4 November 2003 External T.I. 2003-0036505 - NON-ARM'S LENGTH SALE OF VEHICLE

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:

Can a non-arm's length sale of class 10.1 vehicle and subsequent arm's length disposition result in recaptured depreciation for the non-arm's length that acquired the vehicle as a used vehicle even though no CCA was claimed by that taxpayer?

Position TAKEN:

No.

Reasons:

Subsection 1102(14) of the Regulations deems the vehicle to be a class 10.1 asset. Subsection 13(2) of the Act prevents the amount of recapture from being included in income.

XXXXXXXXXX T. Young, CA
2003-003650
November 4, 2003

Dear XXXXXXXXXX:

Re: Non-arm's Length Sale of Class 10.1 Vehicle

We are writing in response to your letter dated August 21, 2003, concerning a series of transactions involving a passenger vehicle included in class 10.1 of Schedule II of the Income Tax Regulations (the "Regulations").

In your letter, you described the following example:

1. ACo acquires a passenger vehicle as defined in subsection 248(1) of the Income Tax Act (the "Act") in 2003 for $50,000.

2. When the vehicle is acquired by ACo, pursuant to paragraph 13(7)(g) of the Act, the capital cost is deemed to be $30,000 for 2003. Pursuant to the Regulations, the vehicle will be a Class 10.1 asset for capital cost allowance purposes.

3. In 2006, the vehicle will be sold to BCo, a related corporation, for its fair market value ("FMV") of $29,000.

4. At that time, the undepreciated capital cost ("UCC") of the vehicle for ACo will be $16,000.

5. In 2007, BCo will sell the vehicle to an arm's length party for its FMV of $26,000.

6. BCo will not have claimed any CCA on the vehicle.

You have provided the following analysis:

On the transfer of the asset from ACo to BCo, ACo will not have any recaptured depreciation pursuant subsection 20(16) of the Act. BCo will be deemed to have acquired the vehicle at the least of three amounts:

? The FMV of the vehicle at that time, which is $29,000;

? The amount that immediately before that time, was the cost amount to ACo, which pursuant to the definition in subsection 248(1) is $16,000; and

? The amount prescribed by subsection 7307(1) of the Regulations, which is $30,000.

Because the capital cost of the vehicle to BCo does not exceed the amount prescribed in subsection 7307(1) of the Regulations, the vehicle will go into Class 10. Pursuant to subsection 1100(2.2) of the Regulations, the half-year rule does not apply to the vehicle.

On the subsequent sale by BCo, it will have recaptured depreciation of $10,000 (BCo is deemed to have claimed CCA of $14,000) pursuant to subparagraph 13(7)(e)(iii) of the Act.

You have asked us to confirm your understanding of the above.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to provide the following comments, which may be of assistance to you.

It is our understanding that your concern is that on disposition of the vehicle, BCo will be required to include recaptured CCA in income, whereas, had the vehicle been retained by ACo until its sale in 2007 to the arm's length party, no amount of recaptured CCA would be included in ACo's income. However, this is not the case.

Subsection 1102(14) of the Regulations states, in part:

(14) For the purposes of this Part and Schedule II, where a property is acquired by a taxpayer

(d) 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, and

the property, immediately before it was so acquired by the taxpayer, was property of a prescribed class or a separate prescribed class of the person from whom it was so acquired, the property shall be deemed to be property of that same prescribed class or separate prescribed class, as the case may be, of the taxpayer.

As a result, subsection 1102(14) will deem the vehicle to be a class 10.1 asset of BCo. When BCo disposes of the vehicle, pursuant to subsection 13(2) of the Act, no amount of recaptured CCA will be included in income pursuant to subsection 13(1) of the Act. However, for purposes of B in the definition "undepreciated capital cost" in subsection 13(21), subsection 13(2) will deem the amount to be included in income.

We trust our comments will be of assistance to you.

Yours truly,

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