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: application of fresh-start rules in 95(2)(k)
Position: "95(2)(k) does not apply in the computation of capital gains and losses
Reasons: Our understanding that Finance will amend 95(2)(k) to address capital gains and losses
XXXXXXXXXX 990873
J. Stalker
Attention: XXXXXXXXXX
January 6, 2000
Dear Sirs/Mesdames:
Re: "Fresh start rules"
Paragraph 95(2)(k) of the Income Tax Act (the "Act")
This is in reply to your letter of February 20, 1999 in respect of the application of the "fresh start rules" under paragraph 95(2)(k) of the Act.
When property that is previously used to earn income from active business is subsequently used to earn income from an investment business (or from a business that is deemed under paragraphs 95(2)(a.1), (a.2), (a.3) or (a.4) to be a separate business), the deeming rules in paragraph 95(2)(k) apply for the purpose of computing income from the investment business. Consequently if real estate is inventory in an investment business which is subject to paragraph 95(2)(k), any gain or loss on that inventory would be determined taking into account the deemed disposition of that property under paragraph 138(11.91)(e) immediately before the commencement of the particular taxation year. The fresh start rules also ensure that the foreign affiliate is entitled to reserves and capital cost allowance as if the business had just started at the coming into force of those rules. However, those rules do not apply for the purpose of computing a capital gain or loss, as that would not be income from an investment business or the separate business. As a result, there is no "bump" to the adjusted cost base at the time of the coming into force of the fresh start rules for the purpose of computing any capital gain or loss from the property. Under current law, the full gain or loss would be included at the time of subsequent disposition as income from property under the usual rules.
Nevertheless, it is our understanding that the Department of Finance will eventually introduce amendments to deal with the current exclusion of capital gains and losses from the fresh start rules. We suggest you contact the Department of Finance if you wish more information on those amendments.
In addition, we note that it is a question of fact whether property used in an investment business is on capital or income account.
We trust our comments are helpful.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
c.c. G. Street
Edmonton TSO
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