4 December 2018 TEI Roundtable Q. 1, 2018-0782341C6 - Regulation 1103(1)

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: Can the CRA confirm whether the following statement continues to reflect its interpretation of Income Tax Regulation 1103(1); “where a taxpayer elects under Regulation 1103(1), the election affects all such properties on hand at the commencement of the taxation year and acquired during the year for which the election is made. The election does not affect properties acquired after the end of that year as referred to in your letter but, of course, they could be subject to a later election.

Position: Yes this statement continues to reflect our view.

Reasons: Paragraph 1.132 of Income Tax Folio S3-F4-C1, General Discussions of Capital Cost Allowance.

2018 TEI Conference

Question 1 of part E. Capital Cost Allowance – Elections to Include Properties in Class 1

Under Part XI of the Income Tax Regulations, a taxpayer’s depreciable property is grouped into various classes described in Schedule II. The rules in Regulation 1103 allow a taxpayer, under certain conditions, to elect to transfer assets from one class to another. (footnote 1) Under Regulation 1103(1), a taxpayer may elect to include in Class 1 of Schedule II all properties otherwise included in any of Classes 2 to 10, 11 and 12 to the extent they are acquired for the purpose of gaining or producing income from the same business. Regulation 1103(4), in turn, provides that such an election will be effective from the first day of the taxation year in respect of which the election is made and will continue to be effective for all subsequent taxation years.

In a technical interpretation letter dated January 8, 1980, confirming its position in Interpretation Bulletin IT-327 (July 5, 1976), the CRA stated that:

[W]here a taxpayer elects under Regulation 1103(1), the election affects all such properties on hand at the commencement of the taxation year and acquired during the year for which the election is made. The election does not affect properties acquired after the end of that year as referred to in your letter but, of course, they could be subject to a later election.

Could the CRA confirm whether this statement continues to reflect its interpretation of the Regulation?

CRA Response

The CRA confirms that this statement continues to be our position.

Interpretation Bulletin IT-327, Capital Cost Allowance – Elections under Regulation 1103, has been cancelled and information regarding the election under subsection 1103(1) has been incorporated into paragraph 1.132 of Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance (the “Folio”). Paragraph 1.132 states:

“Section 1103 of the Regulations contains elections that, under certain conditions, permit a taxpayer to transfer property otherwise included in one class to another class. Normally such a transfer is made to defer either immediate recapture or a terminal loss. For example, under subsection 1103(1) of the Regulations, a taxpayer may elect to transfer all properties otherwise included in Classes 2 through 12 (excluding Class 10.1) to Class 1 provided that all such properties were acquired for the purpose of gaining or producing income from the same business. The election affects all properties on hand at the commencement of the tax year for which the election is made, as well as any such property acquired during that year.”

Sandro D’Angelo
2018-078234
December 4, 2018

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 All references to “Regulation” herein are to sections of the current federal Income Tax Regulations, C.R.C., c. 945