29 January 1997 External T.I. 9640135 - SUBSECTION 13(5.1) OF THE ACT

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:

Does 13(5.1) apply to a leasehold interest in real property, in particular a leasehold interest in land.

Position:

Yes, however there is no class in which the land would come under in Schedule II

Reasons:

Intent of the Act

XXXXXXXXXX 964013

Attention: XXXXXXXXXX

January 29, 1997

Dear Sirs:

Re: Subsection 13(5.1) of the Income Tax Act (the "Act")

This is in reply to your letter of November 29, 1996 in which you request a technical interpretation of the application of subsection 13(5.1) of the Act where the particular property acquired is real property.

The situation described in your letter appears to be an actual fact situation and written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Where a completed transaction is involved, the enquiry should be addressed to your local District Tax Services Office. Consequently, we can only offer the following general comments.

A leasehold interest is the interest of a tenant in any leased tangible property. Where a tenant, who has a leasehold interest in a property, acquires ownership of that property, subsection 13(5.1) provides that

(a)the leasehold interest is deemed to have been disposed of by the taxpayer at the time of the acquisition of the property for proceeds equal to the capital cost of the leasehold interest minus the capital cost allowance allowed in respect thereof before that time,

(b)the property acquired is deemed to be depreciable property of a prescribed class of the taxpayer acquired at that time, and to the cost of that property is to be added the capital cost of the leasehold interest immediately before the deemed disposition of it, and

(c)the aggregate capital cost allowance allowed to the taxpayer before that disposition in respect of the leasehold interest is to be added to the capital cost allowance allowed to the taxpayer before that time in respect of the class to which the acquired property belongs.

We agree with your opinion that paragraph 13(5.1)(b) of the Act would deem the particular property acquired to be depreciable property of a prescribed class. In the situation given in your letter, the leasehold interest is in land and it is the land that is subsequently acquired, we agree that paragraph 13(5.1)(b) of the Act would apply and deem this property to be depreciable property of a prescribed class. However, as there is no class in Schedule II which land could come under, there is no claim for capital cost allowance on this property. However, the land would be subject to the provisions of the Act which deal with recapture and terminal losses.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch