7 February 2002 External T.I. 2002-0117605 - DEMOLITION OF RENTAL BUILDING

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.

This letter contains a statement that "if a building is demolished and there are no other assets in the capital cost allowance ("CCA") class to which the building belonged, a terminal loss equal to the undepreciated capital cost would result." The deeming rule in paragraph 13(21.1)(b) of the Act would apply in this case. The "actual" proceeds of disposition would still be nil and the fair market value of the building would also likely be nil. As such, the "deemed" proceeds of disposition would be 1/2 of the cost amount of the building, i.e., the UCC. Therefore, the terminal loss would be 1/2 of the UCC, not the whole amount. [02.09.04]

Principal Issues: Whether a terminal loss may be taken on a rental building demolished 3 yrs after acquisition where a new rental building is erected in its place and whether the costs of demolition may be deducted.

Position: Perhaps but only if the demolished building was acquired for the purposes of gaining or producing income. If the acquisition of the building does not meet this test, it is likely that we would consider the initial purchase price paid for both the land and building to be for the land. Further, the cost of demolishing the old building, less the amount of any salvage, would form part of the cost of land.

Reasons: By reason of paragraph 1102(1)(c) of the Income Tax Regulations, "depreciable property" does not include property that was not acquired for the purposes of gaining or producing income.

XXXXXXXXXX 	J. Gibbons, CGA
		2002-011760
February 7, 2002

Dear XXXXXXXXXX:

Your letter of January 7, 2002, to the XXXXXXXXXX Tax Services Office was forwarded to us for reply. You wish to know how to treat the demolition of a rental building for purposes of filing your 2001 income tax return.

Confirmation of the tax consequences of completed transactions can only be provided following an actual review by a tax services office. However, we have provided general comments which should help you in filing your 2001 tax return.

Facts

1. In XXXXXXXXXX, you and two other taxpayers (the "group") bought a property in XXXXXXXXXX with the intention of using it as a rental property.

2. At the time of acquisition, the rental property consisted of the land and a duplex housing XXXXXXXXXX units.

3. From XXXXXXXXXX, the group earned rental income on the rental property, which was reported for income tax purposes.

4. Meanwhile, in XXXXXXXXXX, the group severed approximately one-third of the land from the rental property and transferred it to you and one of the other members of the group. The remaining portion of the rental property continued to be used as a rental property by the group.

5. As the rental property became increasingly run-down, the group decided in XXXXXXXXXX to demolish the existing building and to build a new building on the site.

6. The old building was demolished in XXXXXXXXXX, and a new building was erected in its place in the same location.

7. The new rental building consists of XXXXXXXXXX rental units instead of the original XXXXXXXXXX; however, it is, and will continue to be, used as a rental property. Both units were expected to be ready for occupation in XXXXXXXXXX, and are already on the market as rental units.

Based on the foregoing, you raised certain questions about the demolition of the old building and how the new building will be treated for purposes of calculating "capital cost allowance" ("CCA").

Our Views

In our view, the demolition of a building constitutes a disposition of property with nil proceeds. Thus, in general terms, if a building is demolished and there are no other assets in the capital cost allowance ("CCA") class to which the building belonged, a terminal loss equal to the underpreciated capital cost would result. Further, where a new building is erected on the same site in the manner described above, the cost of demolition will likely form part of the cost of the new building. Although, the cost of demolition may be deducted as a current expense in some cases, it is our view that this only applies if the building has been used for a long time to earn income.

We would like to emphasize that the foregoing comments are based on the presumption that the taxpayer acquired the building for the purposes of gaining or producing income. Otherwise, the building would not qualify as "depreciable property" and a terminal loss would not arise. Also, in this case, the cost of demolition would likely be considered part of the cost of land. See the comments in paragraphs 7 and 8 of IT-220R2, "Capital Cost Allowance -proceeds of disposition of depreciable property", and paragraph 6 of IT-485 "Cost of Clearing or Levelling Land". Interpretation bulletins may be obtained on our website which is located at www.ccra-adrc.gc.ca.

Rental properties are generally in a separate CCA class, unless they cost less than $50,000. In this regard, you may wish to refer to Interpretation Bulletin IT-274R, "Rental properties - Capital cost of $50,000 or more".

Since your situation involves the interpretation of relatively complex provisions of the Income Tax Act, you may wish to consider obtaining professional advice if you need further help. We trust that our comments will be of assistance.

Yours truly,

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

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