See Also
Bergeron v. The Queen, 2013 DTC 1081 [at 450], 2013 TCC 13
The taxpayer managed a the immigrant investor program at an investment dealer ("Cannacord") and was entitled to receive certain amounts from his employer upon the maturity of the underlying investments. The program was transferred to another firm, for whom the taxpayer continued to manage the program on a contractual basis. Under the transfer agreement, the taxpayer was entitled to "deferred closing fees" in respect of the above deferred amounts.
Boyle J affirmed the Minister's position that the deferred closing fees, when later received, were paid pursuant to a contract for services, and thus gave rise to income rather than capital gains. Section 42 stipulates a disposition of capital property, and therefore did not apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Contracts | 117 |
Fortino v. R., 97 DTC 55, [1997] 2 CTC 2184 (TCC), briefly aff'd on procedural grounds 2000 DTC 6060 (FCA)
Lump sums received by individual vendors of shares for their execution of non-competition agreements with the share purchaser did not form part of the proceeds of disposition of their shares because their non-compete covenants did not represent "conditional obligations" i.e., obligations where there is uncertainty in respect of any of three things: "(1) whether the payment will be made; (2) the amount payable; or (3) the time at which the payment shall be made". (p. 71)
Administrative Policy
21 May 2003 Internal T.I. 2003-0001407 F - DISPOSITIONS SUBJECT TO WARRANTY
Where, after selling a property, the vendor settled a claim of the purchaser based on a latent defect in the property with the payment of a lump sum (which was not allocated between the damages amount, interest and the purchaser’s costs) as well as paying its own legal costs, s. 42 applied to deem a capital loss in the year in which it made those payments.
19 January 2015 External T.I. 2013-0511381E5 F - Disposition subject to warranty
An estate pays pursuant to a claim made on a warranty clause in a real estate sale agreement made by the deceased. Can the estate claim a loss under s. 42(1)(b)? CRA responded (TaxInterpretations translation):
[T]he outlay or expense incurred by the estate, under the terms of the indemnity given by the vendor respecting property sold before the vendor's death, became payable by the estate after the death. Consequently, the estate cannot claim a capital loss…for purposes of paragraph 42(1)(b).
26 November 2014 External T.I. 2014-0551641E5 F - Winding-up and subsection 42(1)
In accordance with IT-126R2, para. 5(b), a corporation is considered to have "been wound up" on the basis that it has been liquidated and the only reasons for not yet filing articles of dissolution is outstanding litigation. CRA considers that if the corporation subsequently settles the litigation by making a payment that otherwise qualifies as a deemed capital loss under s. 42(1)(b)(ii), it can claim that capital loss in the year of payment thereof (i.e., after it is considered for s. 88 purposes to have been wound up).
See summary under s. 88(2).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) | effective time of winding-up not delayed by potential litigation liability | 104 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(2) | corporation permitted to claim a s. 42(1)(b) loss after (per IT-126R2) it has been wound up | 140 |
2 October 2014 External T.I. 2013-0513281E5 F - Interaction entre 42(1) et 39(1)c)
An individual after having sold shares of a small business corporation is required to pay $100,000 to the purchaser and incurs related legal expenses of $20,000 as a result of a breach of the terms of the sale agreement. May a business investment loss be claimed respecting a taxation year ending after 4 November 2010, or after 27 February 2004 and before 5 November 2010? CRA responded (TaxInterpretations translation):
For the taxation years and the fiscal periods ending after 27 February 2004, …if subparagraph 42(1)(b)(i) applies…the proceeds of disposition of the SBC shares would be reduced. Consequently, if all the conditions stipulated in paragraph 39(1)(c) were satisfied respecting that SBC shares, it would be possible…to claim a BIL for those years.
For taxation years ending before 28 February 2004, section 42 provides that the expense is deemed to be a loss sustained on the disposition of a property. Given that the deemed loss would not be connected to a particular property,…no BIL could be claimed… .
[F]or expenses made in a taxation year which ends after 4 November 2010…no BIL can be claimed respecting a capital loss resulting from the disposition of property deemed to occur in accordance with subparagraph 42(1)(b)(ii) because the loss would not be connected to a particular property.
[F]or taxation years or fiscal periods ending after 27 February and before 5 November 2010… subparagraph 42(1)(b)(ii) deems a capital loss to result from the disposition of shares of the SBC in the current situation. Consequently, if all the conditions stipulated in paragraph 39(1)(c) were satisfied, it would be possible…to claim a BIL for those years.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) | s. 42(1)(b)(ii) payments currently do not qualify as BILs | 84 |
22 January 2004 Internal T.I. 2003-0047561I7 F - Effet de la délégation puis de la subrogation
The taxpayer sold an immovable to a purchaser who assumed a mortgage on the property. The purchaser subsequently defaulted, and the mortgagee sold the property pursuant to a court order, and the mortgagee also obtained a court order ordering the taxpayer to pay the unpaid balance (which the taxpayer did), with the mortgagee also agreeing that, upon such payment, the taxpayer would be subrogated to the mortgagee’s claim against the purchaser for such balance. The purchaser filed for bankruptcy and the taxpayer then obtained a payment from the trustee in bankruptcy in partial satisfaction of its subrogated claim.
CCRA found that the taxpayer could not claim a loss pursuant to s. 42 or on the basis of an actual disposition when it made the court-ordered payment to the mortgagee, “since the taxpayer did not pay this amount under a warranty but in payment of the mortgage for which the taxpayer remained the debtor” and that the payment “did not represent a disposition of property.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii) | s. 40(2)(g)(ii) did not apply to a debt claim acquired by subrogation against a defaulted debtor since the claim was interest-bearing | 243 |
25 October 1994 External T.I. 9426485 - HAA 7781-4
When a taxpayer is disposing of the shares of a corporation as well as land and building held personally by him and used in the business of the corporation, a non-competition covenant generally will be given by him with respect to the sale of the shares, with the result that s. 42 should apply.
10 September 1991 T.I. (Tax Window, No. 11, p. 15, ¶1512)
S.42 applies to warranties implied or imposed by law.
Articles
Keith R. Hennel, "Escrow Arrangements in Acquisition Agreements: What Are You Creating?", CCH Tax Topics, No. 2176, November 21, 2013, p. 1, at 3
Where an amount of the purchase price is held back by the purchaser to satisfy warranties given by the vendor in relation to the sale of shares, for example, it is possible that separate consideration has been identified for the warranties. In such a case the treatment of the amount for tax purposes is governed by section 42 of the Act.
Richardson, "Purchase and Sale of a Business: Income Tax Aspects of Warranties, Price Adjustments, and Earn-Outs", 1990 Corporate Management Tax Conference Report, c. 10, pp. 10:3-10:7.
Subsection 42(1)
Paragraph 42(1)(b)
Administrative Policy
30 October 2008 External T.I. 2006-0198381E5 F - Disposition d'un BUP - application de l'article 42
In the year following the disposition of the taxpayer’s principal residence, the taxpayer paid an amount to the purchaser of the property following the latter's sending of a formal notice of default relating to latent defects in the property. CRA stated:
[T]he amount paid … as compensation for latent defects in the property represents an expense incurred or made as consideration for warranties, covenants or other conditional or contingent obligations under section 42. However, this amount relates to the disposition of … a personal-use property for which a loss is deemed to be nil … by virtue of subparagraph 40(2)(g)(iii).
28 July 2015 External T.I. 2015-0585431E5 F - Frais juridiques
What is the treatment of legal expenses respecting a hidden defect in a rental property disposed of by the taxpayer? CRA responded:
[T]he legal fees incurred by a taxpayer in defending a hidden defects lawsuit on a rental property that was disposed of are expenditures to which paragraph 42(1)(b) applies.
In the case where the expense is paid or payable no later than the specified date, it is deemed by subparagraph 42(1)(b)(i) to reduce the… proceeds of disposition of the subject property for the taxation year or fiscal period in which the disposition occurred. …
In the case where the expense is paid or payable only after the period specified in subparagraph 42(1)(b)(i), subparagraph (ii) deems the expense to be a capital loss of the vendor from the disposition of a property.