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 that reports income on a cash basis should credit to the CCA class, in the year of disposition, the full amount of the proceeds receivable (less than original cost) or only the portion actually received in the year.
Position: Full amount of proceeds of disposition.
Reasons: See response.
April 2, 2009
Regina Tax Services Office HEADQUARTERS
Appeals Division André M. Gallant
(613) 957-8961
Attention: Mr. Marion Bjola
2008-030263
CCA Recapture and Cash Basis Taxpayer
This is in response to your email of December 4, 2008, and is further to our telephone conversations on February 11 and March 26, 2009 (Gallant/Bjola), regarding the timing of the inclusion of recapture of capital cost allowance (CCA) in a situation where a taxpayer elected under subsection 28(1) of the Income Tax Act (Canada) (the "Act") to use the "cash method" of reporting income.
Our understanding of the facts is as follows:
1. A farmer (the "Taxpayer"), reporting on a cash basis, disposed of all the equipment in a class (the "Equipment") to his brother (the "Purchaser") in XXXXXXXXXX for proceeds of disposition equal to the Equipment's fair market value of $XXXXXXXXXX .
2. The original cost of the Equipment was $XXXXXXXXXX , and the undepreciated capital cost (UCC) at the time of disposition was $XXXXXXXXXX .
3. Under the agreement for sales of the Equipment, the Purchaser was to pay the Taxpayer $XXXXXXXXXX at the date of disposition (XXXXXXXXXX ) and $XXXXXXXXXX in XXXXXXXXXX
4. The Purchaser paid the $XXXXXXXXXX at the date of disposition, but did not pay the $XXXXXXXXXX in XXXXXXXXXX . In the Taxpayer's notice of objection for the XXXXXXXXXX taxation year, it stated that the $XXXXXXXXXX was only paid in XXXXXXXXXX with the treat of a collection action. When you spoke to the Taxpayer's wife in January 2009, it was clarified to you that the treat of a collection action was in fact a letter from the Taxpayer's lawyer to the Purchaser requesting payments of the full amount remaining to be paid.
5. In January 2009, the Taxpayer's wife told you that when the Purchaser did not pay the $XXXXXXXXXX in XXXXXXXXXX , they (Taxpayer and his wife) would periodically ask the Purchaser for the payment of the balance due to the Taxpayer ($XXXXXXXXXX ). The Purchaser would sometime give excuses (i.e., I want to buy a truck instead, etc.) and sometime pay some money to the Taxpayer. It is not known how much money was paid by the Purchaser towards the $XXXXXXXXXX balance due and when these payments were made. The Taxpayer indicated in his notice of objection that he reasonably determined that he would not recover the debt as a whole, and considered the $XXXXXXXXXX debt to be bad in XXXXXXXXXX . The reasons given by the Taxpayer's wife in January 2009 for the conclusion by the Taxpayer that the debt became bad at the end of XXXXXXXXXX were as follows: (1) the Purchaser was the "XXXXXXXXXX " brother of the Taxpayer; (2) the Taxpayer did not want to cause distress or duress to his family, and especially his father; (3) mad cow disease was becoming a problem in Western Canada; and (4) the Taxpayer did not want to spend money on trying to collect at that point.
Your first question concerns whether the Taxpayer, for the purposes of computing the amount of CCA recapture in XXXXXXXXXX should credit to the Equipment's CCA class the full $XXXXXXXXXX amount of the proceeds receivable as a result of a disposition of the Equipment in XXXXXXXXXX , even though he only received $XXXXXXXXXX in XXXXXXXXXX and $XXXXXXXXXX in later years, or whether it is possible for him to report only $XXXXXXXXXX in XXXXXXXXXX , and the remaining $XXXXXXXXXX in the year(s) he received it.
In the event that the Taxpayer must credit all of the $XXXXXXXXXX to the CCA class in XXXXXXXXXX , your second question concerns whether the Taxpayer could claim $XXXXXXXXXX as a bad debt deduction under subsection 20(4) of the Act in XXXXXXXXXX .
Position of the Regina TSO
You disagree with the Taxpayer's principal argument in his notice of objection that he should only include $XXXXXXXXXX into income for XXXXXXXXXX with respect to the disposition of the Equipment simply because the Taxpayer is using the cash method. You also disagree with the Taxpayer's subsidiary argument that he could claim $XXXXXXXXXX as a deduction under subsection 20(4) in the event that the full $XXXXXXXXXX should be credited to the Equipment's CCA class in XXXXXXXXXX .
