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.
MEMORANDUM
DATE December 22, 1987
TO- Head Office Audit Applications Division Technical Applications Section
ATTENTION Bernie Wolters
FROM- Winnipeg District Office Regional Business Equity Valuations M.A. Cudjoe Telephone: 983-3959
RE: Section 85 Query
Relevant provisions involved:
85(l)(a) - Where the agreed amount = deemed proceeds of disposition.
85(l)(b) - Agreed amount cannot be less than the non share consideration.
40(1)(a)(iii) - Rules for calculating the capital gain reserves.
Example:
Property is transferred via Section 85 at the following amounts.
F.M.V. of property transferred $500,000
Agreed amount indicated 250,000
Consideration received
Promissory note (payable on demand) = 250,000
Share consideration 250,000
$500,000
An audit review determined that a non-clerical error was made by the taxpayer and that the A.C.B. of the property transferred was $150,000.
A capital gain was proposed as follows:
Deemed proceeds (agreed amount) = 250,000
Less:
Revised A.C.B. = 150,000
Capital Gain $100,000
At the time of the review, the promissory note was still out- standing.
Assuming that an amended election pursuant to 85(7.1) was not filed to avoid the capital gain, can capital gain reserves be claimed on the unpaid promissory notes ($250,000) using the 5 year rule pursuant to 40(1)(a)(iii)? Personally, I feel that the capital gain reserves can be claimed on the unpaid non-share con- sideration. Can you kindly verify this on our behalf?
for Chief of Audit MAC/bs
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© Her Majesty the Queen in Right of Canada, 1987
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