REVENUE CANADA TAXATION INTERPRETATION BULLETIN NUMBER: IT-170R DATE: August 25, 1980 SUBJECT: INCOME TAX ACT Sale of Property - When Included in Income Computation REFERENCE: Paragraphs 12(1)(b), 13(21)(c) and subparagraph 54(c)(i) (also section 79 and subparagraphs 13(21)(d)(i), 54(c)(v) and 54(h)(i)) At the Canada Customs and Revenue Agency (CCRA), we issue income tax interpretation bulletins (ITs) in order to provide technical interpretations and positions regarding certain provisions contained in income tax law. Due to their technical nature, ITs are used primarily by our staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, we offer other publications, such as tax guides and pamphlets. While the comments in a particular paragraph in an IT may relate to provisions of the law in force at the time they were made, such comments are not a substitute for the law. The reader should, therefore, consider such comments in light of the relevant provisions of the law in force for the particular taxation year being considered, taking into account the effect of any relevant amendments to those provisions or relevant court decisions occurring after the date on which the comments were made. Subject to the above, an interpretation or position contained in an IT generally applies as of the date on which it was published, unless otherwise specified. If there is a subsequent change in that interpretation or position and the change is beneficial to taxpayers, it is usually effective for future assessments and reassessments. If, on the other hand, the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date on which the change is published. If you have any comments regarding matters discussed in an IT, please send them to: Manager, Technical Publications and Projects Section Income Tax Rulings Directorate Policy and Legislation Branch Canada Customs and Revenue Agency Ottawa ON K1A 0L5 This bulletin cancels and replaces IT-170 dated August 6, 1974 Contents General (paragraphs 1-4) Time of Entitlement (paragraphs 5-8) Real Property Sales (paragraphs 9-10) Sale of Shares (paragraphs 11-18) Reacquisition of Property Sold (paragraph 19) General Paragraph 1. The comments contained in this bulletin are specifically directed to transactions that are sales of property and do not necessarily have application in other situations. The comments are inapplicable where subsection 44(2) of the Act is applicable which specifically provides a time for the inclusion of property sales in the income computation. Paragraph 2. When the words of subparagraph 54(c)(i) are read in conjunction with subparagraph 54(h)(i), it is evident that the date of disposition of capital property sold occurs at the time that the vendor is "entitled to...the sale price". Since the corresponding provisions in paragraph 13(21)(c) and subparagraph 13(21)(d)(i) contain these identical words, the same conclusion follows in respect of depreciable property sold. In this manner the date of disposition is given a somewhat restricted meaning when a disposition of capital property involves a sale. Paragraph 3. Where property is sold, paragraph 12(1)(b) requires an amount to be included in the computation of a taxpayer's income from a business at the time that the amount becomes "receivable by the taxpayer" (unless the taxpayer is permitted to use the "cash basis" of reporting). Since the amount that becomes receivable in respect of property sold is the sale price, the taxable event under paragraph 12(1)(b) in respect of the sale of property can be stated as occuring on the date that the sale price becomes receivable to the vendor. Paragraph 4. Subparagraph 54(c)(v) makes it clear for the purposes of subdivision c of Division B of Part 1 that the Act is interested only in dispositions that involve a change in beneficial ownership (unless the contrary is expressly stated). This is also the Department's view in respect of dispositions of depreciable property described in paragraph 13(21)(c) and the sale of trading assets under paragraph 12(1)(b). A transaction that can be described as a "sale" is therefore disregarded for purposes of this bulletin if there is no concurrent change in beneficial ownership. Such transactions will usually involve a "purchaser" who can be described as an agent, nominee, trustee or prête-nom corporation of a "vendor" who basically retains the right to deal with the property as though it were his own. (See Ruling TR-22 for an example). Time of Entitlement Paragraph 5. Despite the absence of terminology in paragraph 12(1)(b) identical to that found in section 54 and subsection 13(21) (see paragraphs 2 and 3 above), it is the Department's view that the sale price of any property sold is brought into account for income tax purposes when the vendor has an absolute but not necessarily immediate right to be paid. As long as a "condition precedent" remains unsatisfied, a vendor does not have an absolute right to be paid. However, the fact that an event subsequent to the completion of a sale restores the ownership of the property involved to the vendor or adjusts the sale price does not alter the fact that the vendor was at a particular time entitled to the sale price and therefore disposed of the property for tax purposes at that time. Similarly, the fact that a contract of sale is subject to ratification is of no consequence in determining a date of disposition unless it is made a condition precedent of the agreement. Paragraph 6. A "condition precedent" is an event (beyond the direct control of the vendor) that suspends completion of the contract until the condition is met or waived and that could cancel the contract "ab initio" if it is not met or waived. Two examples of conditions precedent are (a) a condition in a contract for the sale of a hotel business that provides that the transfer of ownership is not to take place until the purchaser obtains a liquor licence, and (b) a condition in a contract for the sale of land that suspends completion until the purchaser's solicitor has approved the vendor's title to the property. Paragraph 7. Formal agreements of purchase and sale are frequently explicit as to the date of exchange and, unless circumstances indicate that a specified date was changed or was not the true intent of both parties, the date so specified is presumed to be the date of entitlement. Where the date of exchange is not expressly agreed between the parties, the time that the attributes of ownership pass from the vendor to the purchaser is presumed to be the date of entitlement. Since this test is the same test that is applied to determine the date of acquisition of depreciable property by a purchaser, the comments contained in IT-50R are equally valid in determining a vendor's date of disposition in these cases. Paragraph 8. Since possession, use and risk are the primary attributes of beneficial ownership, registration of legal title alone is of little significance in determining the date of disposition. Factors that are strong indicators of the passing of ownership include: (a) physical or constructive possession (refer to IT-50R), (b) entitlement to income from the property, (c) assumption of responsibility for insurance coverage, and (d) commencement of liability for interest on purchaser's debt that forms a part of the sale price. Real Property Sales Paragraph 9. In the case of sales of real property (as well as sales of other property where the contract could be specifically enforced by the courts), a purchaser acquires an equitable interest in the property upon execution of a binding agreement for sale or an accepted offer to purchase. Although it may be correct to say that the property has been "sold" at that time, there is not necessarily a disposition at that time for the purposes of paragraphs 13(21)(c) and 54(c) because of the restricted meaning given in respect of a disposition that involves a sale (see paragraph 2 above). It is equally clear that a vendor will not necessarily have an "amount receivable" under paragraph 12(1)(b) at that time. There will be no effect for income tax purposes unless and until the vendor becomes entitled to the sale price. Paragraph 10. Many agreements involving the sale of real property propose a "closing date" for the completion of the sale. This is normally the date that beneficial ownership is intended to pass from the vendor to the purchaser and the time the vendor is entitled to the sale price but the facts of a particular situation must support that the expressed intent was in fact carried out. In cases where the "closing date" is to occur "on or before" a specified date, the actual date of closing must be determined by the particular facts such as (a) the date funds required to be paid on closing were actually paid, (b) the date that the title was conveyed, (c) the date of adjustments of insurance premiums, rentals, mortgage interest, realty taxes etc., and (d) the date of possession by the purchaser. Sale of Shares Paragraph 11. The date of disposition of shares sold in stock exchange transactions is discussed in IT-133. Paragraph 12. A shareholder who deposits a share with a depository pursuant to a "take-over-bid" (as defined and regulated by provincial or federal statutes) is entitled to the sale price on the earlier of (a) the date that the offeror takes up the share, and (b) the date upon which all conditions of the offer have been satisfied or waived. Paragraph 13. Shares are considered to be "taken up" at the time of payment if this occurs before the period of acceptance expires and there is no indication that the offeror acquired the usual ownership rights before that time. Although an offeror usually reserves a short period of time after the expiry date of the offer to effect payment for shares taken up, a shareholder is nevertheless entitled to payment at the time that the offeror's obligation to pay is unconditional. Paragraph 14. Most take-over bids provide the offeror with the right to withdraw his offer at any time up to a specified date following the period of acceptance if the directors of the corporation (the subject of the take-over bid) take any action that materially changes the undertaking, assets or captial of the corporation. As long as such a right remains in effect and is not waived, a shareholder is not entitled to the sale price. Another condition frequently found in take-over bids is the right of the offeror to withdraw the offer if less than a specified percentage of the outstanding shares is on deposit at the end of the period of acceptance. Although it may be argued that (in the absence of other unsatisfied conditions) a shareholder is entitled to the sale price when the specified percentage of shares has been achieved, it is the Department's view that entitlement normally occurs only after the expiry of the period of acceptance (unless payment is made before that time). Paragraph 15. A trustee or escrow agent is frequently appointed to retain physical possession of shares for the period of time during which their selling price is not fully paid. An agreement setting out the duties of such a trustee or agent usually contains provisions that effectively modify the ownership rights of the vendor and purchaser during the transitional period. In such cases, the time that beneficial ownership passes from the vendor to the purchaser can be difficult to ascertain. Although each case can only be judged in the light of all the relevant facts and circumstances, the Department's views on the significance of modifications to some of the usual attributes of share ownership are outlined in paragraphs 16 to 18 below. Paragraph 16. Suspension of a purchaser's right to transfer shares to a third party before the vendor has been fully paid is not regarded as a significant factor in determining beneficial ownership. Paragraph 17. A purchaser's right to dividends, voting rights and right to a return of capital in the event of the corporation's dissolution are considered to be important factors in determining beneficial ownership. The potential reversion of these rights to a vendor in the event of a specified default situation is not regarded as an indication that beneficial ownership has not passed. Registration on the records of the corporation is of no significance where the agreement between the vendor, purchaser and trustee or agent validly assigns a particular right to a person who is not the registered owner. For example, a vendor may actually receive a dividend because he is the registered shareholder of shares sold which have been endorsed in blank and deposited with a trustee under an agreement that compells him to remit the dividend to the purchaser. Paragraph 18. Where a sale of shares involves a change in effective control of the subject corporation, restrictions on dividends and voting rights are frequently imposed upon the purchaser while any portion of the sale price remains unpaid. As long as such restrictions can reasonably be regarded as being for the protection of the vendor's right to collect the sale price, they are not considered significant in determining beneficial ownership. Reacquisition of Property Sold Paragraph 19. Many agreements comtemplate the reacquisition by the vendor of property that has been sold upon the happening of a specified event, the failure of a specified event to occur or a specified default of the purchaser. Where a reacquisition of beneficial ownership occurs by reason of the purchaser's failure to pay all or any part of an amount owing, section 79 provides rules to determine the tax consequences for both vendor and purchaser. Although the Act provides no specific rules where reacquisition occurs in situations to which section 79 does not apply, it is clear that such an occurrence does not retroactively nullify the effects of the original disposition for income tax purposes even if the agreement restores the vendor and purchaser to their relative positions before the sale took place.