25 March 1981 Income Tax Severed Letter

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.

P.J. Fuoco (613) 563-7295

March 25, 1981

Dear Sirs:

This is in reply to your letter of February 6, 1981 in which you request our opinion on the income tax consequences in the following circumstances:

1. The taxpayer has for a number of years, commencing before 1971, carried on a farming business. Certain farm assets, principally a barn and other farm buildings used in the farming operation, had been depreciated in accordance with Part XVII of the Regulations to the Income Tax Act. After several years the taxpayer ceased his farming business and began to rent the farm property to his son who started his own farming business on the property.

2. At the time of "converting" the farm buildings from a business to rental use the cost of farm buildings had been completely depreciated. Accordingly, while such assets were no longer eligible for capital cost allowance under Part XVII pursuant to Reg. 1700(1) the taxpayer was also not able to make any claims for capital cost allowance under Part XI inasmuch as the undepreciated capital cost of such assets was nil. Furthermore the former farm property was not disclosed in any capital cost allowance schedule included with the taxpayer's income tax return for years after "conversion to rental property".

In connection with the foregoing we confirm the following:

(A) if the farm buildings which were depreciated under Part XVII of the Regulations were disposed of for an amount in excess of the difference between their capital cost to the taxpayer and the capital cost to allowance deducted, no recaptured depreciation would be included in the taxpayer's income for tax purposes. We agree that this would be the case notwithstanding that such assets, although no longer eligible to be depreciated under Part XVII of the regulations, could not be included in Part XI of the Regulations because no claim for capital cost allowance under Part XI had been made by the taxpayer prior to the disposition.

(B) Since Part XVII assets are not depreciable property of a prescribed class they do not qualify for the rollover provisions of subsection 73(3) of the Income Tax Act (the Act). Furthermore, in the situation outlined above it is not possible to transfer the assets to a prescribed class described in Part XI of the Regulations since such a transfer can only be accomplished by an appropriate claim for capital cost allowance being made by the taxpayer under Part XI of the Regulations in respect of those assets. Since the assets have been fully depreciated under Part XVII, no claim for capital cost allowance may be made.

(C) If the taxpayer made a capital addition to an existing Part XVII asset and the expenditure incurred in connection therewith forms part of the capital cost of that asset, he could then make an allowable claim for capital cost allowance under Part XI of the Regulations in respect of that asset. However, Part XVII assets are considered individually for the purpose of making a claim thereunder and, accordingly, each asset would need to qualify separately before it could be included in a prescribed class for the purpose of making a claim under Part XI.

(D) In a year subsequent to the year in which an allowable claim for capital cost allowance under Part XI of the Regulations was made by the taxpayer, the former Part XVII asset could then qualify for a rollover under subsection 73(3) of the Act provided the other conditions of that subsection are met.

There are certain aspects of the foregoing on which we would like to comment.

Firstly, we do not agree that making an allowable claim for capital cost allowance on a similar asset that has been acquired for inclusion in a prescribed class under Part XI of the Regulations would automatically convert a fully depreciated Part XVII asset to that class under Part XI. Paragraph 20(1)(a) of the Act permits a deduction for "such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation." Since the asset has been fully depreciated under Part XVII, no part of, or any amount in respect of the capital cost can be further deducted. Furthermore, paragraph 1100(1)(a) sets out the prescribed classes and rates of allowance that may be claimed in respect of the "undepreciated capital cost" to the taxpayer of the property at the end of the taxation year. It follows that, if the Part XVII asset has been fully depreciated, no "undepreciated capital cost" remains for a deduction to be made.

Secondly, it should be kept in mind that, once an allowable claim for capital cost allowance has been made under Part XI in respect of a property that was formerly depreciated under Part XVII, the property will be considered for recapture and terminal loss purposes to have always been included under Part XI. In this respect, we refer you to section 20 of the Income Tax Application Rules.

We trust our comments will be of assistance.

Yours truly,

ORIGINAL SIGNED BY

for Director Non-Corporate Rulings Division