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: When proceeds of disposition of an expropriated property are deemed to have been received under subsection 44(2) if, not before 2 years after the expropriation, the taxpayer does not institute legal proceedings and is unable to reach a settlement with the expropriating authority.
Position: Two years following the day of expropriation.
Reasons: Clear language of paragraph 44(2)(c).
January 14, 2000
XXXXXXXXXX Tax Services Office HEADQUARTERS
Verification and Enforcement Division J. Gibbons
(613) 957-8953
Attention: XXXXXXXXXX
1999-000619
XXXXXXXXXX (the "Taxpayer")
We are replying to your memorandum of November 2, 1999, in which you requested our views concerning the application of subsection 44(2) of the Income Tax Act in a situation where an appeal for additional compensation has been made by a taxpayer more than two years after an expropriation of the property.
Pursuant to the preamble of subsection 44(2) of the Act, the time at which a taxpayer has disposed of property which has been expropriated and the time at which an amount in respect of the proceeds of disposition has become receivable is deemed to occur at the earliest of five times. For purposes of our discussion, we will presume that paragraphs 44(2)(d) and (e) do not apply.
Facts
1. In XXXXXXXXXX (the "City") advised the Taxpayer of its intention to expropriate its land and buildings.
2. In XXXXXXXXXX, the City expropriated the land and buildings and offered $XXXXXXXXXX in full settlement. The Taxpayer accepted the offer without prejudice to its right to seek further compensation.
3. Under an arrangement with the City, the Taxpayer continued its operations in the facility until the latter part of XXXXXXXXXX.
4. In XXXXXXXXXX, the Taxpayer purchased a replacement property in XXXXXXXXXX
5. In XXXXXXXXXX facility was shut down. In the early part of XXXXXXXXXX, the Taxpayer commenced its operations in XXXXXXXXXX.
6. In XXXXXXXXXX, the Taxpayer filed a claim for additional compensation from the City for the expropriated property.
7. In XXXXXXXXXX, the Taxpayer agreed to a settlement with the City. The settlement resulted in the Taxpayer receiving an additional $XXXXXXXXXX in XXXXXXXXXX, and an additional $XXXXXXXXXX in XXXXXXXXXX.
8. The total proceeds received by the Taxpayer were $XXXXXXXXXX. The proceeds net of costs associated with the expropriation were $XXXXXXXXXX.
9. The Taxpayer reported the disposition in its XXXXXXXXXX tax return. The net proceeds received have been reallocated by the Department pursuant to section 68 as follows:
Land $XXXXXXXXXX
Building $XXXXXXXXXX
$XXXXXXXXXX
10. In XXXXXXXXXX, the Taxpayer elected under subsection 44(1) to defer the capital gain and recaptured CCA on the building. No election has been made to defer the capital gain on the land.
11. The Taxpayer filed a waiver for the XXXXXXXXXX taxation year. The XXXXXXXXXX tax returns are statute-barred.
Your position
Since the Taxpayer did not file an appeal before the tribunal within two years, as provided in paragraph 44(2)(c), the full and final net proceeds received for both the land and buildings should be reported in XXXXXXXXXX.
Taxpayer's position
1. The Taxpayer refers to the following comments made by the Minister of Finance when introducing the Budget Resolution which resulted in the addition of subsection 44(2):
It has also come to my attention that the tax system does not apply fairly where the property has been expropriated, lost or destroyed. Quite often a taxpayer may be faced with a significant tax liability long before a settlement date has been agreed upon and funds are available. This seems quite unfair, and I am introducing a relieving provision which will ensure that under such circumstances no tax is payable until the compensation had been finally determined.
2. The Taxpayer refers to Laurentide Rendering Inc. (88 DTC 6331), in which the Federal Court of Appeal concluded that the proceeds should be included in the taxation year in which the proceeds were fixed.
3. The Taxpayer suggests that your approach leads to the proposition that a taxpayer which receives an initial payment without prejudice in year A, launches an appeal in Year B and finally settles the total amount of compensation in year C, would not be required to recognize the additional proceeds if year B becomes statute-barred prior to year C.
Our Views
In our view, subsection 44(2) does not support the Taxpayer's position. Where a taxpayer initiates legal proceedings within two years of an expropriation, paragraph 44(2)(b) provides that the deemed time will be the day on which the taxpayer's compensation for the property is finally determined as a result of those proceedings unless the taxpayer settles with the expropriator beforehand. If a settlement is reached beforehand, pursuant to paragraph 44(2)(a), the deemed time is the day on which settlement is reached. In any case, if an owner does not institute legal proceedings within two years of the expropriation and is unable to reach a settlement with the authority within that time, paragraph 44(2)(c) requires any gains or losses to be accounted for in the second taxation year following the expropriation.
In regard to Laurentide Rendering Inc, paragraph 44(2)(c) was not argued except at the Tax Review Board stage. It is apparent that the reason for it not having been argued subsequently is that the operation of 44(2)(c) would have resulted in the proceeds being deemed to have been received prior to the coming into force of subsection 44(2), and such retroactivity was apparently not contemplated by the legislation. In discussing retroactivity, the Federal Court stated that there was no retroactivity in applying paragraph (a) to a disposition that occurred prior to May 7, 1974, where the amount did not become receivable until after May 6, 1974.
We recognize that taxpayers which are subject to paragraph 44(2)(c) may have difficulties estimating the proceeds of disposition at the time of filing their income tax returns for the particular taxation year in which such proceeds are to be reported. Accordingly, they should file a waiver for this particular taxation year. If not, the Agency might assess such taxpayers based on the maximum likely proceeds which they might receive. As we understand it, the latter aspect is not an issue in the Taxpayer's case since a valid waiver was filed for the applicable taxation year.
In conclusion, based on the clear statutory language of paragraph 44(2)(c), the proceeds of disposition are deemed to have been received by the Taxpayer on the particular day that is two years following the day in XXXXXXXXXX on which the City expropriated its property. Accordingly, a reassessment should be issued for the taxation year that includes this particular day to reflect the actual proceeds of disposition received, and a reassessment for XXXXXXXXXX should be issued to remove the proceeds of disposition previously reported in error.
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 Agency'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 trust that these comments will be of assistance.
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
- 4 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content