29 June 1993 Income Tax Severed Letter 930493 - Income Calculation—Segregation of Capital Gain and Losses

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                                   930493
XXXXXXXXXX                                         W.P. Guglich
                                                   (613) 957-2102

Attention: XXXXXXXXXX

June 29, 1993

Dear Sirs:

Re: Application of paragraph 40(2)(e)

This is in reply to your letter of February 8, 1993 concerning the application of paragraph 40(2)(e) of the Income Tax Act (the "Act").

You request we assume the following facts:

1. The taxpayer an individual owns 100% of the shares of a corporation ("Farmco") which carries on the business of farming.

2. Farmco owns two quarter sections of farm land ("Quarters 1 & 2"). At all relevant times, both of Quarters 1 & 2 are fully utilized in the business of farming. Moreover, for all intents and purposes, Quarters 1 & 2 are operated by Farmco as a single farm.

3. Quarters 1 & 2 were purchased at different times for different cost amounts. Quarter 1 has an adjusted cost base of $20,000 and a fair market value of $40,000. Quarter 2 has an adjusted cost base of $60,000 and a fair market value of $40,000.

4. If Farmco sells Quarters 1 & 2 to an arms length party for their combined fair market values, Farmco would be left with neither a capital gain nor a capital loss.

You request our views as to whether paragraph 40(2)(e) of the Act would apply to deny Farmco the capital loss on the disposition of Quarter 2 if, instead of an arms length party, the taxpayer purchases Quarters 1 & 2 for their combined fair market value of $80,000, or whether Quarters 1 & 2 would be considered a single property so that there would neither be a capital gain or capital loss.

In your letter you have outlined what appears to be an actual fact situation related either to a past transaction or to an actual proposed transaction. If the situation described relates to an actual transaction which has already been implemented, the review of such transactions falls within the responsibility of District Taxation Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. If, however, the situation described relates to an actual proposed transaction, it should be the subject of an advance income tax ruling. However, we can provide you with the following general comments which we hope will be of assistance.

OUR VIEWS

Since Quarters 1 & 2 were purchased at different times we assume they are held under separate titles and would be considered separate properties.

In calculating income for the taxation year clause 3(b)(i)(A) of the Act requires that the capital gains for the year from dispositions of capital property be aggregated and subparagraph 3(b)(ii) requires a separate aggregation of the capital losses for the year. The aggregate of the capital losses for the year is then deducted from the aggregate of the capital gains for the year. In the situation you describe paragraph 40(2)(e) of the Act would apply so that for purposes of subparagraph 3(b)(ii) the capital loss in respect of the disposition of Quarter 2 to the taxpayer would be nil.

We trust our comments will be of assistance.

Yours truly,

R. Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch