Income Tax Application Rules

Subsection 19(1)


Gastrebski v. The Queen, 94 DTC 6355 (FCA)

The taxpayer, who was hospitalized and treated as an out-patient for severe depression until March 1973 and then returned to work until 1983, when he stopped work because of his disability, was not grandfathered. Linden J.A. found (p. 6359) that "the 'event' that must occur before 1974 is the actual disability which prevents someone from working at full capacity, resulting in a loss of employment income as a consequence of that disability ... . [T]he reoccurrence of a pre-1974 disability after a period during which the taxpayer was not incapacitated is no different than if the first incapacity appeared after 1974."

Subsection 20(1)


Fletcher Challenge Canada Ltd. v. The Queen, 2000 DTC 6437 (FCA)

As a consequence of an amendment to the Forest Act (British Columbia) which gave holders of existing timber rights and privileges the entitlement to replace their existing rights with new timber licences governed by the new provisions of that Act, in 1979 the taxpayer exercised this right of replacement to obtain replacement licences that covered identical areas subject to the terms of the same tree farming licence. Desjardins found that as a result of this exchange, the taxpayer had acquired the replacement licences, with the result that it had not owned such licences without interruption from December 31, 1971 onwards.

Paragraph 20(1)(a)

Administrative Policy

27 July 2004 External T.I. 2004-007575 -

Where a building purchased prior to 1972 had a capital cost of $75,000, $40,000 of capital cost allowance was deducted on the building prior to V-Day, and the V-Day value of the building was $120,000, the entire amount of such capital cost allowance previously claimed would be recaptured if the actual proceeds of disposition of the property exceeded its capital cost.

Paragraph 21(3)(a)


Tekarra Lodge Ltd. v. The Queen, 85 DTC 5227, [1985] 1 CTC 334 (FCTD)

S.21(3)(a) avoids a distinction between a "licence" and a "lease". A government lease for use of lands as a "bungalow camp" was found to be "substantially similar" (within the meaning of s. 21(3)(a)(iii)(B) to the preceding government licence for the use of the lands as a "bungalow camp".

Subsection 26(3)

Administrative Policy

16 March 1995 Memorandum 942959 (C.T.O. "Personal Use Property")

Where a taxpayer's cottage had a pre-1972 cost of $20,000, a V-day value of $50,000 and a current fair market value of $90,000, on a purely technical basis his ACB will be $50,000 even if in 1980 he made capital additions of $5,000. In order to resolve this inequity, RC will add to the median amount the cost of any post-1971 capital additions.

8 April 1991 T.I. (Tax Window, No. 3, p. 2, ¶1259)

Where an individual transfers his shares of an operating company having a V-day value between their cost and fair market value, and elects under s. 85(1) at an amount equal to their cost, his proceeds of disposition for purposes of ITAR 26(3) will be determined under s. 85(1)(a) only, without regard to paragraph 85(1)(c.1).

IT-84 "Capital Property Owned on December 31, 1971 - Median Rule (Tax-Free Zone)".

Subsection 26(5)

See Also

Davidson Estate v. The Queen, 96 DTC 1652 (TCC)

The estate of a deceased taxpayer (which was deemed by s. 248 to be a person) was found to be dealing at arm's length with the taxpayer's surviving wife with respect to a transfer of shares from the estate to her, given that two of the three executors were unrelated to the deceased taxpayer, and the estate had complete discretion as to whether it would sell the shares or transfer them to the wife in specie. Accordingly, ITAR 26(5) did not apply in computing the adjusted cost base of the shares to the wife's estate following her death.

Administrative Policy

8 November 1994 Memorandum 942638 (C.T.O. "Transfer of Pre-1972 Property to a Trust")

The words "or events" were added in ITAR 26(5) for greater certainty in order to confirm that the provision applied to bequests.

Subsection 26(7)


The Queen v. Adelman, 93 DTC 5376 (FCTD)

The failure of the taxpayer to make a purported election under s. 26(7) resulted in the cost of his shares being determined without reference to that subsection.

Subsection 26(26)

Administrative Policy

S4-F5-C1 - Share for Share Exchange

1.18 In respect of shares which are rolled over under subsection 85.1(1), subsection 26(26) of the ITAR provides that where the exchanged shares were owned by the vendor on December 31, 1971 and thereafter without interruption until the time of the exchange, the shares of the purchaser are deemed to be those same shares owned on December 31, 1971. The tax-free zone is thereby preserved.

1.19 By virtue of subsection 26(28) of the ITAR, subsection 26(26) of the ITAR will apply to the exchanged shares even though there has been a previous application of any of subsections 26(5), (21), (24), (26) or (27) of the ITAR to those shares. …

Subsection 26(27)

Administrative Policy

ATR-22R (14 April 89)

S.26(27) does not apply to a change of common shares into special shares pursuant to a s. 86 reorganization of a pre-1972 company, where the shareholder had acquired its common shares after 1971.

Subsection 29(29)


The Queen v. Pan Ocean Oil Ltd., 94 DTC 6412 (FCA)

The taxpayer made continual outlays on scientific research carried out by its personnel in order to identify improvements to its methods for processing ores. In accepting the taxpayer's position that these expenditures (which were deducted by it under s. 72 of the pre-1972 Act) were not deductible from its resource profits for purposes of the depletion allowance. After asserting that "if a patent is obtained the patent will represent a capital asset" (p. 5349), Cattanach J. went on to state that he was "unable to distinguish between an expenditure on scientific research which results in a patent and a similar expenditure which does not result in a patent but does result in the accumulation of a store of new knowledge upon which the appellant can draw and does draw to keep itself to the forefront of the particular trade in which it is engaged" (p. 5349).