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: Does a transfer pursuant to 97(1) allow for a reserve for a note taken back as part consideration.
Position: In our opinion 97(1) contemplates an exchange pf property for property ie: partnership interest only received as consideration.
Reasons: 97(2) allows for reserve if true conditional payment received as part consideration. Also fair market value sale with proceeds of cash and note.
XXXXXXXXXX 990126
S. Tevlin
Attention: XXXXXXXXXX
November 17, 1999
Dear Sirs:
Re: Subparagraph 40(1)(a)(iii) and Subsection 97(1) of the Income Tax Act (the "Act")
We are writing in response to your letter dated January 12, 1999 wherein you requested our opinion with respect to whether a taxpayer may claim a reserve pursuant to subparagraph 40(1)(a)(iii) of the Act in respect of a transfer of property to a partnership pursuant to subsection 97(1) of the Act.
You refer to our document 9430115 wherein we opined that it was our position that the decision in the case of Derlago v the Queen, 88 DTC 6290, would apply in respect of a transfer of property to a partnership pursuant to subsection 97(1) of the Act, such that the transferor would be unable to claim a capital gains reserve under subparagraph 40(1)(a)(iii) of the Act. It is your opinion that the Derlago decision did not intend this result.
You suggest that there is a significant distinction between the results in Derlago and the transfer or sale of property to a partnership which includes debt consideration which is payable over a number of years. You submit that the decision in Derlago was reasonable since there were no actual proceeds to be received, but is not a reasonable result in situations involving real transfers for actual consideration.
In this regard we offer the following general comments.
It remains our position that where a provision of the Act deems a property to have been disposed of for certain proceeds the taxpayer is considered to have received those proceeds at the time of, or immediately after the disposition. Therefore, where a transferor is deemed by subsection 97(1) of the Act to have disposed of property to a partnership for proceeds equal to the fair market value of the property acquired by the partnership, the transferor will not be entitled to a reserve pursuant to paragraph 40(1)(a)(iii) of the Act in respect of the capital gain arising on the disposition of the property. In our opinion subsection 97(1) of the Act generally contemplates transfers involving property for property i.e. a partnership interest only, received as consideration.
However, where an individual transfers property to a partnership under subsection 97(2) of the Act and receives, in addition to a partnership interest as consideration, a promissory note payable over say five years, the agreed amount would include the note and this amount would be deemed to be the proceeds for the individual and the cost to the partnership. In such a situation, where a gain has been triggered i.e. the agreed amount exceeds the adjusted cost base of the property transferred, the transferor will be entitled to claim a reserve under paragraph 40(1)(a) of the Act if the note taken back is received as a "conditional payment".
Where a fair market sale occurs between a taxpayer and a partnership for cash consideration, neither subsection 97(1) or (2) will apply. Where such a fair market transaction includes consideration other than cash, a reserve will be available if a note taken back as part of the proceeds is conditional and there is a capital gain reported.
The foregoing comments are given in accordance with the practice referred to in paragraph 22 of IC-70-6R3 and are not binding on the Canada Customs and Revenue Agency.
We trust our comments are of assistance to you.
Yours truly,
Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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