Principal Issues: What is the appropriate tax treatment regarding the sale of properties in a specific situation?
Position: For one property, the proceed of disposition is not a source of income under section 3 and, for the other property, 69(1)(c) applies.
Reasons: Question of fact.
October 15, 2015
| Diane Poulin
Tax Services Office for the West of Québec Audit Division 3400, Avenue Jean-Béraud Laval QC H7T 2Z2 |
Headquarters
Rulings Directorate Section 1 of Business and Employment Income |
2014-052704
Tax treatment of amounts received for the disposition of property
Facts
The memo concerns the tax treatment of amounts received by XXXXXXXXXX (the "Taxpayer") as a result of the disposition of property, the "XXXXXXXXXX" ("Property 1") and the "XXXXXXXXXX" ("Property 2") during the course of the of the XXXXXXXXXX and XXXXXXXXXX taxation years.
All statutory references herein are references to the provisions of the Income Tax Act ("Act").
Context
We will not reiterate the facts of the current situation since they have been the subject of many discussions and are not in dispute.
Our Comments
Nature of Property 1 transactions
According to the facts and documents submitted to us for Property 1, the Canada Revenue Agency ("CRA") is of the view that the amount the Taxpayer received on the disposition of that property is not derived from a source of taxable income that comes within section 3.
Expenditures incurred respecting Property 1
Since there is no source of income under section 3, the expenses incurred respecting Property 1 are not deductible in computing the Taxpayer's income.
Nature of Property 2 transactions
According to the facts and documents submitted to us respecting Property 2, the CRA is of the view that the Taxpayer acquired the property as a gift. Consequently, for the purposes of paragraph 69(1)(c), the Taxpayer acquired the property at its fair market value at the time of gift.
Regarding the sum of US $XXXXXXXXXX that the Taxpayer paid, the CRA believes that this amount is not a consideration for the acquisition of Property 2.
Respecting the disposition of Property 2, the CRA is of the view that this transaction is capital in nature. Since the time of the gift and the time of disposition of the property by the Taxpayer are close in time, the CRA is of the view that the adjusted cost base ("ACB") of the property corresponds to the proceeds of disposition
Determination of the capital gain or loss respecting Property 2
Under subparagraph 40(1)(a)(i), a taxpayer’s gain for a taxation year from the disposition of any property disposed of in the year is the amount, if any, by which the taxpayer’s proceeds of disposition exceed the total of the ACB to the taxpayer of the property, calculated immediately before the disposition, d any outlays or expenses to the extent that they were made or incurred by the taxpayer for the purpose of making the disposition.
Under subparagraph 40(1)(b)(i), a taxpayer’s loss for a taxation year from the disposition of any property is, if the property was disposed of in the year, the amount, if any, by which the total ACB to the taxpayer of the property immediately before the disposition, and any outlays and expenses to the extent that they were made or incurred by the taxpayer for the purpose of making the disposition, exceed the taxpayer’s proceeds of disposition of the property.
In the Avis Immobilien GMBH case (footnote 1), which was confirmed by the Federal Court of Appeal, the Tax Court of Canada ("TCC") determined that the expression "for the purpose of" in subparagraph 40(1)(a)(i) means the immediate or initial purpose and not the eventual or final goal that a taxpayer may have in mind. The TCC added that it was not Parliament’s intent to give the term a meaning that would allow the most indirect or distantly related outlay or expense to reduce a capital gain. Finally, according to the TCC, only the outlays and expenses incurred or made directly for the purpose of making the disposition of the property are considered in subparagraph 40(1)(a)(i), and not those which may have merely facilitated the disposition. The CRA is of the view that these principles established for the purposes of subparagraph 40(1)(a)(i) also apply to subparagraph 40(1)(b)(i).
The determination of whether a specific expense was made or incurred for the purpose of a disposition of a property is a question of fact, and in this regard, it is necessary to consider all the facts and circumstances of a particular situation. Consistent with the Avis Immobilien GMBH case, all expenses incurred in the course of a disposition of property are not necessarily expenditures made or incurred for the purpose of making the disposition for the purposes of subparagraph 40(1)(a)(i) or 40(1)(b)(i).
To make this determination, we suggest your review of each expenditure in this file in light of the principles established in the Avis Immobilien GMBH case.
Deductible expenses under article 9 with respect to Property 2
Where a taxpayer derives income from property, the taxpayer can generally deduct under section 9 the expenses incurred to earn income from the property.
However, subsection 9(3) provides that income from a property excludes a capital gain from the disposition of that property, and loss from a property excludes a capital loss from the disposition of that property.
Therefore, the expenses the Taxpayer has incurred in relation to Property 2 are not deductible in computing the Taxpayer's income for the purposes of section 9.
We trust that these comments will be of assistance.
Michel Lambert, CPA, CA, M. Fisc.
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, page footnotes contained in the original document are reproduced below:
1 Case of Avis Immobilien GMBH v. The Queen 94 DTC 1039