31 August 1998 Internal T.I. 9807817 - APPROPRIATION AND RECAPTURE

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 amount of recapture on transfer of property to corporation is reduced by amount of appropriation.

Position: Yes.

Reasons: 248(28) prevents double income inclusion. The excess is more in the nature of an appropriation.

		August 31, 1998

	Regina TSO	HEADQUARTERS
	Audit Directorate	J.D. Brooks
	Phyllis Lukey	957-2103
	Technical Advisor
		980781

Determination of Benefit on Transfer of Property to Corporation

This is in reply to your request of March 24, 1998 for our views on the tax implications of a shareholder disposing of property to a corporation of which he is the sole shareholder at a price that exceeds the fair market value of the property. You noted that where non-depreciable property is sold at a price that exceeds the shareholder’s cost of the property, the amount of the capital gain that would otherwise be recognized on the sale is, according to paragraph 39(1)(a) of the Income Tax Act, reduced by the amount of the appropriation determined pursuant to subsection 15(1) (subject to the possible application of subsection 84(1)). You queried the calculation of the amount of recapture pursuant to subsection 13(1) and the amount of appropriation pursuant to subsection 15(1) in the following example:

Depreciable property having a current fair market value of $.6 million and initially costing $1.5 million was the only property of its class and the undepreciated capital cost of the class was $.6 million. The property was sold to the sole shareholder’s corporation for non-share consideration having a total value of $1.4 million.

As noted in paragraph 6 of Interpretation Bulletin IT-432R2, where the value of the property transferred from the corporation is more than the value of the property received by it from a shareholder, there is an appropriation of property for the benefit of the shareholder. In your example, the amount of the appropriation pursuant to subsection 15(1) is $.8 million (being $1.4 million - $.6 million). The amount of recapture that is added to the shareholder’s income pursuant to subsection 13(1) would also be $.8 million, were it not for subsection 248(28). That subsection provides that, unless there is a contrary intention (and there is none here), no provision of the Income Tax Act is to be construed to require the inclusion in computing the shareholder’s income for a taxation year of any amount to the extent that the amount has already been included in computing such income for the year or any preceding taxation year. Thus, in your example, in our view that there would be no recapture; the $.8 million excess consideration taken from the corporation is most accurately described as an appropriation from the corporation.

Roberta Albert, CA
Manager
Business, Property & Employment Income Section I
Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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