(21.1)-(37)

Subsection 13(21.1) - Disposition of building

See Also

9136-6872 Québec Inc. v. The Queen, 2010 TCC 91, 2010 DTC 1263 [at 3833]

Paragraph 13(21.1)(b) applies as long as land is not disposed of in the same year as a building on the land.

The taxpayer purchased a building property in order to demolish the building and replace it with a new building that it could lease out. The taxpayer was deemed to have proceeds of disposition on the demolished building, in accordance with s. 13(21.1)(b).

Administrative Policy

11 March 2013 External T.I. 2012-469231E5 F -

A disposition by the taxpayer of a building and contiguous land (necessary for the building's use) would have given rise to a terminal loss in the absence of s. 13(21.1). In response to a question as to how s. 13(21.1) would apply when the taxpayer elects under s. 85(1) with respect to the disposition of the land (which has an accrued capital gain), CRA stated (TaxInterpretations translation):

The fact that the land contiguous to the building is transferred to a corporation utilizing the rules in section 85 of the Act does not prevent the application of the special rules in subsection 13(21.1) ....

Assuming that the fair market value of the land exceeds its cost amount, the elements used in determining the proceeds of disposition of the building in accordance with the calculating rules in paragraph 13(21.1)(a) of the Act…are, among others, the fair market value of the land immediately before its disposition and its cost amount to the vendor. Consequently, the agreed amount of the land for purposes of section 85 of the Act does not itself affect the determination of the proceeds of disposition of the building for purposes of subparagraphs 13(21.1)(a)(i) and (ii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.2) 373

Paragraph 13(21.1)(a)

Administrative Policy

11 March 2013 External T.I. 2012-0469231E5 F - Deferred terminal loss

s. 13(21.1)(a) adjusts the proceeds as determined under s. 85

An individual, who disposed a building (with an accrued terminal loss) and its contiguous land (which was necessary for the use of the building and had an accrued gain), wishes to access s. 85 respecting the transfer of the contiguous land (whose fair market value exceeds its cost amount.) Does s. 13(21.1) apply where the contiguous land is transferred in accordance with the s. 85 rules and, if so, what are the consequences? CRA responded:

[T]he elements applied to determine the proceeds of disposition of the building according to the calculation rules set out in paragraph 13(21.1)(a) … are, inter alia, the fair market value of the land immediately before its disposition and its cost amount to the vendor. Therefore, the agreed amount for the land for the purposes of section 85 would not have an impact per se when calculating the proceeds of disposition of the building under subparagraphs 13(21.1)(a)(i) and (ii).

On the other hand, the proceeds of disposition of the land will be adjusted for the purposes of the Act, despite the fact that section 85 applied in determining its proceeds of disposition. As provided for in subparagraph 13(21.1)(a)(iii), this adjustment will take into account the agreed amount established for the purposes of section 85 of the Act as it takes into account the proceeds of disposition of the land determined without reference to subsections 13(21.1) and 13(21.2)…. [T]he individual could designate an agreed amount for the purposes of section 85 that was between the fair market value of the land and its adjusted cost base (but that would be higher than the adjusted cost base), in order to reduce the loss that was deemed to be nil and to increase the cost of the land to the acquirer as well as the cost of the consideration received by the vendor.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.2) notional properties fall in same class so that losses suspended until triggering events for all properties/ordering of dispositions to affiliated and unaffiliated transferees generally not relevant 413

2016 Ruling 2016-0635101R3 - 55(3)(a) Spin-Off to Use Parent Losses

where land transferred under s. 85(1) along with terminal loss building, elect high with a view to s. 13(21.1)(a) applying to reduce the land proceeds to ACB
Part of s. 55(3)(a) spin-off and immediate sale

It is proposed that the Property be spun-off by Subco to a newly-incorporated subsidiary of Parent (“Newco”), so that Parent can then receive the Property under a s. 88(1) wind-up of Newco, and then close on the sale to Purchaser, thereby utilizing its net capital or non-capital losses.

Use of terminal loss to bump elected amount

As part of the spin-off transactions, Subco will transfer the Property to Newco in consideration for the assumption of liabilities and the issuance of redeemable Newco Preferred shares. An s. 85(1) election will be made only respecting the Land parcels, with the agreed amount for each parcel equalling its ACB plus the terminal loss that, but for ss. 13(21.1) and (21.2), would be recognized on the disposition of the Building thereon (except that the elected amount will not exceed the parcel’s FMV).

Ruling

Subject to s. 13(21.2), the provisions of s. 13(21.1)(a) will apply to Subco’s transfer of the parcels so that its proceeds of disposition otherwise determined under s. 85(1) will be redetermined under s. 13(21.1)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) 55(3)(a) spin-off of property already subject to sale agreement to parent before closing date 548
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) s. 86(1) applied where “dirty” s. 85 exchange mechanic used, but no s. 85 election made 91
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(a) elected amount deterines proceeds before s. 13(21.1)(a) grind 197

S3-F4-C1 - General Discussion of Capital Cost Allowance

Purpose of required allocation

1.87 Paragraph 13(21.1)(a) applies where both a building and land are disposed of in the same tax year… . [T]he combined proceeds must be allocated between the building and land. This is primarily to ensure that no loss will be claimed in respect of the disposition of the building unless it is determined that no gain is reported on the land component.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

Paragraph 13(21.1)(b)

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance

Example of reduction of terminal loss

1.94 …

Example 9

In 2014, a taxpayer sells a building that is a rental property for $100,000. The taxpayer sells the land for $400,000 in the following year.

Building
Fair market value (FMV) $100,000
Capital cost $200,000
Cost amount (UCC) $180,000

Land
FMV $400,000
ACB $300,000

Results:

The deemed proceeds of disposition of the building are calculated under paragraph 13(21.1)(b) as the total of A + B, where:

A = the proceeds of disposition (POD) otherwise determined ($100,000)
A = $100,000

and

B = ½ of the amount by which the greater of:

  1. Cost amount (UCC) ($180,000); and
  2. FMV of building ($100,000)

exceeds

The POD otherwise determined (A) ($100,000)

B = ½ of (180,000 – 100,000)
B = $40,000

The deemed proceeds of disposition of the building are A ($100,000) + B ($40,000) = $140,000, resulting in a reduced terminal loss of $40,000 ($180,000 - $140,000).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

Subsection 13(21.2) - Loss on certain transfers

Commentary

Loss suspension

S. 13(21.2) applies to suspend a terminal loss on a disposition of depreciable property by a person or partnership (referred to as the transferor) where on the 30th day after the disposition, the property is owned by (or subject to a right to acquire of) a person or partnership who is affiliated with the transferor or is the transferor itself (in either case, referred to as the "subsequent owner." Affiliated status is defined in s. 251.1.

Where the terminal loss is suspended under this rule, the transferor is deemed under s. 13(21.1)(e)(iii) to own depreciable property that was acquired before the year in question and which has a capital cost reflecting the denied terminal loss. (To be somewhat more precise, the transferor is deemed to dispose of each depreciable property for proceeds of disposition equal to the portion of the undepreciated capital cost of the relevant class which is applicable to that property based on its relative fair market value - but not exceeding its capital cost - and the excess of that amount over the fair market value of the depreciable property represents the deemed capital cost of the notional depreciable property to the transferor.) As indicated in the December 1997 Technical Notes of the Department of Finance, the intent of this rule is that "the transferor will be permitted to claim capital cost allowance (CCA) after the transfer on the difference between the transferred property's tax cost and the transferor's proceeds of disposition otherwise determined." Consistently with this intent that the transferor be permitted to claim CCA on the notional depreciable property, the rule in s. 13(21.2)(e)(iv) provides that the transferor is deemed to satisfy the available for use rules in s. 13(26) et seq in the year of disposition if by that year the property has become available for use by the subsequent owner.

The notional depreciable property arising under s. 13(21.1)(e)(iii) is of the same class as the property that in fact was disposed of. Accordingly, where the transferor disposes of all the properties in a depreciable class to both an affiliated and unaffiliated person, the requirement under s. 20(16)(b) that there be no properties left in the class at the end of the year in order to claim a terminal loss, generally will not be satisfied, so that no terminal loss will be realized in respect of the disposition to either person. See 11 March 2013 T.I. 2012-469231E5.

Where the transferor amalgamates with another corporation owning depreciable property of the same type as the depreciable property of the transferor held as notional depreciable property, those two pools of depreciable will be held in separate classes of depreciable property if they were used in separate businesses (25 July 2005 T.I. 2005-0125501E5).

Release events

This notional depreciable property will be deemed to be disposed of by the transferor for purposes of the depreciable property rules in sections 13 and 20 immediately before the first to occur of the various release events listed in s. 13(21.2)(e)(iii). These release events are:

  • the property no longer being owned by (or subject to a right to acquire of) the transferor or a person affiliated with the transferor, for example, as a result of a dipsoition of the property to an arm's length purchaser (provided that neither the transferor nor an affiliated person acquires or has a right to acquire the property within 30 days after this situation arising) (s. 13(21.2)(e)(iii)(A))
  • a change in the property's use so that it ceases to be used by the transferor or a person affiliated with the transferor for the purpose of earning income (s. 13(21.2)(e)(iii)(B))
  • a "deemed disposition" of the property under section 128.1 (change of residence of the owner) or subsection 149(10) (change of taxable status of a corporate owner) (s. 13(21.2)(e)(iii)(C))
  • where the transferor is a corporation, an acquisition of control of the transferor (with the release event occurring immediately before that time) (s. 13(21.2)(e)(iii)(D)); or
  • where the transferor is a corporation, the beginning of its winding-up (other than a winding-up to which s. 88(1) applies) (s. 13(21.2)(e)(iii)(E)).

For example, where a corporation (Aco) transfers depreciable property to an affiliated corporation (Bco), the suspended terminal loss of (Aco), as reduced by CCA claims, will cease to be suspended under the first release event when Bco ceases to be affiliated with Aco (ACo1999 TEI Round Table, Q. XXII 992951).

Partnership windings-up

Were a transferor partnership ceases to exist after the disposition of the depreciable property, the partnership is deemed to not have ceased to exist for purposes of s. 13(21.2), and each person who was a member of the partnership before it would otherwise cease to exist is treated as having remained a member of the partnership for this purpose, until immediately before the occurrence of a release event: s. 13(21.2)(f). CRA has stated that the approximately equivalent rule in s. 40(3.4) is intended to ensure that a previously suspended loss of a partnership can be reported on the occurrence of a release event notwithstanding an intervening winding-up of the partnership, so that "former partners of the partnership who were members of the partnership immediately before it was wound up will be allowed to claim their share of the deferred loss as allocated to them pursuant to the rules in subsection 96(1)": (2010 Conference Report CRA Round Table, Q. 8).

Where s. 98(5) applies to the winding-up of a partnership, s. 98(5)(f) deems each property of the partnership to have been disposed of for its cost amount - even where the fair market value is lower. Accordingly, the suspended loss rule does not apply to depreciable property on such winding-up (2010 Ruling 2009-0347301R3). (Most or all of the accrued terminal loss effectively will become an accrued terminal loss of the (former) "proprietor" partner under s. 98(5)(e).)

Trust windings-up

There is no similar rule respecting a trust which ceases to exist. Accordingly, an accrued terminal loss on a trust's depreciable property which is distributed to the beneficiaries on the trust's winding-up, will not be suspended given that on the 30th day after the winding-up the trust, the owner(s) of the depreciable property will not be affiliated with the trust (which, instead, will have ceased to exist) (21 March 2007 T.I. 2004-0091061E5).

Corporate windings-up

Where s. 13(21.2) has applied to suspend a terminal loss of a subsidiary and it is then wound-up into its corporate parent as described in s. 88(1), the parent will be deemed (by ss. 88(1)(e.2) and 87(2)(g.3)) to be a continuation of the subsidiary so that the deemed depreciable property of the subsidiary will be deemed to continue to be held by the parent until the occurrence of a release event (2003 APFF Round Table Q. 14 2003-003009).

Where a transferor is a corporation which is wound-up otherwise than under s. 88(1), there will be a release event at the time of the commencement of the winding-up (the fifth release event listed above) rather than when that corporation ceases to be affiliated with the subsequent owner when its existence is terminated on filing of articles of dissolution or the corporate equivalent (which would engage the first release event listed above). CRA likely would consider the winding-up to commence when any formal positive corporate step is taken to that end, e.g., passing a shareholder's resolution authorizing the commencement of voluntary dissolution proceedings (IT-126R2, para. 2).

Preservation of accrued recapture

The capital cost of the (actual) property to the subsequent owner for purposes of the CCA/recapture of depreciation rules is deemed to be its capital cost to the transferor; and the difference between this capital cost and the fair market value of the property at the time of the disposition is deemed to have been deducted as CCA, so that (leaving aside complications where not all the depreciable property of a class was disposed of) the initial undepreciated capital cost of the property to the subsequent owner is equal to its fair market value at the time of disposition: s. 13(21.2)(e)(iv).

Administrative Policy

2 April 2015 External T.I. 2015-0571501E5 F - Perte sur certains transferts

CCA claims made on hypothetical property while partnership is deemed to exist by s. 13(21.2)(f)

A partnership transferred a depreciable property to an affiliated person for proceeds less than its undepreciated capital cost, and then ceased to exist. Can the partnership claim capital cost allowance on the depreciable property it was deemed to hold under s. 13(21.2)(e)(iii)? After noting that the hypothetical property arising under s. 13(21.2)(e)(iii) "is used by the transferor for the purpose of earning income," CRA stated:

[I]f the partnership ceased to exist before the 30th day following the disposition…subsection 13(21.2) would simply not apply. However, if the partnership ceased to exist after the 30th day after the disposition, it would be deemed [by s. 13(21.2)(f)] to not cease to exist until the time immediately after the first to occur of the times specified in clauses (e)(iii)(A) to (E). Such partnership has a hypothetical property of a class of depreciable property and, during the period of its deemed existence under the terms of paragraph 13(21.2)(f), it could claim CCA on the property and its deemed partners could receive their share of its income taking into account such CCA.

11 March 2013 External T.I. 2012-469231E5 F -

A number of depreciable properties in the same class are transferred to an affiliated person, so that s. 13(21.2)(e)(iii) deems the transferor to own notional depreciable property. The transferor will not recognize a terminal loss in respect of such notional property until, at the end of a taxation year, all such notional properties are deemed to cease to be owned by it in accordance with the release events in s. 13(21.1)(e)(iii).

In an alternative situation, the depreciable properties of the same class are disposed of to two different transferees, only one of whom is affiliated. CRA was queried as to whether the Act permitted a choice as to the order in which the properties were disposed of, in order that a terminal loss could be realized as a result of the last property being considered to be disposed of to the unaffiliated person.

CRA noted that the order of disposition affected the calculation in s. 13(21.2)(b)(ii), and that if the dispositions were simultaneous as a factual matter, s. 13(21.2)(e)(ii) provided that the order of disposition could be designated. CRA then noted that the disposition of the properties last to the unaffiliated person generally would not give rise to a terminal loss, as the notional property arising under s. 13(21.2)(e)(iii) on the disposition to the affiliated person would belong to the same class (TaxInterpretations translation):

…each of the notional properties is part of the same class as the properties whose disposition engaged the application of the rules in subsection 13(21.2)….Consequently, if at the end of the taxation year, there still are properties (being notional properties) which are part of the same class, no terminal loss can be deducted…

Thus, even if the disposition of the properties to the unaffiliated transferee occurs subsequently to the disposition of the properties to the person who is affiliated (as a matter of fact or by virtue of an ordering under subparagraph 13(21.2)(e)(ii)), the notional properties arising from the disposition of the properties to the affiliated person are part of the class in question at the end of the taxation year, so as to not permit the deduction of the terminal loss respecting that class in accordance with the terms of paragraph 20(16)(b)….

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) 191

3 January 2013 External T.I. 2012-0460011E5 - Subsection 13(21.2)

A taxable Canadian corporation ("Canco") sells a depreciable property, with a fair market value lower than its undepreciated capital cost, for its fair market value to its sole shareholder ("Parent"), which is exempt from tax under s. 149(1). In response to a question as to whether "Canco can rely on clause 13(21.2)(e)(iii)(B) of the Act in order to claim the loss arising on the sale of the Property, on the basis that Parent would not be considered to be using the Property for an income earning purpose because it is exempt from tax," CRA (as per the summary) concluded "probably not," and in the body stated:

if Parent is using the Property for its normal activities, the fact that it is exempt from Part 1 tax on its taxable income earned from those activities does not mean that the Property was not being used for an income earning purpose.

11 March 2013 External T.I. 2012-0469231E5 F - Deferred terminal loss

notional properties fall in same class so that losses suspended until triggering events for all properties/ordering of dispositions to affiliated and unaffiliated transferees generally not relevant
First Situation

S. 13(21.2) applied to the transfer of all the depreciable properties in a prescribed class to an affiliated person. Could ss. 85 and 97(2) apply to these properties? Would notional property created under s. 13(21.2) will be in the same class so that the terminal loss for that class is recognized only when all the property is disposed of by the affiliated person? CRA responded:

[T]he properties disposed of belonged to the same class of property. Consequently, even if each of the notional properties is a separate property … the notional properties would all fall into the same class which includes the property so disposed of.

If at the end of a taxation year there is still property (including notional property) that is included in this class, no terminal loss will be deductible from the taxpayer's business or property income … pursuant to paragraph 20(16)(b). Thus, the terminal loss for that class will be recognized only when the transferor is no longer deemed to hold any notional properties pursuant to any of clauses (A) to (E) of subparagraph 13(21.2)(e)( (iii), provided that the taxpayer does not hold any other property of that class.

Second Situation

An individual disposes of all depreciable property of a prescribed class with an accrued terminal loss to two different transferees, one of them affiliated, on the same day. Can the order of disposition be chosen so that the last disposition is to the unaffiliated transferee, thereby triggering a terminal loss? CRA responded:

If the disposed of property belonged to the same class of property, all the notional property would be part of the same class which includes the property so disposed of.

Consequently, if at the end of a taxation year there is still property (including notional property) that is part of that class, no terminal loss can be deducted from business or property income of the taxpayer (regardless of the source of the loss) by virtue of paragraph 20(16)(b).

Thus, even if the disposition of property to a transferee who is not an affiliated person occurs subsequently to the disposition of property to an affiliated person (either because of the actual timing of the disposition or because of 13(21.2)(e)(ii)), the notional property that would result from the disposition of the property to the affiliated person would be included in the particular class at the end of the taxation year, which would not to permit the deduction of the terminal loss in respect of this class pursuant to paragraph 20(16)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) s. 13(21.1)(a) adjusts the proceeds as determined under s. 85 298

7 January 2013 External T.I. 2012-0452611E5 - Subsection 13(21.2)

CRA considered a scenario in which an individual transfers a depreciable property to his or her spouse and elects under s. 73(1) for the transfer to occur at fair market value. The individual then dies before full capital cost allowance has been claimed on the separate depreciable property that the individual is deemed to have acquired under s. 13(21.2)(e)(iii) with a capital cost equal to the accrued loss at the time of the transfer (and before one of the events in ss. 13(21.2)(iii)(A)-(E) triggers a terminal loss for this notional property). CRA stated that the death of the transferor is not one of those five triggering events, and there is no other mechanism by which the residual undepreciated capital cost of the notional property could be deducted.

2010 Ruling 2009-0347301R3 - Does s.s. 13(21.2) apply on s.s. 98(5) rollover

Debt owing by a limited partnership to its limited partner is converted into equity; and the limited partnership (which has a large number of depreciable properties in different classes) then is wound up under s. 98(5), by its general partner being wound-up as described in s. 88(1) into the limited partner.

Ruling that s. 13(21.2) will not apply to the transfer of the depreciable properties by the limited partnership to the limited partner. The issue summary states:

Although there is no specific rule in the Act that provides an exception to the application of subsection 13(21.2) in the case of a rollover under subsection 98(5), this provision would not apply to the particular circumstances set out in the ruling.

21 March 2007 External T.I. 2004-0091061E5 - stop loss rules for depreciable property

S. 13(21.2) would not apply to a transfer of depreciable property from a personal trust to a person affiliated with the trust, with the trust winding up within 30 days - as no person would be affiliated with the trust on the day that was 30 days after the transfer.

25 July 2005 External T.I. 2005-0125501E5 - Subsection 13(21.2)

Aco and Bco (which are both owned by Holdco) carry on two distinct businesses with Class 13 properties. Aco transfers all its property to Newco, with s. 13(21.2) applying to what otherwise would have been a terminal loss on the Class 13 properties of Aco, then Aco amalgamates with Bco.

S. 87(2)(g.3) deems Amalco to be a continuation of Aco. However, the deemed Class 13 property that Amalco is now deemed to hold as a result of this rule is considered to be in a separate class from the former Class 13 properties of Bco given the separate businesses. Accordingly, the terminal loss in question will cease to be suspended when all the properties of Newco are sold to an unaffiliated purchaser.

2003 APFF Roundtable Q. 14, 2003-003009 -

Where a subsidiary corporation has had s. 13(21.2) apply to a transfer of depreciable property to its parent corporation, and the subsidiary is then wound up under s. 88(1), ss. 88(1)(e.2) and 87(2)(g.3) will deem the parent corporation to be a continuation of the subsidiary corporation for the purposes of applying the rules in s. 13(21.2) to the parent corporation in respect of the denied terminal loss.

1999 TEI Round Table, Q. XXII 992951

Where Aco transfers depreciable property to an affiliated corporation (Bco), the terminal loss of Aco will cease to be suspended when Bco ceases to be affiliated with ACo.

Subsection 13(26) - Restriction on deduction before available for use

Administrative Policy

1993 December Tax Executive Institute Roundtable, 5-932784 -

On the acquisition of control of a corporation, it is deemed to have claimed additional CCA under s. 111(5.1) on property which is not available for use.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 26

Subsection 13(27) - Interpretation — available for use

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance

Capable of producing salable product

1.34

Example 2

Company B purchased specialized machinery for use in its manufacturing business. The machinery, which was capable of producing commercially saleable parts used in the assembly process, was delivered and installed in Year 1. However, the company did not complete construction of the manufacturing facility until Year 2, at which time the production line was put into service.

Results:

Although the machinery was not used in the production line until Year 2, it was capable of producing a commercially saleable product in Year 1. Therefore, the earliest time at which CCA can be claimed is Year 1 (subject to the half-year rule).

Application to leased building

1.36 … [S]ubsection 1102(5) of the Regulations requires the cost of a building or other structure to be added to Class 1 (or Class 3) in certain circumstances rather than to Class 13. … [E]ven though a taxpayer may erect a building on leased land, it will still be considered property (other than a building or part thereof) acquired by the taxpayer within the meaning of subsection 13(27) of the Act for the purpose of the available-for-use rules. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

18 October 2011 External T.I. 2011-0401381E5 - Capital Cost Allowance for a Partnership

In our opinion, paragraph 13(27)(f) of the Act would not apply where depreciable property is acquired by a partnership even if the only members of the partnership are corporations described in that paragraph.

1993 December Tax Executive Institute Roundtable, 5-932784 -

"With regard to equipment in the testing stage, it is our opinion that the testing activity would not qualify equipment to be considered 'available for use'."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(26) 26

21 April 1993 T.I. (Tax Window, No. 31, p. 9, ¶2518)

A fishing vessel cannot be considered to be capable of performing the function for which it was acquired until all permits, certificates and licences are acquired.

15 April 1992 T.I. (Tax Window, No. 18, p. 13, ¶1846)

Even though a corporation is permitted a deduction under s. 20(1)(c) for interest on money borrowed to acquire equipment that is being tested, the equipment will not qualify under the available-for-use rules.

November 1991 Memorandum (Tax Window, No. 12, p. 19, ¶1567)

A machine is "available for use" if it is capable of producing a commercially saleable product or extensive alterations are required to bring it up to its designed capacity.

24 June 1991 T.I. (Tax Window, No. 4, p. 14, ¶1314)

Equipment which has been acquired and is being tested is not considered for purposes of s. 13(27)(a) to be used for the purpose of earning income. The equipment must first be used for the function for which it was intended that will contribute to earning income.

A piece of equipment will be considered to be capable of producing a commercially saleable product for purposes of s. 13(27)(d) when it can perform its task at such a rate and at such a level of quality that a profit would reasonably be expected to ensue.

90 C.P.T.J. - Q.15

A well must be tied into a gas gathering system which in turn must be connected to a commercial gas plant in order to meet the requirements of ss.13(27)(a) or (b).

Articles

Sinclair, "Depreciable Property: A Review of Recent Legislative Developments", 1991 Conference Report, c. 26.

Paragraph 13(27)(b)

Articles

Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.

Use of rolling-start rule in s. 13(27)(b) to accelerate CCA (p. 10:20)

[G]iven the long duration of major construction projects, the rolling-start rule described above is frequently used to accelerate CCA claims to a time before the asset would otherwise be available for use. Under this rule, a cost incurred in 2014 would become available for use in 2016 and hence depreciable for CCA purposes. This would be the case even if the asset were not otherwise in a state where it could be used in an income-earning capacity.

Paragraph 13(27)(d)

See Also

Morley v. The Queen, 2004 DTC 2604, 2004 TCC 280, briefly aff'd 2006 DTC 6351, 2006 FCA 171

Software allegedly acquired by a partnership in 1993 was not available for use in that year given that no sales of the software were ever made (let alone in 1993) and the software was not used in 1993 to create business solutions for potential clients (s.13(27(a)), given that it was not clear that the software was delivered to the partnership as the partnership did not have access to the source code (s.13(27)(d)(i)) and given that the software was not complete and functional in 1993 (s.13(27)(d)(ii)).

Brown v. The Queen, 2001 DTC 1094 (TCC), aff'd supra 2003 DTC 5298 (FCA)

A partnership acquired game "engines" (i.e., programs that would become functional games when graphic "shells" were added) at the end of 1993. The taxpayer successfully submitted that developers of the games constituted the "other persons" referred to in s. 13(27)(d)(ii), with the result that it was not relevant that the engines were not delivered to the vendor of the software or the partnership at the end of 1993. In addition, the developers, as the "other persons", used the engines to create game shells so that games could then be sold commercially. Rip T.C.J. stated:

"I do not believe that it is necessary, nor desirable, to import a reasonable expectation of profit test into the available for use rules. The words commercially 'saleable' should be given their ordinary meaning of being capable of being sold commercially."

Words and Phrases
commercially saleable

Subsection 13(28) - Idem [Interpretation — available for use]

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance

Example of two-year rolling start rule

1.33

Example 1

Company A owns a Class 1 building that is used to earn business income. Near the end of Year 1, the company started construction of a major addition to the building. The construction of the addition continued for the next several years and was completed in Year 4, at which time the addition was first used by Company A for the purpose for which it was intended. Company A incurred the following construction costs:

  • $10 million in Year 1;
  • $50 million in Year 2;
  • $75 million in Year 3; and
  • $15 million in Year 4.

The long-term election under subsection 13(29) and discussed in ¶1.37 is not made.

Results:

  1. The two-year rolling-start rule in paragraph 13(28)(c) will apply such that the $10 million spent by Company A in Year 1 is available for CCA purposes in Year 3. The half-year rule does not apply (see ¶1.39).
  2. The $50 million spent in Year 2 is available in Year 4. The half-year rule does not apply.
  3. As the building was completed and first used to earn income in Year 4, the combined $90 million spent in Year 3 and Year 4 is also available in Year 4. However, these costs are subject to the half-year rule because the two-year rolling-start rule does not apply.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

19 December 2003 Internal T.I. 2003-003534 -

In connection with indicating that a building that was to be used as a sawmill which was substantially complete but was not yet operational (e.g., various items of processing equipment were still in crates) did not satisfy the test in s. 13(28)(a), the Agency stated:

"In our view, the time 'all or substantially all' of the building is first used in the sawmill operation, will occur when 90% or more of the building's square footage is occupied by processing equipment that is also being used to process logs into lumber. Because certain areas of the building may not contain processing equipment (e.g., offices, washrooms and cafeteria), it may be appropriate to consider them used in the sawmill operation if they are functional at the time."

16 October 1992 Memorandum 922845 (September 1993 Access Letter, p. 406, ¶C9-284)

A leasehold improvement referred to in Regulation 1102(5) is a building only for purposes of Schedule II and not for other purposes of the Act such as s. 13(28). Accordingly, such a leasehold improvement would be property described in s. 13(27).

22 April 1992 Memorandum 920983 (May 1993 Access Letter, p. 191, ¶C20-069)

A building purchased by a taxpayer requiring extensive renovations will be eligible for capital cost allowance claims in the year of acquisition. The renovations, are being deemed to be a separate building by s. 13(28), will not be so eligible until the requirements of s. 13(28) have been satisfied.

Subsection 13(29) - Idem [Interpretation — available for use]

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance

Overview

1.37 Subsection 13(29) provides an election in respect of property acquired for use in a long-term project. The property can be a building, but not a building that is used or to be used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent. Under this election, the general available-for-use rules will be applied to all project-related expenditures made in the year in which the project property was first acquired and in the following year. However, in the third and subsequent years, the application of the available-for-use rules to expenditures made as part of the project will be limited so that only those expenditures in any year in excess of certain threshold amounts will be subject to the available-for-use rules. Those expenditures exempted from the application of the available-for-use rules through this mechanism will be subject to the half-year rule. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

Articles

Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.

Long-term project rule may permit faster CCA write-offs for long-term projects (p. 10:20)

When the creation of an asset in a major construction project is expected to extend beyond three years, a faster CCA writeoff may be available through reliance on the long-term project rules described above. Once the subsection 13(29) election is made, costs incurred in the third and subsequent years of the project that are not otherwise available for use will be deemed to be available for use up to certain limits based on tire costs incurred in the first two years. Given that some projects can exist for more than 10 years before such assets are otherwise available for use—and can require tens of billions of dollars to complete—it is generally beneficial to consider making a subsection 13(29) election to accelerate the timing of CCA deductions for a major construction project. In order for a subsection 13(29) election to be valid, a form T1031 must be completed and filed with the income tax return for the particular year to which the election relates.

Subsection 13(35)

Paragraph 13(35)(a)

Administrative Policy

27 November 2018 CTF Roundtable, Q.15

capital expenditures not giving rise to property are deemed to be goodwill property

Class 14.1 depreciable property references “property” of the taxpayer. Does this have the effect of disqualifying, as Class 14.1 additions, capital expenditures, such as legal costs of aborted acquisitions, that potentially could have qualified as eligible capital expenditures if incurred before 2017, as Class 14.1 property additions if incurred after 2016 given that no property is acquired?

CRA noted that s. 13(35) provides that such expenditures incurred on capital account for the purpose of gaining or producing income from a business are deemed to be the cost of property that is goodwill, and that the definition of “property” in 248(1) has been amended to clarify that goodwill is property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 14.1 Class 14.1 “property” need not be property 87

Subsection 13(38)

Finance

5 October 2018 Financial Strategies and Instruments Roundtable, Finance Response to Q.6

Finance is reviewing the deemed cost of shares received on s. 85 drop-down of transitioned Class 14.1 property

An individual transfers a directly-held pharmacy business to a wholly-owned Newco in 2017. On January 1, 2017, the cumulative eligible capital (CEC) account of $1.5 million, reflecting a previous purchase price for goodwill of $2 million, was transferred to Class 14.1 resulting in an undepreciated capital cost (UCC) balance of $1.5 million. The FMV of the goodwill at the time of the drop-down in 2017 is $2.2 million. The s. 85(1) elected amount is $1.5 million to avoid recapture. However, the shares received by the individual in exchange therefor would have a cost only of $1.5 million, whereas if the drop-down had occurred in 2016, it could still have occurred on a rollover basis with an elected amount of $2.0 million (i.e., 4/3 of the CEC balance), thereby giving rise to a cost of the same shares to the individual of $2 million.

What are the comments of the Department of Finance on the tax policy respecting this $500,000 discrepancy in cost to the individual where the drop-down occurs in 2017 rather than 2016? After discussing the general policy behind the Class 14.1 transitional rules, Finance responded:

Subsections 13(38) and (39) and their interaction with other rules, including subsection 85(1), are the subject of a review by the Department of Finance Canada in order to ensure that the tax consequences of a rollover under subsection 85(1) are appropriate for the transferor and the transferee of property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(h) Finance is reviewing the interaction of the Class 14.1 transitional, and s. 85(1) rollover, rules 189

Paragraph 13(38)(a)

Administrative Policy

7 June 2016 External T.I. 2016-0641851E5 - ECP Rules NAL Disposition

no recognition of pre-2017 gain of non-arm’s length transferor

As a result of the taxpayer’s acquisition of eligible capital property from a non-arm’s length transferor prior to January 1, 2017, the amount otherwise added to the taxpayer’s cumulative eligible capital was reduced by variable A.1 in s. 14(5), CEC definition until such time that the particular ECP is subsequently disposed of to an arm’s-length (“AL”) person. Under the proposed transitional rule in draft s. 13(37), is such grind restored where the property is sold after January 1, 2017 to an AL person? CRA responded:

[P]roposed paragraph 13(37)(a) provides that the total capital cost of Class 14.1 at the beginning of January 1, 2017 is 4/3 of the amount that would be the CEC pool balance at the beginning of January 1, 2017; plus 4/3 of the amount of deductions taken that have not been recaptured; less 4/3 of any negative CEC pool balance at the beginning of January 1, 2017. …

[F]or capital gains purposes there is no upward adjustment (for the amount of the former grind to the CEC pool) to the cost or capital cost of the Class 14.1 property where such property is sold to an AL person after January 1, 2017.

…[W]e have referred this matter…for [Finance’s] consideration in the finalization of the proposed legislation.

Paragraph 13(38)(b)

Subparagraph 13(38)(b)(ii)

Administrative Policy

27 September 2016 External T.I. 2016-0660861E5 - partial disposition of farm quota

farm quota units may be identical properties

A taxpayer, who owns farm quota purchased at various times and prices before January 1, 2017, thereafter sells a fraction of the farm quota. What is its capital cost? CRA responded:

New subparagraph 13(37)(b)(ii) [now s. 13(38)(b)(ii)] provides that the capital cost of a particular property (other than goodwill) is generally the taxpayer’s ECE in respect of that property. …

Typically, farm quota is a statutory licence to produce a quantity of regulated agricultural product. In most cases, units of a particular type of farm quota are indistinguishable from one another. …[W]here units of a particular type of farm quota are indistinguishable from one another, the ECE, for the purposes of new subparagraph 13(37)(b)(ii), may be determined by averaging the total cost of the particular type of quota by the number of units of that type held. …

[A]ssuming they are identical properties, for the purposes of determining the adjusted cost base of farm quota that is depreciable property included in new CCA Class 14.1, the averaging rule in subsection 47(1) would apply.

Paragraph 13(38)(c)

Administrative Policy

27 October 2017 External T.I. 2017-0688971E5 F - New Class 14.1

a s. 85 roll of purchased goodwill at an agreed amount of unamortized cost can trigger recapture

The CEC balance on December 31, 2016 in respect of Mr. X’s business was $75,000, equaling 75% of previously purchased goodwill and with no s. 20(1)(b) deductions having been claimed. In 2017, Mr. X transfers his business under s. 85(1) to Newco. The consideration for the goodwill, which has a value of $140,000 that consists of the assumption of a $100,000 loan and the issuance of preferred shares with a redemption amount of $40,000. Will any gain be recognized if the agreed amount for the transferred goodwill is $100,000? CRA responded:

[U]nder paragraph 13(38)(a), the total capital cost of Mr. X's property included in Class 14.1 in respect of the business was deemed to be $100,000 … .

However, by virtue of paragraph 13(38)(c) … [t]he UCC balance for Class 14.1 in respect of Mr. X’s business ... would be $75,000.

… [The] agreed amount [of $100,000] would be deemed to be the proceeds of disposition of the property tor Mr. X and the cost of the property to Newco. These proceeds of disposition would result, in the circumstances, would result in recapture of Class 14.1 depreciation in respect of Mr. X's business.

The potential adjustment by virtue of subsection 13(39) to prevent excessive recapture of the disposition of Class 14.1 property would not apply in light of the fact that the property would have been transferred to Newco pursuant to subsection 85(1). …

However, on an ultimate disposition of the goodwill by Newco, Newco could avail itself of the provisions of subsection 13(39).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(39) non-application on s. 85 roll can result in recapture -but disposition bump available to NAL transferee 107
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e) permitted agreed amount for Class 14.1 property rollover must be UCC even where amortized cost (equalling boot) is higher 178

Paragraph 13(38)(d)

Administrative Policy

9 March 2017 External T.I. 2016-0680071E5 F - Règles transitoires - immobilisations admissibles

s. 13(38)(d)(iii) election can be available notwithstanding that only a minor pre-2017 ECE was incurred

At the 2016 CTF Annual Conference, Q13, CRA indicated that the s. 13(38)(d)(iii) election to maintain the effect of the s. 14(1)(b) inclusion is unavailable where a taxpayer’s only intangible asset was internally-generated goodwill with no cost – so that the taxpayer could not be said to have made or incurred an ECE in respect of the business, thereby ousting the election.

CRA confirmed the flip side of the coin: even a trivial previous ECE expenditure respecting the business, such as incorporation expense or a trade mark expenditure, will eliminate this particular issue.

27 March 2017 External T.I. 2016-0680141E5 - Subsection 13(38)

previously having incurred trivial ECE may generate better ECP transitional results

In December 2016, a corporation with an April 30, 2017 year end and which had previously incurred eligible capital expenditures, such as incorporation costs, in respect of a business, sells the internally-generated goodwill of that business to an arm’s length purchaser. Would the s. 13(38)(d)(iii) election be available? CRA responded:

One of the conditions, set out in the preamble of subsection 13(38), states that the subsection will only apply if a taxpayer has incurred an eligible capital expenditure in respect of a business before January 1, 2017.

In our view, a taxpayer who has incurred any eligible capital expenditure in respect of the business prior to 2017 has met the condition set out in the preamble of subsection 13(38) of the Act. Therefore, paragraphs (a) to (d) of subsection 13(38) apply and the taxpayer may, provided that all other conditions are met, file the election under subparagraph 13(38)(d)(iii).

Therefore, our response...can be distinguished from... Q13 since in that situation the taxpayer in question had never incurred any eligible capital expenditure in respect of the business prior to 2017.

29 November 2016 CTF Roundtable Q. 13, 2016-0669721C6 - ECE/Class 14.1

s. 13(38)(d) does not extend to internally-generated goodwill

Proposed s. 13(38)(d)(iii) provides in the case of a taxation year straddling January 1, 2017, a taxpayer would have had a particular amount included from a business for the particular year under s. 14(1)(b) (as that paragraph applied immediately before January 1, 2017, the taxpayer can elect to include the particular amount in income from its business for the particular year, provided inter alia the taxpayer has incurred an eligible capital expenditure (ECE) in respect of a business before January 1, 2017. In a situation where a taxpayer has disposed of all of its business in a straddle year but before January 1, 2017, and the intangible business assets disposed of only include internally generated goodwill with no cost, will s. 13(38)(d)(iii) apply even though no ECE in respect of the business was incurred before January 1, 2017? CRA responded:

Where a taxpayer’s only intangible asset is internally-generated goodwill with no cost, that taxpayer cannot be said to have made or incurred an ECE in respect of the business. As such, the taxpayer would not meet the requirements of the election in subparagraph 13(38)(d)(iii). It is our understanding that this result is consistent with tax policy.

