Principal Issues: [TaxInterpretations translation] 1. How is an election made under any of paragraphs 56.4(3)(b) and (c) if there is no prescribed form?
2. Will section 600 of the Income Tax Regulations be amended to add paragraphs 56.4(3)(b) and (c), as proposed in the February 27, 2004 legislative proposals, so that those provisions are prescribed for the purposes of subsection 220(3.2) of the Act?
Position: 1. Since the CRA has not yet issued a prescribed form, the recipient and payer must submit and sign the letter on the CRA website regarding the non-compete undertaking.
2. Currently under review.
Reasons: The letter to be filed pending the prescribed form was issued by the CRA after the client's email was received.
XXXXXXXXXX Sylvie Labarre, CA
2004-010355
April 7, 2005
Dear Sir,
Subject: Choice - non-compete undertaking
This is in response to your email of November 17, 2004, requesting our views on the paragraph 56.4(3)(c) election as proposed in the February 27, 2004, legislative proposals (the "Proposals"). We apologize for the delay in responding to your request.
You wish to know how to proceed with the election since there is no prescribed form.
You also asked whether section 600 of the Income Tax Regulations will be amended to add the new paragraphs 56.4(3)(b) and (c) that are proposed in the Proposals, as prescribed provisions for the purposes of subsection 220(3.2) of the Income Tax Act (the "Act").
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
The proposed changes to the Act provide that any amount received or receivable as consideration for a non-compete covenant will be treated as ordinary income for income tax purposes. These new provisions apply to any amount received or receivable by a taxpayer after October 7, 2003, except for amounts received before 2005 pursuant to a written contract, entered into on or before October 7, 2003, by parties dealing at arm's length.
Some exceptions to this rule are found in subsection 56.4(3), as proposed in the Proposals. Paragraphs 56.4(3)(b) and (c), as proposed in the Proposals, indicate that the exception in each of those paragraphs applies so long as the vendor and the purchaser elect in prescribed form to rely on that paragraph and each attaches a copy of the form to their income tax return for their taxation year that includes the date the non-compete covenant was entered into, which return is filed with the Minister on or before their filing-due date for the year.
Since the CRA has not yet issued a prescribed form for making the election under a non-compete covenant, both the vendor and the purchaser will need to submit and sign the letter found at one of the following Internet addresses:
http://www.cra-arc.gc.ca/tax/business/topics/life-events/selling/restric...
or
http://www.cra-arc.gc.ca/tax/business/topics/life-events/selling/restric...
The CRA and the Department of Finance are currently considering amending section 600 of the Income Tax Regulations to add the proposed paragraphs 56.4(3)(b) and (c) to the provisions in that section.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch