28 February 1992 Administrative Letter 9121226 F - Cost of Capital for M & P After 85(1) Rollover

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.

February 28, 1992

957-4363

912122

Cost of Capital for M & P

This is in reply to your memorandum dated August 1, 1991 wherein you request our opinion as to the meaning of "cost of capital" for the Manufacturing and Processing Profits calculation in the following circumstances.

1.     Corporation A acquires Class 12 assets (the "assets") and claims 100% capital cost allowance thereon.

2.     Corporation A then transfers the assets to Corporation B and elects pursuant to subsection 85(1) to deem Corporation A's proceeds of disposition and Corporation B's cost of the assets to be nil.

You have specifically asked our view as to what the "cost of capital" of the assets should be in the context of Regulation 5202 for Corporation B.

Regulation 5202 states, in part, that "cost of capital" of a corporation for a taxation year means an amount equal to the aggregation of 10 per cent of all amounts each of which is the gross cost to the corporation of a property referred to in paragraph 1100(1)(e),(f),(g) or (h), paragraph 1102(1)(d) or (g) or Schedule II.

The definition of "gross cost" of a property in Regulation 5202 is the "capital cost" of the property computed without reference to subsection 13(7.1) or (10) or section 21 or 80 of the Act.

The term "capital cost" is not defined in the Act but IT-174R indicates at paragraph 1 therein that "capital cost of property" generally means the full cost to the taxpayer of acquiring the property.

In this situation a fully depreciated Class 12 asset has been transferred from one corporation to another pursuant to an election under section 85. The "agreed amount" was nil and this became the transferee corporation's cost of the property pursuant to paragraph 85(1)(a).

Subsection 85(5) states, in part, that where subsection 85(1) has applied in respect of a transfer of property, for the purposes of section 13 and 20 and any regulation made under paragraph 20(1)(a) where the capital cost to the transferor exceeds the proceeds of disposition to the transferor the capital cost of the property to the transferee shall be deemed to be the amount that was the capital cost of the property to the transferor.

Thus, the transferee will assume the transferor's capital cost of the property for calculating such things as capital gains or losses and recapture.

However, because subsection 85(5) does not make a specific reference to Regulation 5202, it would appear the original capital cost of a depreciable asset would not flow through to the transferee corporation for the purpose of that Regulation in the foregoing circumstances.

We trust that our comments will be of assistance.

for DirectorManufacturing, Partnershipsand Trusts DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch