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:
Taxpayer overstated the V-day value and fair market value of land in filing the capital gains election pursuant to subsection 110.6(19) of the Act.
(1) would the Department’s revision of these values constitute "amending the election" which is prohibited by subsection 110.6(28) of the Act?
(2) does the revised election constitute a valid election even if it results in a taxable capital gain in excess of the capital gains deduction?
Position: (1) No. (2) Yes.
Reasons:
(1) the Department is not precluded from determining the v-day value or fair market value of property at the end of February 22, 1994.
(2) since the revised v-day values and fair market values result in the election satisfying the requirements of subparagraph 110.6(20)(a)(ii) of the Act, the election is a valid election.
March 18, 1998
J. McNelly Resource Industries
Director - Audit Services Section
Halifax T.S.O. A. Seidel
(613) 957-8974
Attention: Brian Munroe
972650
Capital Gains Exemption
This is in reply to your memorandum dated September 26, 1997 in which you requested our views with respect to a capital gains election pursuant to subsection 110.6(19) of the Income Tax Act (the "Act").
Background
XXXXXXXXXX
Issues
A. If the Department determines that the adjusted cost base of a property on a T664 election is overstated, does correcting the error constitute amending the election, which is specifically prohibited by subsection 110.6(28) of the Act?
B. Paragraph 110.6(20)(a) of the Act seems to indicate that the election is valid only where the election does not result in a capital gain in excess of the available capital gains deduction "or" the amount designated is 110% over fair market value. Does the election remain valid even if the result is a taxable capital gain in excess of the capital gains deduction?
It should be noted that the taxpayer in question is retired and living on a modest pension. Should the answers to A. and B. above support a $XXXXXXXXXX taxable capital gain, is there any administrative relief for the taxpayer?
Subsections 110.6(19) through 110.6(30) of the Act are relevant for the capital gains election for property owned by an individual at the end of February 22, 1994.
Subsection 110.6(20) of the Act provides that subsection 110.6(19) of the Act applies to a property of an elector who is an individual if one of the three requirements in subparagraphs 110.6(20)(a)(i), (ii) or (iii) of the Act is satisfied.
Issue A
The Department is not precluded from re-valuing the adjusted cost base of property to reflect its true V-day value or to revise the fair market value of property at the end of February 22, 1994.
Issue B
The amended V-day value and fair market value at the end of February 22, 1994 for each of the XXXXXXXXXX parcels of land would result in the Taxpayer’s election satisfying the requirements of subparagraph 110.6(20)(a)(ii) of the Act since the designated proceeds of disposition for each parcel of land exceeds 11/10 of their respective revised fair market value.
Subject to subsection 110.6(28), subsection 110.6(25) of the Act provides that a taxpayer may revoke an election made under subsection 110.6(19) of the Act provided a written notice of the revocation is filed before 1998.
Subject to subsection 110.6(28) of the Act, subsection 110.6(27) of the Act provides that a taxpayer may amend an election made under subsection 110.6(19) of the Act provided the amended election is filed before 1998 and an estimate of the penalty under subsection 110.6(29) of the Act is paid at the time the amended election is filed.
Subsection 110.6(28) of the Act provides that an election made under subsection 110.6(19) of the Act cannot be revoked or amended where the amount designated in the election exceeds 11/10 of the fair market value of the property at the end of February 22, 1994 i.e. qualified under subparagraph 110.6(20)(a)(ii) of the Act, as is the case here. Consequently, it is our view that pursuant to subsection 110.6(28) of the Act the election cannot be revoked or amended.
Issue C
During our telephone conversation (Seidel/Munroe), you indicated that the Taxpayer had no documentation or valuations to support either the V-day value or the fair market value at the end of February 22, 1994 for the XXXXXXXXXX parcels of land.
The technical notes relating to subsection 110.6(20) of the Act and the February 22, 1994 capital gains election contain the following comments:
"There are adverse tax consequences for an individual who over-estimates a property’s fair market value as at the end of February 22, 1994 and designates in the election in respect of the property an amount greater than 11/10 of that fair market value. Subparagraphs 110.6(20)(a)(ii) and (iii) ensure that the individual cannot avoid the tax consequences of such an election by, for example, triggering additional capital gains that in total exceed his or her available exemption."
Further, the technical notes relating to subsection 110.6(28) of the Act state the following:
"Subsection 110.6(28) prohibits the revocation or amendment of an election where the amount designated in the election in respect of the property is greater than 11/10 of its fair market value at the end of February 22, 1994. This is intended to ensure that an individual cannot, by revoking or amending an election, escape the consequences of having used an inflated value in an election in respect of a property."
Subsection 220(3.2) of the Act, amongst other things, provides that the Minister may grant permission to amend or revoke an election made under a provision of the Act or a regulation that is a prescribed provision. Subsection 110.6(19) of the Act is not a prescribed provision under section 600 of the Income Tax Regulations. Furthermore, subsection 110.6(28) of the Act applies to this situation which specifically provides that the subsection 110.6(19) election cannot be revoked or amended.
If subsection 220(3.2) were to apply, Information Circular IC 92-1 ("IC 92-1") outlines the guidelines for when the Department will accept late, amended or revoked elections. In particular, paragraph 10(a) of IC 92-1 states that a request for an amended or revoked election may be accepted where "there have been tax consequences not intended by the taxpayer, and there is evidence that the taxpayer took reasonable steps to comply with the law. This could include, for example, the situation where the taxpayer obtained a bona fide valuation for a property, but after the Department’s review the valuation was found to be incorrect." The information you have provided indicates that the taxpayer in this case did not obtain a bona fide valuation.
Conclusion
Since the Taxpayer cannot satisfy the criteria for revoking the subsection 110.6(19) election as provided for in subsection 110.6(25) of the Act or the criteria for amending the subsection 110.6(19) election as provided for in subsection 110.6(27) of the Act, subsection 110.6(28) applies to preclude amendment or revocation of the election and the Taxpayer is unable to satisfy the conditions for revoking/amending the election as outlined in paragraph 10 of IC 92-1 even if subsection 220(3.2) of the Act were to apply (but, as described above, it does not), it is our view that, subject to any additional information that may be provided to the Halifax T.S.O. which would enable it to permit the Taxpayer to revoke or amend the subsection 110.6(19) election, the revised taxable capital gain from the disposition of the XXXXXXXXXX parcels of land is $XXXXXXXXXX and the increase in the Taxpayer’s 1994 taxable income will be $XXXXXXXXXX after taking into consideration the Taxpayer’s available capital gains exemption of $XXXXXXXXXX.
If you wish to discuss any of the above, or if we can be of any further assistance, please contact the writer.
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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