Tax Tip:   Transfers of Assets to a Corporation

In a July 29, 2014 Tax Court of Canada case, the taxpayer transferred oilfield equipment (Equipment) to his Company in 2004 and 2005 in return for fair market value proceeds of $135,000 and $73,500 respectively. The taxpayer did not report any gains for 2004 on the basis that the adjusted cost base (ACB) of the Equipment was equal to the proceeds. For 2005 the taxpayer reported a gain of $43,500. In this case, the assets were acquired over time, often from related business ventures, and limited or no records were available.

CRA reassessed on the basis that:

  • the Equipment transferred was inventory rather than capital (this means that 100% of the gain on sale would be taxable as opposed to 50%);
  • the ACB for the two years of transfers was only $30 because there was no evidence to support the contrary; and
  • GST should apply on the transfer.

Subsequently, CRA issued a second reassessment to increase the proceeds again by $90,093. This reassessment was issued outside the three-year period in which CRA is normally allowed to reassess.

Taxpayer loses

The Court found that the taxpayer’s evidence to support the original amount paid for the Equipment, the ACB, was insufficient to rebut the Minister’s assumption that it was only $30. Therefore, the gains on sale were increased from $0 (in 2004) and $43,500 (in 2005) to almost $135,000 and $73,500 respectively. The taxpayer was also found to be liable for GST on the sale of the Equipment to his Company.

Action Item: Retain receipts for capital purchases. Not doing so could result in a reassessment based on a nominal cost base and an inflated tax liability.

Taxpayer wins

The Court determined that the long period that the taxpayer held the Equipment prior to selling it was more indicative of a capital investment than an inventory investment. Therefore, the sale was held to be on account of capital rather than inventory.

Also, the Court found that the second CRA reassessment to increase the proceeds was not valid (it was statute-barred) as the taxpayer did not make a misrepresentation attributable to neglect, carelessness or willful default.

Action Item: Contact us if CRA has questions or is proposing an audit.