23 February 2004 Internal T.I. 2003-0049157 - ELECTION BORROWED MONEY CAPITALIZE

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.

Principal Issues:

Whether a 21(1) or (3) election may be made after the taxpayer has disposed of the relevant depreciable property

Position: yes

Reasons: scheme of Act - UCC pool is cumulative

								February 23, 2004

HEADQUARTERS	HEADQUARTERS
Returns Processing Compliance Section 	Corporate Financing Section
International Tax Directorate					Denise Dalphy, LL.B.
	941-1722
Attention:	Robert Green
			Senior International Officer
	2003-004915

Paragraph 9 of Interpretation Bulletin IT-121R3,
Election to Capitalize Cost of Borrowed Money, (the "IT Bulletin")

We are writing in reply to your e-mail of November 18, 2003, wherein you asked what support we have for the position described in paragraph 9 of the above-referenced IT Bulletin. In particular, you have asked whether we agree with the statement that a taxpayer may not make an election under subsection 21(1) or (3) of the Income Tax Act (the "Act") if the relevant depreciable property is no longer on hand at the end of the taxation year for which the taxpayer wishes to make the election.

The Legislation

Subsection 21(1) of the Act provides:

"21. (1) Cost of borrowed money - Where in a taxation year a taxpayer has acquired depreciable property, if the taxpayer elects under this subsection in the taxpayer's return of income under this Part for the year,

(a) in computing the taxpayer's income for the year and for such of the 3 immediately preceding taxation years as the taxpayer had, paragraphs 20(1)(c), (d), (e) and (e.1) do not apply to the amount or to the part of the amount specified in the taxpayer's election that, but for an election under this subsection in respect thereof, would be deductible in computing the taxpayer's income (other than exempt income) for any such year in respect of borrowed money used to acquire the depreciable property or the amount payable for the depreciable property; and

(b) the amount or the part of the amount, as the case may be, described in paragraph (a) shall be added to the capital cost to the taxpayer of the depreciable property so acquired by the taxpayer."

Our Comments

The sole support that we have been able to determine for the position described in paragraph 9 of the IT Bulletin is an 1981 opinion (EC2513) that "a depreciable property that has been disposed of has no capital cost at any time thereafter and consequently an election under section 21 is possible only in respect of depreciable properties which are owned at the time of the election."

In view of the scheme of the Act, and in particular the provisions of subsection 13(1) of the Act (which provides for an income inclusion, where at the end of a taxation year, the balance in the "undepreciated capital cost" pool is negative) and the definition of "undepreciated capital cost" in subsection 13(21) of the Act (which provides for a cumulative pool of properties acquired and disposed of before a particular time), as well as the wording of subsection 21(1) of the Act, we would not recommend any challenge to a taxpayer who makes an election under subsection 21(1) of the Act in respect of the year in which the taxpayer has disposed of a depreciable property.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada 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 copy severed using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898.

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate