29 February 2000 External T.I. 1999-0001435 - TRANS. OF CAPITAL PROPERTY TO A SPOUSE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: If the transferor receives a promissory note as consideration for property transferred (shares) to his spouse or spouse trust, is the adjusted cost base of the note equal to the value equal to the face amount of the note?

Position: Question of fact

Reasons: Generally, the ACB of capital property of property is the amount paid. However, it is also arguable that a note received from a spouse or a spouse trust may not be regarded as capital property but simply a promise to pay.

XXXXXXXXXX 							1999-000143
C. Tremblay
Attention: XXXXXXXXXX 

February 29, 2000

Dear Sir:

Re: Transfer of Capital Property to a Spouse

This is in reply to your letter of May 26, 1999, wherein you requested us to clarify whether or not the adjusted cost base (ACB) of a note issued to a taxpayer using the rollover provisions in either subsection 73(1) or subsection 70(6) of the Income Tax Act (the "Act") to transfer shares would be equal to the face amount of the note. We apologize for the delay in responding.

As requested we have considered your enquiry and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only. We should also note that we have limited our general comments to a transfer of property involving subsection 73(1) of the Act. The issuance of a note by the spouse or spouse trust in circumstances where subsection 70(6) of the Act applies is an uncommon scenario which raises several technical issues. We would only consider providing our comments on such issues once we have had the opportunity to review all the relevant documentation (e.g. the will, the trust agreement, the promissory note, etc.). If you have an actual transaction that involves these circumstances, you should contact your local tax services office (TSO). We would be glad to assist the TSO on this matter should they request our help.

Where subsection 73(1) of the Act applies and the taxpayer does not opt out of the provision, this subsection allows for the capital property in question to be transferred to a spouse or to a spouse trust at the transferor's ACB and the spouse or spouse trust is also deemed to have acquired the capital property for an amount equal to those proceeds. Further, subsection 73(1) of the Act does not preclude a taxpayer from receiving a note or similar debt instrument as consideration for transferred property. Thus, assuming that the requirements of subsection 73(1) of the Act is otherwise met, and that an election not to have subsection 73(1) of the Act apply is not made, the proceeds of disposition of the transferred property would be deemed to be equal to the ACB of the capital property to the taxpayer immediately before the transfer. Furthermore, the spouse or the spouse trust would be deemed to have acquired the shares at that time for an amount equal to such proceeds of disposition whether or not the transferor received a cash payment, a promissory note, or no consideration.

Subsection 73(1) of the Act does not have a specific rule with respect to the cost to the transferor of any particular property received by him or her as consideration for the disposition, unlike, for example, paragraphs 85(1)(f), (g) and (h) of the Act. Generally, the ACB of "capital property" would equal its cost to the taxpayer plus or minus the adjustments described in subsections 53(1) and (2) of the Act. Since "cost" is not a defined term in the Act, reference must be made to its ordinary meaning and jurisprudence. The Canada Customs and Revenue Agency has accepted that cost is "the sum or equivalent expended, paid or charged for something." In Her Majesty the Queen v. Geoffrey Stirling, 85 DTC 5199, the Federal Court of Appeal held that cost as used in the capital gains provisions means the price that the taxpayer gave up in order to get the asset. However, in some cases, property is considered to have been acquired at an amount other than cost by virtue of specific provisions of the Act. For example, where a capital property was acquired from a non-arm's length person, paragraph 69(1)(a) of the Act must also be considered in determining the cost of the capital property. This paragraph provides that property acquired from a non-arm's length person for an amount in excess of its fair market value at the time the taxpayer so acquired it is deemed to be acquired at its fair market value.

We should also note that in a situation where a promissory note is received by a spouse as consideration for capital property transferred to a spouse or spouse trust in a situation similar to the one described in your letter, we would have to examine the relevant agreements to determine if a promissory note is in fact "capital property" within the meaning of section 54 of the Act or "property" as defined under subsection 248(1) of the Act. In our view, the issuance of a promissory note acknowledges the existence of a debt but may not itself be a capital property "acquired" by the spouse.

For example, where a sales agreement does not clearly support the contention that a promissory note has been accepted as absolute payment, it is arguable that the note may not be regarded as capital property that has been acquired.

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch