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.

Principal Issues: Will the transitional relief discussed in the October 9, 2003, comfort letter from the Department of Finance apply to the proposed amendments to subsection 20(8) announced on December 20, 2002?

Position: No comments provided.

Reasons: No further amendments to the Act have been proposed to implement the transitional relief.

XXXXXXXXXX T. Young, CA
2004-006528
May 12, 2004

Dear XXXXXXXXXX:

Re: Subsection 20(8) of the Income Tax Act (the "Act")

We are writing in response to your letter of March 3, 2004, concerning proposed amendments to subsection 20(8) of the Act. We also acknowledge our telephone conversations (Young / XXXXXXXXXX) of May 4 and 5, 2004.

Background

Where an amount has been included in computing a taxpayer's business income for the year or for a preceding taxation year in respect of property sold in the course of the business and all or part of the amount is not due until after the end of the year, paragraph 20(1)(n) of the Act permits the taxpayer to claim a reasonable reserve in respect of the profit from the sale. Where the property is real property, there is an additional requirement that all or part of the amount not be due until more than two years after the end of the year. Subsection 20(8) of the Act provides that the taxpayer will not be able to claim a reserve under paragraph 20(1)(n) in certain circumstances.

A proposed amendment to subsection 20(8) of the Act announced on December 20, 2002, provides that the reserve under paragraph 20(1)(n) will not be available to a taxpayer in certain non-arm's length situations (for example, where the purchaser of the property was a corporation that controlled the taxpayer). If enacted, the amendment will apply to all sales that occur after December 20, 2002. In a published comfort letter dated October 9, 2003, the Tax Policy Branch of the Department of Finance stated:

[We] will propose to the Minister of Finance that property transferred before 2004, pursuant to an agreement in writing made before December 21, 2002, not be subject to the proposed amendment (to subsection 20(8) of the Act). However, the amount that the transferor would be entitled to claim as a reserve for a taxation year under paragraph 20(1)(n) of the Act would be reduced if the transferee has received, before the end of the taxation year of the transferor, proceeds from a subsequent disposition of the property."

You asked for our views on whether the transitional relief outlined in the letter will be granted.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, which can be found on our web site at www.cra.gc.ca. Since draft legislation to enact the transitional relief described in the October 9, 2003 Department of Finance comfort letter has yet to be proposed, we are unable to provide you with comments. In this regard, you may wish to contact:

Mr. Brian Ernewein

Director, Tax Legislation Division
Tax Policy Branch
Department of Finance
L'Esplanade Laurier
140 O'Connor Street

Ottawa ON K1A 0G5.

We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett, B. Comm.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch