7 October 1991 Income Tax Severed Letter - Inducement Payment - Proceeds of Disposition

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.

Subject: XXX Inducement Payment, Proceeds of Disposition Section 12(1)(x), 54(h)

This is in reply to your memorandum dated July 19, 1991, requesting our opinion on the nature of the settlement payment received by XXX The facts of the situation presented in this memorandum follow.

Facts

• 1. XXX
• 2. XXX
• 3. XXX
• 4. XXX

Your Interpretation

XXX

Our Comments

In our opinion, the settlement payment should be treated as proceeds received on the disposition of a capital property. XXX In Westcoast Energy Inc. v. the Queen [[1991] 1 C.T.C. 471] (91 DTC 5334) the court stated with respect to the definition of "reimbursement" found in subsection 12(1)(x) that "... the ordinary and legal meaning of the word reimbursement contemplates different legal relationships than that of parties in a law suit.". The same logic could be applied in this case if you were to assess the settlement payment as an inducement payment under subsection 12(1)(x) of the Act. Also, as the right to acquire the real estate was, due to the definition of property in section 248(1), a property of XXX subparagraph 12(1)(x)(viii) would, in our view, take the payment in the present case out of paragraph 12(1)(x).

XXX

The Department's administrative practice with respect to rights of first refusal, in the context of shareholder agreements, is expressed in paragraph 31 of IT-64R2 as follows:

"Shareholder agreements commonly referred to as `the right of first refusal' are considered not to confer a right to acquire a share but rather an option to acquire, in certain future circumstances, a right to acquire a share."

XXX This "right", although an intangible, was not an eligible capital property as explained in Interpretation Bulletin IT-143R2, Meaning of Eligible Capital Expenditure. Paragraph 3(b)(iv) of IT-143R2 states that "an interest in, or a right to acquire" a tangible property is not an eligible capital expenditure. Therefore, in our opinion, the settlement payment should be treated as proceeds received by XXX upon the disposition of a capital property.

We trust these comments are of assistance.