Principal Issues: Would the CRA be willing to consider the application of the position in paragraph 9 of Interpretation Bulletin IT-365R2 in the situation described in technical interpretation 2016-0652851C6?
Position: No.
Reasons: The position set out in paragraph 9 of Interpretation Bulletin IT-365R2 should be applied in the limited circumstances in which it was contemplated.
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 7
Application of damages on the cancellation of a purchase contract
Technical Interpretation 2016-0652851C6, dated October 7, 2016, submitted the following situation:
“An individual put the individual's personal home up for sale. An offer to purchase made by a third party was accepted by the individual. Before the transaction was notarized, the purchaser did an about face and sought to withdraw the offer to purchase. The buyer offered $50,000 in compensation to the individual, which the individual accepted.”
The CRA stated that an offer to purchase is generally a "promise" within the meaning of Article 1396 of the Civil Code of Québec and that the term "property" as defined in subsection 248(1) is a broad term which could extend to rights under a promise. As a result, the CRA indicated that the amount that the vendor received could be considered as proceeds of disposition of the vendor's right under the promise, which could result in a capital gain of $50,000 in that example.
However, the CRA had already stated in paragraph 9 of Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts, dated May 8, 1987 (now archived), that where the amount of compensation relates to a particular asset that was not disposed of, the amount will serve to reduce the cost of that asset to the taxpayer.
Question to the CRA
Will the CRA accept that the position set out in paragraph 9 of Interpretation Bulletin IT-365R2 applies in the situation described in Technical Interpretation 2016-0652851C6?
CRA response
Paragraph 9 of Interpretation Bulletin IT 365R2 effectively provides that "[w]here the amount of compensation relates to a particular asset that was not disposed of, the amount will serve to reduce the cost of that asset to the taxpayer." However, the CRA is of the view that the scope of this paragraph, which was written under the heading "Receipts in Respect of Non-Performance of Business Contracts" should be restricted to such a context.
Consequently, the CRA would not accept that the position set out in paragraph 9 of Interpretation Bulletin IT 365R2 applies to the situation described in the question. Thus, the CRA is still of the view that the amount received by the vendor would be treated as proceeds of disposition of its right arising from the promise. If this right is capital property, within the meaning of section 54, the vendor would realize a capital gain of $50,000.
Response prepared by
Danny Gagnon
613-670-9030
October 6, 2017
2017-070905
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-365R2 ARCHIVED "Damages, settlement and similar receipts", May 8, 1987.