7 May 1991 Income Tax Severed Letter - Terminal Loss Involving Leasehold Improvements

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.

Dear Sirs:

Re: Subsection 20(16)

This is in reply to your letter of January 18, 1991 concerning a terminal loss involving leasehold improvements. We apologize for the delay in replying to your request.

A corporation leases a building (the "old building") for use in its operations and makes leasehold improvements to the building. The leasehold improvements are included in Class 13 and capital cost allowance ("CCA") is claimed on the leasehold improvements.

Subsequently, before the end of a taxation year the Corporation terminates its lease of the old building and enters into a new lease arrangement in another building (the "new building"). At the time of terminating the lease the corporation has undepreciated capital cost ("UCC") for the leasehold improvements on the old building. The corporation did not incur any leasehold improvements for the new building in the taxation year of acquisition, nor does the corporation have any other leasehold interests.

You note that paragraph 20(16)(c) of the Act allows a taxpayer to claim an amount equal to the balance of UCC of a particular CCA Class where the taxpayer no longer owns any property of the particular class. However, paragraph 3 of IT-464R states that a tenant who leases property acquires a leasehold interest in that property whether or not a capital cost is incurred. On the surface this would appear to mean that the corporation cannot claim a terminal loss for the leasehold improvements on the old building since it acquires (at no cost) a leasehold interest in the new building before the end of the taxation year.

The actual wording of paragraph 20(16)(b) indicates that a terminal loss is available when the taxpayer no longer owns any property of that class. Furthermore, paragraph 3 of IT-464R states that depreciable property is not considered to be acquired until a capital cost is incurred for the property. Consequently, if the reference to property in paragraph 20(16)(b) is to depreciable property rather than just property, the taxpayer would be entitled to the terminal loss since Class 13 depreciable property is not acquired prior to the year end.

We assume for the purpose of our reply that these transactions are at arm's length and are normal business transactions. In such circumstances, we confirm that the reference in paragraph 20(16)(b) is to depreciable property of the taxpayer and accordingly, in the above example the corporation would be entitled to a terminal loss.

We trust our comments will be of assistance.