21 October 1991 External T.I. 912095 F - Inducement Payment - Proceeds of Disposition

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.

Re: Inducement Payment - Proceeds of Disposition Section 12(1)(x) 54(h)

This is in reply to your memorandum dated July 19, 1991, requesting our opinion on the nature of the settlement payment received by 24(1)

    the facts of the situation presented in this memorandum follow.

Facts

1.

2.     

24(1)3.

4.     

Your Interpretation

21(1)(b)

Our Comments

In our opinion, the settlement payment should be treated as proceeds received on the disposition of a capital property.          24(1)

21(1)(b)           In Westcoast Energy Inc. v the Queen (91 DTC 5334) the court stated with respect to the definition of "reimbursement" found in subsection 12(1)(x) that '...the ordinary and legal meaning of the word reimbursement contemplates different legal relationships than that of parties in a law suit."  The same logic could be applied in this case if you were to assess the settlement payment as an inducement payment under subsection 12(1)(x) of the Act.  Also, as the right to acquire the real estate was, due to the definition of property in section 248(1), a property of   19(1)   subparagraph 12(1)(x)(viii) would, in our view, take the payment in the present case out of paragraph 12(1)(x).

24(1)

The Department's administrative practice with respect to rights of first refusal, in the context of shareholder agreements, is expressed in paragraph 31 of IT-64R2 as follows:

    "Shareholder agreements commonly referred to as the right of first refusal are considered not to confer a right to acquire a share but rather an option to acquire, in certain future circumstances, a right o acquire a share."

24(1)

This "right". although an intangible, was not an eligible capital proper as explained in Interpretation Bulletin IT-143R2, Meaning of Eligible Capital Expenditure.  Paragraph 3(b)(iv) of IT-143R2 states that "an interest in, or a right to acquire" a tangible property is not an eligible capital expenditure.  Therefore, in our opinion, the settlement payment should be treated as proceeds received by 19(1)      upon the disposition of a capital property.

We trust these comments are of assistance,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch