30 October 1997 Internal T.I. 9712086 - HISTORICAL CALCULATION OF UCC

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:

Calculation of the UCC of a class of assets

Position:

Historical basis

Reasons:

Reading of the Act

			October 30, 1997

	Audit Directorate	Income Tax and
	GAAR and Technical Support Section	  Interpretations 		Directorate
	Tax Avoidance and Legislative	J.P. Dunn
	Recommendations Division		957-2747

	Attention:  Sandra Graham
			971208			

Historical Calculation of UCC

We are writing in response to your correspondence of May 5, 1997 concerning the calculation of the undepreciated capital cost (the "UCC") of depreciable property and, in particular, the timing of such calculation.

The calculation of the UCC of depreciable property is, pursuant to the definition of UCC in subsection 13(21) of the Income Tax Act (the "Act"), calculated with reference to a "class" of property and the calculation is applicable "at any time". The basic calculation is composed of a number of positive and negative components, which, when aggregated, can result in a UCC of the class which must be either positive or zero - the result can never be negative. As noted, this determination of the UCC of a class of property is applicable only at the time of the calculation which could be at any time in a taxation year.

Also, the computation of the UCC of a class of depreciable properties is a cumulative calculation involving, for example, the capital cost of all additions to the class, the total depreciation claimed in all prior taxation years and all amounts of assistance received or repaid in respect of assets acquired for that class. The UCC of a class of depreciable properties will change at each time that an event occurs that affects one of the components of the calculation.

Should, however, the negative components of the calculation exceed the positive components at the end (and only at the end) of a taxation year, the resulting amount will, pursuant to subsection 13(1) of the Act, be included in income ("recaptured depreciation") in that taxation year. This amount then becomes a positive component in the calculation of the UCC of the pertinent class pursuant to component "B" of the calculation at all times following the end of that taxation year.

Although the UCC of a class of depreciable properties would usually be calculated only at end of the taxation year because any claim for capital cost allowance is based on the UCC of the class at that time, there are certain other transactions which may require the computation of the UCC of a class at some other time during the taxation year. For example, subsection 85(5.1) of the Act requires a comparison of the fair market value of a depreciable asset with a proportionate amount of the UCC of the class of property to which that property belongs. Both the fair market value and the proportionate amount of the UCC of the class are to be determined immediately prior to the disposition of the asset to determine if the subsection would be applicable. A similar computation is required by subsection 111(5.1) of the Act upon an acquisition of control of a corporation in which the comparison is made immediately prior to the acquisition.

With respect to the application of section 80 of the Act to depreciable properties, a similar calculation is made. Subsection 80(5) of the Act states that;

Where a commercial obligation ...is settled at any time, ...the forgiven amount at that time ...shall be applied, ...to reduce immediately after that time the following amounts:

(a) the capital cost to the debtor of a depreciable property that is owned by the debtor immediately after that time; and

(b) the undepreciated capital cost to the debtor of depreciable property of a prescribed class immediately after that time.

Accordingly, pursuant to subsection 80(5) of the Act, the UCC of property of a prescribed class is reduced immediately after the time that there is a settlement of a commercial debt obligation which event could, obviously, occur at any time in a taxation year of the debtor.

While paragraph 80(5)(a) of the Act reduces the capital cost to the debtor of a depreciable property owned at the time of application, subsection 80(6) limits the reduction to the amount that would, absent the reduction, otherwise be the UCC of the class. Similarly, paragraph 80(5)(b) of the Act reduces the UCC of the class by the amount of the settled debt. Subsection 80(6) does not, as in the case of paragraph 80(5)(a), limit this particular reduction to the balance of the UCC as, to the extent that the capital cost is greater than the UCC of the class, the balance in the class would be reduced to a zero balance because of the application of paragraph 80(5)(a) as limited by subsection 80(6). If the amount of the settled debt is in excess of the capital cost of an asset and that capital cost is less than the UCC of the particular class, the UCC of the class would be reduced by the full amount of the settled debt but only to the extent that the UCC would be reduced to a nil balance. This reduction is reflected as component "E.1" of the definition of UCC in subsection 13(21) of the Act. Any excess of the settled amount subsequent to the application of subsection 80(5) would then be applied in accordance with the ordering provision of paragraph 80(2)(h) of the Act.

A similar result would be obtained pursuant to subsection 80(1) of the Act as that provision applied to obligations settled or extinguished prior to February 22, 1994. As above, this provision refers to the settlement or extinguishment of a debt or other obligation at "any time in a taxation year". If there is any excess of the settled amount after the application of reductions provided for in paragraph 80(1)(a) of the Act, paragraph 80(1)(b) which provides that the capital cost, but not the UCC of the class of depreciable property to which the property is included, be reduced at the time of the settlement or extinguishment. Accordingly, if the UCC of the class of properties is calculated immediately after the time of settlement, the capital cost of properties acquired before the time of calculation will have been reduced thereby reducing the UCC of the class of properties because of lesser amount added to the calculation pursuant to component "A" being the capital cost of properties acquired before the time of the calculation. Unlike the provisions applicable to settlements of debt after February 22, 1994, there is no provision to reduce the UCC by any amount beyond that applied to reduce the capital cost of the properties in the event that the UCC of the class is greater than that capital cost.

Because, however, in both of the above cases, the total depreciation claimed will not have been reduced, this could result in the total of the negative components of the calculation exceeding the positive components, which would be included in income as recaptured depreciation, but again, only in the event that this situation still exists at the end of the year.

We trust that this is the information which you require.

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