7 May 1990 Income Tax Severed Letter RRRR364 - Whether an election under subsection 70(6.2) can be made with respect to a partial shareholding of a corporation. Also, new capital cost allowance rules to building additions and alterations made after 1987.

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.

ROUND TABLE - JUNE 1990

900936

Don Sommerfeldt

Question 11

May an election under subsection 70(6.2) be made with respect to a partial shareholding of a corporation? For example, a shareholder owns 1,000 shares of A Co. His will provides that on his death the shares are to be bequeathed absolutely to his spouse, in such a manner as to be subject to subsection 70(6). May an election under subsection 70(6.2) be made in respect of 100 of the shares, but not in respect of the other 900 shares?

The Department's Position

An election under subsection 70(6.2) may be made in respect of "any property of a deceased taxpayer." Since the word "property," as defined in subsection 248(1) includes a share, the Department is of the view that each share of the capital stock of a corporation is a separate property in respect of which an election under subsection 70(6.2) may be made. Accordingly, in the above example, an election under subsection 70(6.2) may be made in respect of 100 shares of A Co., such that they will be subject to subsection 70(5), while the other 900 shares of A Co. will not be affected by the election, such that they will be subject to subsection 70(6).

Query

CAPITAL COST ALLOWANCE

Application of new CCA rules to building additions and alterations made after 1987. Please explain the allocation of building costs to CCA classes 1, 3 and 6 under the following scenarios.

• (a) A building is acquired in 1977 for $200,000 (class 6). The building has underground base support. An addition is made to the building in 1985 at a capital cost of $40,000. In 1986, a portion of the total building is demolished for nil proceeds of disposition. In 1987, an addition to the building is made at a capital cost of $50,000. In 1989, an addition to the building is made at a capital cost of $150,000.
• (b) Same facts as in (a) above except that disposition in 1986 resulted in proceeds of disposition of $60,000.
• (c) Same facts as in (a) above except that capital cost of the building addition in 1989 was $30,000 and, in 1990, an additional $80,000 is added to capital cost of the building.

Synopsis

Although certain buildings or parts thereof may be included in classes 1, 3 and 6, additions made to a building included in class 6 must be included in that class, subject to a limit of $100,000, in priority over classes 3 and 1. Additions over $100,000 are to be included in class 3 subject also to a specified limit.

Additions after 1987 in excess of the amount required to be included in class 3, are included in class 1. The wording in class 1 is not as specific as that for classes 6 and 3 and describes generally a building, structure or any part thereof.

Answer

Scenario (a)

1977 Acquisition

The building was acquired in 1977 and was included in class 6 at that time. However there were changes to the wording of class 6 effective January 1, 1979 and as a result of those changes, the building remained in class 6 by virtue of subparagraph (a)(viii) thereof.

1985 Addition

The addition of $40,000 made the building in 1985 should be included in class 6 by virtue of paragraph (k) thereof which requires "an addition . . . made after 1978 to a building in this class by virtue of subparagraph (a)(viii)".

1986 Disposition

There is no effect to the undepreciated capital cost ("UCC") of the class as a result of the partial demolition of the building since there were no proceeds of disposition and not all of the asset was disposed of. Capital cost allowance should continue on the UCC of the class including the cost of the property demolished.

1987 Addition

The cost of the 1987 addition of $50,000 should be included in class 6 for the same reasons stated in respect of the 1985 addition.

1989 Addition

Only $10,000 of the 1989 addition of $150,000 should be included in class 6 because of the $100,000 limit described under paragraph (k) thereof. (The additions to class 6 were 1985-$40,000 + 1987-$50,000 + 1989-$10,000).

$75,000 of the balance of the 1989 $140,000 addition should be included in class 3 by virtue of paragraph (k) thereof. The amount of $75,000 is restricted to 25% of $300,000 being the aggregate of the cost of the building ($200,000) and the additions included under class 6 ($100,000). The remaining $65,000 (i.e. $140,000 less $75,000) would be included in class 1.

Scenario (b)

Revised 1986 Proceeds of Disposition If the 1986 proceeds of disposition were $60,000 instead of nil, the amount of $60,000 would reduce the UCC in that year and should not have any effect on the additions in the preceding or succeeding years.

Scenario (c)

Revised 1989 Cost of Addition

An addition in 1989 costing $30,000 instead of $150,000 should be treated as follows:

Cost of addition        $30,000
Less  - amount included in Class 6       $10,000
  (to top $100,000 limit in (k) of Class 6)
 - amount included in Class 3       $20,000
  (less than 25% x$300,000)                     $30,000

1990 Addition

Only $55,000 of the $80,000 cost of addition for 1990 should be included in class 3 because of the $75,000 limit described under paragraph (k) thereof. The additions to class 3 are: 1989-$20,000 + 1990-$55,000.

The balance of $25,000 ($80,000 less $55,000) would be included in class 1.