2 May 2003 External T.I. 2003-0183995 - ACCOUNTS RECEIVABLE

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 CCRA.

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

Principal Issues:

Can a cash basis farmer transfer an account receivable to a corporation pursuant to subsection 85(1) of the Act? If so, can the corporation report, as income, the amount realized on such receivables in the year of receipt?

Position:

Section 85(1) of the Act cannot be used by a cash basis farmer for accounts receivable.

Reasons: Paragraph 15 of IT-433R

							2003-018399
XXXXXXXXXX 						Bob Naufal, CMA
(613) 957-2744
May 2, 2003								

Dear XXXXXXXXXX:

We are writing in response to your facsimile dated January 9, 2003 wherein you requested our views on whether an election under subsection 85(1) of the Income Tax Act (the "Act") may be made in respect of the transfer of an insurance receivable, held by a cash basis farmer, to a corporation. The insurance receivable results from a crop insurance contract that is settled prior to the incorporation of the individual's farming operation.

Our Comments

Written confirmation of the CCRA's position on the income tax consequences arising from proposed transactions is only provided under our advance income tax ruling service. Should you wish to proceed in this manner, we would be pleased to consider an application for an advance ruling submitted in the manner described in Information Circular 70-6R5. In the meantime, we offer the following comments, which are general in nature and are not to be construed as binding with respect to any particular situation.

In our view, an election under subsection 85(1) of the Act is not available in the circumstances outlined above. In this regard, we refer you to paragraph 15 of IT-433R, "Farming or fishing - Use of cash method," which states that a section 85 rollover is not available to a taxpayer using the cash method in respect of accounts receivable. If a cash basis taxpayer disposes of accounts receivable to a corporation in a non-arm's length transaction for shares of the corporation, the proceeds of disposition to the taxpayer and the cost to the corporation of the accounts receivable would be the fair market value of the shares.

In addition, paragraph 10 of IT-188R, "Sale of accounts receivable", provides that where a taxpayer who reports income from a farming or fishing business on a cash basis, disposes of, or ceases to carry on, all or part of the business, the amount received for the accounts receivable would be income to the taxpayer in the year of receipt pursuant to subsection 28(5) of the Act.

We trust our comments will be of some assistance.

Yours truly,

D. Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate