9 March 2004 External T.I. 2004-0059661E5 - Subsection 13(16) Vessel Election

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 taxpayer can elect under subsection 13(16) of the Act to defer the inclusion in income of recaptured CCA on a class 7 vessel when immediately thereafter another vessel is acquired and included in a separate prescribed class by virtue of paragraph 1101(2a) of the Income Tax Regulations.

Position: Yes, provided the conditions below are met.

Reasons: Subsection 13(16) of the Act provides that where a vessel owned by a taxpayer is disposed of, the taxpayer may elect to treat the proceeds that would be included in computing the taxpayer's income under Part I of the Act, as proceeds of disposition of property of another prescribed class that includes a vessel owned by the taxpayer. The taxpayer must file the election within the time required for filing the taxpayer's return of income for the taxation year in which the class 7 vessel was disposed of. Also, the taxpayer cannot elect under subsection 13(16) of the Act if subsection 13(15) applies to the proceeds of disposition of the class 7 vessel or if the taxpayer makes an election under paragraph 13(15)(b) in respect of the class 7 vessel.

XXXXXXXXXX Randy Hewlett, B. Comm.

2004-005966
March 9, 2004

Dear XXXXXXXXXX:

Re: Subsection 13(16) of the Income Tax Act (the "Act") - Vessel Election

We are writing in response to your e-mail of January 29, 2004, wherein you requested our opinion on the application of subsection 13(16) of the Act.

You described a situation in which a taxpayer disposed of a fishing vessel and immediately thereafter acquired another vessel that is included in a separate prescribed class by virtue of paragraph 1101(2a) of the Income Tax Regulations (the "Regulations"). The fishing vessel disposed of is the only property included in class 7 by the taxpayer. You inquired whether the taxpayer is eligible to elect under subsection 13(16) of the Act to defer the inclusion in income of recaptured capital cost allowance ("CCA") on the class 7 vessel.

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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following comments.

Subsection 13(16) of the Act provides that where a vessel owned by a taxpayer is disposed of, the taxpayer may elect to treat the proceeds that would be included in computing the taxpayer's income under Part I of the Act, as proceeds of disposition of property of another prescribed class that includes a vessel owned by the taxpayer. Subject to the requirements outlined below, we are of the view that a taxpayer who disposes of a class 7 vessel and has another vessel that is included in a separate prescribed class by virtue of paragraph 1101(2a) of the Regulations, is eligible to elect under subsection 13(16) of the Act to defer the inclusion in income of recaptured CCA on the class 7 vessel.

The election under subsection 13(16) of the Act must be filed by the taxpayer within the time required for filing the taxpayer's return of income for the taxation year in which the class 7 vessel was disposed of. Further, the taxpayer cannot elect under subsection 13(16) of the Act if subsection 13(15) applies to the proceeds of disposition of the class 7 vessel or if the taxpayer makes an election under paragraph 13(15)(b) in respect of the class 7 vessel [subsection 13(15) pertains to vessels generally acquired prior to 1966]. Finally, for purposes of calculating the undepreciated capital cost of the vessel included in the separate prescribed class, the recaptured CCA on the class 7 vessel is considered part of its proceeds of disposition and consequently, reduces the CCA otherwise available to the taxpayer in respect of this property. For more information regarding the CCA rules that apply to vessels, see Interpretation Bulletin IT-267R2, Capital Cost Allowance - Vessels.

We trust our comments are of assistance.

Yours truly,

John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch