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: Where a property is subject to an involuntary disposition and proceeds are, or may be, receivable from both an insurance settlement and a civil suit, should settlements in respect of those actions be considered separately?
Position: No.
Reasons: Previous position. Wording of the Act. Subsection 44(2) lists the circumstances that will trigger the timing of the deemed disposition of a property involuntarily disposed. In the situation described, paragraphs 44(2)(a) or (b) should be applicable, as the case may be. The application of 44(2) results in a single disposition.
2007-022760
XXXXXXXXXX James Atkinson CGA
(519) 457-4832
July 25, 2007
Dear XXXXXXXXXX:
Re: Involuntary Disposition - Subsection 44(2)
This is in response to your letter of March 12, 2007 concerning the application of subsection 44(2) of the Income Tax Act (Act) in the case of an involuntary disposition.
In your correspondence, you describe a hypothetical situation as follows:
1. Contractors are hired to perform construction work in a building,
2. While working, the contractors accidentally set fire to the building, with the result being that the building is destroyed,
3. During the course of the same year, the corporation (taxpayer) agrees to, and receives all the insurance compensation to which it is entitled from its insurer, and,
4. In the same year the corporation files a civil lawsuit against the contractors responsible for creating the fire seeking compensation to cover the difference between the fair market value of the assets destroyed and the compensation received from its insurer.
Your question is whether subsection 44(2) will deem the insurance compensation to become receivable by the taxpayer as proceeds of disposition at the particular time when compensation as a consequence of the civil suit against the contractors has been finally determined by the appropriate tribunal or court, or whether the insurance compensation has to be reported separately in the corporation's tax return in the year it has been agreed to.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Subsection 44(2) of the Act provides a rule to establish the date of disposition of a property and the date at which time an amount in respect of the proceeds are receivable where the proceeds of disposition are those described in paragraph (b), (c) or (d) of the definition of "proceeds of disposition" in subsection 13(21) of the Act or paragraph (b), (c) or (d) of the definition "proceeds of disposition" in section 54 of the Act. Generally speaking, this rule applies to the involuntary disposition of property (for example, theft, destruction or expropriation). Subsection 44(2) deems the disposition of a property to occur and an amount in respect of the proceeds of disposition to be receivable at the particular day or time in which the earliest of certain events enumerated in paragraphs (a) to (e) of the subsection occurs.
In the situation described, only paragraphs 44(2)(a) and (b) are relevant. Based on the application of paragraphs 44(2)(a) and (b), the particular time is the earlier of:
- the day the taxpayer agrees to an amount as full compensation for the property; and
- the day on which the taxpayer's compensation for the property is finally determined by a tribunal or court of competent jurisdiction (court) where a claim, suit, appeal or other proceeding has been taken before a tribunal or court.
In the situation you described, the issue is whether the corporation should report the insurance compensation as proceeds of disposition of the building before a tribunal or court determines the compensation from the corporation's lawsuit against the contractors on the basis that the insurance compensation is settlement of one action for which a disposition has occurred and the lawsuit against the contractors is a separate event that gives rise to a separate disposition. As explained below, in our view, there is only one disposition of the building.
As noted above, subsection 44(2) applies inter alia to compensation described in paragraph (c) of the definitions of "proceeds of disposition " in subsection 13(21) and section 54. This paragraph's description of compensation is: "compensation for property destroyed and any amount payable under a policy of insurance in respect of loss or destruction of property"; that is, the compensation is made up of two components, the first component comprising compensation for property destroyed (non-insurance proceeds) and the second component consisting of insurance proceeds. In the situation you described, there has been an involuntary loss of the building by fire. The amount payable under the insurance policy and any amount of compensation subsequently awarded by a tribunal or court in respect of the civil action will represent the full compensation in respect of the disposition of the building that is referred to in paragraph (c) of the definitions of "proceeds of disposition" mentioned above.
In our view, the expression "an amount as full compensation" in paragraph 44(2)(a) indicates the totality of the compensation described in paragraph (c) of the definitions of "proceeds of disposition" in subsection 13(21) and section 54, namely an amount equal to any compensation recoverable other than insurance proceeds plus insurance proceeds. Since in the case you described, the taxpayer has not agreed to the "first component" of compensation, paragraph 44(2)(a) does not apply to deem a disposition to have occurred when agreement was reached with respect to the insurance proceeds (second component).
In the facts presented and on the assumption that the lawsuit was initiated in good faith and pursued with all diligence, the answer to your question is that the date of disposition of the building will be the day (determination day) on which the lawsuit is settled and the compensation is finally determined; the insurance proceeds are deemed to have become receivable on such determination day. Subsection 44(2) of the Act will deem the corporation to own the building continuously until the determination day. At the determination day subsection 44(2) will deem the disposition of the building to occur and the proceeds, in their entirety, to be have become receivable.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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