24 May 1989 Income Tax Severed Letter 5-7610 - [Determination of "Cost" for Tax Purposes]

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.

Revenue Canada Revenu Canada Taxation Impôt

Head Office Bureau principal

Your file Votre reference Our file Notre reference Firoz Ahmed (613) 957-2092

Attention: XXXX

MAY MAI 24 1989

Dear Sirs:

Re: Determination of "Cost" for Tax Purposes ---------------------------------

This is in response to your letter of February 23, 1989 in which you requested our opinion as to the meaning of the word "cost" for purposes of the Income Tax Act (Canada) (the "Act") in circumstances where the Act does not specifically establish a cost. You were particularly concerned with the determination of the cost of an asset to a transferee where the transfer was recorded for accounting purposes at the transferor's "carrying value" which is not equal to the fair market value of the consideration given by the transferee for the asset.

Requested Confirmations

You specifically requested our confirmation of the following:

1) Except where one of the "rollover" provisions of the Act applies or where the Act specifically provides otherwise, the cost of property for purposes of the Act is arrived at by applying the ordinary dictionary meaning of the word, i.e., "the price paid to acquire, produce, accomplish or maintain anything". This will be the case even where the transferee has recorded as the cost of property for accounting purposes the transferor's carrying value in the accounts regardless of the consideration given for the property.

2) In the case of a transfer of an asset by a shareholder to a corporation which is recorded by the transferee at carrying value, for accounting purposes, a charge to retained earnings for the excess of the purchase price over the transferor's carrying value is not considered to be an appropriation of property to the shareholder.

3) On a non-arm's-length transfer of an asset, other than on a tax-deferred basis under the Act, where shares are given as consideration for the transferred asset and the increase in share capital in the accounts is limited to the carrying value of the asset transferred, the recorded share capital will not be considered to be the basis for paid-up capital within the meaning of paragraph 89(1)(c) of the Act.

4) Where a general partner has transferred assets to a partnership, such that subsection 97(2) of the Act is applicable thereto, the increase in the adjusted cost base ("ACB") of the partner's interest will be the fair market value of the assets transferred, rather than the partner's carrying value, even though the increase in the partner's capital account has been limited for accounting purposes to the cost of the asset to the partner. "Adjusted cost base" has the meaning assigned by paragraph 54(a) of the Act.

Opinions

Subject to the specific provisions of the Act, it is our view that the cost to a taxpayer of property acquired from another person is generally the fair market value of the consideration given by the taxpayer in exchange for the property regardless of the accounting treatment in respect of the acquisition. See, for example, D'Auteuil Lumber Co. Ltd. v. M.N.R. 70 DTC 6096 (Ex. Ct.) and paragraph 3 of Interpretation Bulletin IT-93 .

One possible exception to this general rule may involve the acquisition of property by a corporation in exchange for shares of the corporation. A number of older Canadian and English cases have ruled that the cost of the property to the corporation in such circumstances is the par value of the shares issued in consideration for the property, rather than their fair market value. See, for example, Tuxedo Holding Co. Limited v. M.N.R. 59 DTC 1102 (Ex. Ct.). While the application of such cases to circumstances where shares without par value are issued has not been resolved by the courts, we understand that any uncertainty as to the cost of the property acquired by a taxable Canadian corporation in exchange for shares of the corporation is normally resolved by having the transferor and the corporation file an election under subsection 85(1) of the Act.

You have informed us that where, for example, a parent company sells property to a subsidiary for fair market value consideration (which exceeds the parent's book or carrying value of the property), the accounting treatment of the sale to the subsidiary is that the subsidiary's cost of the asset is the parent's carrying value thereof and a debit is made to retained earnings in the amount of the difference between the fair market value of the consideration given up by the subsidiary and such carrying value. The fact that the subsidiary's retained earnings account is debited as described above would not ordinarily cause us to consider that an appropriation of the subsidiary's property by the shareholder had taken place for the purposes of subsection 15(1) of the Act. The parent's proceeds of disposition of the property for purpose of the Act would, however, be the fair market value of the consideration received in exchange therefor, subject to the application of specific provisions of the Act, such as subsection 85(1).

The starting point for the determination of the paid-up capital, within the meaning of paragraph 89(1)(c) of the Act, in respect of shares of a corporation is the stated capital (i.e. paid-up capital computed without reference to the Act for the purposes of clause 89(1)(c)(ii)(C)) in respect of such shares under the relevant corporate statute. The amount recorded as share capital for accounting purposes is irrelevant to this determination. Thus, where a transferor transfers assets to a corporation in return for shares of a particular class of the capital stock of that corporation, the increase in the paid-up capital in respect of such class of shares will equal the increase in the stated capital for corporate purposes of such class of shares, subject to the provisions of the Act which provide for a reduction in paid-up capital, which are listed in clause 89(1)(c)(ii)(C) of the Act.

Where a partner contributes property to the partnership and subsection 97(2) of the Act is not applicable to the contribution, the resulting increase in the partner's ACB of his partnership interest is determined under subparagraph 53(1)(e)(iv) of the Act, which provides for an increase in the partner's ACB equal to the amount of the contribution, assuming that no part of the contribution can be regarded as a benefit conferred on another member of the partnership which was related to the partner. By virtue of the definition of "amount" in subsection 248(1) of the Act, the amount of the contribution would be the value in terms of money of the property which is the subject matter of the contribution.

Thus, the amount of the increase in the partner's ACF of his partnership interest could, subject to the exception in subparagraph 53(1)(e)(iv) of the Act, be equal to the fair market value of the property and the accounting treatment would again be irrelevant. The cost to the partnership of the property and the transferor's proceeds would also be deemed by subsection 97(1) of the Act to be fair market value thereof.

Our opinions, as set out herein, are provided pursuant to the practice referred so in paragraph 24 of Information Circular 7J-6R.

Yours truly,

Original signed by Original signé par J.C. CLARK

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch