Principal Issues: [Tax Interpretations translation] What is the deemed capital cost pursuant to subparagraph 13(7)(e)(i) where a shareholder sells depreciable property to the shareholder’s corporation for more than fair market value?
Position: The capital cost is that determined pursuant to subparagraph 13(7)(e)(i). The difference between the sale price and the FMV of the property may be a benefit to the shareholder.
Reasons: The Income Tax Act.
January 4,2012
East of Quebec Tax Services Headquarters Office Income Tax Rulings Directorate Audit Division Attention: Diane Brunet
2011-040808
Transactions between a corporation and its shareholders
This is in response to your May 27, 2011 e-mail regarding the above subject.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
In particular, you wish to discuss the application of subparagraph 13(7)(e)(i) in the context where a shareholder has sold depreciable property to the corporation for a sum exceeding its fair market value ("FMV"). In the example you submitted to us - which is modeled on the one found on page 17 of the FP1018-000 Guide dealing with transactions between a corporation and its shareholders - the capital cost of the depreciable property to the corporation would exceed the FMV of the property at the time of the transfer. You wish confirmation of the correctness of this result.
Furthermore, you wish to confirm that in the event that shortly after the transaction the corporation sells the depreciable property at its FMV of $180,000 to an arm's length person, the corporation could incur a terminal loss.
If, however, the property was not sold until a few years later for an amount in excess of the amount determined pursuant to subparagraph 13(7)(e)(i), you believe that the disposition would generate a capital gain and that there could not be any recapture to be included in the income of the corporation.
Our Comments
Based on the example provided on page 17 of the FP1018-000 Guide, we agree with the conclusions in your May 27, 2011 e-mail.
However, where a shareholder sells depreciable property to the shareholder’s corporation for more than its FMV, we believe that the difference between the sale price and the FMV of the property at the time of the transfer must be included in computing the income of the shareholder pursuant to subsection 15(1).
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope that these comments will be of assistance.
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate