28 August 2002 External T.I. 2002-0146025 - IT 218R PARAGRAPH 19 EXAMPLE

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether the example in paragraph 19 of IT-218R would change if the building that was converted to inventory were in a class with other properties (e.g. hotel properties), and at the time of conversion the fair market value was less than its proportionate share of undepreciated capital cost?

Position:

Yes.

Reasons:

See below.

XXXXXXXXXX 		2002-014602
	Randy Hewlett, B.Comm.
August 28, 2002

Dear XXXXXXXXXX:

RE: Technical Interpretation Request : IT-218R Paragraph 19 Example

We are writing in response to your letters dated June 10 and August 13, 2002, wherein you requested our opinion with respect to the above-noted issue.

In your letters, you note that paragraph 18 of IT-218R states that where a depreciable property is converted to inventory it ceases to qualify for CCA in the year of conversion and subsequent years, but will continue to have a UCC balance in the class of Schedule II of the Income Tax Regulations (the Regulations) to which it was assigned until its ultimate disposition at which time the class will be credited with the lesser of the cost of the asset and its fair market value at the time of conversion to inventory. You inquire how the example in paragraph 19 of IT-218R would change if the building that was converted to inventory were in a class with other properties (e.g. hotel properties), and at the time of conversion the fair market value was less than its proportionate share of UCC.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (TSO). However, we offer the following comments.

In part, Interpretation Bulletin, IT-218R, describes the income tax consequences where a taxpayer coverts a depreciable property that is a building to inventory. The example in paragraph 19 assumes that the building was the only property in the class and at the time of conversion, its fair market value exceeded the UCC of the class. In your situation, however, the building converted to inventory is in a class with other properties and, at the time of conversion, the fair market value is less than its proportionate share of UCC.

In our view, by virtue of paragraph 1102(1)(b) of the Regulations, a taxpayer cannot claim CCA in any taxation year in which any portion of the converted building remains in inventory. Further, a terminal loss cannot be claimed under subsection 20(16) of the Income Tax Act in the year in which the last portion of the converted building is sold because the taxpayer still owns property of that class.

In our view, the converted building ceases to qualify for CCA for the taxation year during which the conversion occurs and all subsequent taxation years in which any portion of the converted building remains in inventory. As noted in paragraph 18 of IT-218R, even though the converted building is in inventory, it "continues to have an undepreciated capital cost balance in the class". As portions of the converted building are sold, the class will be credited with the proportionate share of the lesser of the cost of the converted building and its fair market value at the time of conversion. There is no inventory once all portions of the converted building are sold and therefore, paragraph 1102(1)(b) of the Regulations is no longer applicable. In any taxation year following the year in which all portions of the converted building are sold, a taxpayer may claim CCA on the UCC of the whole class, including the unclaimed UCC balance that relates to the converted building.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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