As explained below, the proceeds of disposition to be credited to the Equipment's CCA class is the full $XXXXXXXXXX .
Subsection 28(1) of the Act sets out the general rules for calculating income from a farming business on a cash basis. Paragraph 28(1)(d) specifically includes in computing such income, the full amount of recapture of CCA determined under subsection 13(1). As noted in paragraph 6 of Interpretation Bulletin IT-478R2, Capital Cost Allowance - Recapture and Terminal Loss, if recapture of CCA results from the disposition of a depreciable property in a particular year and full payment of the proceeds of disposition is not received in that year, the taxpayer must nevertheless include the entire amount of recaptured CCA in income for that year and is not entitled to any reserve on the recaptured amount.
In the case at hand, the Taxpayer must credit to the Equipment's CCA class in XXXXXXXXXX the amount of $XXXXXXXXXX which is the lesser of the proceeds of disposition (net of disposal costs) of $XXXXXXXXXX and the original cost of $XXXXXXXXXX , pursuant to the description of parameter F of the definition of "undepreciated capital cost" in subsection 13(21) of the Act. As a result, the recaptured CCA under subsection 13(1) to be included in income in XXXXXXXXXX will be $XXXXXXXXXX (i.e., the excess of $XXXXXXXXXX over the UCC of $XXXXXXXXXX ).
As explained below, the evidence provided to us does not support that the $XXXXXXXXXX was a bad debt at the end of XXXXXXXXXX and accordingly could be deducted under subsection 20(4) in computing XXXXXXXXXX income.
The Taxpayer relies on subsection 20(4) of the Act as authority for claiming $XXXXXXXXXX as a bad debt deduction in XXXXXXXXXX . As explained in paragraph 3 of Interpretation Bulletin IT-220R2, Capital Cost Allowance - Proceeds of Disposition of Depreciable Property, this provision generally applies where a taxpayer has disposed of depreciable property and the proceeds of disposition have been credited to the relevant class for CCA purposes. If the proceeds (or part thereof) are established by the taxpayer to have become a bad debt in the year, subsection 20(4) provides for a deduction in computing income for the year equal to the lesser of (a) the bad debt owing and (b) any excess of the capital cost of the property over the amounts realized on account of the proceeds of disposition.
As explained in paragraph 10 of Interpretation Bulletin IT-159R3, Capital Debts Established to Be Bad Debts, the time at which a debt becomes a bad debt is a question of fact and any decision made must be dependent upon the circumstances in each case. As also stated in paragraph 3 of IT-220R2, a debt is considered bad for the purpose of section 20(4) only when the whole amount is uncollectible or when a portion of it has been settled and the remainder is uncollectible, not where the amount is merely a doubtful account.
Since whether an amount owing is a bad debt is a question of fact, we defer to your office for a final decision as to whether the $XXXXXXXXXX was a bad debt at the end of the Taxpayer's XXXXXXXXXX taxation year or any other year before XXXXXXXXXX . Nevertheless, we will make the following comments, which may be of assistance.
In the present case, it would appear that the Taxpayer is not able to claim $XXXXXXXXXX as bad debt in XXXXXXXXXX for the following reasons. The time elapsed since the due date for payment of the debt was not more than 4 months (since XXXXXXXXXX ) by the time the Taxpayer would have made his assessment, on XXXXXXXXXX , that his debt had become bad. More importantly, taking into account the Taxpayer's wife version of events and those in the Taxpayer's notice of objection, it would appear that the Taxpayer did not make a reasonable assessment of the Purchaser's financial position at the end of XXXXXXXXXX . On the basis that the Taxpayer did receive some money from time to time with respect to the $XXXXXXXXXX balance due, it raises doubt as to the Taxpayer's reasonable assessment regarding whether the debt became bad at the end of XXXXXXXXXX . The different reasons given by the Taxpayer's wife in January 2009 to justify the Taxpayer's bad debt conclusion in XXXXXXXXXX raises further doubt as to the reasonableness of the bad debt assessment made by the Taxpayer at the end of XXXXXXXXXX .
In the event that, based on all the facts and circumstances, your office concludes that the $XXXXXXXXXX debt became a bad debt in a particular year before XXXXXXXXXX , and as a result the Taxpayer was allowed to claim an income deduction under subsection 20(4) in that year, the amount recovered in XXXXXXXXXX with respect to that debt would have to be included into the Taxpayer's income, pursuant to paragraph 12(1)(i) of the Act, as explained in paragraph 3 of IT-220R2.
We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. 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 electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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