Principal Issues: In a given situation, what are the tax consequences of a taxpayer’s transfer of his or her interest in a family farm or fishing partnership for which he or she made the election of paragraph 73(4.1)(c) whereas the calculation of the ACB of that interest is negative?
Position: The taxpayer will generally not have to include a capital gain equal to the negative ACB at the time of the transfer. In addition, the child will have to take subparagraphs 73(4.1)(c)(ii) and (iii) into account in calculating the ACB of the interest.
Reasons: Analysis of the Act.
XXXXXXXXXX 2018-074776 I. Landry, M. Fisc. July 15, 2019
XXXXXXXXXX,
Subject: Section 73(4.1)(c) of the Income Tax Act
This letter is in response to your e-mail asking for our comments on the tax consequences of an inter vivos transfer of an interest in a family farm or fishing partnership (for which the election of paragraph 73(4.1)(c) of the Income Tax Act (the "Act") is made) while the computation of the adjusted cost base ("ACB") of that interest was negative.
Unless otherwise indicated, all statutory references in this letter are to the provisions of the Act.
For the purposes hereof, we have assumed that all the conditions for the application of subsection 73(4) and paragraph 73(4.1)(c) are met and that subsection 98(5) does not apply.
Comments
Where the conditions in subsection 73(4) are satisfied, the rules in subsection 73(4.1) apply. In particular, where the taxpayer receives no consideration in respect of the transfer to a child of the taxpayer of the taxpayer’s interest in a family farm or fishing partnership (other than an interest to which subsection 100(3) applies) and where the taxpayer makes an election for that subsection to apply in the taxpayer’s income tax return filed in the taxation year that includes the time of the transfer, paragraph 73(4.1)(c) provides that:
(i) the taxpayer is, except for the purpose of paragraph 98(5)(g), deemed not to have disposed of the property at the time of the transfer,
(ii) the child is deemed to have acquired the property at the time of the transfer at a cost equal to the cost to the taxpayer of the interest immediately before the transfer, and
(iii) each amount required by subsection 53(1) or (2) to be added or deducted in computing the adjusted cost base to the taxpayer, immediately before the transfer, of the property is deemed to be an amount required by subsection 53(1) or (2) to be added or deducted in computing at any time at or after the time of the transfer, the adjusted cost base to the child of the property;
In the submitted situation, where all the conditions for the application of subsection 73(4) are satisfied, paragraph 73(4.1)(c) applies and subsection 98(5) does not apply, the taxpayer is not required to include in computing the taxpayer’s income at the time of the transfer a capital gain equal to the negative ACB of the taxpayer’s interest in a family farm or fishing partnership. In addition, the child will be required to take into account subparagraphs 73(4.1)(c)(ii) and (iii) in computing the ACB of the child’s interest.
Best regards,
Michel Lambert, CPA, CA, M. Fisc.
Manager
Employment Income Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Directorate