12 February 1980 Income Tax Severed Letter RCT 5-789

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.

Dear Sirs:

This is in reply to your letter of September 27, 1979 requesting our interpretation of when an amount referred to in subparagraph 40(1)(a)(ii) of the Income Tax Act (the Act) becomes a component in the calculation of the Capital Dividend Account (CDA) by virtue of subparagraph 89(1)(b)(i) of the Act.

It is our opinion that a gain (within the meaning of paragraph 40(1)(a) of the Act) is to be computed for purposes of subparagraph 89(1)(b)(i) of the Act as of the date of the disposition. Thus, where a reserve under subparagraph 40(1)(a)(iii) of the Act is to be claimed, the reserve should be taken into account in the computation of the CDA. The taxpayer should take care not to underestimate the reserve to be claimed since this will overstate the actual balance in the CDA and may give rise to an assessment of Part III tax.

Interpretation Bulletin number IT-66R3 is being revised to reflect the above position.

You have outlined the following hypothetical situation:

A company has a calendar year taxation year (i.e. taxation years end December 31). On November 1, 1974 it disposes of a capital property for proceeds of $10,000, which property had an adjusted cost base of $1,000. The proceeds of $10,000 were due $4,000 on November 1, 1974, $4,000 on November 1, 1975 and $2,000 on November 1, 1976.

Assuming the taxpayer will claim the maximum reserve allowable under subparagraph 40(1)(a)(iii) of the Act, the gains under paragraph 40(1)(a) of the Act will be as follows:

1974 1975 1976
40(1)(a) gain $3,600 $3,600 $1,800

One-half of these amounts will be added to the Company's capital dividend account as follows:

1974 amount - at any particular time between November 1, 1974 and December 31, 1974,

1975 amount - at any particular time between January 1, 1975 and December 31, 1975,

1976 amount - at any particular time between January 1, 1976 and December 31, 1976.

Where, however, no reserve is to be claimed under subparagraph 40(1)(a)(iii) of the Act for 1975, the amount (in this illustration $2,700, which is one-half of the 1974 reserve) to be added to the company's capital dividend account would be added at any particular time between January 1, 1975 and December 31, 1975.

We regret the delay in responding to your inquiry. Workload constraints prevented us from giving full consideration to your query until this time. We trust the information provided will be of assistance.