ARCHIVED - Capital Property - Some Adjustments to Cost Base
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DATE: July 9, 1990
SUBJECT: INCOME TAX ACT
Capital Property - Some Adjustments to Cost Base
REFERENCE: Subsections 53(1) and (2)
This bulletin replaces and cancels Interpretation Bulletin IT-456 dated August 29, 1980. Current revisions are designated by vertical lines.
Determining the adjusted cost base (ACB) of a property is relevant for the purposes of the provisions of the Act relating to capital gains. This bulletin discusses some of the required adjustments to the cost base of various capital properties, including a share of a corporation, a capital interest in a trust and vacant land.
Discussion and Interpretation
1. For comments on other adjustments to cost base, see the current versions of the following Interpretation Bulletins and any Special Releases to these bulletins:
Benefits to Employees - IT-113
Government Assistance - IT-53, IT-249, IT-251, IT-252,
IT-273 and IT-276 Investment Tax Credits - IT-331
Land - IT-200, IT-232, IT-264 and IT-350
Partnerships - IT-338 and IT-353
Unit Trusts - IT-390
Share of a Corporation
2. Paragraph 53(1)(c) provides for an addition to a taxpayer's ACB of a share of a corporation where the taxpayer has made a contribution of capital to the corporation after 1971. The expression "contribution of capital" is not defined in the Act. It is the Department's view that a transaction that otherwise increases the capital of a corporation without any consideration being given by the corporation in respect of that increase may result in a contribution of capital for the purposes of paragraph 53(1)(c). For example, a contribution of capital occurs where a shareholder has fully paid for no-par shares and subsequently agrees to make an additional contribution to the corporation (e.g., to remove a deficit or to provide funds for expansion without the issuance of any additional shares). Also, a contribution of capital occurs where a debt owing by a corporation to a shareholder is absolutely forgiven. Of course, the provisions of subsection 80(1) would apply to such forgiveness.
3. In computing the ACB of property after June 1988, where part or all of a contribution of capital made by a taxpayer after that date can reasonably be regarded as a benefit conferred on any person (other than the corporation) who was related to the taxpayer, it is only that portion of the contribution which exceeds the benefit portion that increases the ACB of the taxpayer's shares. In computing the ACB of property before July 1988, the same restriction will apply where the contribution of capital was made after December 11, 1979 and before July 1988 and part of it can reasonably be regarded as a gift made to or for the benefit of any such person. For example, the requirement that the increase in the ACB be reduced by any such benefit or gift portion will apply where that portion can reasonably be regarded as a benefit conferred on (or, where applicable, a gift made to or for the benefit of) a related person (other than the corporation) who had a right to acquire shares of the corporation. Prior to December 12, 1979, this treatment was limited to contributions made to or for the benefit of another shareholder of the corporation who was related to the contributor. Where a contribution of capital by a taxpayer increases the fair market value of another person's share, that increase will be considered a benefit conferred on (or, where applicable, a gift made to or for the benefit of) another person.
4. Where a shareholder disposes of capital property to a corporation and an election is made pursuant to section 85, no amount may be added to the adjusted cost base of the shareholder's share under paragraph 53(1)(c), except to the extent allowed by subsection 53(1.1) in respect of dispositions of property before May 7, 1974.
5. Provided the contribution results in some increase in the fair market value of the contributor's shares, the ACB of those shares will be increased by that proportion of the amount of the contribution as may reasonably be regarded as pertaining to those shares. Where the contributor owns more than one class of shares of the corporation, the ACB increase to the contributor's shares otherwise calculated will be prorated among those shares on the basis of the relative increases in fair market value, as a result of the contribution, of the shares owned in each class.
6. Where treasury shares are acquired from a corporation in a non-arm's length transaction at a price that is greater than their fair market value, the cost of the shares is reduced under paragraph 69(1)(a) to that fair market value. The difference between the price paid for the shares and their fair market value is considered to be a contribution of capital for the purpose of paragraph 53(1)(c) provided the contribution results in some increase in the value of all the shares of the corporation owned by the shareholder.
7. Under the Internal Revenue Code, a U.S. corporation and its shareholders may elect to deem the corporation to have paid a dividend ("consent dividend") and the shareholder to have simultaneously made a contribution of capital, when in fact no dividend payment or contribution of capital takes place. This "dividend" is not recognized as an amount received for the purpose of section 90, nor is the notional contribution of capital recognized as a contribution of capital for the purpose of paragraph 53(1)(c).
8. Subsection 84(9) provides that for greater certainty, where a taxpayer's shares of a corporation are redeemed, acquired or cancelled by the corporation, the taxpayer shall be deemed to have disposed of the shares to the corporation. Therefore, where a taxpayer's shares (including a partnership's shares) in a corporation are redeemed, acquired or cancelled, subsection 85(4) is applicable in those cases where the corporation is directly or indirectly controlled immediately after the transaction by
(a) the taxpayer,
(b) the taxpayer's spouse, or
(c) where the taxpayer is a corporation, a person or group of persons by whom the taxpayer was directly or indirectly controlled.
If the taxpayer realizes a capital loss in such circumstances, subsection 85(4) deems the loss to be nil and, together with paragraph 53(1)(f.2), provides for the loss to be added to the ACB of the taxpayer's remaining shares. Paragraph 85(4)(b) provides a formula for allocating the adjustment to each class of shares held by the taxpayer.
9. Where an additional payment is made on a share as a result of a call for instalment payments, the amount of the payment is included in the ACB of the share under paragraph 54(a) as part of the cost.
10. Paragraph 53(2)(a) provides for the following deductions in computing a taxpayer's ACB of a share of a corporation resident in Canada.
(a) The amount of a dividend received by a taxpayer is deducted under subparagraph 53(2)(a)(i), unless the dividend is
(i) a taxable dividend,
(ii) a dividend in respect of which the corporation paying the dividend elected in accordance with subsection 83(2); i.e., a deemed capital dividend, or
(iii) a dividend paid after June 28, 1982 and before May 24, 1985 in respect of which the corporation paying the dividend elected in accordance with subsection 83(2.1) as it read with respect to dividends paid before May 24, 1985 (i.e., a deemed life insurance capital dividend).
Dividends to which this provision would apply are dividends payable after 1978 to which subsection 83(1) applies, and dividends in respect of which an election was made under subsection 83(1) as it read with respect to certain dividends payable before 1979.
(b) Any amount received by the taxpayer after 1971 on a reduction of the paid-up capital of the corporation in respect of the share is deducted under subparagraph 53(2)(a)(ii), except to the extent that the amount is deemed by subsection 84(4) to be a dividend received by the taxpayer.
(c) Any reduction required under section 84.1 as it applied before May 23, 1985 is deducted under subparagraph 53(2)(a)(iii).
(d) In respect of a transaction or event that occurred before May 24, 1985, any amount that would, but for subsection 84(8) as it applied before May 24, 1985, have been a deemed dividend under subsection 84(2) is deducted under subparagraph 53(2)(a)(iv), except to the extent that such amount was proceeds of disposition of a share.
11. With certain exceptions, a loss sustained by a taxpayer on the disposition of a property will represent a "superficial loss" pursuant to paragraph 54(i) where the same or identical property (referred to as "substituted property") is
(a) acquired by the taxpayer, the taxpayer's spouse or a corporation controlled by the taxpayer within the period beginning 30 days before and ending 30 days after the disposition, and
(b) owned 30 days after the disposition by the person who acquired the property.
Paragraph 53(l)(f) permits the owner of the substituted property to add the amount of a superficial loss in determining the owner's ACB of that substituted property.
12. The adjustment provided by paragraph 53(1)(f) is more difficult to determine when identical properties (such as shares having the same rights) are bought and sold and some are on hand at the end of the period. When more items are sold than acquired, an allowable capital loss will occur. For example, if a taxpayer having initially 50 identical properties on hand sells 20 items at a loss and reacquires 15 in the relevant period, thus reducing the properties on hand to 45, the superficial loss will be limited to the 15 properties considered to be reacquired. In such cases, it is the Department's practice to allow the taxpayer to consider the superficial loss as being either the actual loss incurred on any of 15 of the 20 items sold or the average loss per item multiplied by 15. If the taxpayer and related persons (spouse or controlled corporations) are involved in the disposition and acquisition of identical property, the superficial loss should initially be determined as if all the parties were one person and subsequently prorated on the basis of actual substituted property held by a person at the end of the period.
Capital Interest in a Trust
13. In computing the ACB of a capital interest of a taxpayer in a trust, other than an interest in a "personal trust" (see 16 below) acquired by the taxpayer for no consideration or an interest of the taxpayer in those trusts referred to in 15 below, the taxpayer shall
(a) deduct under subparagraph 53(2)(h)(i) any amount paid to the taxpayer by the trust after 1971 and before the time of the computation as a distribution or payment of capital by the trust, other than as proceeds of disposition of the interest or part thereof, to the extent that such amount became payable before 1988,
(b) deduct under subparagraph 53(2)(h)(i.1) any amount that has become payable to the taxpayer after 1987 (subject to the transitional rules discussed in 14 below) and before the time of the computation in respect of that interest, other than as proceeds of disposition of all or part of an interest, except to the extent of the portion
(i) that has been included in the taxpayer's income by reason of subsection 104(13) or, where the taxpayer is not resident in Canada, that is subject to Part XIII tax by reason of paragraph 212(1)(c), or
(ii) that, where the trust was resident in Canada throughout its taxation year in which the amount became payable,
(A) is equal to one-third (one-half if payable before 1990) of the net taxable capital gains of the trust designated by the trust under subsection 104(21) in respect of the taxpayer, or
(B) represents non-taxable dividends of the trust designated by the trust under subsection 104(20) in respect of the taxpayer,
(c) deduct under subparagraph 53(2)(h)(ii) any amount deducted for post 1981 taxation years by the taxpayer under subsection 127(5) in calculating the tax otherwise payable under Part 1 for taxation years ending before the time of the computation in respect of an investment tax credit allocated by the trust pursuant to subsection 127(7),
(d) deduct under subparagraph 53(2)(h)(iii) the amount of share-purchase tax credit allocated to the taxpayer after the 1982 taxation year by the trust and added under subsection 127.2(3) in calculating the tax otherwise payable under Part 1 for a taxation year ending before or after the time of the computation,
(e) deduct under subparagraph 53(2)(h)(iv) 50% of the amount of any scientific research tax credit allocated to the taxpayer after the 1982 taxation year and before the time of the computation by the trust under subsection 127.3(3), and
(f) deduct under subparagraph 53(2)(h)(v) the amount of any assistance received by the taxpayer before the time of the computation from a government, municipality or other public authority that has resulted in a reduction to the trust under subsection 13(7.2) of the capital cost of a depreciable property acquired after May 9, 1985.
The above comments apply also to a unit in a unit trust which, as mentioned in 1 above, is discussed in IT-390 and the Special Release to it. With respect to (a) above, one situation to which those comments would apply is the case of encroachment upon the capital in favour of the capital beneficiary. It is not the Department's practice to apply the provisions of subparagraph 53(2)(h)(i) to reduce the ACB of the capital interest in a trust where it is clear that the payment from the trust represents a distribution of tax-paid income, including capital gains taxed in the trust as well as the untaxed portion of capital gains, even though some or all of those amounts may be considered to form part of the trust capital.
14. Where the trust was created before October 2, 1987, transitional rules provide that in respect of an amount that becomes payable to a taxpayer in a taxation year of the trust ending before 1990, the comments in 13(b) above shall not apply with respect to the portion thereof that may reasonably be considered to have been deducted as a terminal loss under subsection 20(16), as capital cost allowance under paragraph 20(l)(a) or as a depletion allowance under subsection 65(l) in computing the income of the trust for the year, where
(a) such portion is designated by the trust in respect of the taxpayer and not in respect of any other beneficiary under the trust and does not exceed the proportion of the aggregate of amounts that the trust so designates in respect of all beneficiaries for the year that
(i) the taxpayer's share of the income of the trust for the year computed without reference to the Act is of
(ii) the income of the trust for the year computed without reference to the Act,
(b) no beneficial interest in the trust is created before the end of the year and after October 1, 1987 (other than pursuant to the terms of a prospectus, preliminary prospectus, registration statement, offering memorandum or notice filed before October 2, 1987 with a public authority in Canada, where such document was required by law to be so filed before trading in the securities could commence), and
(c) there has not been a substantial increase in the indebtedness of the trust before the end of the year and after October 1, 1987 (other than as a consequence of an agreement in writing entered into before October 2, 1987).
These transitional rules do not apply to a unit trust. As noted above, unit trusts are discussed in IT-390 and the Special Release to it.
15. The comments in 13 above do not apply to
(a) a trust referred to in subparagraph 108(1)(j)(ii) (i.e., a trust governed by certain registered funds or plans, an employee trust or a "master trust" referred to in paragraph 149(1)(o.4)),
(b) a related segregated fund trust referred to in subparagraph 108(1)(j)(iii),
(c) a "religious organization" trust described in subparagraph 108(l)(j)(iv), and
(d) a trust referred to in subparagraph 108(1)(j)(v) (i.e., a Retirement Compensation Arrangement trust within the meaning assigned by subsection 207.5(1)).
16. A "personal trust" is defined in subsection 248(1) to mean
(a) a testamentary trust, or
(b) an inter vivos trust, no beneficial interest in which was acquired for consideration payable directly or indirectly to
(i) the trust, or
(ii) any person who has made a contribution to the trust by way of transfer, assignment or other disposition of property,
and, for the purposes of (b) above and paragraph 53(2)(h), where an inter vivos trust is created by way of the transfer, assignment or other disposition of property by an individual (or two or more individuals each of whom was, at the time the trust was created, related to each of the other individuals), any beneficial interest in the trust acquired by such individual (or such individuals) at the time the trust was created shall be deemed to have been acquired for no consideration.
17. Paragraph 53(1)(h) provides for adding to the ACB of a taxpayer's land an amount paid by the taxpayer after 1971 in respect of certain interest and property taxes where such amount was not deductible
(a) by virtue of subsection 18(2) as it read with respect to such expenses incurred in the 1987 and prior taxation years (see the current version of IT-153 for comments on subsection 18(2)), and
(b) by reason of subsection 18(2) or 18(3) as they read with respect to such expenses incurred in the 1988 and subsequent taxation years.
The non-deductible amount relates to an interest or property tax expense that would otherwise be deductible in computing a taxpayer's income from property or from a business. For example, where an expense in respect of property taxes is not incurred for the purpose of gaining or producing income from a business or property, the deduction of that expense is denied by virtue of either paragraph 18(1)(a) or (h), rather than by virtue of subsection 18(2) or by reason of subsection 18(2) or (3). Consequently, an amount paid in respect of those property taxes cannot be added under paragraph 53(1)(h) to the ACB of the land.
Cost of Property Deductible in Computing Taxpayer's Income
18. Where capital property is transferred to a Registered Retirement Savings Plan as a premium and the amount of the premium is deductible in computing the transferor's income, paragraph 53(2)(m) does not apply to reduce the ACB of the capital property.
19. Where an election under subsection 53(2.1) is made with respect to an amount that would otherwise be included in income under paragraph 12(1)(x) in respect of the cost of property, the amount specified in the election is deducted under paragraph 53(2)(s) in computing the ACB of the property. Where part or all of the specified amount is repaid after the 1984 taxation year, the amount repaid is effectively added under subparagraph 53(2)(s)(ii) in computing the ACB of the property.
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