Principal Issues: [TaxInterpretations translation]
We reconsidered our position taken in case 9918467 in light of additional information submitted by the taxpayer.
Position:
We maintain our position that the portion of the amount representing the repayment of payments made on the mortgage must be included in the taxpayer's income under paragraph 12(1)(x) of the Act.
Reasons:
The determination of the tax treatment to be accorded to amounts paid under the agreement rests, in our view, on the common intention of the two parties involved and their interpretation of it. In our view, it is reasonable in the present situation to consider that the clauses of the agreement represent the intention of both parties. It is clear from the terms of the agreement that the amount of $XXXXXXXXXX is being paid by Brother A as reimbursement for payments already made by Brother B on the mortgage that is being transferred to Brother A. Nothing in the agreement indicates the amount of the error or that the entire amount is being paid to correct that error. We are therefore unable to give this interpretation to the agreement.
June 13, 2000
XXXXXXXXXX Tax Services Office Headquarters de XXXXXXXXXX Ghislaine Landry, CGA Business Audit (613) 957-8953
Attention: XXXXXXXXXX 2000-002757
Tax treatment of amounts paid following a partition of property to end indivision
File: XXXXXXXXXX
This is further to the technical interpretation we issued on January 12, 2000 regarding the XXXXXXXXXX file (#9918467) and to the letter that Mr. Bill McCloskey, Deputy Commissioner of the Policy and Legislation Branch, sent to him on May 2, 2000. In this letter, Mr. McCloskey informed XXXXXXXXXX that his file would be re-examined in light of the additional information that he and his representatives had submitted. We hereby inform you of our position following the review of this additional information.
For the purposes of this letter, the following names will be replaced as follows:
XXXXXXXXXX: Brother A
XXXXXXXXXX: Brother B
Canada Customs and Revenue Agency: The Agency
Income Tax Act: The Act
ADDITIONAL INFORMATION
The following is a summary of the additional information submitted by XXXXXXXXXX and its representatives in letters and documents dated March 6, 7 and 9, 2000:
- According to Brother B, the error in the partition of XXXXXXXXXX would be $XXXXXXXXXX. The total amount received under the XXXXXXXXXX agreement does not compensate for the entire error, and the Agency, by imposing part of the correction, has increased Brother B's financial loss;
- The sole purpose of the XXXXXXXXXX agreement was to correct the error in the valuation of the properties and thus ensure that Brother A and Brother B ended up with properties having a value proportional to their interests in the corporation. The two elements of the agreement, namely the assumption of a debt and the payment by way of compensation of an amount of $XXXXXXXXXX, constitute a whole that cannot be separated. If each element of the agreement is analyzed separately, the spirit of the agreement is ignored;
- The Agency must respect the advance ruling that the partition of property between the partners was tax-neutral;
- The payment of $XXXXXXXXXX constituted the payment of a balance and not a reimbursement of expenses;
- The Agency's position in Brother B's case is based on the treatment given to those amounts in Brother A's case.
OUR POSITION
In our opinion, the determination of the tax treatment to be accorded to amounts paid under the XXXXXXXXXX agreement is based on the common intention of the two parties involved and their interpretation of it. In situations where there is an out-of-court settlement between the parties, it is more difficult to establish with certainty the intention and interpretation of both parties. In our opinion, it is reasonable in these situations to consider that the clauses of the agreement represent the intention of both parties and those clauses must be interpreted according to their ordinary meaning.
In the present situation, Brother B says that the error was greater than the amounts provided for in the agreement and that the entirety of those amounts should be considered a correction to the partition. However, the terms of the agreement do not, in our view, support this position. In our view, it is clear from the terms of the agreement that the amount of $XXXXXXXXXX was paid by Brother A as reimbursement for payments already made by Brother B on the mortgage that was being transferred to Brother A. Nothing in the agreement indicates the amount of the error or that the entire amount was being paid to correct that error. We are therefore unable to agree to this interpretation of the agreement.
We therefore maintain our position that the amount of $XXXXXXXXXX paid by Brother A constitutes a reimbursement and that that amount must be included in computing Brother B's income in XXXXXXXXXX pursuant to paragraph 12(1)(x) of the Act since all the conditions for the application of that paragraph are satisfied.
We would also like to make the following clarifications for the benefit of the taxpayer and his representatives. The advance ruling rendered in 1989 with respect to the partition was based on the facts presented in the ruling and on the proposed transactions described therein. We are not bound by that ruling with respect to transactions that occur following the partition. Furthermore, as you have already indicated, our position in this file is not based on the treatment in another file. The basis for our decision in this case is explained above. Finally, we are of the view that the amount of $XXXXXXXXXX is not a balancing adjustment since it is not an amount paid to compensate for the inequality of the lots but rather a reimbursement as indicated above. In that regard, the Agency's position on the treatment of a balancing adjustment is that it should be treated as proceeds of disposition.
For your information, a copy of this memo will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. 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 your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that our comments will help you settle the matter. Should you require additional information regarding this matter, please do not hesitate to contact us.
Ghislain Martineau
Acting Manager
Individuals and Business Section
Business and Publications Division
Income Tax Rulings Directorate
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