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.
Principal Issues:
Whether the provisions of paragraph 13(7)(e) or subsection 14(3) apply in non-arm's length situations to effectively restrict the "bump" in cost on depreciable or eligible capital property under paragraph 98(5)(d).
Position TAKEN:
Yes.
Reasons FOR POSITION TAKEN:
The opening words of each provision are "notwithstanding any other provision of this Act".
932568
XXXXXXXXXX B. Kerr
June 24, 1994
Dear Sirs:
Re: Canadian Partnership Engaged in Farming
This is in response to your letter of September 7, 1993, wherein you requested our comments concerning the application of subsection 14(3) and paragraph 13(7)(e) in relation to paragraph 98(5)(d) of the Income Tax Act. We apologize for the delay in responding.
Unless otherwise stated all references to statute are references to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act").
In your letter you presented a situation where an individual owns 60% of the common shares of a Canadian corporation. The corporation owns a 40% interest in a Canadian partnership engaged in farming and the individual owns the remaining 60% interest in the partnership. Each of the interests was acquired either before December 5, 1985 or were acquired after that time from a non-arm's length person. The corporation will purchase the 60% partnership interest from the individual at fair market value and the partnership will then be wound-up into the corporation. The corporation will continue to carry on the farming business that was previously carried on by the partnership. Accordingly the provisions of subsection 98(5) will apply, including repealed paragraph (d) which permits a "bump" to the cost base of depreciable property or property, other than capital property, acquired before December 5, 1985. However, you feel that this bump seems to be restricted by subsection 14(3) in the case of eligible capital property or paragraph 13(7)(e) in the case of depreciable property. You feel that these two provisions were intended to address those situations where the capital gains exemption has been claimed.
You have requested our comments on the application of these provisions and whether our views would be any different if the individual does not claim the capital gains exemption in respect of the sale of his partnership interest or if he had only owned a 40% interest.
Even though the transitional rules continue to permit the "bump" under repealed paragraph 98(5)(d) of the Act in certain situations, including the one you describe, the provisions of subsection 14(3) or paragraph 13(7)(e) would override the applicable provisions of subsection 98(5) if the conditions set out in subsection 14(3) or paragraph 13(7)(e) are met. This is so by virtue of the opening words in each of these two provisions "notwithstanding any other provision of this Act". We therefore agree with you that the bump is effectively restricted when either of subsection 14(3) or paragraph 13(7)(e) applies.
As for the intention of these provisions, we refer you to the May 1991 technical notes issued by the Department of Finance, where although it was stated that "the rules are intended to prevent taxpayer's from increasing the depreciable base of property through the use of a non-arm's length transfer of depreciable property in respect of which the transferor benefits from the exclusion of 1/4 of the capital gains from income and the capital gains exemption provided under section 110.6.", it was also stated that "Paragraph 13(7)(e) provides two general rules for the purposes of the provisions relating to capital cost allowance. First, where the cost of depreciable property to the transferee would otherwise exceed the capital cost of the property to the transferor, subparagraphs (i) and (ii) generally provide that the capital cost of the property to the transferee is limited to the sum of the capital cost of the property to the transferor and the transferor's taxable capital gain in respect of the property minus any related claim by the transferor for a capital gains exemption under section 110.6." and that "paragraph 13(7)(e) sets out special rules that apply in determining a taxpayer's capital cost of depreciable property acquired from a person or partnership with which he was not dealing at arm's length. The taxpayer's capital cost for this purpose is intended to be the cost or capital cost to the transferor at the time of the transfer plus the portion of any capital gain realized on the transfer on which the transferor was taxed...". These comments are consistent with those stated in the technical notes of November 1985 when paragraph 13(7)(e) was first introduced. In regards to eligible capital property covered under subsection 14(3), when it was first introduced the technical notes of 1988 stated "The rule provided in new subsection 14(3) corresponds with the existing rule in paragraph 13(7)(e) which applies in respect of non-arm's length transfers of depreciable property."
The effect that claiming the capital gains exemption by an individual has on the application of these provisions in respect of a disposition of an eligible capital property or a depreciable property as the case may be is on the amount to be used in paragraph 14(3)(b) of the Act in the determination of the taxpayer's eligible capital expenditure in the case of eligible capital property or on the amount to be used in subclause 13(7)(e)(i)(B)(III) of the Act in the determination of the taxpayer's capital cost in the case of depreciable property. However, in your particular case the property disposed of by the individual was a partnership interest not an eligible capital property nor a depreciable property and therefore the claiming of the capital gains exemption in respect of the disposition of the partnership interest would have no effect.
One of the conditions that must be present for the provisions of either subsection 14(3) or paragraph 13(7)(e) to apply is that at the time the taxpayer acquires the particular property from the partnership, the taxpayer and the partnership do not deal at arm's length. Paragraph 251(1)(a) of the Act deems related persons not to deal at arm's length; and paragraph 251(1)(b) of the Act states that it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length. In your situation at the time of acquisition of the particular property, the corporation does not deal at arm's length with the partnership since the corporation has control over the partnership by virtue of its owning a controlling interest in the partnership. This would also be our view even if the individual only had a 40% interest in the partnership, since the corporation will still control the partnership at the time of the acquisition of the property. The arm's length test is to be applied at the time of the transfer of the property. In addition, in our view since the corporation is related to the individual and the mind that directs the bargaining for each party is the same any transactions between the partnership and either the individual or the corporation would be considered to be not at arm's length. For additional comments concerning arm's length please refer to Interpretation Bulletin IT-419 entitled "Meaning of Arm's Length".
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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