14 March 1984 Income Tax Severed Letter RCT 5-1178A

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.

Subsection 85(5.1) provides, amongst other things, that in certain circumstances involving a disposition of depreciable property of a prescribed class, a determination must be made of the undepreciated capital cost (“UCC”) to the taxpayer of all property of that class immediately before the disposition.

When several properties of the same class are disposed of at the same time, the question arises as to how to calculate the UCC of that class immediately before the disposition of a particular property.

Paragraph 85(5.1)(f) provides that when two or more properties of the same class are disposed of at the same time, paragraph 85(5.1)(e) (which determines the transferor's proceeds of disposition and the transferee's cost which are both functions of the UCC of that class) applies as if each property had been separately disposed of in the order designated by the taxpayer. Therefore, in our opinion, in order to determine, for the purpose of subsection 85(5.1), the UCC of a prescribed class immediately before the disposition of a particular property of that class, a designation must be made of the order of disposition of all properties of that class are disposed of at the same time. This designated order of disposition would even include properties of that class that are disposed of at that time that will not be subject to the rules in paragraphs 85(5.1)(d) through (g).

The situation will often arise where a taxpayer, planning to transfer several properties of the same class to a corporation under subsection 85(1), will find that he is precluded from using that subsection for some of the properties because of subsection 85(5.1). The question then arises as to how the designation referred to in paragraph 85(1)(e.1) relates to the designation found in paragraph 85(5.1)(f).

In our opinion, since paragraph 85(5.1)(d) indicates that subsection 85(1) does not apply to the disposition of a particular property if 85(5.1) applies in respect of that property, it is necessary to determine the properties, if any, to which subsection 85(5.1) applies before one can determine which properties are eligible for an 85(1) election. Therefore, initially, a designation should be made pursuant to 85(5.1)(f) to cover all properties of a prescribed class that are disposed of at the same time. Once this designation is made, a determination can be made as to which properties subsection 85(5.1) will apply. The remaining properties will then be eligible for a subsection 85(1) election.

Although it is not clear that the designation referred to in subsection 85(1)(e.1) should include all properties of a prescribed class disposed of at the same time including those that are not the subject of an 85(1) election, in order for paragraph 85(1)(e) to work this needs to be the case. If the designation in paragraph 85(1)(e.1) only included properties that were the subject of an 85(1) election, one would still need to know, for purposes of paragraph 85(1)(e), whether properties that were disposed of at the same time but which were not subject to an 85(1) election, should be considered to be disposed of before, after or in between the properties that were the subject of an 85(1) election. Therefore, in our opinion, the designation in 85(1)(e.1) should include all properties disposed of at the same time, whether or not they are the subject of an 85(1) election.

As a result, both the designation in 85(5.1)(f) and the designation in 85(1)(e.1) will include a list of all properties of a prescribed class that are disposed of at the same time. In our opinion there is no legislative requirement that these designations be the same. However both the taxpayer and the Department will likely find that these provisions are easier to work with if the designations are the same.