27 July 2004 External T.I. 2004-0075751E5 - Recaptured Capital Cost Allowance

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.

Principal Issues: A building that was purchased prior to V-Day was disposed of in 2004. The building had a capital cost of $75,000 and capital cost allowance of $40,000 was deducted on the building prior to V-Day. The V-Day value of the building is $120,000. The actual proceeds of disposition of the building was in excess of the V-Day value. Whether or not the capital cost allowance of $40,000 is subject to recapture.

Position: Yes.

Reasons: In any situation where the actual POD of a depreciable property that was owned on V-Day exceed its capital cost, the entire amount of capital cost allowance previously claimed must be included in income under subsection 13(1).

XXXXXXXXXX 2004-007575
Kathryn McCarthy, CA
July 27, 2004

Dear XXXXXXXXXX,

Re: Recaptured Capital Cost Allowance

We are writing in response to your letter of May 11, 2004, concerning the above-noted issue. We also acknowledge additional information obtained in our telephone conversation on July 19, 2004 (McCarthy/XXXXXXXXXX).

You described a situation where a building that was purchased prior to December 31, 1971 ("V-Day"), was disposed in 2004. The building had a capital cost of $75,000 and capital cost allowance of $40,000 was deducted on the building prior to V-Day. The V-Day value of the building is $120,000. The actual proceeds of disposition of the building was in excess of the V-Day value. You question whether the capital cost allowance of $40,000 is subject to recapture.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

Subsection 13(1) of the Income Tax Act (ITA) provides for the inclusion in a taxpayer's income of recaptured capital cost allowance when the taxpayer disposes of a depreciable property and the proceeds of disposition (POD) exceeds the undepreciated capital cost of the prescribed class in which the property is included. Where a taxpayer disposes of any depreciable property acquired before January 1, 1972, that was owned by the taxpayer without interruption from V-Day until the time of disposition, the transitional provisions contained in paragraph 20(1)(a) of the Income Tax Application Rules (ITAR) are applicable. Where the capital cost of the depreciable property is less than the POD and the fair market value (FMV) of the property on V-Day, for purposes of the rules relating to recaptured capital cost allowance, paragraph 20(1)(a) of the ITAR deems the POD of the depreciable property to be equal to its capital cost plus the excess, if any, of the actual POD over the FMV of the property on V-Day. Consequently, in any situation where the actual POD of a depreciable property that was owned on V-Day exceed its capital cost, the entire amount of capital cost allowance previously claimed must be included in income under subsection 13(1) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett, B. Comm.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch