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: The mechanics of CCA claims for Class 29 property transferred between parties not dealing at-arm's-length.
POSITION: Maximum CCA permitted calculated.
REASONS: As provided by ITR 1100(1)(ta) and ITR 1100(2.2).
Matthew Ross, CPA, CA
October 3, 2019
Re: Class 29 property acquired from a non-arm’s length party
This is in reply to your email of October 31, 2018, in which you requested our interpretation of the amount of capital cost allowance (“CCA”) which may be claimed in a given situation.
In the situation you presented, Company A acquired an asset (“the Property”) in 2015 for $100,000. The Property was included in Class 29 of Schedule II of the Income Tax Regulations (“the Regulations”). Company A claimed CCA in respect of the Property in the amount of $25,000 in 2015 and $50,000 in 2016. There was no other property in Class 29. Accordingly, Company A’s undepreciated capital cost (“UCC”) for Class 29 at the end of 2016 was $25,000. In 2017, Company A sold the Property to a non-arm’s length corporation, Company B, for fair market value of $30,000, resulting in recapture for Company A of $5,000. You would like to know in which taxation year the $30,000 cost of the Property would be added to Company B’s Class 29 UCC, and the maximum CCA that can be claimed by Company B in that year and the following years.
This technical interpretation provides general comments about the provisions of the Income Tax Act (“the Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
Generally, subsection 1102(14) of the Regulations provides that, where property of a prescribed class is acquired from a person (“the transferor”) with whom the transferee was not dealing at arm’s length, the property is deemed to be property of that same prescribed class of the transferee. Thus, in the situation presented, as the Property was included in Class 29 for Company A, Company B will also include the $30,000 capital cost of the Property in Class 29 in the year acquired, 2017.
The maximum CCA that may be claimed in respect of property in Class 29 is calculated according to paragraph 1100(1)(ta) of the Regulations. Generally, paragraph 1100(1)(ta) provides that the maximum CCA that may be claimed is 25% of the capital cost in the year of acquisition, 50% in the next year, and 25% in the third year. Where the maximum CCA is not claimed in a year, the subsequent year’s maximum is increased by that unclaimed amount. If, however, property is “designated property,” other than property acquired in a specified transaction, the maximum CCA that may be claimed is different. We note that, in the situation presented, it does not appear that the Property was acquired in a “specified transaction” as defined by subparagraph 1100(1)(ta)(vi).
For the purposes of the CCA calculation in paragraph 1100(1)(ta) of the Regulations, subparagraph 1100(2.2)(j)(i) deems property to be “designated property” where, among other things, the property was acquired by a taxpayer from a person with whom the taxpayer was not dealing at arm’s-length, the property was depreciable property of the transferor and the transferor owned the property continuously during a certain period of time. That period is described in paragraph 1100(2.2)(f) and begins from a day that was at least 364 days before the end of the transferee’s taxation year in which the transferee acquired the property and ends at the transferee’s acquisition date.
In the situation presented, as the Property was owned continuously by Company A from a day in 2015 to a day in 2017 (the year in which Company B acquired the Property), this period of time meets the requirements of paragraph 1100(2.2)(f) of the Regulations. Accordingly, the Property would be deemed by subparagraph 1100(2.2)(j)(i) to be “designated property” for the purposes of the CCA calculation in paragraph 1100(1)(ta).
If a property is designated property, for the purposes of the CCA calculation in paragraph 1100(1)(ta) of the Regulations, pursuant to subparagraph 1100(2.2)(j)(ii), the property is deemed to have been acquired by the transferee immediately after the commencement of the transferee’s first taxation year that commenced after the time that the property was last acquired by the transferor of the property. Therefore, in the situation presented, subparagraph 1100(2.2)(j)(ii) deems Company B to have acquired the Property at the start of its first taxation year that began after the Property was actually acquired by Company A. As the Property was acquired by Company A in 2015, this provision deems Company B to have acquired the Property at the start of its 2016 taxation year.
Additionally, subparagraph 1100(2.2)(j)(iv) of the Regulations deems the Property to have become “available for use” by Company B at the earlier of the time it became available for use by Company A or Company B. The combined effect of these provisions is to enable a non-arm’s length transferee to calculate CCA according to subsection 1100(1)(ta) without reference to the general half-year rule and by reference to an earlier acquisition time of the transferor.
In the situation you have presented, assuming the Property is “designated property” not acquired in a “specified transaction,” and assuming that the Property is not “leasing property” (as defined by subsection 1100(17) of the Regulations) or “specified leasing property” (as defined by subsection 1100(1.11)), for the purposes of the CCA calculation in paragraph 1100(1)(ta), the Property will be deemed to have been acquired and become available for use by Company B in its 2016 taxation year. As a result, for the purpose of Company B’s CCA calculation for 2017, the Property is deemed to have been acquired in the “immediately preceding year” (2016) rather than “in the year” (2017). Accordingly, the maximum CCA that Company B may claim in its 2017 taxation year for the Property as calculated under subsection 1100(1)(ta) is $30,000.
We trust our comments will be of assistance.
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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