7 January 2013 External T.I. 2012-0452611E5 - Subsection 13(21.2)

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 the terminal loss denied under subsection 13(21.2) can be claimed on the death of a taxpayer.

Position: No.

Reasons: A loss on the transfer of property to a spouse which is suspended by reason of subsection 13(21.2) would be suspended indefinitely if the transferor died more than 30 days after the transfer but before the spouse disposed of the property since the death of a taxpayer is not one of the "triggering events" for the purposes of subparagraph 13(21.2)(e)(iii) and there is no mechanism for the deceased taxpayer to claim the loss in a taxation year that occurs after the death.

XXXXXXXXXX
2012-045261
Charles Rafuse
613-247-9237

January 7, 2013

Dear XXXXXXXXXX

Re: Subsection 13(21.2) of the Income Tax Act

This is in response to your email of June 9, 2012, wherein you requested our interpretation regarding the application of subsection 13(21.2) of the Income Tax Act (the "Act") to a situation where an individual (the "transferor") transferred a depreciable property to his/her spouse (the "transferee") and elected pursuant to subsection 73(1) of the Act to have the transfer occur at fair market value instead of cost.

You indicate that in this situation, the transferor would otherwise have realized a terminal loss on the transfer of the depreciable property but the terminal loss was denied by virtue of subsection 13(21.2) of the Act since the transferor's spouse continued to own the property 30 days after the transfer. The transferor subsequently died without having claimed full capital cost allowance ("CCA") on the hypothetical property that the transferor was deemed to still own by virtue of subparagraph 13(21.2)(e)(iii) of the Act.

You have asked whether the remaining balance of the loss relating to this hypothetical property could be claimed as a terminal loss in the year of transferor's death.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.

As you know, subsection 13(21.2) of the Act will apply where depreciable property of a prescribed class has been disposed of by a person (the "transferor") to a transferee who is affiliated with the transferor and who continues to own the property 30 days after the transfer of the property (the "transferee") and the proceeds of disposition for the property are less than the lesser of:

A) the capital cost of the property, and

B) the proportion of the undepreciated capital cost of the property of that class that the fair market value of the transferred property is of the fair market value of all property of that class.

Subparagraph 13(21.2)(e)(iii) of the Act will deem the transferor to own a hypothetical property that was acquired before the taxation year of the transferor that includes the date of the transfer having a capital cost that is equal to the excess of the lesser of the amounts referred to in A) or B) above over the proceeds of disposition and that is property of the same class as the transferred property. Subparagraph 13(21.2)(e)(iii) of the Act further provides that this hypothetical property will be deemed to be owned by the transferor until the time that is immediately before the first time after the transfer that one of the events described in any of clauses (A) to (E) thereof occurs (a "triggering event").

In the situation you described, it appears that the remaining balance of the loss on the hypothetical property would be suspended indefinitely since the death of the transferor is not a "triggering event" described in any of clauses (A) to (E). Moreover, in these circumstances, there does not appear to be any other mechanism that would permit the transferor to claim the remaining balance of the loss, either for the year of death or for any other year.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, C.P.A., C.A.
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch