ARCHIVED - Capital Cost Allowance - Partial Dispositions of Property
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ARCHIVED - Capital Cost Allowance - Partial Dispositions of Property
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NO: IT-418
DATE: June 26, 1978
SUBJECT: INCOME TAX ACT
Capital Cost Allowance - Partial Dispositions of Property
REFERENCE: Subsection 13(21) (also section 43 subsection 13(1) and subparagraph 54(a)(i))
1. Section 43 of the Act provides that, for the purpose of computing the gain or loss from the disposition of part of a property, the adjusted cost base (ACB) of the whole property immediately prior to the disposition must be apportioned on a reasonable basis between the part disposed of and the part retained. A disposition of part of a property may refer either to the disposition of a physical part of the property or to the disposition of an undivided interest therein. Where the property is depreciable property, subparagraph 54(a)(i) defines the adjusted cost base to mean the capital cost of the property but makes no provision for adjustments thereto under section 53. Subsection 248(1) indicates that the definition in subparagraph 54(a)(i) applies for all purposes of the Act. The determination of capital cost in various circumstances is explained in IT-174 "Capital Cost Allowance - Meaning of "Capital Cost of Property"'.
2. Where a taxpayer disposes of only part of a depreciable property of a prescribed class (other than a timber resource property as defined in paragraph 13(21)(d.1)), the capital cost of the part disposed of must be determined for the purpose of clause 13(21)(f)(iv)(B), in order to determine the amount of any recaptured depreciation under subsection 13(1) and the undepreciated capital cost of the property remaining in the class under paragraph 13(21)(f). To accomplish this, it is the Department's view that the apportionment rule in section 43 should be used. However, no reduction of the capital cost referred to in subparagraph 13(21)(f)(i) will be required as a result of a partial disposition, since that paragraph refers to the capital cost of all depreciable property in a prescribed class that has been acquired before the time the undepreciated capital cost is calculated. This would include property that has previously been disposed of in whole or in part.
3. The following illustrates the application of the principles in 2 above in a situation where the taxpayer disposes of a physical part of a depreciable property (other than a timber resource property) and the capital cost of the part disposed of and of the part retained is ascertainable with accuracy.
Example:
Assume a taxpayer with a fiscal period ending May 31, has a depreciable property which is the sole property of its class. The capital cost allowance schedule as of May 31, 1977, shows:
| Capital cost of property in the class, acquired after December 31, 1971 | $15,000 |
| less: Total depreciation allowed | ($10,000) |
| Undepreciated capital cost of the class (a) On June 1, 1977, the taxpayer sells one-half of the property for $17,000. The capital cost of the part disposed of is known to be 50% of the capital cost of the whole property immediately before the sale. | $ 5,000 |
The capital gain on the date of sale and the undepreciated capital cost as well as any recaptured depreciation at the year end would be calculated as follows:
| (i) Calculation of Capital Gain | ||
| Proceeds of disposition, June 1, 1977 | $17,000 | |
| less: Capital cost of part sold immediately before disposition (Section 43) | $ 7,500 | |
| Selling expenses | 1,000 | $ 8,500 |
| Capital gain (paragraph 39(1)(a)) | $ 8,500 | |
| (ii) Calculation of recaptured depreciation and U.C.C. as at May 31, 1978 | ||
| Capital cost of all property in class (13(21)(f)(i)) | $15,000 | |
| Recaptured depreciation in previous taxation years (13(21)(f)(ii)) | NIL | |
| $15,000 | ||
| less: Total depreciation allowed prior to year end (13(21)(f)(iii) | $10,000 | |
| Proceeds of all dispositions prior to year end ($17,000 - $1,000) | $16,000 | |
| Capital cost of part of property sold (Section 43) | $ 7,500 | |
| The lesser of the two (13(21)(f)(iv)) | $ 7,500 | $17,500 |
| Recaptured depreciation (13(1)) | ($2,500) | |
| U.C.C. of class (13(21)(f)) | NIL | |
(b) On July 1, 1978, the taxpayer sells the remaining one-half of the property for $18,000. The capital cost of the remaining part, per (a) above, is 50% of the capital cost of the whole property.
The capital gain on the date of sale and the undepreciated capital cost as well as any recaptured depreciation at the year end would be calculated as follows:
| (i) Calculation of Capital Gain | ||
| Proceeds of disposition, June 1, 1978 | $18,000 | |
| less: Capital cost of part sold immediately before disposition (Section 43) | $ 7,500 | |
| Selling expenses | $ 1,200 | $ 8,700 |
| Capital gain (paragraph 39(1)(a)) | $ 9,300 | |
| (ii) Calculation of recaptured depreciation and U.C.C. as at May 31, 1979 | ||
| Capital cost of all property in class (13(21)(f)(i)) | $15,000 | |
| Recaptured depreciation in previous taxation years (13(21)(f)(ii)) | $ 2,500 | |
| $17,500 | ||
| less: Total depreciation allowed prior to year end (13(21)(f)(iii) | $10,000 | |
| Proceeds of all dispositions prior to year end ($35,000 less total of selling expenses ($2,200) | $32,800 | |
| Capital cost of both parts sold (Section 43) | $15,000 | |
| The lesser of the two (13(21)(f)(iv)) | $15,000 | $25,000 |
| Recaptured depreciation (13(1)) | $(7,500) | |
| U.C.C. of class (13(21)(f)) | NIL | |
4. In the following paragraphs, the application of the principles in 2 above is considered for situations where the taxpayer disposes of part of a depreciable property (other than a timber resource property) and the capital cost of the part disposed of cannot be ascertained with accuracy. Where this is so, section 43 merely requires that the attribution of a portion of the capital cost of the whole property to the part sold must be reasonable.
5. Where the value of different parts of the same property can be ascertained, one method that could be used to determine the capital cost of the part sold is to take that proportion of the capital cost of the whole property that the amount or value of the consideration for the part disposed of (before the deduction of selling expenses) is of the amount above plus the fair market value at the date of disposition of the part retained.
Example:
A taxpayer disposed of a part of a depreciable property acquired after December 31, 1971, for $18,000. The capital cost of the whole property immediately before the disposition was $42,000. A valuation was made of the part of the property retained on the date of disposition of the other part. The part retained was valued at $66,000. Accordingly, the capital cost of the part disposed of for purposes of clause 13(21)(f)(iv)(B) was $9,000, calculated as follows:
| $18,000 ÷ ($18,000 + $66,000) × $42,000 = $9,000 |
6. The formula outlined in the preceding paragraph for the pro rata apportionment of the capital cost of a depreciable property would not be reasonable in all circumstances. Where, for instance, the value of different parts of the same property cannot be ascertained, it will be a question of fact as to what is a reasonable allocation of the capital cost of the whole property to the part disposed of and the part retained. Further, where the taxpayer, before the disposition, had incurred an expenditure that was wholly attributable to one specific part of the property, it would be unreasonable to make the pro rata apportionment on the disposition of part of the property, without first excluding the amount of that expenditure from the capital cost. Having made the apportionment, the amount of the expenditure would then be added back to the capital cost of the part disposed of or retained, as the case may be.
Timber Resource Properties
7. Where a taxpayer disposes of only a part of a timber resource property (as defined in paragraph 13(21)(d.1)), it will not be necessary to apply the apportionment rule of section 43. Any gain within the meaning of paragraph 40(1)(a) which may arise from such a disposition is not a capital gain by reason of subparagraph 39(1)(a)(iv), but is subject to recapture under subsection 13(1) by virtue of subparagraph 13(21)(f)(v).
8. Subparagraph 13(21)(F)(v) requires the amount of the proceeds, less selling expenses, of each disposition of a timber resource property or part thereof to be deducted from the capital cost of the property in the class. It follows that any negative balance in the class resulting from the calculation under paragraph 13(21)(f) will be included in the taxpayer's income for the year pursuant to subsection 13(1).
- Date modified:
- 2002-09-06