Principal Issues: [TaxInterpretations translation] If an option is for different types of property including a principal residence, can the portion of the consideration received for the option and its extension that can reasonably be attributed to the principal residence be excluded from the application of subsection 49(1)?
Position: It would be reasonable to exclude the portion of the consideration that can be attributed to the disposition of the principal residence.
Reasons: Same treatment as if separate options had been granted for each type of property.
XXXXXXXXXX 2007-023038 Sylvie Labarre, CA April 17, 2007
Dear Sir,
Subject: Property purchase option
This is in response to the telephone conversations we had (Labarre/XXXXXXXXXX) and to the documents you sent us following the letter we sent you on December 21, 2006, bearing the number 2006-017085.
Document 2006-017085 discussed the tax treatment of amounts your father received as a result of granting an option to a prospective purchaser of the farm he owned. We determined the tax consequences taking into account that the option was granted in respect of the farmland and not in respect of a principal residence. Consequently, in our letter 2006-017085, we did not take into account the exception to the application of the disposition rules in subsection 49(1) of the Income Tax Act (the "Act") for an option relating to the acquisition or disposition of a principal residence.
You believe that a portion of the consideration received for the option and its extension should be excluded from the application of subsection 49(1) to reflect the fact that the option and its extension is in part for the disposition of a principal residence.
Subsection 49(1) states that, in general, the granting of an option is equivalent to the disposition of a property with a nil adjusted cost base unless it is, inter alia, an option to acquire or dispose of a principal residence. In the present situation, there is no separate option for the different types of property covered by the option, including the principal residence. However, it would be reasonable to consider that part of the consideration received for the option and its extension was received for an option to dispose of the principal residence and that the other part of the consideration received for the option and its extension was not received for an option to dispose of the principal residence, and to treat each part as the grant of a separate option. Thus, the portion of the consideration received for the option and its extension allocated to the option for the disposition of the principal residence would not form part of the proceeds of disposition included pursuant to subsection 49(1).
The allocation of the consideration received for the option and its extension between the portion for the disposition of the principal residence and the portion for the disposition of the farmland could be based on the reasonable value attributed to each type of property in relation to the total value. We do not express an opinion on what that value is. As noted in paragraph 5 of the Interpretation Bulletin IT-220R2, even where a value is specified in an agreement for each class or kind of property or service and the total consideration for the whole sale is reasonable, a re-allocation of the consideration may, nevertheless, be made by the Canada Revenue Agency if it determines that some or all of the values specified are unreasonable.
If consideration was received in 2006 for the extension of the option, a similar calculation should be made to determine the consideration attributed to the option that was not for the disposition of the principal residence.
The other comments in the letter relating to the exercise of the option will not apply in 2006 as XXXXXXXXXX did not exercise the option in 2006. However, those comments could apply in the year of exercise of the option.
We hope you find these comments of assistance. If you require any further information regarding the content of this document, please do not hesitate to contact us.
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch