28 April 1989 Income Tax Severed Letter 5-7725 - [Subsection 20(24)]

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.

R. B. Day (613) 957-2136

APR 28 1989

Dear XXXX

Re: Subsection 20(24)

We are writing in reply to your letter of March 13, 1989, which requests clarification of the comments set out in our letter of March 6, 1989 (the "previous letter").

In this regard you have made the following comments and observations on our previous letter and have posed certain questions, as follows:

"In the comments section of your letter you distinguish between a situation where the vendor is selling the business and as a result, transfers unearned income to a purchaser and the situation where the vendor, on a regular basis, generates new income which is included in income and then transfers this liability to a service company that is going to fulfil the obligation under the contract.

In the case of the sale of the business you have given capital treatment to the transaction whereas on the sale of the liability on a regular commercial basis, you have given income treatment. Both assume the absence of an election under subsection 20(24).

It appears to me that the wording in subsection 20(24) does not make any distinction between whether or not the liability is transferred as a result of the sale of the business or as a result of a normal commercial transaction that takes place on a regular basis.

My specific question is whether subsection 20(24) could be applied to give capital treatment to the situation outlined in Section 1 of your comments. My second question is whether Revenue Canada's administrative policy is different from the technical interpretation of the law as it currently stands."

Our Comments

It is our view that subsection 20(24) was enacted to provide relief where a hardship does in fact exist. In other words when taxpayers have a problem with paragraphs 12(l)(a) and 20(l)(m), subsection 20(24) may be of assistance to them.

In the two situations described in our previous letter, a problem may have existed in the situation where the service accounts were transferred as a part of the sale of a business. Here the payment involved was considered to be on account of capital and this may have been unacceptable for both the payer and the recipient. It is only in such circumstances and where the taxpayers wish to have the amount treated on income account that they will make the election pursuant to subsection 20(24).

In the other situation where Company A engages Company B to provide services to Company A's customers no problem arises. All the transactions were assumed to take place on a routine basis and thus all are considered to be on income account. In other words, capital treatment does not apply in these circumstances and thus no election pursuant to subsection 20(24) is necessary to obtain income treatment.

While subsection 20(24) does not indicate when it may be applicable, it is a matter which is determined by the circumstances in each case. In this regard it is interesting to note a comment which was contained in the Department of Finance's technical notes which were released on September 9, 1985. In the second last paragraph on page 10 there is an explanation of when subsection 20(24) is applicable. The paragraph starts off as follows:

"Where a taxpayer transfers his business ..."

While we are not prepared to state that this is the only circumstance when the election will have to be made in order for the taxpayers to receive income treatment, we are of the view that no election is necessary in order for the parties to receive income treatment in the circumstances where the service accounts are transferred on a routine basis (and are not a part of the sale of a business).

Finally, we would note that there is nothing in the wording of subsection 20(24) which would deem the relevant transactions to be on capital account in the event that the parties did not make the joint election described. As indicated earlier whether a transaction will be treated, for these purposes, as being on account of income or capital will depend on all the circumstances in each case. However, once a transaction is considered to be on account of capital, then the taxpayers have the option of making a subsection 20(24) election.

We trust these comments will be of assistance.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch