15 May 1998 External T.I. 9604165 - CG ELECTION ON REAL PROP. & ACB REDUCTION

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 reduction to the ACB of property under paragraph 110.6(21)(b) should be based on the elected capital gain where the election is excessive.

Position:

According to the legislation, yes. However, the legislation does appear to penalize excessive elections on “non-qualifying real property” more severely than other types of property. The Department of Finance is aware of this issue.

Reasons:

Since the reduction under paragraph 110.6(21)(b) is calculated using the elected capital gains, an excessive capital gains election will result in a larger ACB reduction under paragraph 110.6(21)(b) as compared to that where the capital gains election is not excessive. However, paragraph 110.6(21)(b) applies only to non-qualifying real property; therefore, the ACB of other types of property will only be reduced by subsection 110.6(22).

		5-960416
XXXXXXXXXX 	J. Gibbons

Attention:  XXXXXXXXXX 

May 15, 1998

Dear XXXXXXXXXX:

We are replying to your letter of January 16, 1996, concerning possible duplicate reductions to the adjusted cost base (the “ACB”) of property in subsection 110.6(22) and paragraph 110.6(21)(b) of the Income Tax Act (the “Act”) in situations involving excessive capital gains elections. We apologize for the delay in replying.

Where a taxpayer designates proceeds in excess of 110% of the fair market value (the “FMV”) of the property, pursuant to subsection 110.6(22) of the Act, there is a punitive reduction to the adjusted cost base of the property equal to the amount by which the excess exceeds the FMV of the property at February 22, 1994. Where the property is “non-qualifying real property,” there is a further reduction to the ACB of the property under paragraph 110.6(21)(b) of the Act.

In your example, the FMV of the property at February 22, 1994, is nil, but the taxpayer designates proceeds of $100,000. The property has an adjusted cost base (“ACB”) of nil. This would result in a capital gain of $100,000. Since the property is non-qualifying real property, pursuant to subsection 110.6(21) of the Act, the capital gain and the adjusted cost base must be reduced by the non-qualifying portion, which, in your example, is $60,000. Furthermore, the ACB of the property must be reduced by the excess election pursuant to subsection 110.6(22) of the Act. Therefore, the ACB of the property after both adjustments would be $(160,000), whereas the designated proceeds exceeded the FMV of the property by only $100,000.

Since the ACB reduction under paragraph 110.6(21)(b) of the Act is calculated using the elected capital gain, an excessive capital gains election will result in a larger ACB reduction as compared to that where the capital gains election is not excessive. Although we do not know if this is intentional, it does appear to penalize excessive capital gains elections on non-qualifying real property more severely than other types of property, since the latter are subject only to the ACB reduction under subsection 110.6(22) of the Act.

Any changes to the rules relating to these provisions would require an amendment to the Act and a change in tax policy, which fall within the purview of the Department of Finance. In this regard, we have made Finance officials aware of the views you have expressed. Should you wish to follow up, we suggest that you contact them directly.

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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