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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether the payment of an amount to settle a dispute over ownership of the lobster license can be included as part of the "adjusted cost base" of the lobster license or as an expense in selling it.
Position: Based on the facts provided, it is our view that the $XXXXXXXXXX settlement payment could likely be considered an outlay or expense "for the purpose of making the disposition" pursuant to subparagraph 40(1)(a)(i) of the Act.
Reasons: It seems to us that the settlement payment was an essential outlay that was made directly for the purpose of making the disposition, i.e., the lobster license could not be sold without confirmation of the Estate's ownership of it.
XXXXXXXXXX J. Gibbons, CGA
2000-006306
March 26, 2001
Dear Sir or Madam:
We are replying to your letter of December 15, 2000, concerning the disposition of a lobster license by a testamentary trust. In particular, you enquired whether the disposition of the lobster license should be reported in 2000 or 2001, and whether the payment of an amount to settle a dispute over ownership of the lobster license can be included as part of the "adjusted cost base" of the lobster license or as an expense in selling it. We also acknowledge receipt of a letter dated January 2, 2001, from the legal firm of XXXXXXXXXX, which also sets out some of the facts of this case.
As indicated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, a request for a written opinion on a completed transaction is normally considered by a taxpayer's local tax services office. Accordingly, you may wish to submit all relevant facts and documentation to the appropriate Tax Services Office for their comments. However, we have provided the following general comments for your benefit.
Facts
1. XXXXXXXXXX (the "Taxpayer"), died in XXXXXXXXXX.
2. The Taxpayer was deemed to have disposed of a lobster license, owned by him at the time of his death, for proceeds equal to fair market value (i.e., $XXXXXXXXXX) pursuant to subsection 70(5) of the Income Tax Act (the "Act"). This disposition was reported on the Taxpayer's final income tax return.
3. A few months after the Taxpayer's death, the ownership of the lobster license was disputed, and the executor of the Taxpayer's estate (the "Estate") embarked on a legal process to establish ownership of it.
4. In XXXXXXXXXX, a $XXXXXXXXXX settlement was paid by the Estate in return for uncontested ownership of the lobster license. Immediately afterwards, the Estate sold the lobster license.
The question as to when a disposition of property occurs is one of fact and law which can only be ascertained following a comprehensive review of the relevant documentation and other pertinent information. However, it is our position that the sale price of any property sold should be brought into income for income tax purposes when the vendor has an absolute but not necessarily immediate right to be paid, and, as long as a condition precedent remains unsatisfied, it is our position that a vendor does not have an absolute right to be paid. (See paragraphs 5 to 8 of IT-170R, "Sale of Property - When Included in Income Computation.")
In regard to the income tax treatment of the payment of $XXXXXXXXXX to settle the issue of the ownership of the lobster license, we are under the assumption that the lobster license is a capital property of the estate rather than an eligible capital property. In our view, the settlement payment cannot be considered part of the "cost" of the lobster license, nor is it an amount which may be added to the adjusted cost base of property under subsection 53(1) of the Act. As to whether the $XXXXXXXXXX settlement payment may be considered an outlay or expense "for the purpose of making the disposition" of the lobster license, and thus deductible under subparagraph 40(1)(a)(i) of the Act, we refer to Avis Immobilien G.M.B.H. (94 DTC 1039), wherein Rip, T.C.C.J. stated that:
The words "for the purpose of" in subparagraph 40(1)(a)(i) mean "for the immediate or initial purpose of" and not the final or eventual goal which the taxpayer may have in mind....The statutory provision under consideration sets out a rule to determine a taxpayer's capital gain from the disposition of property and only expenses or outlays to be applied in reducing the gain are those incurred or made directly for the purposes of making the disposition. Subparagraph 40(1)(a)(i) does not contemplate expenses or outlays which may have merely facilitated the making of the disposition or which were entered into on the occasion of the disposition.
In our view, it would be difficult to conclude that the $XXXXXXXXXX settlement "merely facilitated the making of the disposition or [was] entered into on the occasion of the disposition." However, it seems to us that it was an essential outlay that was made directly for the purpose of making the disposition, i.e., the lobster license could not be sold without confirmation of the Estate's ownership of it. In our view, the fact that the lobster license was sold immediately after the Estate's ownership of it was confirmed tends to support the conclusion that the settlement payment was made to effect the sale of the lobster license. Therefore, based on the facts provided, it is our view that the $XXXXXXXXXX settlement payment could likely be considered an outlay or expense for the purpose of making the disposition pursuant to subparagraph 40(1)(a)(i) of the Act.
We trust that these comments will be of assistance.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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