24 March 1995 External T.I. 9507295 - SALE PRICE OF SHARES - CLOSING

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

WHETHER AN INCREASE IN THE SALE PRICE OF SHARES BETWEEN THE DATE OF AN AGREEMENT OF SALE AND CLOSING REPRESENTS INTEREST OR AN ADJUSTMENT TO THE PROCEEDS OF DISPOSITION.

Position TAKEN:

QUESTION OF FACT THAT WOULD HAVE TO BE DETERMINED ON A CASE BY CASE BASIS.

Reasons FOR POSITION TAKEN:

OUTCOME DEPENDENT UPON THE SPECIFIC TERMS OF THE RELEVANT AGREEMENTS.

					950729
XXXXXXXXXX      			G. Donell

Attention: XXXXXXXXXX

March 24, 1995

Dear Sir:

Re: Disposition of Shares: Capital gain or Interest?

This is in reply to your letter of March 13, 1995 concerning the characterization of an increase in the selling price of shares, as interest or capital gains, between the date of an agreement of sale and closing. In your letter you have outlined what appears to be an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of the District Taxation Offices and it is the practice of this Branch not to comment on the income tax consequences arising as a result thereof. Opinions with respect to such past transactions may be requested from the relevant District Taxation Office. However, we offer the following general comments with regard to the issues raised in your letter which we hope will be of assistance to you.

Unless otherwise stated, all references to statute are to the Income Tax Act (the "Act").

The Department's views on the sale of property are contained in Interpretation Bulletin IT-170R. As stated therein, when the words in the definition of "disposition" are read in conjunction with the definition of "proceeds of disposition" in section 54, it is evident that the date of disposition of capital property sold occurs at the time that the vendor is "entitled to...the sale price." In this manner the date of disposition is given a somewhat restricted meaning when a disposition of capital property involves a sale.

It is the Department's view that the sale price of any property sold is brought into account for income tax purposes when the vendor has an absolute but not necessarily immediate right to be paid. As long as a condition precedent remains unsatisfied, a vendor does not have an absolute right to be paid. Furthermore if the contract of sale specifies one or more conditions precedent (as described in paragraph 6 of IT-170R) to completion of the sale, the date of disposition cannot precede satisfaction or waiver of the conditions precedent.

The date on which the vendor has an absolute, although not necessarily immediate, right to be paid generally represents the date upon which the vendor has an enforceable claim. Paragraph 12 of Interpretation Bulletin IT-396R states:

"Where an enforceable agreement for the sale of property is executed but the negotiated price is not paid until a subsequent date, any interest that is received by the vendor from the date of the agreement to the date of payment is interest income in the vendor's hands."

For the above statement to apply there must be both an enforceable agreement for the sale of property and the amount must meet the definition of interest. The courts have established that an amount will not be interest unless it:

a) is calculated on a day-to-day basis (see The Attorney General For Ontario v. Barfield Enterprises Ltd. (1963) SCR 570, at 575),

b) is calculated in reference to a principal sum or a right to a principal sum (see Reference as to the Validity of Section 6 of the Farm Security Act, 1944, of the Province of Saskatchewan, (1947) SCR 394, at 412), and

c) is compensation paid for the use of the principal sum or the right to use the principal sum (see Reference Farm Security, supra, at 411).

It follows then that the character of amounts paid subsequent to closing, whether as additional proceeds from the disposition of capital property, interest or a payment on income account cannot be determined without an examination of the relevant agreements and facts.

We trust that the above comments are of assistance to you.

Yours truly,

Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch