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 Issues:
1.Whether subsection 13(21.1) of the Act will apply where the capital gains election is filed in respect of a building.
2.Whether the election under subsection 110.6(19) in respect of a depreciable property will result in recapture of depreciation.
3.Whether a terminal loss on a building, triggered by the election, must offset a capital gain on land.
4.Where the property in respect of which the election is filed consists of shares of a Canadian-controlled private corporation that were acquired under a stock option plan, whether the election results in a disposition for purposes of section 7 of the Act.
Position TAKEN:
1.Subsection 13(21.1) will not apply.
2.The election will not result in recapture of depreciation.
3.The election will not result in a terminal loss.
4.The election will not result in a disposition for purposes of section 7.
Reasons FOR POSITION TAKEN:
1.The election under subsection 110.6(19) is only effective if it results in an increase in the $100,000 capital gains exemption claimed under subsection 110.6(3) of the Act. Accordingly, where the election is filed in respect of a building, the designated amount in respect of the building must be such that a capital gain is triggered. Since subsection 13(21.1) of the Act only applies where a building is disposed of for proceeds that are less than its proportionate share of the undepreciated capital cost of its class, it will not apply where the election is filed.
2.An election under subsection 110.6(19) in respect of a depreciable property will not result in recapture of depreciation because paragraph 13(7)(e.1) of the draft legislation ensures that subparagraph 13(7)(e)(i) of the Act will apply to determine the capital cost to the elector on the reacquisition of the property that occurs because of an election made under subsection 110.6(19).
3.Since the amount designated in respect of a building for purposes of the capital gains election must exceed the building's capital cost, it is not possible to trigger a terminal loss on a building by filing the election.
4.Where the capital gains election is filed, paragraph 110.6(19)(a) of the draft legislation provides that the capital property in respect of which the election is filed is deemed, except for purposes of sections 7 and 35 of the Act, to have been disposed of by the elector.
5-942846
XXXXXXXXXX C. Chouinard
January 30, 1995
Dear Sir:
Re: Capital Gains Election
We are writing in response to your memorandum of November 4, 1994, wherein you requested our comments on the application of the capital gains election to rental properties and employee stock options.
More specifically, as regards rental properties, you ask whether subsection 13(21.1) of the Income Tax Act (the "Act") will apply, whether the deemed disposition that arises as a result of filing an election to recognize accrued capital gains will result in recapture and whether a terminal loss on a building will have to offset a capital gain on land. With respect to employee stock options, you ask whether a deemed income benefit will have to be recognized where the capital gains election is filed in respect of shares acquired under an employee stock option plan.
Rental Properties
Where the property in respect of which the subsection 110.6(19) election is filed consists of land and building, an amount must be designated for each of the land and the building, so that an allocation of the fair market value will be necessary. However, the election may be filed in respect of only the land or the building, since they both qualify as capital property for purposes of the election.
As regards the schedule you have attached to your letter, it sets out the formula for the calculation of the proceeds of disposition of land and building as provided in subsection 13(21.1) of the Act. Subsection 13(21.1) of the Act applies when a building is sold for proceeds that are less than its proportionate share of the undepreciated capital cost of its class. As indicated in paragraph 9 of Interpretation Bulletin IT-220R2, when a building is sold for proceeds that are less than its proportionate share of the undepreciated capital cost of its class, subsection 13(21.1) of the Act provides special rules to allocate proceeds of disposition between land and buildings, to restrict the potential terminal loss and possibly recapture capital cost allowances previously taken.
According to subsection 110.6(20) of the draft legislation, the election under subsection 110.6(19) of the draft legislation will only be effective if it results in an increase in the $100,000 capital gains exemption under subsection 110.6(3) of the Act, that may be claimed by the person making the election or that person's spouse. Accordingly, where the election is filed in respect of either the building alone or both the land and the building, the designated amount in respect of the building must be such that a capital gain is triggered. However, as previously noted, subsection 13(21.1) of the Act only applies where a building is disposed of for proceeds that are less than its proportionate share of the undepreciated capital cost of its class. Accordingly, if an election is filed in respect of a building or a building and the underlying land, the designated amount in respect of the building and thus, the proceeds of disposition, must exceed the building's capital cost in order for the election to be valid. If the proceeds of disposition of a building exceed its capital cost, they will necessarily exceed its proportionate share of the undepreciated capital cost of the class to which it belongs. Hence, subsection 13(21.1) of the Act will not apply where a subsection 110.6(19) election is filed in respect of a building. Therefore, the schedule attached to your letter does not have to be filed with the capital gains election.
With respect to your question concerning terminal losses on buildings, since the amount designated in respect of a building for purposes of the capital gains election must exceed the building's capital cost, it is not possible to trigger a terminal loss on a building by filing the election.
As regards recapture, an election under subsection 110.6(19) in respect of a depreciable property will not result in recapture of depreciation because paragraph 13(7)(e.1) of the draft legislation ensures that subparagraph 13(7)(e)(i) of the Act will apply to determine the capital cost to the elector on the reacquisition of the property that occurs because of an election made under subsection 110.6(19). Subparagraph 13(7)(e)(i) of the Act applies to certain transfers of depreciable property between non-arm's length parties, so that, generally, there is no bump on the capital cost of depreciable property on reacquisition. Accordingly, the amount included in the determination of F in the definition of "undepreciated capital cost" in subsection 13(21) of the Act, as a consequence of the deemed disposition of the property, will be offset by the amount included in the determination of A in that definition, as a result of the deemed reacquisition of the property.
Employee stock options
Where the capital gains election is filed, paragraph 110.6(19)(a) of the draft legislation provides that the capital property in respect of which the election is filed is deemed, except for purposes of sections 7 and 35 of the Act, to have been disposed of by the elector. Accordingly, where the property in respect of which the election is filed consists of shares of a Canadian-controlled private corporation that were acquired under a stock option plan, the election does not result in a disposition for purposes of section 7 of the Act.
However, in order to ensure that the section 7 income inclusion is not avoided on a future disposition, the mechanism in subsection 110.6(19) of the draft legislation reduces the amount designated as proceeds of disposition by the amount of the unrealized income inclusion under section 7 of the Act and the shares are deemed to be reacquired at the deemed proceeds of disposition, unless the amount designated in the election is greater than the fair market value of the property at the end of February 22, 1994.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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