Small Business and General Division G. Thornley (613) 957-2101
MAY 17 1989
Dear Sirs: This is in reply to your letter dated March 8, 1989, respecting the applicability of section 14 of the Income Tax Act (the "Act") as amended by 1988 C.55, S. 7(1) and (3) in the following circumstances.
1. A taxpayer disposes of his proprietorship in 1984. The proceeds for this sale include a down payment and a five year deferred payout commencing January 1, 1986. The deferred payout is a function of the predetermined price, adjusted for the results of the intervening two years. The deferred payout is paid monthly from January 1, 1986 through to December 31, 1991.
2. The taxpayer files his pre-1988 tax returns annually and timely, reporting as business income one-half of the deferred proceeds received in each year, effectively claiming a reserve for amounts not due to him until subsequent years.
3. Revenue Canada, Taxation ("RCT") assesses the taxpayer consistent with the above treatment.
We hesitate to comment in respect of a particular fact situation which appears to be currently before a District. Taxation Office. We therefore suggest that you discuss the details of the above particular case with personnel of the appropriate District Taxation Office.
We do, however, offer the following comments which have general application only. It is our opinion that 3/4 of the amounts received (in respect of which subsection 14(1) has application) after the taxpayer's "adjustment time" i.e. in the fiscal periods commencing after 1987, are includable in an individual's cumulative eligible capital account. This also applies to installment amounts received after the taxpayers adjustment time that relate to dispositions that occurred prior to that time.
Generally, to the extent a taxpayer's cumulative eligible capital account is in a negative balance at the end of a taxation year it is included in income by virtue of subsection 14(1) of the Act. The amount by which the negative balance (the "excess") exceeds previously claimed deductions under paragraph 20(l)(b) of the Act is deemed to be a taxable capital gain for purposes of the capital gains exemption in section 110.6 of the Act.
Although you have not raised the issue, we note that if the amount collected in respect of the outstanding balance includes an element of interest due, any interest so collected would be reported as interest and would not form part of the amount included in a taxable capital gain.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch