29 July 1993 External T.I. 9300765 F - Eligible Property Right to Income

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Subsection 85(1.1) of the Income Tax Act (Canada) (the "Act")

This is in reply to your letter dated January 5, 1993 wherein you requested a technical interpretation as to whether or not a certain right would qualify as "eligible property" within the meaning assigned by subsection 85(1.1) of the Act in the following situation.

Facts

1.     The taxpayer ("Mr. A"), an individual resident in Canada for purposes of the Act, is employed as a research scientist at a Canadian University (the "University").

2.     Under the terms of Mr. A's employment contract with the University, he receives a proprietary interest in royalties (the "Interest") received in respect of the use of processes and equipment developed in the course of his employment.

3.     In order to more easily market the use of the processes and equipment developed by employees of the University, a marketing corporation was formed and the employees of the University, including Mr. A, assign their Interests to the marketing corporation. As consideration for the assignment of his Interest, Mr. A receives a proprietary interest in the net revenues generated by the marketing corporation (the "New Interest"). The net revenues represent the amount that the royalties received by the marketing corporation for the use of the Interest exceeds Mr. A's share of the expenses incurred by the marketing corporation in respect of earning such royalties.

4.     For estate planning purposes, Mr. A would like to transfer his rights to the New Interest (the "Right") to a separate corporation under the provisions of subsection 85(1) of the Act.

You are of the view that the Right would be an eligible capital property, within the meaning assigned by paragraph 54(d) of the Act, which qualifies as eligible property under paragraph 85(1.1)(e) of the Act. Since the property qualifies as an eligible property, Mr. A should be allowed to transfer such property to a corporation under the provisions of subsection 85(1) of the Act.

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

In order to qualify as eligible property, it would appear that a right to receive income would have to be either a capital property which would qualify under paragraph 85(1.1)(a) or an eligible capital property which would qualify under paragraph 85(1.1)(e) of the Act.

We are of the view that a right to receive income, in and by itself, would not be considered capital property, within the meaning assigned by paragraph 54(b) of the Act, for purposes of the Act. Our position is based on the decision rendered in Gladys (Geraldine) Evans v. Minister of National Revenue 60 DTC 1047 (S.C.C.) wherein Mr. Justice Cartwright (for the Court) at 1050 stated:

"With the greatest respect for the contrary view entertained by the learned Judge, I cannot agree that the fact that a bare right to be paid income can be sold or valued on an actuarial basis at a lump sum requires or permits that right, while retained by the appellant, to be regarded as a capital asset. I do not think that in ordinary language a right to receive income such as that enjoyed by the appellant would be described as a capital asset."

A similar conclusion was reached in Asamera Oil (Indonesia) Limited 73 DTC 5274 (F.C. - T.D.) wherein it was held that the right to receive income where there was no underlying rights to any of the properties that may create this income would not be regarded as a capital asset.

We are also of the view that a right to receive income would not generally qualify as an eligible capital property for purposes of the Act. An eligible capital property is defined, pursuant to paragraph 54(d) of the Act, to be "any property, a part of the consideration for the disposition of which would, if (the taxpayer) disposed of the property, be an eligible capital amount in respect of a business" (emphasis added). As described in paragraph 4 of Interpretation Bulletin IT-386R, in order to make such a determination it would be necessary for the taxpayer to determine whether, if the taxpayer were instead purchasing the property, its cost would qualify as an eligible capital expenditure of the taxpayer's business. Unless, the taxpayer was a trader in such rights to receive income, we doubt that the acquisition of such rights could be considered to be "in respect of a business." In the situation described in your letter it would seem that the rights to income were acquired by the taxpayer in respect of his employment, not a business. Finally, if a right to receive income is not a capital property, we doubt that a payment to acquire such a right could qualify as an eligible capital expenditure.

It would, therefore, appear that a right to receive income would not generally qualify as eligible property within the meaning assigned by subsection 85(1.1) of the Act.

We trust that the above comments will be of assistance.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch