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: Application of Schedule III in various situations
Position: See letter
Reasons: Provisions of Income Tax Act
2004-007182
XXXXXXXXXX Denise Dalphy, LL.B.
(613) 941-1722
June 14, 2004
Dear XXXXXXXXXX:
We are writing in reply to your letter dated April 15, 2004 wherein you requested our views on the following hypothetical situations relating to Schedule III ("Schedule III") of the Income Tax Regulations (the "Regulations") to the Income Tax Act (the "Act").
Written confirmation of the tax implications inherent in a particular transaction 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. Where a particular transaction is completed, the inquiry should be addressed to your Tax Services Office. Notwithstanding the foregoing, we are, however, prepared to provide you with the following general comments about the application of the Act.
Acquisition of Control:
The Interaction of Subsection 111(5.1) of the Act and Schedule III
Example
Assume a leasehold interest with a capital cost of $2,400, a lease term of 20 years and a fair market value at the beginning of year 10 (at acquisition of control) of $840. The capital cost allowance ("CCA") claimed through to the end of year 9 results in an undepreciated capital cost ("UCC") of $1320 before the application of subsection 111(5.1) of the Act.
You have asked us to confirm that:
Since the annual CCA claim (based on the prorated portion of the capital cost of the property of $2,400) after the acquisition of control continues to be $120, the remaining UCC will be written off after 7 years, being the end of the 16th year of the lease.
We agree with your interpretation.
As you stated, where subsection 111(5.1) of the Act applies on an acquisition of control of a corporation, and the fair market value of depreciable property is less than the UCC of the property immediately before the acquisition of control, the difference between the two amounts is deducted in computing income for the year of the corporation ending immediately before that time and is deemed to have been allowed in respect of property of that class under the Regulations made under paragraph 20(1)(a) of the Act. For the purposes of the Act, the Regulations, and Schedule III, neither the capital cost of the property nor the term of the lease has changed. Therefore, it is possible that the remaining UCC of the leasehold interest may be claimed over a period that is less than the remaining lease term.
Transfer to Affiliated Person:
The Interaction of Subsection 13(21.2) of the Act and Schedule III
Example 1
Assume a leasehold interest with a capital cost of $2,400, a lease term of 20 years and a fair market value at the beginning of year 10 (at the date of transfer to an affiliated person) of $840.
You have asked us to confirm that:
The annual CCA claim (based on the prorated portion of the capital cost of the property of $2,400) after the acquisition of the property by the [affiliated person] will be $218 (i.e., $2,400 divided by 11 years). As a result, the UCC of $840 to the affiliated person will be written off after 4 years, being the end of the 13th year of the lease.
We agree with your interpretation.
As you stated, where depreciable property was disposed of by a person (the "transferor") to a transferee who is affiliated with the person and who continues to own the property 30 days after it received the property (the "transferee") and where the proceeds of disposition of the property are less than the lesser of the capital cost of the property and its UCC, subsection 13(21.2) of the Act may apply.
Subparagraph 13(21.2)(g)(i) of the Act will deem the transferee to have a capital cost of the property that is equal to the amount that was the transferor's cost of the property. Pursuant to paragraph 1100(1)(b) of the Regulations and Schedule III, the capital cost of the property to the transferee is deemed to be incurred by the transferee at the time of the acquisition of the property since it is available for use at that time. The termination date of the lease is not changed for the purposes of the Act, Regulations or Schedule III.
Subparagraph 13(21.2)(g)(ii) of the Act will deem the difference between the capital cost of the property and its fair market value at the time of the transfer to have been deducted by the transferee under paragraph 20(1)(a) of the Act. The transferee will have a UCC equal to the purchase price of the property (assuming fair market value).
Therefore it is possible that the remaining UCC of the leasehold interest may be claimed over a period that is less than the remaining lease term.
Example 2
Assume a leasehold interest with a capital cost of $2,400, a lease term of 20 years and a fair market value at the beginning of year 10 (at the date of transfer to a related party) of $840.
You have asked us to confirm that:
The CCA claimed by the transferor to the end of year 9 results in a UCC of $1,320. The capital cost to the transferor of the separate property [that the transferor is deemed to own] is therefore $480.
The annual CCA claim of the transferor (based on the prorated portion of the capital cost of the property of $480) after the disposition of the property by the transferor will be $44 (i.e., $480 divided by 11 years). As a result, the UCC to the transferor of $480 will be written off after 11 years, being the end of the 20th year of the lease, assuming no event described in clauses 13(21.2)(e)(iii)(A) to (E) occurs before that time.
We agree with your interpretation.
Subparagraph 13(21.2)(e)(iii) of the Act will deem the transferor to own a separate property that was acquired before the beginning of the taxation year that includes the disposition and that has a capital cost equal to the excess of the UCC over the proceeds of disposition.
Non-Arm's Length Acquisition:
The Interaction of Paragraph 13(7)(e) of the Act and Schedule III
Example 1
Assume a leasehold interest with an original capital cost to a person who is not resident in Canada of $2,400, a lease term of 20 years and a fair market value at the beginning of year 10 (at the date of transfer to a related party) of $3,100.
You have asked us to confirm that:
The capital cost to the transferee is $2,750 ($2,400 + ($3,100 - $2400)/2). The annual CCA claim (based on the prorated portion of the transferee's capital cost of the property of $2,750) will be $250 (i.e., $2,750 divided by 11 years). As a result, the capital cost to the transferee will be written off after 11 years, being the end of the lease term.
We agree with your interpretation.
As you stated, where the purchase price for the property exceeds the capital cost of the property to the non-resident transferor, subparagraph 13(7)(e)(ii) of the Act applies; the capital cost of the property is deemed to be the amount that was the transferor's capital cost of the property plus an amount equal to one-half of the sale price in excess of that amount. By virtue of paragraph 1100(1)(b) of the Regulations and section 2 of Schedule III, the capital cost is deemed to be
incurred by the transferee at the time when the transferee acquired the property (since it is available for use at that time). Since the Act, Regulations and Schedule III do not change the termination date of the lease, the UCC of the leasehold interest may be claimed over the remaining lease term.
Example 2
Assume a leasehold interest with an original capital cost to a transferor of $2,400, a lease term of 20 years and a fair market value at the beginning of year 10 (at the date of transfer to a person with whom the transferor does not deal at arm's length (the "transferee")) of $1,400. The CCA claimed through the end of year 9 results in a UCC of $1,320.
You have asked us to confirm that:
The annual CCA claim (based on the prorated portion of the capital cost of the property of $2,400) will be $218 (i.e., $2,400 divided by 11 years). As a result, the UCC of $1,400 to the transferor will be written off after 7 years, being the end of the 16th year of the lease.
We agree with your interpretation.
As you stated, where a transfer of property to the purchaser at fair market value that is equal to or greater than the UCC, but not more than the capital cost of the property to the transferor, subparagraph 13(7)(e)(iii) of the Act applies; the capital cost of the property to the purchaser is deemed to be the amount that was the transferor's capital cost of the property. By virtue of paragraph 1100(1)(b) of the Regulations and paragraph 2(b) of Schedule III, the capital cost is deemed to be incurred by the transferee at the time when the transferee acquired the property (since it is available for use at that time). Since the Act, Regulations and Schedule III do not change the termination date of the lease, the UCC of the leasehold interest may be claimed over the remaining lease term.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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