26 January 1989 Income Tax Severed Letter 5-7077 - []

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.

XXXX R. B. Day (613) 957-2136

JAN 26 1989

XXXX

We are writing in reply to your letter of November 17, 1988, wherein you requested our interpretation of subsection 13(21.1) of the Income Tax Act (the "Act") relative to subsection 111(5.1) and paragraph 111(4)(e) of the Act.

Your analysis of the inter-relationship of these provisions, is as follows:

Due to a change in control of a corporation, subsection 111(5.1) of the Act requires that where a depreciable property's undepreciated capital cost is greater than its fair market value, the excess is deemed to have been allowed in respect of the property under paragraph 20(1)(a) of the Act for the taxation year before the change in control occurred.

Paragraph 111(4)(e) of the Act allows a corporation, immediately before a change in control, to elect a deemed disposition of any capital property immediately before the year end resulting from the acquisiton of control. The elected proceeds may be anywhere between the adjusted cost base and the fair market value of the property, where the fair market value exceeds the adjusted cost base.

You are questioning whether subsection 13(21.1) of the Act must be applied to reallocate the elected proceeds of disposition of the election under paragraph 111(4)(e) of the Act with respect to the land and 111(5.1) of the Act applies with respect to the building.

It is your view that subsection 13(21.1) of the Act would not be applied as the section specifically states "where a taxpayer disposed of a building" and the provisions of subsection 111(5.1) of the Act do not require a disposition of the building. In fact, the building would still be owned by the particular corporation involved.

For example, a corporation owns land and a building, just prior to the acquisition of control, as follows:

Building Land

Cost                                      $100,000
Undepreciated Capital Cost                              $150,000
Fair Market Value                         $125,000      $130,000

Pursuant to subsection 111(5.1) of the Act, the corporation would be required to realize an income loss of $20,000 with respect to the building. The corporation could also elect to have a deemed dispostion and reacquisition of the land for $125,000, under paragraph 111(4)(e) of the Act, and thus realize a capital gain of $25,000.

Subsection 13(21.1) of the Act applies where a taxpayer disposes of a building of a prescribed class at a loss. This would occur where the proceeds of disposition for the building are less than its cost amount (undepreciated capital cost). Since there is neither an actual or deemed dispostion of the building nor proceeds or deemed proceeds of dispostion when subsection 111(5.1) of the Act applies with respect to the building in this scenario, it is our opinion that subsection 13(21.1) of the Act would not be applied to offset the $20,000 income loss on the building against the $25,000 capital gain on the land.

We would caution that the above comments represent an expression of opinion only, and as such, are not binding upon the Department.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch