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: 1) If a depreciable property with a pregnant loss is transferred to an affiliated entity described in paragraph 149(1) XXXXXXXXXX could the loss be allowed on the basis that the relieving condition described in clause 13(21.2)(e)(iii)(B) is met?
Position: Question of fact but probably not.
Reasons: The fact that a XXXXXXXXXX described in paragraph 149(1) XXXXXXXXXX is exempt from Part 1 tax does not, in of itself, mean that it could not be carrying on income earning activities.
XXXXXXXXXX
2012-046001
Charles Rafuse
613-247-9237
January 3, 2013
Dear XXXXXXXXXX:
Re: Subsection 13(21.2) of the Income Tax Act
This is in response to your email of August 23, 2012, wherein you requested our interpretation regarding the application of subsection 13(21.2) of the Income Tax Act (the "Act") to the situation that is briefly described below.
A taxable Canadian corporation ("Canco") owns a depreciable property ("Property") with a fair market value less than its undepreciated capital cost. The Property will be sold to Canco's sole shareholder ("Parent") for its fair market value. Prior to this sale, the Property was rented by Canco to Parent. Following the sale, the Property will continue to be used by Parent in carrying out its activities.
Parent is an "affiliated person", as that term is defined in subsection 251.1(1) of the Act. Parent is also an entity that is exempt from Part I tax by virtue of paragraph 149(1) XXXXXXXXXX of the Act. In this situation, the rules in subsection 13(21.2) of the Act will apply to prevent Canco from recognizing the loss on the sale of the property to Parent unless one of the events described in any of clauses 13(21.2)(e)(iii)(A) to (E) is applicable.
In the above situation, you want to know if Canco can rely on clause 13(21.2)(e)(iii)(B) of the Act in order to claim the loss arising on the sale of the Property, on the basis that Parent would not be considered to be using the Property for an income earning purpose because it is exempt from tax under Part 1 by virtue of paragraph 149(1) XXXXXXXXXX of the Act.
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 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").
These rules serve to defer the recognition of that terminal loss (by deeming the property to be owned by the transferor) until the earliest of several possible triggering events, one of which, as you noted, is described in clause 13(21.2)(e)(iii)(B). This particular clause will apply where the transferred property is no longer being used by the transferor or a person affiliated with the transferor for the purpose of earning income and is used for another purpose.
In our view, the fact that no Part 1 tax may be payable under subsection 149(1) of the Act by a particular entity described therein does not automatically result in a finding of fact that a particular property owned by such an entity was not otherwise acquired for the purpose of earning income.
Therefore, if Parent is using the Property for its normal activities, the fact that it is exempt from Part 1 tax on its taxable income earned from those activities does not mean that the Property was not being used for an income earning purpose.
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
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