2016-0660861E5 partial disposition of farm quota

Principal Issues: What is the capital cost of a portion of farm quota disposed of under the proposed new ECP rules?

Position: See response

Reasons: See response

Author: Ryer, Andrea
Section: 13(37), 13(40), 14(5), 47

XXXXXXXXXX                                                                                                                         2016-066086
                                                                                                                                                 A. Ryer
September 27, 2016

Dear XXXXXXXXXX:

Re: Partial Disposition of Farm Quota - Proposed Eligible Capital Property (ECP) Rules

We are writing in response to your enquiry, dated August 9, 2016, wherein you requested our views on the application of legislative proposals released on July 29, 2016, relating to the repeal of the existing eligible capital property (ECP) regime and its replacement with a new capital cost allowance (CCA) class (the “proposed rules”).

You have asked us to consider a hypothetical situation involving the disposition of a particular type of farm quota. In the example you provided, a taxpayer owns farm quota purchased at arm’s length at various times and prices before January 1, 2017. The taxpayer sells a fraction of the farm quota after December 31, 2016. You have asked our views on what the capital cost is for the fraction of farm quota sold.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

The proposed rules, if enacted, will repeal the existing ECP rules in the Act and replace them by introducing a new class of depreciable property, Class 14.1 of Schedule II to the Regulations, effective January 1, 2017. Under the proposed rules, property that was ECP immediately before January 1, 2017, will become depreciable property, and expenditures and receipts that were accounted for under the old ECP rules will be accounted for under the existing rules for depreciable capital property.

Gains from the disposition of property in Class 14.1 will be taxable under subdivision c of Division B of Part I of the Act. When a property in Class 14.1 is disposed of, the amount by which the proceeds of disposition exceed the adjusted cost base of the property generally results in a capital gain, 50% of which is included in income as a taxable capital gain. Section 54 defines the adjusted cost base for depreciable property as the capital cost of that property (subject to any adjustments required under the Act).

Under the proposed rules, the capital cost of former ECP is provided in new subsection 13(37), a transitional rule that applies where a taxpayer has incurred an eligible capital expenditure (ECE) in respect of a business before January 1, 2017. Generally, new paragraph 13(37)(a) will deem the total capital cost of all property included in Class 14.1 on January 1, 2017, to be equal to the amount of receipts a taxpayer could have received under the former ECP rules without resulting in an income inclusion under paragraph 14(1)(b), while new paragraph 13(37)(b) allocates the total capital cost between goodwill and the identifiable properties in that class on that day.

New subparagraph 13(37)(b)(ii) provides that the capital cost of a particular property (other than goodwill) is generally the taxpayer’s ECE in respect of that property. New subsection 13(40) provides that, for the purposes of subsection 13(37), inter alia, the term “eligible capital expenditure” has the meaning it had prior to 2017 – namely, the meaning assigned to the term in subsection 14(5) of the Act. Under the existing ECP rules, the cost of, for example, milk quota or other similar rights and licences issued under governmental authority is an ECE.

Typically, farm quota is a statutory licence to produce a quantity of regulated agricultural product. In most cases, units of a particular type of farm quota are indistinguishable from one another. When part of the quota is sold, it may not be possible to determine which particular unit of quota has been sold. In our view, where units of a particular type of farm quota are indistinguishable from one another, the ECE, for the purposes of new subparagraph 13(37)(b)(ii), may be determined by averaging the total cost of the particular type of quota by the number of units of that type held.

Furthermore, where properties acquired after 1971 are identical, subsection 47(1) assigns each property an average cost equal to the total cost of all such property (including adjustments to the cost base) divided by the number of properties in question. As explained in IT-387R2, Meaning of “Identical Properties”, identical properties are properties which are the same in all material respects, such that a prospective buyer would not have a preference for one property over another.

While it is a question of fact whether units of a particular type of farm quota are identical properties, assuming they are identical properties, for the purposes of determining the adjusted cost base of farm quota that is depreciable property included in new CCA Class 14.1, the averaging rule in subsection 47(1) would apply.

We trust these comments will be of assistance to you.

Sincerely,

Michael Cooke, CPA, CA
|Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate

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