4 November 1998 External T.I. 9642215 - INTERACTION OF 85(1) AND 70(3)

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 subsection 85(1) overrides the applicablitliy of subsection 70(3).

Position: No

Reasons: Subsection 85(1) deems the proceeds of disposition to be a certain amount whereas subsection 70(3) taxes the amount received.

XXXXXXXXXX                       		              964221
F. Francis
Attention:  XXXXXXXXXX 

November 4, 1998

Dear Sirs:

Re: Subsections 85(1) and 70(3) of the Income Tax Act (the "Act")

This is in reply to your letter of December 18, 1996, wherein you requested our comments with respect to the application of subsections 70(3) and 85(1) of the Act in the following situation:

- Mr. A carried on a farming business and used the cash method for reporting income.

- Mr. A dies. At this time, he owns cattle inventory with a fair market value of $10,000 and a tax cost of nil. This is bequeathed to his son ("Son").

- The cattle livestock is a "right or thing", as that expression is used in subsections 70(2) and (3), and is transferred to Son within the time frame referred to in subsection 70(3) of the Act.

- Son transfers the cattle to a corporation using an election under subsection 85(1) of the Act and receives preferred shares. The elected amount under subsection 85(1) is $1. You note that, by virtue of the provisions of subsection 69(1.1) of the Act, Son has a tax cost of nil in respect of the cattle inventory.

You request our views as to whether, pursuant to subsection 70(3) of the Act, Son would be required to include $10,000 in income at the time when the cattle inventory is transferred to the corporation. In particular, you question whether subsection 85(1) would override the application of subsection 70(3) in this situation.

Our Comments

We note that a taxpayer using the cash method to compute income from a farming business may elect to roll over inventory owned in connection with the farming business to a corporation under subsection 85(1) of the Act. Under the provisions of paragraph 85(1)(a) of the Act, the elected amount is deemed to be the taxpayer's proceeds of disposition of the property. However, subsection 70(3) of the Act provides that "an amount received by one of the beneficiaries on the realization or disposition of the right or thing shall be included in computing the taxpayer's income for the taxation year in which the taxpayer received it".

It is our view that Son would receive the fair market value of the preferred shares on the disposition of the right or thing to the corporation for purposes of subsection 70(3) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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