3 March 1999 External T.I. 9727195 - INTERACTION 13(7)(E), 110.6(19) AND 85

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: Interaction between paragraph 13(7)(e), subsections 85(5) and 110.6(19)

Position: The capital cost of a depreciable property to the transferor that must be used for the purposes of 85(5) is the capital cost to the transferor as determined pursuant to paragraph 13(7)(e) rather than the deemed capital cost under 110.6(19) and (21).

Reasons: See the analysis

XXXXXXXXXX 972719
Robert Gagnon
Attention: XXXXXXXXXX

March 3, 1999

Dear Sir:

Re: Interaction Between Paragraph 13(7)(e), Section 85 and Subsection 110.6(19) of the Act

This is in reply to your letter of October 8, 1997 wherein you requested our opinion concerning the determination of the capital cost of depreciable property of a corporation for purposes of calculating the recapture of capital cost allowance, in the following situation examined in our letter 5-963642. We apologize for the long delay in replying to your letter.

An individual ("Mr. X") has made an election pursuant to subsection 110.6(19) of the Act with respect to a building that is a depreciable property and a non-qualifying property (as defined in subsection 110.6(1) of the Act). The capital cost of the building prior to the application of subsections 110.6(19) and 110.6(21) of the Income Tax Act ("Act") is $10. The undepreciated capital cost is $7. The deemed capital cost of the building pursuant to subsections 110.6(19) and 110.6(21) of the Act is $13.

Mr. X transfers the building to a corporation in exchange for common shares of the corporation and makes an election under subsection 85(1) of the Act. The agreed amount is $7 in order to avoid any recapture of depreciation.

It is your view that the relevant capital cost for the purposes of the application of subsection 85(5) of the Act to the corporation should be $10 rather than $13 as mentioned in our letter.

Comment

In our memorandum 5-963642 dated August 7, 1997, we took the position that the capital cost to the transferor of the depreciable property for the purposes of the application of subsection 85(5) of the Act to the corporation is the deemed capital cost under subsection 110.6(19) and (21) of the Act. The reasoning for this was that paragraph 13(7)(e) of the Act applies for the purposes of certain specifically stipulated provisions of the Act, including section 20 and any regulations made for the purpose of paragraph 20(1)(a), but not including subsection 85(5) of the Act. Accordingly, the conclusion was that the capital cost for the purposes of subsection 85(5) must be determined pursuant to the other provisions of the Act.

In the situation described above, if the capital cost of the depreciable property to the corporation is $13 pursuant to subsection 85(5) of the Act for the purposes of calculating the recapture of depreciation when the property is sold, it leads to an absurd result because the corporation would be taxable on a recapture of depreciation of $6 even though Mr. X claimed only $3 of depreciation. The capital cost and adjusted cost base for the purposes of calculating the capital gain on a disposition of the building by the corporation is $7. However, the amount of any capital gain from the disposition of the depreciable property does not include, pursuant to paragraph 39(1)(a) of the Act, the amount of any recapture of depreciation included in the income of the corporation.

Subsection 85(5) of the Act applies to redetermine the capital cost of depreciable property of a corporation for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a), where subsection 85(1) has applied in respect of the disposition of the property to the corporation and the capital cost to the transferor of the property exceeds the transferor’s proceeds of disposition (i.e. the cost for the corporation). Our view is now that the capital cost of a depreciable property to the transferor that must be used for the purposes of subsection 85(5) of the Act is the capital cost of the transferor ($10) as determined pursuant to paragraph 13(7)(e) of the Act rather than the deemed capital cost under subsections 110.6(19) and (21) of the Act.

The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R3 dated December 30, 1997, is not binding on the Department in a particular situation.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch