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Proceeds of Disposition and Conditional Portion of Sales Price

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Proceeds of Disposition and Conditional Portion of Sales Price

Deragon v The Queen, 2015 TCC 294

At issue was whether the conditional elements of determining a sales price for shares should be taken into account in determining what the Proceeds of Disposition are for purposes of Income Tax Act section 54.

FACTS

The Appellant sold shares of a business. The purchase price was subject to a price adjustment clause in the agreement of purchase and sale. The sale price was adjusted resulting in a $500,000 reduction.

ANALYSIS

The Court referred to the definition of “proceeds of disposition” in section 54 of the ITA, where the definition includes such things as the sale price of the property.   In this case, it seemed obvious to the Court that the conditional portion of the sales price was part of the proceeds of disposition.

The contractual price adjustment clause provided that the share purchase price would be adjusted upwards or downwards to reflect certain factors. Also, a settlement agreement reduced the maximum amount of compensation the seller could obtain. The court held:

  • the increase of the balance of the conditional sales price and its spread over a number of years had not impact on the total purchase price as it was part of the purchase price;
  • The amount reimbursed under the settlement declaration could not be deducted from the purchase price as it was contingent on and dependent on a condition, and were not made;
  • The contract was structured, in line with CRA IT-462 “Payments based on production and use” to avoid application of ITA paragraph 12(1)(b);

Where the maximum price is set in contract with adjustments to reduce the price based on performance, the entire amount is included as the proceeds of disposition and any reduction is treated as a capital loss . The Court concluded at paragraph 41:

In my opinion, there is no basis for excluding from the proceeds of disposition of the shares, amounts for which reimbursement was conditional and which were not reimbursed for the last two years of the five-year period.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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New Principle Residence Exemption Income Tax Rules – Sas Ansari

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New Principle Residence Exemption Income Tax Rules

Department of Finance Information (release)
Canada Revenue Agency Information (release)

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The exemption from taxable income of gains from the sale of a taxpayer’s principal residence is found in in the Income Tax Act. The changes are generally positive in principle, but there is some risk of potential unintended problems or inconsistencies depending on how the provisions are drafted.

“Principal residence” is defined in section 54 for each taxation year to mean a property that is a “housing unit, leasehold interest in a housing unit or a share of the capital stock of a cooperative housing corporation” that is owned in any way in the year by a taxpayer if the statutory conditions are met.  Where the taxpayer is an individual other than a personal trust, the condition is that the unit “was ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer”.   There are some exclusions, including a designation requirement in paragraph (d) of the definition, and some relief from the ordinary inhabited requirement in section 54.1.  The exemption is claimed either under paragraph 40(2)(b) or (c) on the basis of a formula.  See generally Folio S1-F3-C2. (See additional information provided by CRA)

In part due to concerns about foreign ownership and tax avoidance by foreign owners of property, the Government of Canada as proposed to change the principal residence exemption.  This is accompanied with new mortgage rules that won’t be covered here.

There are both substantive and administrative changes proposed. The proposed rules would operate from October 2, 2016, on and transitional relief will be provided.

Substantively, the changes are meant to ensure that the exemption is only available in what the government considers to be appropriate cases in line with the (i) one property per family and (ii) Canadian residence limitations.  Under the proposed rule:

  • An individual who purchased a property at a time they were not a Canadian resident won’t be able to claim the exemption for that year;
  • Trusts designating a property as a principal residence for a tax year will have to meet additional eligibility criteria, particularly the trust will (i) have to be one of a spousal or common-law partner trust, an alter ego trust, a qualifying disability trust, or a trust for the benefit of a minor child of deceased parents; (ii) and the individual or eligible family member will have to be resident in Canada for the year AND will have to be a family member of the settlor of the trust.

Administrative Changes are meant to allow the CRA to monitor compliance with eligibility requirements by giving the CRA necessary information that has hereto been unavailable to it.  The proposed changes are:

  • A taxpayer will be required to report the disposition for which a principal residence exemption is claimed on the entirety of the gain (not previously required);
  • Late filed designations will be accepted by the CRA;
  • A new exception to the normal reassessment period limitation period will be added in respect to real estate disposition where the disposition is nor reported for the year of the disposition.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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