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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] (1) Does the Canada Revenue Agency consider that the difference of $200,000 between the price paid of $4,200,000 and the cost of $4,000,000 as determined by section 13 of the Income Tax Act does not fall into any class of Schedule II of the Income Tax Regulations?
(2) If so, can the purchaser of the depreciable property - who resells the property for proceeds between the price paid of $4,200,000 and the cost determined by section 13 of $4,000,000 - claim a capital loss on the disposition of the property?
(3) If a capital loss cannot be claimed, can the $90,000 selling costs be subtracted from the $4,000,000 proceeds?
Position: (1) This difference cannot be added to any class in Schedule II of the Income Tax Regulations.
(2) No.
(3) No.
Reasons: Interpretation of the Income Tax Act.
XXXXXXXXXX 2006-017617
November 8, 2006
Dear Sir,
Subject: Request for Technical Interpretation: Application of paragraph 13(7)(e) of the Income Tax Act (the "Act")
This is in response to your letter of November 1, 2005, requesting our opinion on the above subject. We apologize for the delay in responding to your question.
Facts
Your letter describes the following facts:
- Corporation A owns an immovable used in an active business;
- the cost of that immovable to Corporation A is $3,800,000;
- as part of a reorganization, Corporation A transfers the immovable to an associated corporation - Corporation B - for $4,200,000;
- the above transaction is carried out at fair market value;
- the taxable capital gain is added to Corporation A's income;
- under the rules in paragraph 13(7)(e), the cost of the immovable to Corporation B is reduced to $4,000,000;
- Corporation B then resells the immovable for $4,150,000 to purchasers with whom it deals at arm’s length;
- this disposition results in disbursements of approximately $40,000.
Questions
You wish to obtain the opinion of the Canada Revenue Agency ("CRA") on the following three questions:
(1) Does the CRA consider that the $200,000 difference between the price paid of $4,200,000 and the cost of $4,000,000, as determined by section 13, should be included in any class of Schedule II to the Income Tax Regulations ("ITR")?
(2) If the answer to the first question is no, can Corporation B claim a capital loss of $90,000 on the subsequent disposition of the immovable?
(3) If not, can the $40,000 selling costs be subtracted from the undepreciated capital cost balance of the class to which the immovable belongs?
Analysis
(1) Where a taxpayer acquired depreciable property of a prescribed class from a person with whom the taxpayer did not deal at arm’s length and, immediately before the transfer, the property was a capital property of the transferor, subparagraph 13(7)(e)(ii) provides for an adjustment to the taxpayer's capital cost for the purposes of paragraphs 8(1)(j) and 8(1)(p), sections 13 and 20 and any regulations made for the purpose of paragraph 20(1)(a).
In this case, we agree with you that the capital cost of the immovable to Corporation B is $4,000,000, even though it paid $4,200,000 when it acquired the building from Corporation A. For the purposes of determining undepreciated capital cost ("UCC") and capital cost allowance1, $4,000,000 must be added to the prescribed class of the ITR. There is no provision in the ITA for the $200,000 difference to be included in a prescribed class of the ITR.
(2) The disposition of depreciable property cannot give rise to a capital loss. Subparagraph 39(1)(b)(i) excludes depreciable property from property that may, on its disposition, give rise to a capital loss. Thus, to the extent that the proceeds of disposition of such property are less than its capital cost, the proceeds of disposition will be applied against the UCC of the class.
(3) Under the definition of "undepreciated capital cost" in the description of F in subsection 13(21), expenses made or incurred for the purpose of disposing of depreciable property reduce the UCC balance where the proceeds of disposition are less than the capital cost of the property. Based on the facts you have provided, the $40,000 selling costs will not be applied against the UCC of the prescribed class of the ITR, since the deemed capital cost is less than the proceeds of disposition.
We hope that that above comments are of assistance.
Best regards,
François D. Bordeleau, LL.B.
Individual, Business and Partnerships Section
Income Tax Rulings Directorate
ENDNOTES
1 See subsection 13(21) and paragraph 20(1)(a).
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