Income Tax Application Rules

Subsection 19(1)


Gastrebski v. The Queen, 94 DTC 6355 (FCA)

The taxpayer, who was hospitalized and treated as an out-patient for severe depression until March 1973 and then returned to work until 1983, when he stopped work because of his disability, was not grandfathered. Linden J.A. found (p. 6359) that "the 'event' that must occur before 1974 is the actual disability which prevents someone from working at full capacity, resulting in a loss of employment income as a consequence of that disability ... . [T]he reoccurrence of a pre-1974 disability after a period during which the taxpayer was not incapacitated is no different than if the first incapacity appeared after 1974."

Subsection 20(1)


Fletcher Challenge Canada Ltd. v. The Queen, 2000 DTC 6437 (FCA)

As a consequence of an amendment to the Forest Act (British Columbia) which gave holders of existing timber rights and privileges the entitlement to replace their existing rights with new timber licences governed by the new provisions of that Act, in 1979 the taxpayer exercised this right of replacement to obtain replacement licences that covered identical areas subject to the terms of the same tree farming licence. Desjardins found that as a result of this exchange, the taxpayer had acquired the replacement licences, with the result that it had not owned such licences without interruption from December 31, 1971 onwards.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A no cost because no exchange 154

Administrative Policy

10 June 2003 External T.I. 2003-0017065 F - Disp. of Property owned on Dec 31, 71

2 detailed examples of the application of ITAR 20(1)
Also released under document number 2003-00170650.

Mr. X (who did not make an election pursuant to s. 26(7)) owned a rental property (the “immovable") which he had acquired in 1965 at a cost of $300,000 ($100,000 and $200,000 for the land and building, respectively). The FMV of the land and building on the valuation day were $150,000 and $250,000, respectively, and their current FMVs are $250,000 and $350,000 for the land and building. The undepreciated capital cost ("UCC") is currently $50,000.

Mr. X proposes to transfer the immovable to a taxable Canadian corporation in a non-arm’s length transaction, with an s. 85(1) election being made on the following basis:








Cost amount




Agreed amount




Share consideration


Note consideration


The corporation subsequently sold the immovable in an arm’s length sale for $600,000 ($250,000 for the land).

Regarding the application of the ITAR and s. 13 rules, CCRA indicated:

ITAR 20(1) would not apply to the s. 85(1) rollover transaction since Mr. X's capital cost of the property ($200,000) would not be less than the otherwise determined proceeds of disposition ($50,000).

Mr. X's ACB of the land calculated in accordance with s. 54 and ITAR 26(3) would be $150,000.

On the subsequent disposition of the building by the corporation, ITAR 20(1.2) could cause ITAR 20(1) to apply because the building was acquired in an s. 85(1) rollover. The proceeds of disposition would be deemed by ITAR 20(1) to be the capital cost to the corporation of the property ($200,000) plus the excess of the proceeds of disposition otherwise determined ($350,000) over the FMV of the building on valuation day ($250,000). Thus, the corporation would be deemed to have received proceeds of disposition of $300,000 for the building, resulting in a capital gain of $100,000.

Such a disposition would also trigger recapture of depreciation in the amount of $150,000 ($200,000 - $50,000) and a capital gain of $100,000 in respect of the land ($250,000 - $150,000).

In a variation of this situation (Particular Situation #2), the immovable, rather than being transferred by Mr. X to the corporation, passes on his death to his son (at which time the FMV of the land and building are $250,000 and $350,000), and the son then disposes of it for its FMV of $600,000 to a corporation in consideration for a $600,000 note.

CCRA indicated that Mr. X's death would trigger a deemed disposition of the immovable for its FMV which, in the case of the building, would be $350,000.

ITAR 20(1) would deem the proceeds of disposition of the building to be Mr. X's capital cost of ($200,000) plus the excess of the proceeds of disposition otherwise determined ($350,000) over the building’s FMV on valuation day ($250,000), so that Mr. X would be deemed to have received proceeds of disposition of $300,000 for the building, resulting in a capital gain of $100,000.

Mr. X's death would also trigger recapture of depreciation in the amount of $150,000 ($200,000 - $50,000) and a capital gain of $100,000 in respect of the land ($250,000 - $150,000) since the ACB of the land, calculated in accordance with s. 54 and ITAR 26(3), would be $150,000.

Under s. 70(5)(b), Mr. X's son would be deemed to have acquired the building and land at the time of Mr. X's death for a total cost of $600,000, i.e. $350,000 for the building and $250,000 for the land. CCRA further stated:

Despite the reference to subsection 70(5) in subsection 20(1.2) of the ITAR, it appears to us that paragraph 20(1)(a) of the ITAR would not apply on a subsequent disposition of the building by Mr. X's son because the capital cost of the building to Mr. X's son ($350,000) would not be less than its FMV on valuation day ($250,000) and the proceeds of disposition ($350,000)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(5) the capital cost is not reduced by s. 85(5) for non-CCA/recapture purposes 858

Paragraph 20(1)(a)

Administrative Policy

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

Where a building purchased prior to 1972 had a capital cost of $75,000, $40,000 of capital cost allowance was deducted on the building prior to V-Day, and the V-Day value of the building was $120,000, the entire amount of such capital cost allowance previously claimed would be recaptured if the actual proceeds of disposition of the property exceeded its capital cost.

Paragraph 21(3)(a)


Tekarra Lodge Ltd. v. The Queen, 85 DTC 5227, [1985] 1 CTC 334 (FCTD)

S.21(3)(a) avoids a distinction between a "licence" and a "lease". A government lease for use of lands as a "bungalow camp" was found to be "substantially similar" (within the meaning of s. 21(3)(a)(iii)(B) to the preceding government licence for the use of the lands as a "bungalow camp".

Subsection 26(3)

Administrative Policy

26 June 2009 Internal T.I. 2009-0319501I7 F - Résidence reçue en héritage - PBR

ACB of property inherited before December 31, 1971 to be determined as of that date

The adjusted cost base of property inherited by the taxpayers prior to December 31, 1971 was to be determined based on its fair market value on such date in accordance with the median rule in ITAR 26(3).

16 March 1995 Internal T.I. 9429596 - PERSONAL USE PROPERTY

Where a taxpayer's cottage had a pre-1972 cost of $20,000, a V-day value of $50,000 and a current fair market value of $90,000, on a purely technical basis his ACB will be $50,000 even if in 1980 he made capital additions of $5,000. In order to resolve this inequity, RC will add to the median amount the cost of any post-1971 capital additions.

8 April 1991 T.I. (Tax Window, No. 3, p. 2, ¶1259)

Where an individual transfers his shares of an operating company having a V-day value between their cost and fair market value, and elects under s. 85(1) at an amount equal to their cost, his proceeds of disposition for purposes of ITAR 26(3) will be determined under s. 85(1)(a) only, without regard to paragraph 85(1)(c.1).

IT-84 "Capital Property Owned on December 31, 1971 - Median Rule (Tax-Free Zone)".

Subsection 26(5)

See Also

Davidson Estate v. The Queen, 96 DTC 1652, [1996] 3 CTC 2900 (TCC)

The estate of a deceased taxpayer (which was deemed by s. 248 to be a person) was found to be dealing at arm's length with the taxpayer's surviving wife with respect to a transfer of shares from the estate to her, given that two of the three executors were unrelated to the deceased taxpayer, and the estate had complete discretion as to whether it would sell the shares or transfer them to the wife in specie. Accordingly, ITAR 26(5) did not apply in computing the adjusted cost base of the shares to the wife's estate following her death.

Administrative Policy

8 November 1994 Internal T.I. 9426387 - TRANSFER OF PRE 1972 PROPERTY TO A TRUST

The words "or events" were added in ITAR 26(5) for greater certainty in order to confirm that the provision applied to bequests.

Subsection 26(7)


The Queen v. Adelman, 93 DTC 5376, [1993] 2 CTC 207 (FCTD)

The failure of the taxpayer to make a purported election under s. 26(7) resulted in the cost of his shares being determined without reference to that subsection.

Subsection 26(26)

Administrative Policy

S4-F5-C1 - Share for Share Exchange

1.18 In respect of shares which are rolled over under subsection 85.1(1), subsection 26(26) of the ITAR provides that where the exchanged shares were owned by the vendor on December 31, 1971 and thereafter without interruption until the time of the exchange, the shares of the purchaser are deemed to be those same shares owned on December 31, 1971. The tax-free zone is thereby preserved.

1.19 By virtue of subsection 26(28) of the ITAR, subsection 26(26) of the ITAR will apply to the exchanged shares even though there has been a previous application of any of subsections 26(5), (21), (24), (26) or (27) of the ITAR to those shares. …

Subsection 26(27)

Administrative Policy

ATR-22R (14 April 89)

S.26(27) does not apply to a change of common shares into special shares pursuant to a s. 86 reorganization of a pre-1972 company, where the shareholder had acquired its common shares after 1971.

Subsection 29(29)


The Queen v. Pan Ocean Oil Ltd., 94 DTC 6412, [1994] 2 CTC 143 (FCA)

The taxpayer made continual outlays on scientific research carried out by its personnel in order to identify improvements to its methods for processing ores. In accepting the taxpayer's position that these expenditures (which were deducted by it under s. 72 of the pre-1972 Act) were not deductible from its resource profits for purposes of the depletion allowance. After asserting that "if a patent is obtained the patent will represent a capital asset" (p. 5349), Cattanach J. went on to state that he was "unable to distinguish between an expenditure on scientific research which results in a patent and a similar expenditure which does not result in a patent but does result in the accumulation of a store of new knowledge upon which the appellant can draw and does draw to keep itself to the forefront of the particular trade in which it is engaged" (p. 5349).