22 December 1995 Internal T.I. 9521556 - ELIGIBLE CAPITAL PROPERTY - INSURANCE BOOK

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 sale of an insurance book would be considered to be the sale of an "eligible capital property".

-Whether the definition of "capital property" includes an "eligible capital property".

Position:

-Yes, in the case at hand, the insurance book represents an "eligible capital property".

-No, the meaning of capital property does not include an eligible capital property

Reasons:

The respective definition of each term in subsection 248(1) and section 54 of the Act, taking into consideration the definitions of all other relevant terms that are applicable as well as published Departmental positions.

		December 22, 1995
H. L. Jones	HEADQUARTERS
	Director	B. Kerr
	General Applications Division	957-8953
	GST Rulings and Interpretations

	Attention: Paul Lafond
		952155

Definitions of Capital Property and Eligible Capital Property

This is in response to your letter of August 11, 1995, wherein you requested our opinion on the meaning of the terms "capital property" and "eligible capital property".

We understand that these issues are relevant for GST purposes and are the subject of a referral from

XXXXXXXXXX

The assets consisted of office furniture, miscellaneous interests and an insurance book, substantially all of the price of which was attributed to the insurance book. It appears that all parties involved agree that the expenditure is capital in nature.

You have asked us whether the sale of an insurance book would be considered to be a sale of "eligible capital property" and whether the definition of the term "capital property" under the Income Tax Act (the "Act") includes "eligible capital property".

Our Comments

Subsection 248(1) of the Act provides that in the Act the terms "eligible capital property" and "capital property" have the meanings assigned by section 54 of the Act.

The term "eligible capital property" of a taxpayer is defined in section 54 of the Act to mean:

"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"

Subsection 14(1) reads in part:

"...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")..."

"E" of the definition of "cumulative eligible capital" in subsection 14(5) is:

"...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..."

The term "eligible capital expenditure" of a taxpayer in respect of a business is defined in subsection 14(5) to mean:

"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."

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 customer lists and ledger accounts..., will be considered to be dispositions of eligible capital property...".

Paragraph 5 of IT-143R2, entitled "Meaning of eligible capital expenditure", specifically states that the Courts have referred to several definitions of goodwill, two of which are "(a) Goodwill is the whole advantage, whatever it may be, of the reputation and connection of the firm which may have been built up by years of honest work or gained by lavish expenditures of money. (b) It is the privilege, granted by the seller of a business to the purchaser, of trading as his recognized successor, the possession of a ready-formed connection of customers, considered as an element in the saleable value of a business additional to the value of the plant, stock-in trade, book debts, etc.". Paragraph 6 of IT-143R2 states that "Goodwill cannot be divorced from the business, and may be sold with the business, but it cannot be sold separately. Generally, goodwill arises as a recognizable asset only when a business is acquired at a price in excess of the value, as a going concern, of its net assets.

Paragraph 8 of IT-143R2 states that "where a taxpayer acquires lists or ledger accounts of clients, customers or subscribers, it is necessary to determine whether the cost of acquisition is a capital expenditure or an expense in the year. Generally, the cost of a list bringing an enduring benefit to the business of the purchaser is a capital outlay and is an eligible capital expenditure."

Section 54 of the Act defines the term "capital property" to mean:

"(a) any depreciable property of the taxpayer, and

(b) any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer"

By virtue of subparagraph 39(1)(a)(i), the gain from the disposition of an eligible capital property is excluded from the meaning of a taxpayer's "capital gain" and by virtue of subparagraph 39(1)(b)(ii), the loss from the disposition of an eligible capital property is excluded from the meaning of a taxpayer's "capital loss".

In our view, the amount deemed in subsection 14(1) to be a "taxable capital gain", a term normally defined in paragraph 38(a) of the Act, is only for the purposes of section 110.6 and paragraph 3(b) of the Act. It does not deem the amount to be a capital gain or the "eligible capital property" creating such amount to be a capital property.

We have considered the views expressed by the taxpayer's representative as outlined in their letter of August 31, 1994, and your views as expressed by XXXXXXXXXX in her letter of December 21, 1994 concerning the case at hand. For the purposes of the Act, we agree with your view that, the insurance book represents an "eligible capital property" and that a "capital property" does not include an "eligible capital property".

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch