24 September 1997 External T.I. 9718365 - PROCEEDS BASED ON PRODUCTION OR USE

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 paragraph 12(1)(g) applies to disposition of a partnership interest held as capital property.

Position:

Yes.

Reasons:

Department's position as stated in IT-462 applies.

971836
XXXXXXXXXX A. Seidel

Attention: XXXXXXXXXX

September 24, 1997

Dear Sirs:

Re: Disposition of Capital Property

This is in reply to your letter dated July 4, 1997 in which you requested our views with respect to the application of paragraph 12(1)(g) of the Income tax Act (the "Act").

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to the application of paragraph 12(1)(g) of the Act which may be of some assistance.

Revenue Canada's views with respect to the situation where a taxpayer disposes of a capital property and the proceeds of disposition includes a fixed amount and an amount to be determined based on the future profits earned on the use of the property sold are outlined in Interpretation Bulletin IT-462 ("IT-462"). Subject to the comments in paragraphs 8 and 9 of IT-462, subparagraphs 5(b) and (c) deal with situations similar to the one described in your letter. "Capital property" and "proceeds of disposition" have the meanings assigned by section 54 of the Act.

We would also bring to your attention the comments made in paragraph 6 of IT-462 which states the following:

"Unless the taxpayer can show that the terms of the agreement are similar to those that would be made in an arm's length transaction, the Department will employ the anti-avoidance sections of the Act to disallow losses that arise in non-arm's length transactions and that are not otherwise specifically disallowed under other provisions of the Act."

Whether or not two taxpayers are dealing at arm's length, within the meaning of subsection 251(1) of the Act, is a question of fact which can only be determined after a review of all of the circumstances of a particular situation.

These comments are provided in accordance with the guidelines set out in paragraph 22 of IC 70-6R3 and are therefore not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships & Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch