11 March 2013 External T.I. 2012-469231E5 F

A disposition by the taxpayer of a building and contiguous land (necessary for the building's use) would have given rise to a terminal loss in the absence of s. 13(21.1). In response to a question as to how s. 13(21.1) would apply when the taxpayer elects under s. 85(1) with respect to the disposition of the land (which has an accrued capital gain), CRA stated (TaxInterpretations translation):

The fact that the land contiguous to the building is transferred to a corporation utilizing the rules in section 85 of the Act does not prevent the application of the special rules in subsection 13(21.1) ....

Assuming that the fair market value of the land exceeds its cost amount, the elements used in determining the proceeds of disposition of the building in accordance with the calculating rules in paragraph 13(21.1)(a) of the Act…are, among others, the fair market value of the land immediately before its disposition and its cost amount to the vendor. Consequently, the agreed amount of the land for purposes of section 85 of the Act does not itself affect the determination of the proceeds of disposition of the building for purposes of subparagraphs 13(21.1)(a)(i) and (ii).

A number of depreciable properties in the same class are transferred to an affiliated person, so that s. 13(21.2)(e)(iii) deems the transferor to own notional depreciable property. The transferor will not recognize a terminal loss in respect of such notional property until, at the end of a taxation year, all such notional properties are deemed to cease to be owned by it in accordance with the release events in s. 13(21.1)(e)(iii).

In an alternative situation, the depreciable properties of the same class are disposed of to two different transferees, only one of whom is affiliated. CRA was queried as to whether the Act permitted a choice as to the order in which the properties were disposed of, in order that a terminal loss could be realized as a result of the last property being considered to be disposed of to the unaffiliated person.

CRA noted that the order of disposition affected the calculation in s. 13(21.2)(b)(ii), and that if the dispositions were simultaneous as a factual matter, s. 13(21.2)(e)(ii) provided that the order of disposition could be designated. CRA then noted that the disposition of the properties last to the unaffiliated person generally would not give rise to a terminal loss, as the notional property arising under s. 13(21.2)(e)(iii) on the disposition to the affiliated person would belong to the same class (TaxInterpretations translation):

…each of the notional properties is part of the same class as the properties whose disposition engaged the application of the rules in subsection 13(21.2)….Consequently, if at the end of the taxation year, there still are properties (being notional properties) which are part of the same class, no terminal loss can be deducted…

Thus, even if the disposition of the properties to the unaffiliated transferee occurs subsequently to the disposition of the properties to the person who is affiliated (as a matter of fact or by virtue of an ordering under subparagraph 13(21.2)(e)(ii)), the notional properties arising from the disposition of the properties to the affiliated person are part of the class in question at the end of the taxation year, so as to not permit the deduction of the terminal loss respecting that class in accordance with the terms of paragraph 20(16)(b)….