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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] Do the proceeds of disposition of a depreciable property held by a deceased taxpayer and the cost to the taxpayer's spouse of acquiring the property, calculated under paragraph 70(6)(d) of the Act, take into account the capital cost and cost amount obtained after an adjustment under paragraph 13(7)(e)?
Does a spouse lose the tax benefit of a deceased taxpayer's election under subsection 110.6(19) of the Act when subsection 70(6) applies?
Position: The capital cost and cost amount used for the purposes of subsection 70(6)(d) do not take into account the adjustment under paragraph 13(7)(e).
The spouse does not lose the benefit even if subsection 70(6) applies.
Reasons: Subsection 70(13) provides that, for the purposes of section 70 and for the purposes of sections 13 and 20 (but not for the purposes of any regulation made under paragraph 20(1)(a)) where a provision of section 70 (other than subsection 70(13)) applies, the capital cost of the deceased taxpayer is to be read without reference to paragraph 13(7)(e).
Interaction of 70(6), 70(13) and the definition of cost in subsection 248(1).
September 15, 2004
XXXXXXXXXX Headquarters
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2004-007500
Transfer of depreciable property to spouse on death
This is further to your memorandum of May 6, 2004, requesting our views on the application of subsection 70(6) of the Income Tax Act (the "Act") to depreciable property where the deceased taxpayer has made an election under subsection 110.6(19).
A taxpayer has owned a building since 1982. In 1994, the capital cost (CC) of the building was $91,000 and the total depreciation deducted since acquisition was $12,000. In 1994, the taxpayer made an election pursuant to subsection 110.6(19) and designated $103,000 as the proceeds of disposition on form T664. The gain resulting from this election was reduced by the amount computed under subsection 110.6(21) so that the taxpayer reported a capital gain of $10,000 (taxable capital gain of $7,500). As a result of the election, the capital cost of the building, as reduced by the amount under paragraph 110.6(21)(b), was $101,000.
However, for the purposes of sections 13 and 20, the taxpayer must reduce the capital cost of $101,000 by the amount set out in subparagraph 13(7)(e)(i). Thus, the deemed capital cost under subparagraph 13(7)(e)(i) was $91,000 and the undepreciated capital cost (UCC) was $79,000.
From 1994 to 2003, the taxpayer did not deduct depreciation. The taxpayer died in 2003. His spouse inherited his property. The taxpayer's legal representative did not elect under subsection 70(6.2). Consequently, the rules in subsection 70(6) applied.
You wish to know the cost to the spouse of acquiring the property and the tax consequences if the spouse sells the property for $109,000.
Where subsection 70(6) applies in a situation, the deceased taxpayer is deemed to have disposed of the depreciable property immediately before death and to have received proceeds of disposition equal to the lesser of its capital cost and its cost amount to the taxpayer immediately before death. The taxpayer's spouse or common-law partner, as the case may be, is deemed to have acquired the property at the time of death at a cost equal to those proceeds.
As stated in subsection 248(1), the "cost amount" of a depreciable property of a prescribed class is , the amount that would be that proportion of the undepreciated capital cost to the taxpayer of property of that class at that time that the capital cost to the taxpayer of the property is of the capital cost to the taxpayer of all property of that class that had not been disposed of by the taxpayer before that time if, inter alia, paragraph 13(7)(e) did not apply.
Subsection 70(13) provides that, for the purposes of section 70, the capital cost to a taxpayer of depreciable property of a prescribed class disposed of immediately before the taxpayer's death is the amount that would be determined if certain items in subsection 13(7), including paragraph 13(7)(e), were ignored. This capital cost will also be used where a provision of section 70, other than subsection 70(13), applies for the purposes of sections 13 and 20 of the Act (but not for the purposes of any regulation made under paragraph 20(1)(a)).
In this situation, we have assumed that the deceased taxpayer had only one property in the prescribed class. The capital cost of this property to the deceased taxpayer for the purposes of subsection 70(6) and for the purpose of calculating the UCC would be calculated without taking into account the adjustments of paragraph 13(7)(e) pursuant to subsection 70(13). The capital cost will therefore be $101,000. Furthermore, the cost amount will be $89,000 which represents the UCC calculated using the capital cost that does not take into account the adjustments under paragraph 13(7)(e).
The deceased's proceeds of disposition of the depreciable property would be $89,000 pursuant to paragraph 70(6)(d). Since subsection 70(6) applies, the capital cost calculated pursuant to subsection 70(13) will also be used to calculate the UCC for the purpose of calculating the recapture under subsection 13(1). Taking into account the deeming rule in subsection 70(13), the proceeds of disposition of $89,000 would not result in recapture of depreciation to the deceased.
The deceased taxpayer's proceeds of disposition, equal to $89,000, will also represent the cost to the spouse of acquiring the property, as provided for in paragraph 70(6)(d). Paragraph 70(6)(e) provides that paragraph 70(5)(c) applies. For the purposes of paragraph 70(5)(c), the deceased taxpayer's capital cost is $101,000. Consequently, for the purposes of sections 13 and 20 and the regulations made for the purposes of paragraph 20(1)(a), the spouse's capital cost is deemed to be $101,000 and the excess of that capital cost over the spouse's cost of $89,000, being $12,000, is deemed to have been allowed as depreciation.
If the spouse has not deducted any additional depreciation under paragraph 20(1)(a), a disposition of the property by her for $109,000 would result in recapture of depreciation of $12,000 and a capital gain of $8,000. This is because the recapture calculation under subsection 13(1) will be based solely on paragraph 70(5)(c) since paragraph 13(7)(e) does not apply to this calculation (the transferor's capital cost pursuant to subsection 70(13) is equal to $101,000 and the spouse's capital cost does not exceed that amount).
Thus, the spouse benefits from the fact that the deceased taxpayer made the election pursuant to subsection 110.6(19) in respect of this property since the increase in the cost of the property resulting from this election is reflected in the spouse's acquisition cost.
For your information, unless exempted, 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, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance. Should you require additional information regarding the content of this letter, please do not hesitate to contact us.
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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