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.
Principal Issues: Whether a taxpayer may claim a capital gains reserve pursuant to subparagraph 40(1)(a)(iii) when part of the consideration received as proceeds of disposition in the form of a mortgage is transferred to a trust.
Reasons: The mortgage would not be considered payable to the taxpayer after the transfer.
Kathryn McCarthy CA
May 2, 2011
Dear XXXXXXXXXX :
Re: Capital Gains Reserve
This is in response to your e-mail of January 27, 2011, concerning the above-noted subject.
You described a situation involving a husband and wife that are resident in Canada ("Taxpayers"). The Taxpayers sell their respective interests in land to an arm's length party and as part of the consideration, the Taxpayers take back a mortgage with a term exceeding 5 years, secured by the land ("Mortgage"). The Taxpayers then transfer their beneficial and legal interest in the Mortgage to a joint partner trust or to separate alter ego trusts ("Trust") and title will be registered in the name of the Trust. The trustees of the Trust will be the Taxpayers and their child.
We presume that your references to a "joint partner trust" and to an "alter ego trust" are references to a "joint spousal or common-law partner trust" and "alter ego trust" as these terms are defined in subsection 248(1) of the Income Tax Act ("Act").
You have enquired whether the Taxpayers can claim their respective reserves pursuant to subparagraph 40(1)(a)(iii) of the Act over a 5-year period. In your opinion, since the Taxpayers will continue to beneficially own the Mortgage through the Trust, the reserve should be available notwithstanding the transfer of the Mortgage to the Trust.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situation involve a specific taxpayer and a transaction that has already been completed, you may wish to submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. However, we are prepared to provide the following general comments, which may be of assistance.
Generally where a taxpayer disposes of capital property and realizes a gain in a taxation year, the taxpayer may reduce, pursuant to subparagraph 40(1)(a)(iii) of the Act, the gain otherwise determined by a reasonable reserve in respect of the proceeds of disposition ("POD") of the property that are payable to the taxpayer after the end of the year. Whether a portion of the POD of the property is payable to the taxpayer after the end of the year is a question of fact that can only be resolved after a review of the particular situation.
A reserve claimed in one year becomes the capital gain on the particular disposition for the next year under subparagraph 40(1)(a)(ii) and a new reserve on that capital gain may be available in that later year. A taxpayer may claim a reserve on the disposition of a particular property for a maximum of 4 years and, by virtue of subsection 40(1.1), up to a maximum of 9 years in respect of properties referred to in subsection 40(1.1).
The reserve under subparagraph 40(1)(a)(iii) can be claimed in a particular year by the taxpayer that disposes of the property at a gain and to whom the POD are payable after the end of the year. This is evident in the wording of paragraph 40(1)(a), which is reported below for ease of reference:
"40. (1) General rules - Except as otherwise expressly provided in this Part
(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which
(i) if the property was disposed of in the year, the amount, if any, by which the taxpayer's proceeds of disposition exceed the total of the adjusted cost base to the taxpayer of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by the taxpayer for the purpose of making the disposition, or
(ii) if the property was disposed of before the year, the amount, if any, claimed by the taxpayer under subparagraph (iii) in computing the taxpayer's gain for the immediately preceding year from the disposition of the property,
(iii) subject to subsection (1.1), such amount as the taxpayer may claim
(A) in the case of an individual (other than a trust) in prescribed form filed with the taxpayer's return of income under this Part for the year, and
(B) in any other case, in the taxpayer's return of income under this Part for the year,
as a deduction, not exceeding the lesser of
(C) a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are payable to the taxpayer after the end of the year as can reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property, and
(D) an amount equal to the product obtained when 1/5 of the amount determined under subparagraph (i) in respect of the property is multiplied by the amount, if any, by which 4 exceeds the number of preceding taxation years of the taxpayer ending after the disposition of the property; and..." (Emphasis added)
No portion of the POD in the form of the Mortgage would be considered payable to the Taxpayers after that time where the Mortgage is payable to the Trust and, therefore, no reserve would be available under subparagraph 40(1)(a)(iii) to the Taxpayers for the Mortgage transferred to the Trust.
We trust the foregoing comments are of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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