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.
19(1) 5-7890
R.B. Day
(613) 957-2136
19(1)
We are writing in reply to your letter of April 6, 1989, herein you requested our views regarding the application of subparagraph 125(1)(a)(i) and paragraphs 125(7)(c) and 125(7)(e) of the Income Tax Act, with respect to the recapture of capital cost allowance (CCA) where the property in question was used in an active business for a number of years and then used to earn rental income for the period immediately prior to its sale. As we understand it, the situation you envisage is as follows:
A manufacturing company uses a building to carry on its manufacturing business and in computing income from the business, deducts CCA on the building. If the manufacturing business were sold or would down, the building might be retained and leased out to earn income from a specified investment business. From that point on, CCA would be deducted against income from a specified investment business. If the building was then sold, the resulting recapture of CCA would be included in the income of the corporation which is now operating a specified investment business.
In this regard, you have requested our views as to whether all if the recaptured CCA is specified investment business income or whether a portion might be regarded as income from an active business qualifying for the small business deduction. Such allocation might be made on the bases of the CCA deducted in the years when the company was carrying on the manufacturing business.
Our comments
It is our view that once a corporation ceases to carry on an active business and commences to carry on a specified investment business, any income received by the corporation from the disposition of property used in the specified investment business would be considered to be income from that source. As a result, recaptured CCA would, by virtue of the interaction of section 4, paragraph 125(7)(c) and subsection 129(4.1), be considered to be income received from a source that is a specified investment business. No allocation between active business income and specified investment income could be permitted without the existence of a specific provision in the Act.
We trust these remarks are of assistance to you.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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