2 December 1982 Income Tax Severed Letter 7-2240 - [Transfer of "Nets and Traps"]

REVENU CANADA TAXATION MEMORANDUM

DATE December 2, 1982

TO: ST. JOHN'S DISTRICT OFFICE

FROM: HEAD OFFICE
        Corporate Ruling
        Directorate
        D.H. Tingley
        (613) 995-1178

ATTENTION: E.J. O'Neil
          Audit Review Division

RE Transfer of "Nets and Traps" under subsection 85(1) I.T.A. (7-2240) -----------------------------------

This is in reply to your memorandum of November 16, 1982 in connection with the transfer by a fisherman of his "Nets and Traps" to a corporation using the provisions of subsection 85(1) of the Income Tax Act ("Act").

You have advised that there are two methods that can be used by a fisherman to charge the costs of nets and traps against income. By one method the cost is capitalized and capital cost allowance is claimed. By the other method (accepted on an administrative basis) the nets and traps are inventoried and the actual loss in value is established and claimed, as shown in the following example:

Value of Nets & Traps on hand at end of last year   $10,000
Add: cost of Nets and Traps purchased                   $15,000
     cost of Net and Trap Material
     purchased                                           4,000    19,000
                                                         ------  -------
     Sub-Total                                                   $29,000

Deduct: Value of Nets, Traps, Twine,etc.
        on hand at end of this year                               18,000
                                                                 -------
Loss of Nets and Traps (claimed as an expense)                   $11,000
                                                                  ======

You have asked us for our views in respect of the following question:

"Notwithstanding the limitations provided on the range of amounts within which a transfer can be made pursuant to paragraphs 85(l) (b) and 85(l) (c); for fishermen who have utilized the 'inventorized' method of charging the costs of nets and traps, what further limitation provisions (i.e.- paragraphs 85(1)(c.1), or 85(1)(e)) would be applicable in respect of such property."

In our view, if a fisherman has treated his nets and traps as inventory and he has not taken any capital cost allowance in respect of such property, they should be treated as inventory for the purposes of subsection 85(1) of the Act. In this situation, paragraph 85(l) (c.1) of the Act would limit the amount that the fisherman and the corporation have agreed upon in their election in respect of such nets and traps to be no less than the lesser of their cost and fair market value.

On the other hand, if a fisherman has capitalized his nets and traps and claimed capital cost allowance (class 8), such pro- perty should be treated as depreciable property for the purposes of subsection 85(1) of the Act and paragraph 85 (1) (e) might apply.

Yours truly,

Chief Corporate Reorganizations Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch