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P.W. Osborn (613) 957-2120
JUN 11 1990
Dear Sirs:
Re: Section 79 and Subsection 85(5.1) of the Income Tax Act
This is in reply to your letter of January 3, 1990 in which you requested our interpretation of the application of section 79 and subsection 85(5.1) of the Income Tax Act (the "Act"). The salient features of the hypothetical situation are as follows:
1) corporation X controls corporation Y;
2) X sells Y one depreciable property and this property secures the indebtedness of Y arising on its purchase of the asset;
3) the asset is the only depreciable property in its class for Y's capital cost allowance purposes;
4) Y fails to pay X under the terms of the sale agreement and subsequently quitclaims the property to X;
5) the quitclaim also extinguishes the $80,000 debt owing by X to Y under the sale agreement;
6) the original cost and the undepreciated capital cost of the property are $100,000; and
7) the fair market value of the property upon its reacquisition is $50,000.
The situation detailed above suggests a series of completed or pending transactions which should be the subject of an advanced tax ruling or a referral to the appropriate District Office. Although we are unable to provide any binding assurance with respect to your query, our observations follow.
In our opinion the more specific provisions of subsection 85(5.1) of the Act dealing with transfers between related persons override the general rules under section 79 of the Act. Under the Act a number of provisions restrict the deduction of losses arising on dispositions of capital property to related persons. These provisions include paragraph 40(2)(e) and subsection 85(4) of the Act. The use of subsection 85(5.1) of the Act to override section 79 of the Act mirrors the application of these other provisions limiting such losses. It is also our view that section 69 of the Act has no application when section 79 and subsection 85(5.1) of the Act have specific application.
In this situation the amount owing by Y to X is settled for an amount less than the principal amount of the debt. It is our opinion that section 80 of the Act will apply in these circumstances.
The comments set out in this letter are of a purely general nature and do not take into account considerations that might arise in the context of specific transactions. In accordance with paragraph 24 of Information Circular 70-6R, the comments expressed above do not constitute advance income tax ruling and are not binding on the Department.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch