26 May 1994 External T.I. 9409255 - CHANGE OF USE OF AUTOMOBILE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

PRINCIPAL ISSUE:

1.What value must be used as capital cost when there is a change in the use of an asset from personal to business?

2.Is the interest on money borrowed to acquire such asset deductible?

Position TAKEN:

1.Standard comments regarding the application of section 45 and paragraph 13(7)(b) of the Act.

2.Yes, from the time it is used to produce income from business.

Reasons FOR POSITION TAKEN:

Routine

                                                      5-940925
XXXXXXXXXX                                                      L. Roy

May 26, 1994

Dear Sir\Madam:

Subject: Change of use of automobile

This is in reply to your facsimile of April 12, 1994 in which you requested our opinion on the above-mentioned subject.

All references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

The situation described in your letter appears to involve actual transactions with identifiable taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Where a taxpayer buys an asset for personal use and then starts using it to produce business income, there is a change in use of the asset. In such circumstances, the taxpayer is deemed to have disposed of the asset at its fair market value and to have immediately reacquired it at that same value. The taxpayer must report any gain on such deemed disposition in his tax return. Once the asset starts being used for business purposes, capital cost allowance can be claimed in respect of the asset. The capital cost to be used by the taxpayer for capital cost allowance purposes at the time of the change in use will be equal to the lesser of:

(a) the fair market value of the asset at the time of the change in use, and

(b) the total of:

(i) the actual cost of the asset

plus

(ii) three-fourths of the following amount: the asset's fair market value at the time of the change minus the actual cost and minus four-thirds of any amount claimed as a capital gain deduction on the taxpayer's income tax return in respect of capital gain on the asset.

Generally, the fair market value of an automobile is less than its original cost. Accordingly, the capital cost will usually be the fair market value of the automobile at the time of the change in use.

In respect of interest deductibility, the interest paid or payable in a particular year will be deductible if it is paid or payable on money borrowed for the purpose of earning income from a business or property. It is the current use made of the borrowed funds in a particular year rather than the initial use of the funds which must be considered in determining whether the interest paid or payable with respect to the borrowed funds is deductible in a particular year. Therefore, it is our view that interest paid or payable on borrowed funds to acquire an asset will be deductible from the date the asset is fully used to produce income from a business.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate