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:
Can an individual transferring property to a partnership under subsection 97(2) claim a reserve under subparagraph 40(1)(a)(iii) where the individual receives as consideration a promissory note payable over 5 years. If the reply is in the affirmative, you want the Department to explain its position with respect to the capital gain reserve in a situation involving a rollover under subsection 85(1) of the Act.
Position TAKEN:
Yes. However, if the individual and each member of the partnership elect under subsection 97(2), they could select the right agreed amount to avoid any tax consequences.
Reasons FOR POSITION TAKEN:
The conclusion reached by the Judge in Derlago v. the Queen, 88 DTC 6290, was related to paragraph 45(1)(a) where a t/p shall be deemed to have disposed of property at that later time and reacquired it immediately thereafter. The wording in s.s. 97(1) is similar to s. 45 and, in a previous opinion (5-943011), we concluded that the Derlago case was applicable. However, the use of the word "deemed" in s.s. 97(2) is related to the taxpayer's proceeds of disposition and the partnership's cost. Furthermore, the Derlago case would not apply if the transferor and transferee select the appropriate agreed amount in order to avoid any tax consequences.
5-951144
XXXXXXXXXX (613) 957-8953
September 18, 1995
Dear Sir:
Re: Paragraph 40(1)(a) of the Income Tax Act (the Act)
This is in reply to your letter of April 19, 1995, which follows our correspondence of March 31, 1995 (5-943011), requesting additional comments on the capital gain reserve with regard to property disposed of to a partnership.
You would like to know whether a reserve under subparagraph 40(1)(a)(iii) of the Act could be claimed by an individual transferring property to a partnership pursuant to subsection 97(2) of the Act where the individual receives as consideration a promissory note payable over five years. If the reply is in the affirmative, you want the Department to explain its position with respect to the capital gain reserve in a situation involving a rollover under subsection 85(1) of the Act.
Written confirmation of the tax implications inherent in particular transactions are given by our Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.
The Department's position on the computation and deduction by a taxpayer of a reserve under subsection 40(1) of the Act is outlined in the current version of Interpretation Bulletins IT-236 and IT-436. As a general rule, two kinds of promissory note may be encountered:
- conditional payment: the vendor's right is suspended until such time as the maker of the note fails to honour the note.
- absolute payment: the vendor is considered to have accepted the note as full or actual payment of the debt as soon as the note is issued.
Where a promissory note has been accepted as "absolute payment", no amount is due in respect of the disposition and therefore, no reserve is available. However, the holder of a promissory note accepted as "conditional payment" is entitled to claim a reserve because the note is not due at the end of the taxation year for which a reserve is being considered.
In the Derlago case (88 DTC 6290, F.C.T.D.), there was no promissory note to be honoured at a later date. The reserve claimed by the taxpayer was related to the change of use of property following the application of paragraph 45(1)(a) of the Act. The Judge concluded that the taxpayer received the proceeds at the time of or immediately after the disposition, and, as a consequence, no reserve was available because no portion of the deemed proceeds were deemed to be payable after the end of Mr. Derlago's taxation year.
In respect of your first concern, where an individual transfers property to a partnership under subsection 97(2) of the Act, and receives as consideration a promissory note payable over five years, the agreed amount will include the promissory note and this amount shall be deemed to be the proceeds of disposition for the individual and the cost for the partnership. In such a situation, the transferor will be entitled to claim a reserve under paragraph 40(1)(a) of the Act if the note taken back is received as a "conditional payment". However, in view of the possible election available to the taxpayer under subsection 97(2) of the Act, the individual making the proper election should not be concerned with any tax consequences following such a rollover.
Concerning your second concern, where the transfer of property is from an individual to a corporation under subsection 85(1) of the Act, it is our opinion that the capital gain reserve under subparagraph 40(1)(a)(iii) of the Act will not be available to the transferor if, immediately after the sale, the rules of subparagraph 40(2)(a)(ii) of the Act apply, i.e. the corporation is controlled, directly or indirectly, in any manner whatever, by the transferor.
However, in a particular situation where subsection 40(2) would not apply to rollovers under subsection 85(1) of the Act, it is our opinion that the individual could claim the capital gain reserve under subsection 40(1)(a)(iii) of the Act provided that the promissory note is received as "conditional payment".
We trust that these comments will be useful.
for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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