 2009 External T.I. 2008-0302641E5 - Transfer of A/R by Cash Basis Farmer to Corp

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 subsection 28(5) apply to require an income inclusion where accounts receivable are transferred personally from a farming business operated on the cash basis to a wholly owned corporation in exchange for a note.

Position: Yes.

Reasons: The law. The note received from the corporation represents an amount paid in satisfaction of the taxpayer's disposition of accounts receivable owned personally prior to the transfer.

									2008-030264
XXXXXXXXXX 								James Atkinson CGA
(519) 457-4832
January 16, 2009

Dear XXXXXXXXXX :

Re: Accounts Receivable Settled on Transfer of Farm Business

This is in response to your e-mail of December 4, 2008 inquiring about the application of subsection 28(5) of the Income Tax Act ("Act") in respect of the transfer of accounts receivable of a farming business by a taxpayer to a corporation.

In your correspondence, you describe a hypothetical situation involving a taxpayer (Mr. A) who operates a farming business as sole proprietor. Mr. A has elected to compute his income in accordance with the cash method. The farming business has accounts receivable totaling $100,000.

Concurrent with a transfer of the farming business (i.e., all the assets and liabilities of the proprietorship) to a wholly owned corporation (Farmco), Mr. A accepts a promissory note (the "Farmco Note") in the amount of $100,000 from Farmco as consideration in respect of Mr. A's assignment of the proprietorship's accounts receivable. You suggest that the Farmco Note was accepted by Mr. A as evidence of the debt owing by Farmco, but not as absolute payment.

Your question concerns whether the CRA would consider that the Farmco Note received by Mr. A is an "amount received in lieu of payment" as contemplated in subsection 28(5) of the Act, and, would therefore result in an income inclusion by Mr. A in respect of the accounts receivable transferred, in the year the Farmco Note is received.

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.

As discussed in paragraph 10 of IT-188 - Sale of Accounts Receivable, where a taxpayer who reports income from a farming or fishing business on a cash basis disposes of, or ceases to carry on, all or part of the business, the "amount received" for the accounts receivable that would have been income is income to the taxpayer in the year of receipt pursuant to subsection 28(5) of the Act. The expression "amount received" refers to amounts that are received "for, on account or in lieu of payment of, or in satisfaction of debts owing to the taxpayer" as a consequence of the express wording of the provision.

In the circumstances described, Mr. A, a cash basis farmer, has ceased to carry on the business of farming as a consequence of the transfer of the farming business to Farmco. The Farmco Note, accepted in exchange for the transfer of accounts receivable, represents consideration paid to, and an amount received by, Mr. A in satisfaction of debts owing to Mr. A.

Therefore, pursuant to subsection 28(5) of the Act, to the extent that the accounts receivable transferred ought to be included in income by Mr. A if received directly from the debtors (i.e., to the extent the receivables are on income account as opposed to being in respect of capital dispositions), such an amount would be required to be included in income in the year the Farmco Note was issued (i.e., the year the farming business was transferred).

In our view, it matters not whether Mr. A accepts the Farmco Note as absolute payment; subsection 28(5) applies for the reasons noted.

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