11 January 1993 Income Tax Severed Letter 9235577 - Part XVII Depreciation—Capital Cost Allownance

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.

January 12, 1993

VANCOUVER DISTRICT OFFICE Business and General
K. F. Slawson, Chief of Audit Division
Glen Thornley
Attention: J. C. Fitz-Clarke (613) 957-2101
923557
Part XVII Transfer under Subsection 85(1)

This is in reply to your Fax of November 19, 1992 with
attached letter from XXXXXXXXXX
concerning the interaction of ITAR 20(1) and paragraph
13(7)(e) of the Income Tax Act relative to the above noted
subject.

• XXXXXXXXXX expresses concern over what he sees as a conflict between the rules in ITAR 20(1)(a) and paragraph 13(7)(e) of the Act. Under the rules in ITAR the corporation in his example is deemed to have acquired a depreciable property at a capital cost equal to deemed proceeds of $42,020 and in paragraph 13(7)(e) the capital cost of property is determined to be $24,489, being the actual capital cost of the property to the former owner.
• Paragraph 13(7)(e) of the Act begins with the words, "notwithstanding any other provision of this Act," thus, the results of ITAR 20(1)(a) are modified when the circumstances of a particular transaction fit the words in paragraph 13(7)(a). That is, when the cost of depreciable property to a taxpayer acquired in an non-arm's length transaction ($42,020) exceeds the capital cost to the transferor immediately before he disposed of it, that capital cost is modified. Thus the capital cost for purposes of sections 13 and 20 is deemed to be $24,489, calculated as follows: (A) $24,489 + (B) 3/4 x ((I) $42,020 - (II) $24,489 + (III) 4/3 x $13,148) = $24,489 + 3/4 x (42,020-(24,489 + 17,531=42,020)) = $24,489 + (3/4 x 0) = $24,489. In this example the $24,489 represents the original capital cost to the transferor, the $42,020 represents the amount deemed by ITAR 20(1)(a) to be the transferor's proceeds of disposition and the $13,148 is the capital gain reported by the transferor on the disposition ($17,531 x 3/4).
• As the corporation is a separate taxpayer, there is nothing to prohibit it from claiming capital cost allowance on the capital cost to it of depreciable property that it has acquired.
• With respect to the question concerning the implications of subsection 1703(6) of the Income Tax Regulations, "depreciable cost" is a term peculiar to Part XVII of the Act, thus Regulation 1703(6) only has application where deductions are being claimed under Part XVII. Assets rolled to a corporation under section 85 of the Act become subject to the rules in Part XI of the Regulations and Regulation 1703(6) would no longer apply.

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

c.c. Head Office
General Audit Services Section
Attention: Phil Jolie.