G. Kauppinen 995-0051
XXXX
March 3, 1986
Dear Sirs:
We are writing in reply to your letter dated January 31 and further to our letter dated January 20 regarding section 47 of the Income Tax Act.
You have outlined the following situation for our comments.
A taxpayer owns $10,000 principal amount of debentures of ABC Corp., purchased at par when the debentures were issued. On November 14, 1985, he sells $8,000 principal amount for proceeds of $8,500. The following day, November 15, he purchases $13,000 principal amount at a cost of $14,000. Settlement date for both transactions is November 21. You wish to determine the capital gains consequences of the sale, and the adjusted cost base of the $15,000 principal amount of debentures that the taxpayer now owns.
You acknowledge that for subdivision c of Division B of Part I, settlement date is the relevant time for a disposition and that it is also the relevant time for an acquisition, as these must be concurrent events when looking at both sides of a single transaction.
With the acquisition and disposition occurring on the same day (settlement date - Nov. 21), the sequence of these transactions is important for the purposes of section 47. Specifically, you have posed the following questions.
What debentures does the taxpayer own at the time of the disposition, and does he still own the debentures sold, at the time the additional debentures were acquired? It appears to you that a sequence can be determined only if one looks at the trade date, and yet settlement date only is relevant for determining the time of a disposition and acquisition.
In particular, when applying section 47 to this situation, will the aggregate determined in subparagraph 47(1)(b)(i) include the $8,000 of debentures sold? If so, will the quotient determined in 47(l)(b)(ii), (as modified by subsection 47(2), include the $8,000 of debentures sold?
We offer the following comments with respect to the situation outlined. First we agree that a different tax result occurs whether the sale occurs prior to the purchase or vice-versa.
If the sale occurs first, the application of section 47 results in the following:
Adjusted cost base Principal
Opening balance 10,000 10,000
Sale 10,000 8,000 8,000
------------
10,000/8,000
------ ------
Purchase 2,000 2,000Closing aggregate balance 14,000 13,000
------ ------
16,000 15,000
------ ------Capital gain on sale: 8,500 - 8,000 = 500
If the purchase occurs first:
Adjusted cost base Principal
Opening balance 10,000 10,000
Purchase 14,000 13,000
------ ------
24,000 23,000Sale 24,000
------------
23,000/8,000 8,362 8,000
------ ------
Closing aggregate balance 15,638 15,000
------ ------Capital gain on sale: 8,500 - 8,362 = 138
In our view where the transactions are settled at the same time a reasonable approach to the problem you have posed would be to use the settlement date as the date of disposition but order the transactions on the basis of the trade dates.
This opinion is our best interpretation of the law as it applies generally. It may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, it is not binding on this Department.
Yours truly,
for Director. Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch