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 a milk quota issued by a provincial marketing board can qualify as an "eligible capital property" owned by an individual for the purposes of the capital gains exemption.
Position TAKEN:
Yes.
Reasons FOR POSITION TAKEN:
Previous positions. The meaning of the several terms, including "property" and "eligible capital property" in subsection 248(1), defined in the Income Tax Act, and the deeming rule in subsection 14(1)(a)(v).
942950
XXXXXXXXXX B.Kerr
Attention: XXXXXXXXXX
April 24, 1995
Dear Sirs:
Re: Milk Quota
This is in reply to your letter of November 16, 1994, wherein you requested a technical interpretation concerning the election pertaining to the capital gains deduction in respect of a milk quota. We also acknowledge our telephone conversations further clarifying your concerns.
The situation described in your letter involves a provincial marketing board (the "Board") set up to regulate the marketing of milk in that particular province. The Board has established a regulatory system (the "Regulations") which involves the registration of all persons engaged in the marketing of milk, and the limitation of the amount each registered producer may market through the use of a quota system. No one is allowed to market milk without a quota and no one is allowed to market milk in excess of the quota allotted to that person.
The quota system administered by the Board was established in a Regulation and requires the approval of a government supervisory agency (the "Agency"). In supervising and monitoring the activities of the Board, one of the responsibilities of the Agency is to ensure that the quota allotted does not obtain value which could find its way into the consumer price of products regulated by a producer marketing board. The Regulations provide that the quota belongs to the Board and that no person may transfer, assign or sell a quota to another person or offer to transfer, assign or sell a quota to another person, or receive payment for a quota from a producer or make a payment to a producer for a quota. Quotas may not be used as security by a producer.
When a producer retires from the business of producing milk and wishes to sell his farm, he and the proposed purchaser of his farm may apply to the Board for a reallotment of the quota used to sanction the marketing of milk produced on that farm. The Board deals with all such applications on a discretionary basis. As part of the application, the applicants must complete an affidavit indicating that the land, buildings and equipment are being sold for their fair market value and that no amount of the purchase price has been allocated to the quota. In most circumstances the applicants must provide the Board with an appraisal of the facilities being sold prepared by a qualified appraiser using approved appraisal methods. If an application is granted, the quota allotted the retiring farmer is cancelled and a new quota is allotted to the purchaser of his farm.
The quota system includes an alternate method to allow producers to expand the size of their operations and to increase their economic efficiency when one of their number wishes to reduce the size of their operation. A "Monthly Quota Exchange" allows a producer to pay a program fee in return for an increase in quota, and allows other producers to apply to have all or a portion of their quota cancelled upon receipt of a program payment. The Board attempts to match the applications under the program and to act on them where volumes match.
You state that the Board has received numerous enquiries from producers anxious to take advantage of either the capital gains election or the capital gains deduction pertaining to "qualified farm property". It is the Board's view that the quota it allots belongs to it and therefore cannot be the subject of either the election or the deduction. You share this view by stating that producers who have been allotted quotas are not able to claim a deduction or make an election with respect to such quotas because they do not own the quotas.
Generally, for the purposes of section 110.6 of the Income Tax Act (the "Act"), the rules in subparagraph 14(1)(a)(v) deem a certain amount determined in respect of a business relating to eligible capital property to be a taxable capital gain from the disposition of capital property in a particular year.
Paragraph 110.6(19)(b) allows certain individuals to make an election in respect of a business carried on by the elector on February 22, 1994. The provisions of paragraph 110.6(19)(b) provide, inter alia, that the amount that would be determined under subparagraph 14(1)(a)(v) in respect of all the eligible capital property owned at that time by the elector shall be deemed to be a taxable capital gain.
The following relevant terms are defined in the Act:
248(1)
"property" means property of any kind whatever whether real or personal or corporal or incorporeal and, without restricting the generality of the foregoing includes
(a) a right of any kind whatever,...,
...
"eligible capital property" of a taxpayer means 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;
14(1)
"...an amount determined in respect of a taxpayer, for E in the definition of "cumulative eligible capital" in subsection (5) (in this section referred to as an "eligible capital amount")..."
14(5)
"cumulative eligible capital" ...
...
E...an amount which, as a result of a disposition..., the taxpayer has or may become entitled to receive, in respect of the business carried on or formerly carried on by the taxpayer therefor was such that, if any payment had been made by the taxpayer after 1971 for that consideration, would have been an eligible capital expenditure of the taxpayer in respect of that business...
"eligible capital expenditure" of a taxpayer in respect of a business means the portion of any outlay or expense made or incurred by the taxpayer, as a result of a transaction occurring after 1971, on account of capital for the purpose of gaining or producing income from the business, other than any such outlay or expense
(a) in respect of which any amount is or would be, but for any provision of this Act limiting the quantum of any deduction, deductible (otherwise than under paragraph 20(1)(b)) in computing the taxpayer's income from the business, or in respect of which any amount is, by virtue of any provision of this Act other than paragraph 18(1)(b), not deductible in computing that income,
(b) made or incurred for the purpose of gaining or producing income that is exempt income, or
(c) that is the cost of, or any part of the cost of,
(i) tangible property of the taxpayer,
(ii) intangible property that is depreciable property of the taxpayer,
(iii) property in respect of which any deduction (otherwise than under paragraph 20(1)(b)) is permitted in computing the taxpayer's income from the business or would be so permitted if the taxpayer's income from the business were sufficient for the purpose, or
(iv)an interest in, or right to acquire, any property described in any of subparagraphs (i) to (iii)
...
As stated in paragraph 1 of IT-386R, ""Eligible capital property" of a business may be broadly described as intangible capital property, such as goodwill and other "nothings", the cost of which neither qualifies for capital cost allowance nor is fully deductible in the year of acquisition as a current expense. "Cumulative eligible capital" is basically an expenditure pool relating to eligible capital property which is increased by a portion of each "eligible capital expenditure" made to acquire eligible capital property and decreased by each "eligible capital amount" related to the proceeds for the disposition of an eligible capital property. The decrease to the pool for an eligible capital amount in a particular taxation year can cause the pool to have a negative balance at the end of that year. Where this occurs, subsection 14(1) requires an amount to be included in the taxpayer's income from the business for the year and, in some cases and for certain taxpayers (primarily individuals), also provides for a deemed taxable capital gain in the year."
Page 14-116 of the Canada Tax Service states that eligible capital expenditures might include costs incurred with respect to property where the taxpayer does not obtain title to the property.
Paragraph 2 of IT-386R provides examples of the type of transaction that can result in an eligible capital amount, including:
"(e) Company A, which is in the trucking transport business, sells its right to use a particular truck route to Company B. Under certain circumstances the transaction will not be considered to be the sale of the licence itself, but rather will be considered to be payment for allowing Company B to "stand in the vendor's shoes" before the provincial transportation authorities in order to gain a better opportunity of acquiring a trucking license itself. In such a case, the proceeds to Company A are considered to be from the disposition of eligible capital property."
Paragraph 4 of IT-386R states that there is "...a "mirror image test" to determine whether an amount which a taxpayer has received or may become entitled to receive in connection with a business as a result of a disposition of property, is proceeds from the disposition of eligible capital property resulting in an eligible capital amount. The test is met where, if any payment had been made after 1971 by the taxpayer for that property, such payment would have qualified as an eligible capital expenditure of the taxpayer...for the business. In other words, a taxpayer disposing of a property in connection with a business looks in the mirror to see whether, if the taxpayer were instead purchasing the property, its cost would qualify as an eligible capital expenditure of the taxpayer for the same business...The mirror image test is particularly significant in determining whether dispositions of...milk quotas and other government rights..., will be considered to be dispositions of eligible capital property...".
The Department has specifically stated in paragraph 24 of IT-143R2 that milk quotas issued by provincial milk marketing boards are generally issued at no cost to the producer. However transfers of quotas for value may generally be made, subject to the terms and approval of the board. The cost of a milk quota purchased after 1971 is an eligible capital expenditure. The cost of other similar rights or licenses issued under governmental authority also are eligible capital expenditures. The Department has also previously stated that the payment of a fee by a producer in regards to a milk quota retirement or reallocation would qualify as an eligible capital expenditure and that the receipt of a retirement allowance by a producer would qualify as an eligible capital amount.
It is therefore our view that the milk quota represents a "right" of an individual farmer to produce and market milk. Such a right constitutes "property" and may therefore qualify as an eligible capital property owned by the individual. It would also qualify as "qualified farm property" if it otherwise meets the conditions provided in the definition of that term in subsection 110.6(1) of the Act.
However, in establishing the amount to designate for the purposes of the election, it would appear that the fair market value of such a property would be minimal given the restrictions imposed by the Board. In this regard, as the determination of fair market value is a question of fact, we refer to Question # 32 of the Revenue Canada Round Table held at the 1989 annual conference of the Canadian Tax Foundation concerning the valuation of government rights where we stated:
"The Department has not established valuation guidelines...for... property created by licensing or quota arrangements by various levels of government. Our...Regional Valuation Units...deal with such valuation problems and have developed internal guidelines based on the commercial realities within their particular regions.
The fact that a government agency might not grant a renewal of the right is considered by each Departmental valuator, along with any other pertinent information concerning the particular asset being valued. The commercial reality of how such assets are treated within a particular region is researched by the valuator, who will use such information in his or her determination of fair market value."
As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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