19 August 1992 Income Tax Severed Letter 9219317 - Confidentiality of Vendor Information to Purchaser, Contingent

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.

August 19, 1992

WINNIPEG DISTRICT OFFICE Personal and
General
Large Case Files Section
A. Humenuk
(613)957-2134
Attention: M.A. Cudjoe

921931

Confidentiality Provisions of the Income Tax Act

Your memorandum of June 26, 1992 has been referred to us for reply.

You are dealing with a situation where a purchaser has assumed certain contingent liabilities of the vendor upon the transfer of property. The vendor has excluded the contingent liabilities in calculating the proceeds of disposition, thereby presumably lowering the amount required to be included in income whereas the purchaser has included them, thereby increasing the recorded tax cost of the assets transferred. Since the liabilities transferred are contingent in nature, it is your view that such liabilities are not considered as part of the consideration for the property transferred. You have asked whether you may advise the purchaser that his recorded costs of the transaction are not commensurate with that of the vendor, presumably for the purpose of advancing the argument that the purchaser's tax cost of the acquired asset does not include the value assigned to the contingent liabilities. In particular, you refer to paragraph 241(4)(e) of the Act which permits the disclosure to the purchaser of tax information obtained from the vendor where the tax cost of the assets transferred is not equal to the consideration paid by reason of a provision of the Act.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

As presently worded paragraph 241(4)(e) would not permit information acquired from the vendor to be communicated to the purchaser unless the tax cost of the asset transferred is different from the consideration paid by reason of some provision of the Act. From the information in your memorandum, the issue at hand is not whether the tax cost of the asset differs from the actual cost or consideration paid but rather involves a determination of the amount that was actually paid as consideration. Accordingly, it is our view that the information acquired from the vendor cannot be communicated to the purchaser. In addition, since the vendor's tax filing position does not establish the purchaser's tax cost of the assets, the information you seek to communicate is not itself, an effective argument as to why the contingent amount should be excluded from the purchaser's tax cost of the assets.

Paragraph 241(4)(e) of the Act was added in 1981 in order to allow the communication of certain tax information received from one taxpayer to another where it is needed to establish the latter's tax liability. An example of where such communication would be necessary would be where the taxpayers have utilized one of the elective provisions in the Act for the transfer of property but the election has only been filed by one party.

You will notice that the Ways and Means Motion tabled June 19, 1992 proposes to amend section 241 to clarify its intent. The authority presently provided by paragraph 241(4)(e) will be provided instead by paragraphs 241(4)(a) and (b) of the Act. Revised paragraph 241(4)(b) will authorize the Department to disclose taxpayer information to a taxpayer where such information can reasonably be regarded as necessary to determine the amount of tax, interest or penalties payable by the taxpayer or any other amount that is relevant for the purpose of that determination. For this purpose, "taxpayer information" is to be defined in subsection 241(10) of the Act. While the proposed wording is not as specific as the current wording, we would be reluctant to suggest that you communicate any information about the vendor's filing position to the purchaser once the new legislation receives Royal Assent unless such communication is likely to resolve the issue.

Our position on the question of whether the tax cost of an asset acquired can include the assumption of a contingent liability (i.e. warranty obligations) has been expressed at the 16th Congress of the Association de Planification Fiscale et Financière held in 1991. In response to a question concerning the tax treatment to a purchaser who has assumed contingent liabilities in the purchase of a business, we stated that no amount is to be included in the cost of the assets for tax purposes on account of contingent liabilities assumed (a copy of the specific question and answer has been enclosed for your convenience).

If you need further assistance in resolving the issues arising from the assumption of the contingent liability by the purchaser, we suggest that you submit the relevant agreements and other pertinent documentation along with your analysis of the situation.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information