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 10 1988
Specialty Rulings Directorate M.F. Symes 957-2110
April 13, 1988 Draft Legislation Proposed amendments to paragraph 13(7)(b), clauses 13(7)(b)(ii)(B), 13(7)(t)(i)(B), 13(7)(e)(i)(B), subsection 40(3), section 42, subsection 96(1.7), and paragraphs 98(1)(c) and 104(21.2)(b) of the Income Tax Act (the "Act")
This is in reply to the request from the Department of Finance that Revenue undertake to administer the Act as though the above-noted amendments were effective for 1985 and subsequent taxation years, notwithstanding that the draft legislation released by the Minister of Finance on April 13, 1988 ("the Draft Legislation") proposes that the amendments be effective for 1988 and subsequent taxation years.
1. Paragraph 13(7)(b) of the Act
The Draft Legislation proposes to replace the reference in existing clause 13(7)(b)(ii)(B) to "... his proceeds of disposition of the property ..." with a reference in proposed subclause 13(7)(b)(ii)(B)(I) to "... the fair market value of the property at that later time ..." Paragraph 13(7)(b) applies where a taxpayer, having acquired property for a non-income-producing use begins to use the property for an income-producing use. The current reference to "proceeds of disposition" in existing clause 13(7)(b)(ii)(B) is inappropriate, because upon such a change in use, the taxpayer does not have any actual proceeds of disposition, nor any deemed proceeds of disposition (except by virtue of paragraph 45(1)(a) of the Act, the application of which is clearly restricted to subdivision c of Division B of Part I of the Act, and is therefore not relevant for purposes of paragraph 13(7)(b)).
It is our view that the existing wording of paragraph 13(7)(b) is clear, and toes not allow us to administer that provision as though the reference therein to "proceeds of disposition" were a reference to "fair market value".
2. Clauses 13(7)(b)(ii)(b), 13(7)(d)(i)(B) and 13(7)(e)(i)(B) of the Act
The above-noted clauses (referred to herein as "the three clauses") provide for a step-up in the capital cost of depreciable property upon certain changes in use and non-arm's length transfers. The Draft Legislation proposes to amend the three clauses by replacing the current reference therein to "... to the extent that it can be established that no deduction under section 110.6 was claimed by him ..." with a reduction in the step-up of "... 4/3 of the amount deducted by him under section 110.6 ..." We understand that these amendments are designed to ensure that a taxpayer is permitted a partial step-up in capital cost where his capital gain resulting from a transaction to which one of the three clauses applies is only partially sheltered by his capital gains deduction.
It is our view that the clear result of the existing wording of the three clauses is that if any amount of capital gains deduction is claimed in respect of the capital gain arising upon the change
in use or non-arm's length transfer in question, then no step-up I
in capital cost is permitted. Accordingly, we cannot undertake to administer the existing provisions to permit a partial step-up where only a partial capital gains deduction is claimed.
3. Subsection 40(3), section 42 and paragraphs 98(1)(c) and 104(21.2)(b) of the Act
The above-noted provisions all deem certain amounts to be gains (or in the case of section 42, losses) of the taxpayer from a disposition of property; they to not deem the taxpayer to have disposed of the property. Therefore, such gains (or losses) do not affect the calculation of the taxpayer's "annual gains limit" as defined in subsection 110.6(1) of the Act which restricts that calculation to "... only such properties disposed of by him ..."
The Draft Legislation proposes to amend the above-noted provisions by adding to each of those provisions wording to the effect that the property "... shall be deemed to have been disposed of by him in the year ..."
It is our view that the existing wording of the definition of "annual gains limit" in subsection 110.6(1) is clear, and does not allow us to interpret that definition as though paragraph (a) of the definition included capital gains or capital losses resulting from the application of subsection 40(3), section 42, or paragraphs 98(1)(c) and 104(21.2)(b) of the Act.
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4. Subsection 96(,1.7) of the Act
The Draft Legislation proposes to introduce new subsection 96(1.7) of the Act, which would treat each member of a partnership which has disposed of a capital property as having disposed of that property. The Explanatory Notes to the Draft Legislation explain that the purpose of this provision is to ensure that individual partners will be entitled to utilize their capital gains deduction in respect of their share of gains realized by the partnership.
It is our position that, under the existing law, the capital gains deduction is available to an individual partner in respect of capital gains allocated to him by the partnership. This position was announced publicly in response to Question 45 of the Revenue Canada Round Table at the Thirty-Eighth Tax Conference of the Canadian Tax Foundation in 1986. The basis for this position is our view that a disposition by a partnership is, in law, a disposition by each person who is a member of that partnership.
Accordingly, the introduction of proposed subsection 96(1.7) should not affect the manner in which we are currently administering the Act.
Our comments above describe our conclusions on the interpretation of the relevant provisions as they currently read, consistent with the function of this Directorate. We will reply to requests for advance rulings and to internal and external opinion requests on this basis. You may wish to consult officials of the Policy and Systems Branch to determine whether they would be willing to advise the District Offices and Taxation Centres to apply the provisions in the manner that the Department of Finance has requested, notwithstanding our technical interpretation of the law set out above.
ORIGINAL SIGNED BY
R.J.L. READ Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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