21 August 1989 Income Tax Severed Letter RRRR182 - Amount in respect of cumulative eligible capital included in a corporation's capital dividend account

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.

This is in response to your memorandum of July 25, 1989 wherein you requested our opinion concerning the amount in respect of cumulative eligible capital to the included in a corporation's capital dividend account (CDA) pursuant to subparagraph 89(1)(b)(iii) of the Income Tax Act.

Specifically, you have referred the following example for our consideration:

A corporation, whose fiscal year end is September 30, has been carrying on business since before January 1, 1972. In 1979 the corporation sold a fishing licence which it has acquired at no cost for $121,333. Subsequently, the corporation purchased additional eligible capital property as follows:

1982          $ 16,667
                      1986            66,666
                      1987            17,767
                     Total          $101,100

The corporation sold eligible capital property on October 5, 1988 for $390,000. The corporation's "adjustment time" within the meaning of paragraph 14(5)(c) of the Act is October 1, 1988.

You have calculated the corporation's CDA under subparagraph 89(1)(b)(iii) of the Act as follows:

89(i)(b)(iii)(A)(I)   1/2  of 75%  of $121,333  -  $ 45,500*
                 (II)                                   NIL
                 (III)  1/2  of $101,100              $50,550
                                                       NIL
               (B)      1/3  (3/4  of $390,000)        97,500
               (C)                                     NIL
               (D)                                     NIL
               (E)                                     NIL
               (F)      1/2 of $5,050 (50,550 - 45,500) (2,525)
               (G)                                     NIL
        Amount to be included  in CDA                 $ 94,975

* The amount under subclause 89(1)(b)(iii)(A)(I) above reflects the application of ITAR 21(1).

You have asked us to review your calculations with particular emphasis on the amount included under subclause 89(1)(b)(iii)(A)(I) of the Act.

Our Comments

Based on the information which has been provided, we agree with your calculation of the CDA in the example described above. In our view, the amount calculated under clause 89(1)(b)(iii)(A) of the example is equal to the amount that would have been included in the CDA under subparagraph 89(1)(b)(iii) as it read prior to the 1988 amendments to implement the tax reform proposals. Based on the relevant explanatory notes to Bill C-139, this result is consistent with the intent of the provision.

We are, however, unable to comment on whether the provisions of ITAR 21(1) have been properly applied in the above calculation under subclause 89(1)(b)(iii)(A)(I). We would expect that a fishing licence would constitute a goverment right and that its fair market value at Valuation Day could affect the calculation under ITAR 21(1). In this regard, please refer to ITAR 21(1)(b)(iii)(B) and paragraph 13 of Interpretation Bulletin IT-123R4.