16 August 1989 Ministerial Correspondence 73804 F - Capital v. Income - IT-182

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.

SUBJECT: Capital v. Income IT 182 - Paragraph 4

We are writing in reply to your memorandum of April 4, 1989 wherein you requested our views as to whether the guidelines set out in paragraph 4 of IT 182 would apply to compensation received by 24(1).

Our understanding of the facts in this case is as follows:

24(1)

Our Comments

With respect to the application of the guidelines set out in IT 182, it is our view that the payments made by 24(1) do not fall within the exception set out in paragraph 3 thereof and that the guidelines in paragraph 4 would have general application.

Although, as stated in your memorandum, there is a voluntary aspect to the payments made by 24(1) to the various recipients, the payments do not relate to a disaster relief fund set up for a specific purpose.  In addition, the nature of the claims made to 24(1) by the taxpayers' representative indicate that they have a legal right to compensation for losses of income and capital resulting from the direct actions of 24(1).  This legal right is evidenced by the Statements of Claim made on behalf of the various taxpayers against 24(1).  For these reasons, it is our view that paragraph 4, rather then paragraph 3, would apply to these taxpayers.

In addition to the commentary in IT 182, IT 365R2 entitled "Damages, Settlements and Similar Receipts" contains information and commentary that may be helpful in evaluating the capital v. income implications of the 24(1) settlements (See Appendix "A" attached, which extracts from paragraph 8 of IT-365R2 the relevant commentary).

Paragraph 10 of IT 365R2 also makes the following comments under the heading "Compensation for loss of Business Income or Business Properties".

     "Amounts received by a taxpayer with respect to the loss of business income or business property may fall into one of the following categories:

     (a)  a non-taxable receipt, (b)  an income receipt, (c)  a receipt resulting from the disposition of a capital property, or(d)  an eligible capital amount."

With regard to the income tax implications for the recipients of the 24(1) compensation, the results will vary with each individual taxpayer.  It will, therefore, involve a finding of fact in each particular case as to which of these four categories could apply to compensation received.  Since your office is in the best position to evaluate each taxpayer's income tax position relative to these four categories, our comments with respect thereto will be of a general nature.

(a)     Non-taxable receipts

     Non-taxable receipts would, in our view, include amounts paid from disaster relief funds, compensation received for the sterilization of an asset or permanent crippling of a business or reimbursements for the loss of personal use property (except to the extent of any capital gain on the disposition of personal-use property).

     In the situation involving the 24(1) & 21(1)(a)

(b)&(c)     Income receipt and receipt from disposition of capital property

     Amounts to be included in income would, of course, be those items that can be identified as either payments for loss of income or reimbursements for outlays or expenses.  Receipts from disposition of capital property would include those amounts which reimburse taxpayers for the loss or destruction of depreciable property (caused by the flooding etc.) and would be credited to the appropriate CEA class in schedule II of the Regulations.

     For example, amounts totalling 24(1) #106, 107 & 114) would appear to be income subsidies or expense reimbursements. 

     As a second example, the payments to 24(1) would appear to be comprised of both income items and reimbursements for depreciable property lost or destroyed 24(1).

(d)     Eligible capital amounts

     This category relates to all other payments of a capital nature that cannot be included in either (a), (b) or (c) and relate to the business of the taxpayer.

     For example the payments of 24(1) difficult to categorize because of the manner in which compensation packages were determined.  24(1)

     In the court decision in Glenboig Union Fireclay Co. Ltd. V. l.R.C. (1922) s.c. 112, it was held that "... where interest is not directed to be paid as such but is computed solely for the purpose of arriving at the quantum of compensation or damages, it is not income." In this case, and others, it was held that such payments were capital payments estimated in terms of interest.

     In view of the above, it would appear that the payments of 24(1) would be characterized as once-and-for-all settlements of the taxpayer's rights to past and future compensation and as such could qualify as an eligible capital amount (see paragraph 9 of IT-365R2).

We regret that we are unable to give you a definitive reply to your enquiry, but hope that these comments are of assistance to you.

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

Again, while it is a question of fact as to whether a receipt is an income or capital amount. the following factors are important in making this distinction:

(a)     if the compensation is received for the failure to receive a sum of money that would have been an income item if it had been received, the compensation will likely be an income receipt,

(b)     "where for example the structure of the recipient's business is so fashioned as to absorb the shock as one of the normal incidents to be looked for and where it appears that the compensation received is no more than surrogatum for the future profits surrendered, the compensation received is in use to be treated as a revenue receipt and not a capital receipt", and

(c)     "when the rights and advantages surrendered on cancellation are such as to destroy or materially to cripple the whole structure of the recipient's profit-making apparatus involving the serious dislocation of the normal commercial organization and resulting perhaps in the cutting down of the staff previously required, the recipient of the compensation may properly affirm that the compensation represents the price paid for the loss or sterilization of a capital asset and is therefore a capital and not a revenue receipt."

((b) and (c) above are quotations from the judgement in Commissioner of Inland Revenue v. Fleming and Co. (Machinery) Ltd. 33TC57 (House of Lords)).