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.
May 5 1988 C. Tremblay (613) 957-2139
Dear Sirs:
This is in reply to your letter of March 12, 1988, concerning the application of section 69 of the Income Tax Act (the "Act") to the computation of business income.
Your analysis and discussion of paragraph 69(1)(b) of the Act results in the following questions: Does paragraph 69(1)(b) of the Act deem the taxpayer to have received an amount equal to fair market value in the course of carrying on his business? In your example, the taxpayer is a real estate developer. The taxpayer sold developed land (inventory for the taxpayer's business) to his daughter. The sale price was $15,000 but the fair market value of the land was estimated to be $34,000.
Our Comments
Section 69 of the Act is sub-titled "Inadequate Considerations" and is quite specific on the subject of non-arm's length transactions and includes ordinary business transactions between persons not dealing with each other at arm's length.
Subsection 17(2) of the pre - 1972 Act, which preceded section 69, applied only to business income, however 69(1) of the current Act is worded more broadly because not only is it relevant to business income but it also applies to purchases and sales of depreciable property (which could be used to earn property income), to acquisition and disposals of capital property (to which capital gains rule apply) and to gifts inter vivos (those made during the lifetime of a donor). Consequently, when a vendor has received less than fair market value from a person with whom he was not dealing at arm's length, his proceeds will be increased to fair market value. This position is clearly evident in paragraph 3 of Interpretation Bulletin IT-287 . There it states that in the event the vendor and the purchaser are not dealing at arm's length and the fair market value of the inventory sold is significantly more or less than the consideration paid, paragraph 69(1)(a) or the Act or 69(1)(b) of the Act will apply, requiring the portion of the total proceeds allocated to inventory to be based on fair market value.
In view of the foregoing paragraph 69(1)(b) of the Act applies in your example to deem that the taxpayer has received proceeds of disposition of $34,000. Thus, for income tax purposes, the taxpayer's business income will have to be increased by $19,000.
We trust our comments will be of assistance.
Yours truly, Wm. R. McColm for Director Small Business and General Division Legislative and Intergovernmental 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, 1988
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, 1988
Email this Content