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 subsection 1100(2) of the Regulations applies to a section 85 rollover of depreciable property between related corporations.
Position: Question of fact.
Reasons: In those situations where the requirements in subsection 1100(2.2) of the Regulations are satisfied, subsection 1100(2) of the Regulations will not apply to such a rollover of depreciable property.
September 28, 2001
Carme Lau HEADQUARTERS
Large File Case Manger A. Seidel, CMA
Toronto Centre Tax Services Office (613) 957-2058
2001-008460
Half-Year Rule for Depreciable Property
This is in reply to your memorandum dated May 10, 2001 concerning the application of subsection 1100(2) of the Income Tax Regulations (the "Regulations") to the depreciable property acquired by XXXXXXXXXX from a related corporation.
Background
1. In XXXXXXXXXX completed a number of restructuring transactions that involved the transfer of various assets among XXXXXXXXXX and its subsidiaries.
2. On XXXXXXXXXX owned all of the issued and outstanding shares of XXXXXXXXXX, which owned all of the issued and outstanding shares of XXXXXXXXXX.
3. On XXXXXXXXXX were amalgamated pursuant to subsection 87(1) of the Income Tax Act (the "Act") to form XXXXXXXXXX.
4. On XXXXXXXXXX transferred various assets, including depreciable property, to XXXXXXXXXX pursuant to subsection 85(1) of the Act.
5. On XXXXXXXXXX transferred various assets, including depreciable property, to XXXXXXXXXX pursuant to subsection 85(1) of the Act. The depreciable property transferred to XXXXXXXXXX included depreciable property acquired by XXXXXXXXXX from XXXXXXXXXX and depreciable property acquired by XXXXXXXXXX pursuant to the XXXXXXXXXX amalgamation of XXXXXXXXXX.
6. On XXXXXXXXXX was dissolved and liquidated into XXXXXXXXXX pursuant to subsection 88(1) of the Act.
7. XXXXXXXXXX is a corporation that dealt at arm's length with XXXXXXXXXX. On XXXXXXXXXX wholly-owned subsidiaries of XXXXXXXXXX were amalgamated to form XXXXXXXXXX.
8. Pursuant to a share purchase agreement dated XXXXXXXXXX acquired all of the issued and outstanding shares of XXXXXXXXXX immediately after the XXXXXXXXXX amalgamation which formed this company. Immediately after the shares of XXXXXXXXXX were acquired by XXXXXXXXXX was amalgamated with XXXXXXXXXX to form XXXXXXXXXX.
Issue
Does subsection 1100(2) of the Regulations apply to the depreciable property acquired by XXXXXXXXXX from XXXXXXXXXX on XXXXXXXXXX?
Analysis
Pursuant to subsection 87(2) of the Act, the corporate entity formed as a result of an amalgamation is deemed to be a new corporation and the taxation year of any predecessor corporation is deemed to have ended immediately before the amalgamation. This provision would apply to the XXXXXXXXXX amalgamation of XXXXXXXXXX and the XXXXXXXXXX amalgamation of XXXXXXXXXX.
Subsection 1100(2) of the Regulations limits, amongst other things, the capital cost allowance ("CCA") that a taxpayer may claim in respect of depreciable property acquired in the current taxation year, the so-called "Half-year rule".
Subsection 1100(2.2) of the Regulations describes those situations where the "Half-year rule" would not apply to depreciable property acquired in the current taxation year. To qualify for the exception in subsection 1100(2.2) of the Regulations, depreciable property acquired by a taxpayer must meet the conditions in either of paragraph 1100(2.2)(a) or (e) of the Regulations and the conditions in either of paragraph 1100(2.2)(f) or (g) of the Regulations.
Paragraph 1100(2.2)(a) of the Regulations applies to certain corporate reorganizations while paragraph 1100(2.2)(e) of the Regulations applies to property acquired from a person with whom the taxpayer was not dealing at arm's length (otherwise than by virtue of a right referred to in paragraph 251(5)(b) of the Act) at the time the property was acquired.
Paragraph 1100(2.2)(f) of the Regulations specifies certain ownership requirements applicable to the vendor of the depreciable property acquired and paragraph 1100(2.2)(g) of the Regulations considers, amongst other things, whether the rules in paragraph 1100(2.2) of the Regulations applied to the depreciable property while it was owned by the vendor. If subsection 1100(2.2) applied to the vendor, XXXXXXXXXX, it will not apply to XXXXXXXXXX.
The transfer of depreciable property by XXXXXXXXXX to XXXXXXXXXX did not involve a corporate reorganization of the type described in paragraph 1100(2.2)(a) of the Regulations. Therefore, the exception described therein does not apply in this situation.
Pursuant to paragraph 251(1)(a) of the Act, "related persons" are deemed not to deal with each other at arm's length. XXXXXXXXXX are all "related persons" pursuant to paragraph 251(2)(c) of the Act and are therefore not dealing at arm's length. Since the depreciable property acquired by XXXXXXXXXX was acquired from persons that do not deal at arm's length with XXXXXXXXXX and the depreciable property acquired by XXXXXXXXXX was acquired from a person that does not deal at arm's length with XXXXXXXXXX, both of these property transfers satisfy the requirements of paragraph 1100(2.2)(e) of the Regulations.
The amalgamation of XXXXXXXXXX causes XXXXXXXXXX to have a taxation year that ends on XXXXXXXXXX. All of the depreciable property that was transferred to XXXXXXXXXX from XXXXXXXXXX, and all of the depreciable property acquired by XXXXXXXXXX on the amalgamation of XXXXXXXXXX, will have been owned by XXXXXXXXXX for less than 364 days before XXXXXXXXXX. Accordingly, the conditions in paragraph 1100(2.2)(f) of the Regulations are not met in this situation.
To determine whether or not paragraph 1100(2.2)(g) of the Regulations applies to the depreciable property acquired by XXXXXXXXXX will require a review of the transfers of depreciable property to XXXXXXXXXX. Paragraph 1100(2.2)(g) of the Regulations will apply to the transfer of depreciable property from XXXXXXXXXX to XXXXXXXXXX if the rules in subsection 1100(2.2) of the Regulations applied to the transfers of depreciable property to XXXXXXXXXX.
The depreciable property acquired on the amalgamation of XXXXXXXXXX and the depreciable property transferred from XXXXXXXXXX to XXXXXXXXXX are transfers of property from persons not dealing at arm's length with XXXXXXXXXX. Therefore, the conditions in paragraph 1100(2.2)(e) of the Regulations are satisfied.
As discussed in our telephone conversation (Seidel/Lau), you will have to determine whether or not the holding requirements specified in paragraph 1100(2.2)(f) of the Regulations applied to the transfers of depreciable property to XXXXXXXXXX.
Conclusion
If your audit determines that subsection 1100(2.2) of the Regulations applied to the transfers of depreciable property to XXXXXXXXXX, then subsection 1100(2) of the Regulations will not apply to the transfer of depreciable property from XXXXXXXXXX to XXXXXXXXXX by virtue of the fact that the exceptions in paragraphs (e) and (g) of subsection 1100(2.2) of the Regulations are satisfied.
On the other hand, if your audit determines that subsection 1100(2.2) of the Regulations did not apply to the transfers of depreciable property to XXXXXXXXXX, then subsection 1100(2) of the Regulations will apply to the depreciable property transferred to XXXXXXXXXX since neither of the requirements in paragraph 1100(2.2)(f) or (g) of the Regulations are satisfied.
We hope our comments are of assistance. If you wish to discuss any of the above further, do not hesitate to contact us at the above number.
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
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