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: lack of recapture when a leasehold interest is sold for more than its capital cost
Position: current tax treatment is within tax policy
Reasons: the case under audit reflects a significant deferral
January 28, 1999
Calgary Tax Services Office HEADQUARTERS
Large Case Audit A. Humenuk
Attention: Doug Reeh
990204
Class 13 and the Disposition of a Lease
This is in response to your memorandum of October 1, 1997 and your e-mail of January 20, 1999 concerning the need for legislative change in respect of the tax treatment of the proceeds of disposition from the disposition of a leasehold interest.
In the situation you have under audit, a taxpayer with a large number of leasehold interests has disposed of some of its interests in those leases and taken leases out on other premises, thereby incurring additional expenditures for leasehold interests. No amount is included in income under section 13 of the Act in the year of the disposition of the taxpayer’s leasehold interests since the undepreciated capital cost to the taxpayer of its property in class 13 is still positive after the adjustment for the disposition of those interests. No amount is included in income under section 38 of the Act for the year since the proceeds of disposition do not exceed the cost amount of the leasehold interests.
As with other classes set out in Schedule II of the Income Tax Regulations, the proceeds of disposition of a leasehold interest reduces the undepreciated capital cost of the class as defined in subsection 13(21) of the Act but no amount is included in income by reason of subsection 13(1) unless the total of amounts determined under E to J of the definition of the undepreciated capital cost for the class exceeds the total of amounts determined under A to D for that class. Generally this occurs when the proceeds of disposition of an asset in the class exceeds the balance of undepreciated capital cost of that class at the end of the year in which the disposition took place. However, unlike other classes set out in Schedule II of the Income Tax Regulations, the amount of capital cost allowance which is deductible in respect of class 13 is not reduced for subsequent taxation years because the amount of capital cost allowance is determined on a lease by lease basis.
As requested, we forwarded your concerns to the Department of Finance who have advised us that the current tax treatment is within tax policy. They note that the result may be either a benefit or a cost to the taxpayer depending on whether the proceeds of disposition are greater than or less than the cost amount of the leasehold interest.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer or the results of our consultations with the Department of Finance. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682 who will send you a copy for delivery to the client.
Patricia Spice
Manager, Technical Publications Section
Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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