2 March 2009 External T.I. 2008-0304991E5 - 111(4)(e) - Land & Bldg Separate Capital Prop.

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: Could a corporation elect to treat land with a building as two separate capital properties for purposes of the paragraph 111(4)(e) designation?

Position: Yes.

Reasons: Wording of the ITA.

								2008-030499
XXXXXXXXXX 							S.Snell
(613) 957-2095
March 2, 2009

Dear Sir:

Re: The Separation of Land and Building for Purposes of the Paragraph 111(4)(e) Designation

We are writing in response to your letter dated December 30, 2008 in which you request our comments regarding the ability of a taxpayer to treat land and building as two separate capital properties for the purposes of making a designation under paragraph 111(4)(e) of the Income Tax Act.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act ("ITA").

1) Facts and Assumptions

Our understanding of the facts is as follows:

• A corporation would own land with a building on it that is depreciable property. The land and building would be held as capital property.
• The land and building would have accrued gains such that the fair market value ("FMV") would exceed the adjusted cost base ("ACB") and capital cost, respectively.
• The corporation would have other non-depreciable capital properties that each have a FMV less than their respective ACBs.
• Control of the corporation would be acquired.
• Paragraphs 111(4)(c) and (d) would apply, resulting in the realization of accrued capital losses on the non-depreciable capital properties for the year ending on the acquisition of control.
• The corporation would make a designation pursuant to paragraph 111(4)(e) on one or more of its capital properties with accrued capital gains.

2) Your Views

It is your view that, where a corporation would have land with a building, the corporation would be permitted to treat the land and building as two separate capital properties in respect of the paragraph 111(4)(e) designation and, accordingly, the corporation would be entitled to designate with respect to either the land or the building, if desired.

You have requested that we provide our comments regarding the aforementioned analysis.

3) 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. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. Accordingly, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we offer the following general comments.

Paragraph 111(4)(e) provides that each capital property owned by the corporation immediately before the time control of the said corporation is acquired (other than a property in respect of which an amount would, but for paragraph 111(4)(e), be required by paragraph 111(4)(c) to be deducted in computing its ACB to the corporation or a depreciable property of a prescribed class to which, but for paragraph 111(4)(e) subsection 111(5.1) would apply), as is designated by the corporation in its return of income for the taxation year that ended immediately before the time of its acquisition of control or in a prescribed form filed within the time limits referred to in paragraph 111(4)(e), shall be deemed to have been disposed by the corporation immediately before the time that is immediately before the time of its acquisition of control for proceeds of disposition equal to the lesser of the FMV of the property immediately before the time of its acquisition of control and the greater of the ACB to the corporation of the property immediately before the disposition and such amount as is designated by the corporation in respect of the property. Furthermore, each such capital property shall be deemed to have been reacquired by it at that time at a cost equal to the proceeds of disposition thereof.

Subsection 248(1) provides that "capital property" has the meaning assigned by section 54. Section 54 provides, among other things, that the definition of capital property means any depreciable property of the taxpayer and any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss.

Subsection 248(1) provides that "depreciable property" has the meaning assigned by subsection 13(21). Subsection 13(21) defines depreciable property as property in respect of which the taxpayer has been allowed, or would, if the taxpayer owned the property at the end of the year, be entitled to a deduction under paragraph 20(1)(a) in computing income for that year. Pursuant to paragraph 20(1)(a) an amount in respect of the capital cost to the taxpayer of the property, may be deducted as is allowed by the regulations.

The preamble to subsection 1100(1) of the Income Tax Regulations (the "Regulations") and paragraph 1100(1)(a) of the Regulations provide that, for the purposes of paragraph 20(1)(a), the deductions allowed in computing the taxpayer's income for each taxation year is such amount as may be claimed in respect of property in each class in Schedule II. Subsection 1102(2) of the Regulations specifically provides that the classes of property described in Schedule II shall be deemed not to include the land upon which a property described therein was constructed or is situated.

Consequently, we are in agreement with your view that, for the purposes of the 111(4)(e) designation, a corporation can elect to treat land with a building as separate capital properties, such that the corporation would be permitted to designate on either the land or the building, separately.

The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5.

We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch