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 or not we are required to accept the deemed cost of a property resulting from an individual's capital gains election under subsection 110.6(19) where the capital gain resulting from the election is understated due to the overstatement of the property's ACB (e.g., overstated V-Day value).
Position: The deemed cost must be accepted if the election is filed on time, in prescribed manner and the individual meets one of subparagraphs 110.6(20)(a)(i), (ii) and (iii).
Reasons: A deeming provision cannot be ignored. However, in many cases the understatement of a property's ACB may cause the individual not to meet the requirement in subparagraph 110.6(20)(a)(i) which could invalidate the election.
November 1, 1999
Mr. David Klein HEADQUARTERS
Senior Auditor Jacques E. Grisé
Victoria Tax Services Office 957-2059
992543
Adjusted Cost Base (ACB)
1994 Capital Gains Election
This is in reply to your memorandum of September 9, 1999, concerning an individual's ACB of a property included in the individual's capital gains election pursuant to subsection 110.6(19) of the Income Tax Act (the Act).
The scenario you are concerned with is where an individual designates, in the election pursuant to subsection 110.6(19) of the Act, an amount which does not exceed the fair market value of the property but nevertheless results in an understated capital gain because of an overstatement of the property's ACB. The time for making a reassessment to the returns containing the election has in most cases expired (i.e., the returns are statute-barred).
The gain from the disposition of a property that was previously subject to the capital gains election is determined pursuant to subsection 40(1) of the Act. Basically, the gain is the amount by which the proceeds of disposition of the property exceeds the total of the property's ACB and outlays and expenses made or incurred for purposes of making the disposition. The starting point for the ACB of a property is the cost of the property. Accordingly, where subsection 110.6(19) of the Act applies, the deemed cost determined pursuant to subparagraph 110.6(19)(a)(ii) of the Act must be used in determining the property's ACB.
Subsection 110.6(19) of the Act only applies to a property if the conditions set out in subparagraph 110.6(20)(a)(i), (ii) or (iii) of the Act, are met by the individual. Since your concern does not relate to a business or an election that exceeds a property's fair market value, we will assume that the conditions in subparagraph 110.6(20)(a)(ii) or (iii) of the Act are not met. According to subparagraph 110.6(20)(a)(i) of the Act, an election under subsection 110.6(19) of the Act will be effective if the election would result in an increase in the $75,000 capital gains deduction under subsection 110.6(3) of the Act by the elector or the elector's spouse and would not result in the lesser of the annual gains limit and the cumulative gains limit exceeding the balance of the $75,000 capital gains deduction available to the elector or the elector's spouse. In a situation where an election is not effective because of an individual's failure to meet the requirements of subparagraph 110.6(20)(a)(i) of the Act, subparagraph
110.6(19)(a)(ii) of the Act should not be used in determining the ACB of a property that is disposed of in any subsequent year.
Your memorandum sets out an example of a property actually worth $100,000 at V-Day, $2,000,000 at February 22, 1994 and $2,010,000 when it was disposed of in 1997. The individual's capital gains election showed an elected amount of $1,600,000 with a V-Day value of $1,500,000 resulting in a capital gain of $100,000 which equalled the individual's capital gain exemption balance. For purposes of illustration, we have assumed that the individual had no spouse, had not disposed of any property since 1984, has not deducted an amount under paragraph 3(e) of the Act for the 1985 taxation year and has no net capital losses, allowable business investment losses and cumulative net investment losses. Since the individual's available balance of the capital gains deduction of $75,000 would be lower than the lesser of the individual's cumulative gains limit ($1,125,000 in the example) and the individual's annual gains limit ($1,125,000 in the example), the conditions in subparagraph 110.6(20)(a)(i) of the Act would not be met and, therefore, the original election would not be valid. Accordingly, in our view, the V-Day value of $100,000 should be used to calculate the gain on the disposition in 1997 in lieu of the ACB based on the cost of $1,600,000 resulting from the invalid election made in 1994. This would be the case, even if the 1994 taxation year is now statute-barred.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.
We hope our comments are helpful
John Oulton
Manager
Business, Property and Employment
Income Section III
Income Tax Rulings and Interpretations Directorate
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