Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Application of fresh start rules under 95(2)(k)
Position: Finance intends to bring in amendments to deal with computation of capital gains and losses.
Reasons:
XXXXXXXXXX J. Stalker
981445
Attention: XXXXXXXXXX
August 3, 1999
Dear XXXXXXXXXX:
We are writing in response to your letter concerning the application of the "fresh start rules" under paragraph 95(2)(k) of the Income Tax Act (the "Act").
When property that is previously used to earn income from active business is subsequenfly used to earn income from an investment business, the deeming rules in paragraph 95(2)(k) of the Act apply for the purpose of computing income from the investment business. Consequently any gain or loss on inventory of an investment business which is subject to paragraph 95(2)(k) would be determined taking into account the deemed disposition of that property under paragraph 138(11.91)(e) immediately before the commencement of the particular taxation year. Paragraph 95(2)(k) is not applicable in the determination of computing surplus or earnings before an affiliate's taxation year beginning atter 1994. Any accrued gain or loss before that time is included in or deducted from earnings pursuant to subparagraphs 5907(2.9)(a)(iii) and 5907(2.9)(b)(iii) respectively of the Income Tax Regulations.
Please note that paragraph 95(2)(k) does not apply for the purposes of computing a capital gain or loss, as the fresh start rules only apply for the purpose of computing income from an investment business or from a business deemed by paragraphs 95(2)(a.1), (a.2), (a.3) or (a.4) to be a separate business. However, it is our understanding that the Department of Finance will eventually introduce amendments to deal with this. It is a question of fact whether property used in an investment business is on capital or income account.
In addition, we note that inventory gains and losses are determined under section 3 and 9 while capital gains and losses are determined under sections 3 and 40.
We trust our comments are helpful.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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