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.
Principal Issues:
1. Would the "change of use rules" in paragraph 13(7)(a) and/or subparagraph 45(1)(a)(ii) of the Act apply in a scenario where in a particular year a business ceases operations, its assets are sold in the following year and its assets were not used for any purpose from the point of time when the business ceased operating, to the date of the sale of the assets?
2. Would the same change of use rules apply in the same scenario, except that the assets are rented out on a commercial basis from the point of time when the business ceased, to the date of their sale?
Position:
1. No.
2. No.
Reasons:
1. Not being used for any other purpose. Consistent with ¶6 of IT-172R and ¶8 of IT-478R2.
2. Assets still being used to gain or produce income. Consistent with position in file #1999-001394 and ¶11 of IT- 218R.
XXXXXXXXXX 2002-014364
Allan Nelson, C.M.A.
(613) 443-7253
July 24, 2002
Dear XXXXXXXXXX:
Re: Technical Opinion Request
We are writing in reply to your letter to us dated May 28, 2002, concerning the application of paragraph 13(7)(a) and subparagraph 45(1)(a)(ii) of the Income Tax Act (Canada) (the "Act"). In this letter these provisions are referred to as the "Change in Use Rules".
You have asked us to consider the following hypothetical scenarios.
Scenario 1
Opco is a taxable Canadian corporation that ceased its active business operations in year 1 and immediately tried to find a buyer for its capital assets (the "Assets", which include, land, buildings and other depreciable assets). In the interim, the Assets were not rented, leased or used for any other purpose. In year 2 a buyer is found and the Assets are sold.
Scenario 2
Same facts as in Scenario 1, except that in the interim, the Assets were rented to a third party on a commercial basis until the Assets were eventually sold in year 2 to an arm's length 3rd party.
Your View
You have asked us to confirm your views that after Opco ceased business operations
? in Scenario 1, the Change in Use Rules would not apply since the Assets were not being used for any purpose or for a new purpose, and
? in Scenario 2, the Change in Use Rules would not apply since the Assets were still being used for the purpose of gaining or producing income (although it would be rental income versus active business income).
As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of some assistance to you.
The Change in Use Rules each provide for deemed dispositions of property at its fair market value in situations where a taxpayer acquired property for the purpose of gaining or producing income, and then at a later time commenced to use the property for some other purpose.
We agree with your view that the Change in Use Rules would not apply in Scenario 1, since after Opco ceased using the property to gain or produce income from its active business operations, Opco did not commence to use the Assets for any other purpose. In this regard, see the Canada Customs and Revenue Agency's similar position outlined below in paragraph 6 of Interpretation Bulletin IT- 172R, Capital cost allowance - Taxation year of individual.
¶6. Where, at a particular time, an individual ceases to carry on a business when certain of its depreciable properties have not been disposed of and after that time no use whatever is made of them, paragraph 13(7)(a) does not apply to deem that a disposition has been made.
It is also our opinion that the Change in Use Rules would not apply in Scenario 2, where Opco still used the property for the purpose of gaining or producing income (i.e., rental income in this instance), after Opco ceased using the property to gain or produce income from its active business operations. In this regard, see CCRA's similar position outlined below in paragraph 11 of Interpretation Bulletin IT- 218R, Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa.
¶11. ...The Department considers that the changes in use as described by subsections 13(7) and 45(1) do not include a transfer of property from one income-earning function to another such function of the same taxpayer. Accordingly, it is the Department's position that subsections 13(7) and 45(1) do not apply where real estate that is used by its owner for the purpose of gaining or producing income from a business or property (e.g., an office building or rental property) is converted by its owner to inventory. The use (by sale) of inventory is still an income-earning function...
Ultimately, whether a property is used at a particular time for the purpose of gaining or producing income, or for some other purpose, as contemplated in the Change in Use Rules, involves a question of fact that must be addressed before conclusive answers can be given. We do not have sufficient information to comment further at this time.
In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the CCRA.
We hope the above will be of assistance to you.
Yours truly,
Milled Azzi, C.A.
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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