CRA considers that an ITC generated to the transferor in a s. 85(1) drop-down of a building does not reduce the building UCC for s. 85 elected amount purposes

A registrant, such as a bank, acquires a building for $100, but for exempt use, so that its capital cost is $113 including non-creditable HST.

After the building has appreciated and CCA claims have reduced the undepreciated capital cost to $90, the building is transferred under s. 85(1) to a subsidiary.  Because this is a taxable sale for HST purposes, the bank now is entitled to a $13 input tax credit.  ITA s. 248(16) deems this ITC to be government assistance, so that for s. 85(1) purposes the building UCC is reduced from $90 to $77.  Right?

CRA considers that because s. 85(1)(e) refers to the UCC of the building "immediately before" its disposition, whereas no entitlement to claim the ITC arises until the consideration for the drop-down becomes payable, the UCC for purposes of determining a permissible elected amount is $90, not $77.  CRA appears to be effectively ignoring s. 248(16)(a)(i), which deems the ITC to have been received as government assistance when the $13 of HST originally was payable, because that does not make any sense under facts such as these.

Neal Armstrong.  Summary of 27 November 2014 T.I. 2013-0503861E5 F  under s. 85(1)(e).