Subsection 79.1(2) - Seizure of property
See Also
568864 B.C. Ltd. v. The Queen, 2014 TCC 373
The taxpayer - which was a member of group of companies that included a producer of exterior trim boards for construction ("W.L.") – earned management fees and rental fees from W.L. In 2003, the taxpayer lent $3.5 million to an arm's length supplier of specially prepared boards ("Interact") secured by patents held by Interact's principal ("Cable").
Following the bankruptcy of Interact and Cable earlier in 2005, the trustee in bankruptcy for Cable released the patents to the taxpayer "subject to ultimate accounting for the proceeds of disposition" - by which the trustee apparently meant to address the unlikely event that the taxpayer could sell the patents for more than the amount it was owed by Interact. Legal title in the patent remained with the trustee.
The taxpayer sold the patents to a corporation owned by the taxpayer's principal's son for $1 in September 2007, and claimed a terminal loss of $3.9 million (based on it having been deemed under s. 79.1 (6) to have acquired them at a cost of $3.5 million plus $0.4 million of relevant legal costs). The trustee (who was not aware of the 2007 transfer) transferred legal title in the patents to the taxpayer in 2010, in exchange for the taxpayer reducing its secured claim by $1 million. The Minister denied the terminal loss - among other reasons, arguing that taxpayer had not become the patents' beneficial owner by the time it sold them in September 2007.
Rip J allowed the taxpayer's appeal. Based on the plain (i.e. dictionary) meaning of the words "beneficial owner, and on the "incidents of title" test in Wardean, he stated (at para. 92):
A beneficial owner of property therefore, is someone who is the real owner of the property, a person who is in possession of the property, a person who could derive income from the property or otherwise use it and who is the person who suffers any loss if the property is damaged or destroyed. The beneficial owner is the only person who can dispose of the property in his or her sole discretion without interference.
The taxpayer had obtained the incidents of title when the trustee released the patents in 2005: the taxpayer possessed the physical patent documents, the trustee confirmed to the patent agent that the taxpayer would henceforth be instructing the patent agent and did not thereafter interfere with the taxpayer's use and enjoyment, the taxpayer assumed the costs of ownership and defended the patent ownership rights against the claims of Cable's common law spouse (who claimed a constructive trust in her favour).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Ownership | beneficial ownership in patents | 434 |
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) | patents were acquired for future joint venture use | 202 |
Administrative Policy
6 December 2011 TEI Roundtable, 2011-0427101C6 - Seizure of Property
In response to a submission that s. 79.1 should apply where the property seized by a creditor includes shares of the debtor or a partnership interest in the debtor, CRA first noted that "the property referred to in paragraph 79.1(2)(a)...is not limited to, a property used to secure the debt referred to in paragraph 79.1(2)(b)," CRA then stated that in order for s. 79.1 to apply, the property which is seized
must have been held by the debtor and would not include an ownership interest in the debtor (i.e., would not include shares of, or a partnership interest in, the debtor.
S. 79.1 also will not apply if a subsidiary of the creditor acquires the beneficial ownership of assets of the debtor as a consequence of the debtor's failure to pay.
General comments on the meaning of beneficial ownership.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Ownership | incidents of ownership | 168 |
Subsection 79.1(6) - Cost of seized properties for creditor
Administrative Policy
23 January 1996 External T.I. 9527905 F - ARTICLE 79 ET 80
Section 69(1) does not apply where ss.79(3) and 79.1(6) determine respectively the proceeds of disposition and cost of a surrendered property.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount | 19 | |
| Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(8) | 19 |
28 July 1995 External T.I. 9512685 - SEIZURE OF PROPERTY
"Although subsection 79.1(6) of the Act refers to a property seized by a creditor 'in respect of one or more debts', it is our opinion that it would not be unreasonable to include all debts owing to that creditor, with respect to the property seized by that particular creditor, in the determination of the cost to that creditor of the seized property ..."
Paragraph 79.1(6)(b)
Administrative Policy
11 June 2003 External T.I. 2002-0175975 F - TRANSFERT-ENT. EXPLOITEE ACTIVEMENT
What constitutes an “outlay or expense made or incurred … by the creditor at or before that time [of the seizure] to protect the creditor’s … right, in the particular property” for the purposes of s. 79.1(6)(b). CCRA responded:
[B]y virtue of subsection 79.1(6), where a creditor seizes property in a taxation year in respect of one or more debts, the cost to the creditor of the property includes inter alia the total of all disbursements made or expenses incurred by the creditor on or before the time of seizure. As noted in paragraph 7 of IT-505, those outlays could include realty tax, insurance premiums, utility rates, necessary repairs and maintenance. Paragraph 79.1(6)(b), however, ignores certain expenses that were, for example, either included in the cost of another property, included in the balance of undeducted outlays or expenses, or deductible under another provision of the Act.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(ii) | application of 24-month test where assets of business transferred to partnership of individuals, transferred to corporation under s. 95(2), partnership wound-up under s. 98(3) and shares sold | 523 |