Capital Property

In finding that the rights of an employee under a deferred share unit plan described in Reg. 6801(d) were not cap[ital property, and not eligible property that could be transferred to the employee’s personal holding company under s. 85(1), CRA stated that an “employee's rights under a DSU Plan generate income from an office or employment.”

In 2016-0652851C6 F, as a result of breach of a purchaser's obligation to purchase a personal residence, the individual vendor received $50,000 in damages from the defaulted purchaser,. which CRA stated was proceeds of disposition of a promise giving rise to a capital gain of $50,000. However, in IT-365R2, para. 9 (archived), CRA states that where an amount of compensation is received respecting a particular asset that was not disposed of, that amount reduces the cost of the asset.

In confirming its earlier position, CRA stated:

Paragraph 9 of Interpretation Bulletin IT 365R2 essentially provides that "[w]here the amount of compensation relates to a particular asset that was not disposed of, the amount will serve to reduce the cost of that asset to the taxpayer." However, the CRA is of the view that the scope of this paragraph, which was written under the heading "Receipts in Respect of Non-Performance of Business Contracts" should be restricted to such a context.

The distinction between a capital property (a property giving rise to a capital gain) and an eligible capital property (a property giving rise to an eligible capital amount) is circular: under ss. 14(1) and 14(5) - CEC-(E), an eligible capital amount is 1/2 of an amount receivable on capital account in respect of a business that is not included in computing a capital gain; and under s. 39(1)(a)(i), a capital gain does not include gain from the disposition of an eligible capital property.

When asked whether a capital property includes an eligible capital property, CRA did not directly discuss this circularity issue, and stated:

By virtue of subparagraph 39(1)(a)(i)…the gain from the disposition of an "eligible capital property" is excluded from the meaning of a taxpayer's “capital gain”... .

After noting that a deceased employee would be deemed under s. 7(1)(e) to dispose of unexercised stock options at fair market value on death, CRA stated:

Where a deceased taxpayer's estate receives an employee stock option, we generally accept to apply paragraph 69(1)(c). Consequently, the option is deemed to have been acquired by the estate at a cost equal to its fair market value....In general, if an estate exercises an employee stock option, subparagraph 49(3)(b)(ii) will apply to add the adjusted cost base (ACB) of the option to the cost of the shares acquired under the option.

A union ceased operations and distributed all its net funds to its members in amounts based on their respective seniority. CRA indicated that a portion of the sums distributed appeared to be taxable under s. 6(1)(j), with the balance being proceeds of disposition of union memberships (having a nominal ACB).

The taxpayer surrendered his stock options to his arm’s-length employer for consideration that was payable partly up front and partly in instalments that were never paid.

As “employee stock options subject to section 7 do not qualify as capital property where the gain on their disposition is treated as employment income and not as a capital gain,” the resulting loss did not qualify as being from “the disposition of capital property” to an arm’-length person under s. 40(2)(g)(ii).

A lump-sum payment received by the individual shareholder of a corporation upon a sale by that corporation of one of its business divisions and in consideration for a non-compete covenant given by the individual to the purchaser would be regarded as a capital gain arising on a disposition of "property" (the right of the individual to compete).

The disposition of money in Canadian currency would not result in a capital gain or capital loss. Therefore, money is not a capital property for purposes of s. 80(1).