Principal Issues: Where a property is subject to an involuntary disposition and only a portion of the proceeds have been received how should such amounts be treated for income tax purposes?
Position: The rules in subsection 44(2) will determine the timing of when such amounts should be reported.
Reasons: The law.
December 22, 2010
Winnipeg TSO HEADQUARTERS Audit Division Income Tax Rulings Michael Cooke C.A. Attention : Maryanne Kelly
2010-039018
Involuntary Disposition of Property
This is in response to your email of December 14, 2010, concerning the application of subsection 44(2) of the Income Tax Act (the "Act") in the case of an involuntary disposition of property.
In your correspondence, you indicate that the assets used in a XXXXXXXXXX business are held in two separate corporations. One corporation ("Aco") owns the land and building used in that business while another corporation ("Bco") owns all of the related equipment that is used in that business. As a result of a fire that occurred sometime during XXXXXXXXXX of XXXXXXXXXX , the building and its contents (i.e., equipment used by Bco in the XXXXXXXXXX business) were totally destroyed. Subsequent to the fire, Aco and Bco received the following insurance proceeds. In respect of the building, Aco received insurance proceeds of $XXXXXXXXXX in XXXXXXXXXX , $XXXXXXXXXX in XXXXXXXXXX and $XXXXXXXXXX in XXXXXXXXXX . In respect of the equipment, Bco received insurance proceeds of $XXXXXXXXXX in XXXXXXXXXX and $XXXXXXXXXX in XXXXXXXXXX . The final insurance settlement for the equipment is expected to be around $XXXXXXXXXX . Aco and Bco each have a taxation year ending on XXXXXXXXXX .
Your indicate that it is your understanding that under subsection 44(2) of the Act each of Aco and Bco will be deemed to have a disposition of the building or equipment, as the case may be, on the day that is two years following the day in which such property was destroyed. However, you wanted to know how each of Aco and Bco should treat the insurance proceeds that they have already received.
Our Comments:
Subsection 44(2) of the Act provides a rule to establish the date of disposition of a property and the date at which time an amount in respect of the proceeds are deemed to be receivable where the proceeds of disposition are described in paragraph (b), (c) or (d) of the definition of "proceeds of disposition" in subsection 13(21) of the Act or paragraph (b), (c) or (d) of the definition "proceeds of disposition" in section 54 of the Act. Generally speaking, this rule applies to an involuntary disposition of property as a result of theft, destruction or expropriation. Subsection 44(2) deems the disposition of the particular property to occur and an amount in respect of the proceeds of disposition to be receivable for the purposes of the Act at the particular day or time in which the earliest of certain events described in paragraphs (a) to (e) of that subsection occurs.
In the situation you described, there has been an involuntary loss of Aco's building and Bco's equipment due to a fire. Assuming there has not been any claim, suit, appeal or any other proceeding taken by Aco or Bco that is before any tribunal or court of competent jurisdiction, only paragraphs 44(2)(a) and (c) of the Act appear to be relevant to this situation. Based on the application of paragraphs 44(2)(a) and (c) of the Act, the particular time of disposition will essentially be the earlier of:
1. the day Aco or Bco, as the case may be, agrees to an amount as full compensation for the destroyed property; and
2. the day that is two years following the day Aco and Bco's property was destroyed by the fire.
Accordingly, assuming Aco or Bco did not otherwise agree to any amount as full consideration before the day that is two years following the day Aco's and Bco's property was destroyed by the fire, such dispositions would be reported by Aco and Bco, as the case may be, in its taxation year ending XXXXXXXXXX . Subsection 44(2) of the Act will also deem Aco and Bco to have owned such property continuously until the particular time of disposition. The fact that Aco and Bco have already received some insurance proceeds does not, in and of itself, affect the timing of the deemed disposition under subsection 44(2) of the Act and such proceeds will be taken into account once the total amount receivable has otherwise been determined.
We trust that these comments will be of assistance.
Yours truly,
Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch