10 August 2004 Internal T.I. 2004-0080201I7 - Capital Cost Allowance

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 subsection 1100(2) of the Regulations applies to property transferred from a non-resident to a Canadian subsidiary where the property was held outside of Canada before the transfer.

Position: Yes.

Reasons: By virtue of subsection 1102(3) of the Regulations, property held outside of Canada by a non-resident is not depreciable property of the non-resident. The subsection 1100(2.2) exception to subsection 1100(2) of the Regulations is therefore not applicable and subsection 1100(2) will apply to the property when it is transferred to Canada.

August 10, 2004

	Moe Bushra	HEADQUARTERS
	Appeals Officer	A. Seidel, CMA
	Toronto Centre Tax Services Office	(613) 957-2058

2004-008020
Capital Cost Allowance

This is in response to your June 7, 2004 e-mail, and further to our telephone conversation (Seidel/Bushra) of August 5, 2004, concerning the non-arm's length acquisition of computer hardware and related peripheral equipment (the "Property") by a Canadian subsidiary of a non-resident corporation.

You indicated that a non-resident corporation owned the Property, which was situated outside of Canada. The non-resident corporation disposed of the Property to its Canadian subsidiary. For domestic income tax purposes, the non-resident corporation capitalized and depreciated the Property in a manner that is consistent with the capital cost allowance provisions in the Income Tax Act (the "Act"). You query whether subsection 1100(2.2) of the Income Tax Regulations (the "Regulations") would apply to the Canadian subsidiary when it acquired the Property at its net book value.

Our Comments

"Depreciable property" is defined in subsection 13(21) of the Act to include property acquired by the taxpayer in respect of which the taxpayer has been allowed, or would, if the taxpayer owned the property at the end of the year and the Act were read without reference to subsection 13(26), be entitled to, a deduction under paragraph 20(1)(a) of the Act in computing income for that year or a preceding taxation year.

Subsection 1102(3) of the Regulations applies where a taxpayer is a non-resident person and provides that the classes of property described in Part XI and in Schedule II of the Regulations shall, except for the purpose of determining the foreign accrual property income of the taxpayer for the purposes of subdivision i of Division B of Part I of the Act, be deemed not to include property that is situated outside Canada. Therefore, we are of the view that any property owned by a non-resident person and situated outside of Canada is not "depreciable property" of the non-resident person for purposes of the Act and Regulations.

The "half-year rule" in subsection 1100(2) of the Regulations is, subject to certain exceptions, applicable to depreciable property acquired in a taxation year. Subsection 1100(2.2) of the Regulations provides the exceptions to the "half-year rule". The exception that applies where a property of a class in Schedule II of the Regulations is acquired by a taxpayer from a person with whom the taxpayer was not dealing at arm's length at the time the property was acquired, requires that the property was depreciable property of the person from whom it was acquired and that the property was owned by the transferor for a period of at least one year.

Since the Property was not, by virtue of subsection 1102(3) of the Regulations, depreciable property of the non-resident corporation, this exception in subsection 1100(2.2) of the Regulations does not apply. Consequently, the "half-year rule" in subsection 1100(2) of the Regulations would apply to the acquisition of the Property by the Canadian corporation.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and 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. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch