9 May 1988 Income Tax Severed Letter 7-2579 - [Sale of Shares]

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 9, 1988

Head Office Rulings Directorate T. Murphy (613)957-2747 XXXX Sale of Shares Your File HAV 4533-12

This is in reply to your February 18, 1988 memorandum requesting our opinion as to whether the XXXX payment to XXXX per the March 20, 1984 agreement represents interest income or an adjustment to the sale price or the shares.

Facts

Our understanding of the facts is as follows:

XXXXXXXXXXXX

9. The Enquiries and Office Examination Section of Vancouver District Office referred the question to your Division on January 26, 1988.

Your Opinion

In your view, the XXXX represents interest as there appears to have been, an enforceable claim arising from the March 29, 1981 agreement and all agreements March 29, 1981, June 17, 1982 and March-20, 1984 stipulated that interest would be paid in accordance with the March 29, 1981 agreement. You thus feel that the conditions in paragraph 12 of IT-396R have been met.

Taxpayer's Opinion

XXXX representative maintains that the XXXX is not interest as he had no right to receive an amount prior to March 20, 1984 the closing date of the agreement of purchase and sale. As no obligation to XXXX existed prior to this date the amount can only be viewed as proceeds of disposition The representative cites Houston, Whitehead & Whitehead v. MNR (60 DTC 1233), Perini Estate v. The Queen (82 DTC 6080) and Brenda J. Miller v. The Queen (85 DTC 5354) as support for his position.

Our Opinion

In our view the XXXX is not interest. It represents an upward adjustment to the sale price of the shares.

Paragraph 12 of IT-396R states: "... where an enforceable agreement for the sale of property is executed but the negotiated price is not paid until a subsequent date, any interest that He received by the vendor from the date of the agreement to the date of payment is interest income in the vendor's hands." It appears the agreement in that paragraph is enforceable on the date of the agreement such that there is an amount owing on that date. This is illustrated in the accompanying example where the interest is calculated from the date of closing (he. when the agreement is enforceable) to the date of payment.

In contrast, paragraph 13 of the IT deals with a situation, similar to the XXXX situation, in which the agreement is not enforceable on the date it is executed, and indicates that the amount paid Is an upward adjustment to the sale price.

Paragraphs 12 and 13 are consistent as both recognize that interest runs from the time at which there is an enforceable right to a sum o f money.

To meet the conditions of paragraph 12 of the IT there must be an enforceable agreement for the sale of property and the amount must meet the definition of interest.

The March 29, 1981 agreement is an agreement for the sale of property but it becomes an enforceable agreement only when the parties can enforce the sale. It would appear that the parties by subsequent agreement agreed to close on March 20, 1984 and at that time the March 29, 1981 agreement became enforceable.

With respect to the June 17 1982 agreement, we note that this agreement was subject to the approval of financing by XXXX a condition precedent as described in paragraph 6 of IT-170R . Based-on the actions of the parties it would appear that financing was not obtained. The June 17, 1982 agreement would therefore have been cancelled "ab initio" and the contractual arrangements would have reverted back to those specified in the March 29, 1981 agreement. Thus, the June 17, 1982 agreement was never enforceable.

The definition of interest as put forth by The Queen (Defendant) and as accepted by Madame Justice Reed at page 5356 in the Miller case (supra), specifies three criteria which must be satisfied to have a sum characterized as interest:

(1) it must be calculated on an (day by day) accrual basis;

(2) it must be calculated on a principal sum or a right to a principal sum; and

(3) it must be compensation for the use of the principal sum or the right to the principal sum.

In XXXX case, the first criterion is satisfied as the amount is calculated on the accrual basis (day-by-day) from April 30, 1981 (the interest date) to March 20, 1984 (the closing date)

In our view, the second and third criteria are not met as a principal sum or a right to a principal sum did not exist until the closing date of March 20, 1984. In contrast, in both Miller and Perini principal sums or the right to principal sums were owed in the years for which the interest was payable.

We hope our comments are of assistance to you. If you accept our view, you may wish to advise the Regina District Office to reconsider its position in respect of XXXX

As our review is completed, the 1984 T1 return of XXXX and the 1983 1984 and 1985 T2 returns of XXXX are hereby returned to you.

R.J. Kauffman A/Chief Leasing and Financing Section Financial Industries Division Rulings Directorate

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