28 August 2000 External T.I. 2000-0012565 - NON ARM'S LENGHT OF DEPRECIABLE PROP.

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Can both subsections 1102(14) and 1103(2d) of the Regulations apply to the same transaction?

Position: Yes

Reasons:

Wording of the subsections does not provide for exclusive application in NAL situations;
Timing provided for in both subsections

							2000-001256
XXXXXXXXXX 							Denise Dalphy
613) 957-9231
Attention: XXXXXXXXXX 

August 28, 2000

Dear Sirs:

Re: Interaction of Regulations

We are writing in reply to your letter of November 18, 1999 wherein you inquire about the interaction of subsections 1102(14) and 1103(2d) of the Income Tax Regulations (the "Regulations") in the following hypothetical situation.

Facts

1. Parent has properties in class A and class B.

2. Parent acquired class A asset in 1990 from AL 1 ("AL" means "arm's length person").

3. Parent acquired class B asset in 1995 from AL 2.

4. In 2000, Parent transfers its class A property to its wholly owned Sub. Parent files an election under subsection 1103(2d) of the Regulations to transfer the class A property to class B.

5. If the class A property had been acquired in 1995 from AL 2, it would have been a class B property.

6. If the class B property had been acquired in 1990 from AL 1, it would have been a class A property.

Issue

What are the income tax consequences (CCA class) to Parent and Sub of the interaction, if any, between subsections 1102(14) and 1103(2d) of the Regulations?

Conclusion

Parent disposes of a class B property. Sub acquires a class B property.

Analysis

CCA Class of Parent

1. Paragraph 1103(2d)(a) is broadly drafted ("Where a taxpayer has (a) disposed of a property...") and there is no provision which limits its application to arm's length dispositions.

2. Paragraphs 1103(2d)(b),(c) and (d) apply (see facts #3, 5 and 6 above). There is no provision which limits the application of any of these paragraphs to arm's length acquisitions.

3. The effect of an election made by Parent pursuant to subsection 1103(2d) is that the class A property is transferred by Parent from class A to class B in the year 2000 AND the transfer from class A to class B by Parent "shall be considered to have been made before the disposition of the property".

So, before Parent disposed of the property it was in class B. The legislation does not indicate how much time before the disposition the property was transferred, but the latest time when the property could have been so transferred would be immediately before the disposition.

CCA Class of Sub

Subsection 1102(14) applies "where a property is acquired by a taxpayer" from a non-arm's length person and "immediately before [the property] was so acquired by the taxpayer" the property was property of a prescribed class of the transferor.

This subsection requires an answer to the following question: What Schedule II class of Parent was the property in "immediately before" Sub acquired it?

1. The preamble of 1102(14) states that this subsection applies "For the purposes of this Part [Part XI of the Regulations] and Schedule II". Although, subsection 1103(2d) does not describe the purposes for which it applies, it must apply to

Part XI and Schedule II, for otherwise the 1103(2d) election could not be given effect, and neither subsection 1102(14) nor subsection 1103(2d) provide that where one subsection applies, the other subsection does not apply.

2. The timing provisions in subsections 1103(2d) and 1102(14) are such that the property changes classes before Parent's disposition of the property and before Sub's acquisition of the property.

Based on the foregoing, the result of the interaction of the two subsections is that the same (although relatively new) asset class is maintained regardless of whether the transfer is at arm's length or is non-arm's length. Accordingly, Sub acquired property in 2000 that is a class B property.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings Directorate