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: In a situation in which a taxpayer disposes of a "rental property", and throughout the period of ownership was not entitled to deduct any CCA in computing income from the property pursuant to subsection 1100(11) of the Regulations, does the property meet the definition of "depreciable property" in subsection 13(21) of the Act and can a "terminal loss" with respect to the property be claimed under subsection 20(16) of the Act?
Position: Yes.
Reasons: A terminal loss with respect to a rental property should not be denied merely because subsection 1100(11) of the Regulations has restricted the taxpayer from deducting any CCA on the property.
January 27, 2003
Mr. Doug Williams HEADQUARTERS
Toronto Centre Tax Services Office Randy Hewlett, B.Comm
Verification & Enforcement Division 613-957-8973
2002-017767
Terminal Loss Deduction on Rental Properties
We are writing in response to your memorandum of December 5, 2002, wherein you requested our opinion on the above-noted issue.
In your memorandum, you described a situation in which a taxpayer disposed of a "rental property" and claimed a "terminal loss" under subsection 20(16) of the Income Tax Act (the Act). Throughout the period of ownership, the taxpayer never deducted capital cost allowance (CCA) in computing income from the property because of the application of subsection 1100(11) of the Income Tax Regulations (the Regulations). You also noted that the taxpayer never realized a profit with respect to the rental property throughout the period of ownership.
In your view, recent jurisprudence with respect to the reasonable expectation of profit (REOP) test can no longer be applied to deny the rental losses as a source of income under the Act if the taxpayer did not use the property for personal purposes. However, you question whether or not the taxpayer is entitled to the deduction for a terminal loss under subsection 20(16) of the Act. In your view, since the taxpayer was never allowed CCA on the rental property by virtue of the application of subsection 1100(11) of the Regulations, the property does not meet the definition of "depreciable property" in subsection 13(21) of the Act. Given that subsection 20(16) of the Act requires that the property be a "depreciable property", it is your view that the taxpayer is not entitled to a deduction for the terminal loss. It is apparent from your memorandum that you feel your position is supported by opinions issued by this Directorate.
We are in general agreement with your comments regarding the REOP test. As you are probably aware, we commented on the jurisprudence you refer to in your memorandum at the 2002 Canadian Tax Foundation Conference. Our complete comments on the 2001 Supreme Court of Canada decisions can be found in Income Technical News No. 25. As a result of these decisions, the REOP test as it formerly applied, is no longer valid to determine if a taxpayer's activity constitutes a source of income under the Act. Now, a taxpayer's activity will be considered a source of income under the Act, if it is carried on in "pursuit of a profit". An activity that does not contain a personal or hobby element will generally be considered undertaken in pursuit of profit and therefore, constitute a source of income under the Act. In your situation, there is no indication that the taxpayer's rental activity contains any personal or hobby element and therefore, constitutes a source of income under the Act.
With respect to the terminal loss issue it should be noted that, although we opined in the past that there may be a technical argument to deny a terminal loss on the basis proposed in your memorandum (our file 9908117), it is our position that a taxpayer should not be denied a terminal loss under subsection 20(16) of the Act merely because subsection 1100(11) of the Regulations did not permit the taxpayer to deduct any CCA (our file 1999-0012687). After reviewing the matter further, we firmly believe that this is the better legal view. In our view, subsection 1100(11) of the Regulations merely restricts the amount of CCA to which a taxpayer is otherwise entitled. Therefore, in accordance with the definition of depreciable property in subsection 13(21) of the Act, a taxpayer will be considered entitled to a deduction under paragraph 20(1)(a), despite the fact that the Regulations may have reduced the CCA claimed by the taxpayer to NIL for the period of ownership of the rental property.
We trust 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 Canada Customs and Revenue Agency's electronic library. 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 electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 2 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2003
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2003