5 June 2001 External T.I. 2001-0076375 - CAPITAL LOSS - DEPRECIABLE PROPERTY

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 capital loss can be claimed where depreciable property whose cost base was bumped-up, as a result of the capital gains election allowed in 1994 under subsection 110.6(19) of the Act, is disposed of at an amount between its original capital cost and its new bumped-up cost.

Position: No.

Reasons: A capital loss is specifically denied in respect of a loss from the disposition of depreciable property as a result of the application of subparagraph 39(1)(b)(i) of the Act and a terminal loss does not result by virtue of paragraphs 13(7)(e) and (e.1) of the Act. This treatment is generally applied to transactions involving non-arm's length parties, particularly those involving the use of the capital gains deduction. An amendment to the Act is required to obtain the results sought by the taxpayer.

XXXXXXXXXX 	2001-007637
		Patrick Massicotte
June 5, 2001

Dear XXXXXXXXXX:

Re: Capital loss - Depreciable Property

We are writing in response to your letter of March 9, 2001, wherein you requested our comments regarding the treatment of a loss resulting from the disposition of depreciable property under the Income Tax Act (the "Act"), particularly in circumstances where a capital gains election under subsection 110.6(19) of the Act was made in 1994, thereby increasing the cost base of the property.

In the situation you submitted, a taxpayer owns depreciable property the capital cost of which is $50,000, the undepreciated capital cost of which was $40,000 and the fair market value at the particular time is $55,000. In 1994, the taxpayer had filed the capital gains election in respect of the property, designating an amount of $60,000 under subsection 110.6(19) of the Act. Assuming the taxpayer sells the property for $55,000, you inquire whether the $5,000 loss (i.e. proceeds of $55,000 less cost for tax purposes of $60,000) resulting from the disposition of the property would be denied.

In your view, such a situation would not result in a deductible loss under the current provisions of the Act, particularly paragraph 39(1)(b) of the Act. You mention that this result does not seem reasonable as a loss in similar circumstances from the disposition of non-depreciable property would generally result in an allowable capital loss.

Our Comments

If the capital gains election that was filed in respect of the depreciable property described above was not excessive, the property would, pursuant to clause 110.6(19)(a)(ii)(C) of the Act, be deemed to have been reacquired by the elector immediately after February 22, 1994 at a cost equal to the designated amount ($60,000). As you indicated, if the property was subsequently sold for proceeds of $55,000, the $5,000 difference between the proceeds and the new cost base of the property for tax purposes ($55,000 - $60,000) would not give rise to a deductible loss (current or capital) by virtue of the combined application of paragraphs 13(7)(e) and (e.1) of the Act, and subparagraph 39(1)(b)(i) of the Act.

Although this result may appear somewhat anomalous at first glance, it is not different from the treatment that would generally apply where depreciable property is disposed of to any non-arm's length person, particularly where the transferor's gain is sheltered by the use of the capital gains deduction, and the property is subsequently disposed of by the purchaser at a loss.

As you know, our role is to administer and enforce the Act as adopted by Parliament. Interpretation Bulletin IT-220R2, Capital Cost Allowance - Proceeds of Disposition of Depreciable Property reflects our interpretation of the existing provisions in the Act. To the extent that you consider that the existing provisions of the Act do not provide for a reasonable treatment of capital losses in situations such as the one described in your request, a change in tax policy and legislative amendments to the Act would be required. These are the responsibility of the Department of Finance. If you wish to pursue this matter with the Department of Finance, Tax Policy Branch, they can be contacted at:

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

Nonetheless, we hope that the above comments will be of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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