3 February 1994 External T.I. 9237475 F - Rollover for Contractors

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.

5-923647

XXXXXXXXXX     M. Séguin

Attention: XXXXXXXXXX

February 3, 1994

Dear Sirs:

This is in reply to your letter of November 10, 1992 wherein you ask for our opinion on the application of section 85 of the Income Tax Act (the "Act") concerning rollovers for contractors of holdbacks receivable and unapproved billings.

You presented the following hypothetical situation:

-     Opco is a contractor.

-     Opco computes its taxable income on the basis of progress billings.

-     At year-end Opco excludes from income unapproved billings (such billings requiring independent approval under the terms of the contract) and unapproved holdbacks.

-     Opco wishes to transfer all or substantially all of its business assets including the unapproved billings and holdbacks to a controlled corporation.

-     The holdbacks and unapproved billings at the time of transfer would not be considered to be receivable (Colford case), however, they would become receivable shortly after the transfer.

You would like to know if on the sale of the whole business including all receivables, whether unapproved billings and unapproved holdbacks would be considered to be eligible property for the purposes of section 85 of the Act.  Secondly, you would like to know, assuming that the property is eligible for the rollover, if the elected amount in respect of these properties can be established at a nominal amount (eg. $1).

Commentary

In our view, if a taxpayer in the above situation sells his whole business concern, the unapproved billings and unapproved holdbacks would be considered to be eligible property for the purposes of section 85 of the Act as capital property.  The elected amount in respect of the transferred property can generally be established at a nominal amount (e.g. $1) in accordance with the provisions of section 85 if such an amount represents the adjusted cost base of the property (as would generally be expected to be the case if it was not acquired from another person).

We note that subsection 56(4) of the Act could apply in certain circumstances to the taxpayer transferring the property and require him to include in his income the amount of the unapproved billings and unapproved holdbacks.  The Department will not generally apply this provision, however, where the recipient of the transfer includes such amounts in his income as business income.

The views expressed herein do not constitute an advance income tax ruling and, as stated in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

We regret the delay in responding to your request.

Yours truly,

for DirectorReorganizations and Foreign Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch