20 September 2004 External T.I. 2004-0072411E5 - Terminal loss on building

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 an election under subsection 1103(1) of the Regulations can be made where subsection 13(21.1) is applicable.

Position: Yes, provided required conditions are met.

Reasons: Complies with legislative requirements.

T. Harris
XXXXXXXXXX 							(613) 957-2114
									2004-007241
September 20, 2004

Dear XXXXXXXXXX:

Re: Subsection 13(21.1) of the Income Tax Act

We are writing in response to your letter of April 13, 2004 wherein you requested our interpretation concerning the interaction of subsection 13(21.1) of the Income Tax Act (the "Act") and subsection 1103(1) of the Income Tax Regulations (the "Regulations") to the situation described below.

You describe the situation where a taxpayer has disposed of a business, including land, a building thereon, machinery and equipment. On the disposition there is a capital gain on the sale of the land, a terminal loss on the sale of the building and recapture on the sale of the machinery and equipment.

Your specific question relates to the terminal loss on the building and whether subsection 13(21.1) of the Act will apply to reduce the terminal loss on the building and the capital gain on the land or whether the taxpayer could elect under subsection 1103(1) of the Regulations to combine the assets under class 1 to reduce the recapture on the machinery and equipment by the terminal loss on the building. In other words, you would like to know if there is an ordering rule that determines which provision should apply.

Our Comments

The situation outlined in your letter appears to relate to either a proposed transaction or completed transactions. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 ("IC-70-6R5") dated May 17, 2002. However, if the situation relates to a completed transaction, a request for the Canada Revenue Agency's views should be made to your local Tax Services Office. We can, however, provide the following general comments.

When the proceeds of disposition of a building are less than the lesser of its cost amount and the capital cost thereof, subsection 13(21.1) of the Act provides special rules to allocate the combined proceeds of disposition between the land and building, to restrict the potential terminal loss thereon and possibly recapture capital cost allowances previously taken.

As noted in paragraph 11 of Interpretation Bulletin IT-220R2 Capital Cost Allowance - Proceeds of Disposition of Depreciable Property, in applying subsection 13(21.1) of the Act it is first necessary to compute the cost amount of both the land and the building. Cost amount is defined in subsection 248(1) to mean, in the case of land, its adjusted cost base and, in the case of a building, the building's proportionate share of the undepreciated capital cost of the class that the capital cost of the building is of the capital cost of all property remaining in the class.

Subsection 1103(1) of the Regulations permits a taxpayer to elect to transfer all properties otherwise included in classes 2 to 12 inclusive to class 1 provided that all such properties were acquired for the purpose of gaining or producing income from the same business. This election affects all such properties on hand at the commencement of the taxation year and acquired during the year for which the election is made. Normally, such an election is made to defer either immediate recapture or a terminal loss.

In our view, in circumstances where the requisite conditions are satisfied, an election may be made under subsection 1103(1) of the Regulations notwithstanding that subsection 13(21.1) of the Act may be applicable. However, once a qualifying election has been made and all properties otherwise included in classes 2 to 12 inclusive have been reclassified to class 1, the provisions of subsection 13(21.1) of the Act would then have to be considered. The fact that the building has been reclassified into class 1 does not preclude it from being a building for the purposes of subsection 13(21.1) of the Act. Consequently, subsection 13(21.1) of the Act will still apply if the proceeds of disposition of the building are less than the lesser of its capital cost or the revised cost amount of the building immediately before the disposition (i.e. the proportionate share of the undepreciated capital cost of class 1 that the capital cost of the building is of the capital cost of all property remaining in class 1 immediately before the disposition).

These comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch

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