Articles

Lorne Richter, "ECP Transitional Rules and 2016 Asset Sales", Canadian Tax Highlights, Vol. 24, No. 7, July 2016, p. 12

Potential application of transitional rule for years straddling 1 January 2017 (p. 12)

[A] transitional rule (proposed paragraph 13(37)(d)) applies to a corporation's taxation year that begins in, but ends after, 2016. The transitional rule applies if the corporation disposed of ECP in calendar 2016, but the gain is included in the taxation year that ends after 2016….an election is available to maintain the effect of the paragraph 14(1)(b) inclusion….

Non-application where business sold before 1 January 2017 (pp. 12-13)

[T]he preamble to the proposed transitional rule is quite restrictive: "a taxpayer has incurred an eligible capital expenditure in respect of a business before January 1, 2017 and carries on the business on that day."…

[I]n many cases, an affected corporation may have sold its business assets in 2016 (in its taxation year that ends in 2017) and have concurrently ceased to carry on that business….Following discussions with Finance, the CRA has said that this anomaly should be corrected… [29 July 2016 draft of s. 13(37) now has dropped requirement to carry on business on 1 Jan. 2017 but still requires ECE to have been incurred, thereby potentially excluding self-generated goodwill.]

CDA addition re transitional inclusion (p. 13)

[The] CDA addition is predicated on an income inclusion under paragraph 14(l)(b) and not under subparagraph 13(37)(d)(iii). In the informal discussion noted above, the CRA acknowledged that this unintended result, will likely be corrected. [See now draft amendment to s 89(1) – CDA – (c.2)(i).]

Subparagraph 13(38)(d)(iii)

Administrative Policy

6 October 2017 APFF Roundtable Q. 11, 2017-0709091C6 F - Transitional rules - Class 14.1

s. 13(38)(d)(iii) transitional election is irrelevant to ECP dispositions by a calendar-year partnership

Where a partnership (the "Partnership") with a calendar year end, but whose corporate partners (the "Partners") have March 31 taxation year ends, disposed of eligible capital property in November 2016, must those partners make the s. 13(38)(d)(iii) election in order for the eligible capital property regime (the "Old Regime"), rather than the new Class 14.1 property regime (the "New Regime"), to apply to the gain? CRA responded:

The rules of the Old Regime with respect to the disposition of eligible capital property, as well as of subsection 13(38), which adds transitional provisions because of the introduction of the New Regime, are statutory provisions for the computation of income. Consequently, in accordance with paragraph 96(1)(a), these provisions apply, as appropriate, at the level of the partnership as if it were a separate person resident in Canada. Thus, the Partnership would be considered to be the taxpayer for the purposes of paragraph 13(38)(d). Given that the Partnership’s taxation year would end on December 31, 2016, paragraph 13(38)(d) would not apply and the Partnership would not have to make an election under subparagraph 13(38)(d)(iii).

…[A] Partner could not make an election under subparagraph 13(38)(d)(iii) in respect of a disposition by the Partnership.

Subsection 13(39)

Administrative Policy

27 October 2017 External T.I. 2017-0688971E5 F - New Class 14.1

non-application on s. 85 roll can result in recapture -but disposition bump available to NAL transferee

Goodwill of a business was purchased in 2016 for $100,000, resulting in a cumulative eligible capital balance on December 31, 2016 of $75,000 (i.e., 75% of $100,000) ignoring any s. 20(1)(b) amortization deductions. The business owner (Mr. X) now wants to roll the business into a Newco under s. 85(1), electing at $100,000 (which, in the posited example, equals the boot).

This elected amount would produce $25,000 in recapture of depreciation. The essential reason is that s. 13(39), which might otherwise increase the undepreciated capital cost by $25,000 on this disposition, does not apply where s. 85(1) applies to the disposition. However, on an ultimate disposition of the goodwill by Newco, Newco could avail itself of the s. 13(39) rule.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(38) - Paragraph 13(38)(c) a s. 85 roll of purchased goodwill at an agreed amount of unamortized cost can trigger recapture 232
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e) permitted agreed amount for Class 14.1 property rollover must be UCC even where amortized cost (equalling boot) is higher 178

Subsection 13(42)

Paragraph 13(42)(a)

Administrative Policy

9 November 2016 External T.I. 2016-0664451E5 - ECP Rules

restoration of UCC on arm's length sale of former ECP where CGD previously claimed

S. 14(3) reduced a corporation’s eligible capital expenditure for its $1,000,000 purchase before 2017 of an eligible capital property (ECP) to nil, as the non-arm’s length transferor had claimed a $1,000,000 capital gains exemption. The corporation now intends to sell the property to an arm’s-length person on January 2, 2017, for the property’s FMV of $2,000,000. Its tax year straddles January 1, 2017. Since the corporation’s CEC pool was nil, its capital cost for Class 14.1 would also be nil. Would proposed s. 13(42)(a) apply to increase the capital cost of the property? CRA responded:

Proposed paragraph 13(42)(a) provides that for the purposes of the Act and its regulations (other than section 13, section 20, and any regulations made for the purposes of paragraph 20(1)(a)), if the amount determined for variable A in the definition of CEC in subsection 14(5) would have been increased immediately before 2017 if the property had been disposed of immediately before that time, the capital cost of the property is deemed to be increased by 4/3 of the amount of that increase.

Therefore, given that the provisions of subsection 14(3) must be taken into account when determining the amount for variable A in the definition of CEC in subsection 14(5)…there would be an increase to the capital cost of such Class 14.1 property in respect of the business at the beginning of 2017 as a result of the application of proposed paragraph 13(42)(a).