Jan 4 1989
C. Tremblay (613) 957-2103
Dear Sirs:
This is in reply to your letter of October 4, 1988 requesting our opinion with respect to the application of section 42 of the Income Tax Act (the "Act") to the following situation.
Our understanding of the facts is as follows:
XXXX
Our Comments
The situation you describe appears to involve a completed transaction. A final determination of the tax consequences to Party B and Party A or answers to the specific questions asked will depend on all the relevant facts and how these are viewed by the District Office. Thus, we are unable to give you specific answers to your questions. However, we are prepared to offer the following general comments.
In our opinion, in a situation such as you describe, section 42 of the Act applies to the disposal of the property. The sale of the business from Party B to Party C provided for a warranty as to the terms of the lease that was being assigned. This warranty was an integral part of the consideration given for the price the purchaser agreed to pay. Since "Warranty" is not defined in the Income Tax Act, it must be given its ordinary meaning. In our view, the following definitions clearing indicate a warranty was given.
Warranty - An assurance or undertaking by the seller of property, express
or implied, that the property is or shall be as it is
represented or promised to be.(Funk and Wagnall's Standard College Dictionary)
Warranty - an express or implied undertaking on vendor's part that thing
sold is vendor's and is fit for use or fulfils specified
conditions; undertaking by insured person of truth of
statement or fulfilment of conditions.(Concise Oxford Dictionary)
XXXX
Furthermore, paragraph 9 of IT-365R2 states that "If, on the basis of the facts of the case, such as the terms of a contract, settlement or judgement, the amount received relates to a particular asset (tangible or intangible) which is sold, destroyed or abandoned as a consequence of the breach of contract, it will be considered proceeds of disposition of that asset or a part thereof, as the case may be."
As to the tax consequences of Party A, in our view, if Party A receives a prepayment of rent either by lump sum or by having the annuity assigned to him, which represents income from property (rather than income from a business) and reports his income on the accrual basis, in accordance with generally accepted accounting principles, only that portion of the rent prepayment which represents the use or possession of the related property for that year need be included in computing income for a particular taxation year (see IT-261R , paragraph 10).
We trust our comments are of assistance.
Yours truly,
ORIGINAL SIGNED BY
Wm. R. McColm
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch