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:

Whether a taxpayer is entitled to claim a capital loss in respect of depreciable property that is no longer available for use in a business in those situations where no compensation has been received in respect of such a loss of use.

Position: No.

Reasons: Specifically excluded pursuant to subparagraph 39(1)(b)(i) of the Act.

		March 7, 2001

	XXXXXXXXXX 	HEADQUARTERS
	Industry Specialist - Construction	A. Seidel
	   and Real Estate	(613) 957-2058
	XXXXXXXXXX  Tax Services Office
		2001-007215

Dispositions of Depreciable Property

This is in reply to your e-mail dated February 26, 2001 concerning the deductibility of losses incurred as the result of the loss of use, either voluntary or involuntary, of depreciable property, as defined in subsection 13(21) of the Income Tax Act (the "Act).

Background

Representatives of the construction industry in XXXXXXXXXX are concerned that there is an element of unfairness in the tax system in that a taxpayer is not permitted to claim a capital loss in respect of the involuntary loss of depreciable property. It is their view that the deductibility of depreciable property, which is no longer available for use in the business, at the prescribed rates is a harsh result and that some form of immediate recognition should be given to the loss in income earning capacity.

Our Comments

Paragraph 18(1)(b) of the Act provides that, in computing the income of a taxpayer from a business or property, no deduction is permitted in respect of "an outlay, loss or replacement of capital property, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly provided by this Part".

Generally, a taxpayer may claim an allowable capital loss for a taxation year from the disposition of any capital property pursuant to the rules in Subdivision c of Division B of Part I of the Act. A disposition of a capital property would include the loss of the use of a capital property because of theft, defalcation, embezzlement or abandonment of the capital property. However, subparagraph 39(1)(b)(i) of the Act provides that depreciable property is excluded from the rules in Subdivision c of the Act. This is consistent with the fact that the Act has specific separate rules for depreciable property.

Outlays in respect of depreciable property would generally be considered to be a non-deductible capital outlay of a taxpayer. However, the Act allows a taxpayer to deduct, pursuant to paragraph 20(1)(a) of the Act, certain amounts in respect of such depreciable property. The specific rules are generally described in section 13 of the Act and the amount that is deductible in computing income is generally determined pursuant to Part XI and Schedules II to VI of the Income Tax Regulations (the "Regulations"). The general scheme of these provisions is that all depreciable property of the same "class" is pooled together. A taxpayer may claim a deduction in each taxation year in respect of the amount, defined in subsection 13(21) of the Act as the undepreciated capital cost ("UCC"), remaining in the class at the end of a taxation year at the rates prescribed in the Regulations.

Subsection 13(21) of the Act defines "disposition of property" to include any transaction or event entitling a taxpayer to proceeds of disposition. "Proceeds of disposition" is also defined in subsection 13(21) of the Act and includes "compensation for property unlawfully taken". We would point out that the definition of "disposition of property" is not an exhaustive definition. As stated in paragraph 3 of Interpretation Bulletin IT-460, we have generally accepted that in the situation where property is unlawfully taken and there is no compensation received in respect of the loss, there is nevertheless a disposition and that the proceeds of disposition are nil.

In the situation where a taxpayer disposes of a depreciable property, the "proceeds of disposition", to the extent they do not exceed the cost of the depreciable property, reduce the UCC of the particular class. In the situation where the proceeds of disposition are nil, there would be no reduction in the UCC of the class. The taxpayer would continue to be entitled to a deduction in respect of the UCC of the class unless the depreciable property unlawfully taken is the last property in the class. In this situation, the taxpayer would be entitled to deduct the balance of the UCC in the class in the taxation year in which the property was unlawfully taken.

Conclusion

Although the Act does not provide for an immediate recognition of a capital loss, 50% of which is deductible for tax purposes, in those situations where depreciable property is no longer available for use to earn income in a construction business, the overall scheme of the Act is such that a taxpayer will be entitled to deduct the entire amount of the cost of depreciable property over time and recognize a loss when all of the property of a particular class has been disposed of. There is a trade-off, if you will, between the amount that is deductible in respect of a loss when depreciable property is unlawfully taken, and the timing for claiming such a loss. Like all other businesses, a construction business is able to deduct the entire cost of depreciable property, albeit over a longer period of time, which is more beneficial than the 50% immediate write-off provided for other capital property under paragraph 38(1)(b) of the Act.

As you know, our role is to administer and enforce the Act as passed by Parliament. Interpretation Bulletins IT-185R and IT-460 reflect our interpretation of the existing provisions in the Act. To the extent that the construction industry considers that the existing provisions of the Act to be too harsh, a change in tax policy and legislative amendments to the Act would be required. These are the responsibility of the Department of Finance. If the construction industry wishes to pursue this matter with the Department of Finance, they can be contacted at:

L'Esplanade Laurier
140 O'Conner Street
Ottawa, Ontario
K1A 0G5

We hope our comments are of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 3 -