Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues:
Calculation of capital gains and recaptured depreciation on the disposition of capital property and depreciable property owned by a taxpayer on December 31, 1971.
Position: General comments.
Reasons: Wording of the Act and of the ITAR.
2003-001706
XXXXXXXXXX Guy Goulet CA, M. Fisc.
(613) 957-9768
June 10, 2003
Dear Sir,
Subject: Request for a technical interpretation of section 85 of the Act
This is in response to your letter of May 5, 2003, in which you requested our opinion regarding the tax treatment of the disposition of real property in the particular situations described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation #1
1. Mr. X owns a rental property (the “immovable") which he acquired in 1965 at a cost of $300,000, i.e., $100,000 for the land and $200,000 for the building.
2. The fair market value ("FMV") of the immovable on the valuation day was $400,000, consisting of $150,000 for the land and $250,000 for the building.
3. The current FMV of the immovable is $600,000, consisting of $250,000 for the land and $350,000 for the building. In addition, the undepreciated capital cost ("UCC") of the building is $50,000 at the time of the transactions.
4. Mr. X proposes to transfer the immovable to a taxable Canadian corporation ("the corporation") with which he does not deal at arm's length on a tax-free basis through making an election pursuant to subsection 85(1) on the following basis:
| |
Land
|
Building
|
Total
|
|
FMV
|
$250,000
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$350,000
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$600,000
|
|
Cost amount
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$150,000
|
$50,000
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$200,000
|
|
Agreed amount
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$150,000
|
$50,000
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$200,000
|
|
Share consideration
|
|
|
$400,000
|
|
Note consideration
|
|
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$200,000
|
5. Mr. X did not make an election pursuant to subsection 26(7) of the Income Tax Application Rules ("ITAR").
Your Questions regarding Particular Situation #1
You are asking us to confirm that:
1. The transfer of the immovable by Mr. X to the corporation will have no tax consequences to Mr. X.
2. In the event that the corporation subsequently disposes of the immovable to an arm's length person at a price of $600,000, the tax consequences would be as follows:
For the land:
Proceeds of disposition $250,000
Adjusted cost base ("ACB") $150,000
Capital gain $100,000
For the building:
Capital cost $200,000
UCC $50,000
Recapture of depreciation $150,000
Deemed proceeds of disposition under the ITAR $300,000
ACB $200,000
Capital Gain $100,000
Particular Situation #2
Same situation as Situation #1 except that the previous paragraph 4 is replaced by the following and the following paragraph 6 is added:
4. In 2003, the immovable is transferred to Mr. X's son following the death of Mr. X.
6. Subsequently, while the FMV of the immovable is still $600,000, Mr. X's son disposes of the immovable to a taxable Canadian corporation in consideration for a note payable of $600,000.
Your Questions regarding Particular Situation #2
You asked us to confirm that:
1. The death of Mr X would have the following tax consequences:
For the land:
Proceeds of disposition $250,000
ACB $150,000
Capital gain $100,000
For the building:
Capital cost $200,000
UCC $50,000
Recapture of depreciation $150,000
Deemed proceeds of disposition under ITAR $300,000
ACB $200,000
Capital gain $100,000
2. The UCC in respect of the building to Mr. X's son immediately after the acquisition, following Mr. X's death, would be $350,000.
3. The transfer of the immovable by Mr. X's son to the corporation would have no tax consequences to him.
It appears to us that the situations described in your letter could be actual situations involving taxpayers. The Canada Customs and Revenue Agency ("CCRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. We can, however, offer the following general comments which may not be fully applicable in a particular situation.
Where a taxpayer disposes of capital property acquired before January 1, 1972 and owned continuously throughout the period from December 31, 1971 to the date of disposition, the transitional rules in sections 20 and 26 of the ITAR may apply.
Subsection 20(1) of the ITAR applies to the disposition of depreciable property and may apply where the capital cost to a taxpayer of the property is less than the FMV of the property on valuation day and less than the proceeds of disposition thereof otherwise determined. The term "proceeds of disposition thereof otherwise determined" means the proceeds of disposition of the property calculated under the Act. Where this rule applies, the taxpayer's proceeds of disposition from the depreciable property will be deemed to be an amount equal to the total of the taxpayer's capital cost of the property and the amount, if any, by which the proceeds of disposition otherwise determined exceed the FMV of the depreciable property on valuation day.
Subsection 26(3) of the ITAR contains rules for determining the ACB of capital property (other than depreciable property). Those rules should be read in conjunction with the definition of ACB in section 54.
Generally, the transitional rule in subsection 20(1) of the ITAR does not apply to a subsequent owner, i.e. a person who acquired the property after December 31, 1971. However, subsection 20(1.2) of the ITAR ensures that subsection 20(1) of the ITAR may apply to a subsequent owner where, pursuant to a transaction to which inter alia subsection 70(5) or 85(1) applies, the subsequent owner has, at a particular time after 1971, acquired depreciable property from a person who had acquired the property before 1972 and had owned it without interruption from December 31, 1971 until the particular time.
Particular Situation #1
Mr. X's otherwise determined proceeds of disposition of the building on transfer to the corporation would, under paragraph 85(1)(a), be the agreed-upon amount of $50,000. Consequently, subsection 20(1) of the ITAR would not apply to Mr. X's disposition of the building to the corporation because Mr. X's capital cost of the property ($200,000) would not be less than the otherwise determined proceeds of disposition ($50,000).
Subsection 85(5) would deem the capital cost to the corporation of the building, for the purposes of sections 13 and 20 and the regulations made for the purposes of paragraph 20(1)(a), to be equal to Mr. X's capital cost ($200,000) and the amount by which that cost exceeded the proceeds of disposition ($50,000) would be deemed to be an amount deducted by the corporation pursuant to paragraph 20(1)(a) in respect of the building in computing its income for taxation years ending before the disposition. On the other hand, the capital cost to the corporation of the building for the purposes of all other provisions of the Act would, in accordance with our position in paragraph 10(a) of Interpretation Bulletin IT-217R Depreciable Property Owned on December 31, 1971, be considered to be Mr. X's capital cost of $200,000.
Mr. X's ACB of the land calculated in accordance with section 54 and subsection 26(3) of the ITAR would be $150,000.
It therefore appears to us that Mr. X's sale of the immovable to the corporation could be tax-free if a subsection 85(1) election were made as described.
On a subsequent disposition of the building by the corporation, subsection 20(1.2) of the ITAR could cause subsection 20(1) of the ITAR to apply to the corporation because the building would have been acquired by the corporation in a transaction to which subsection 85(1) applied. If such a sale occurred at a price of $350,000, the proceeds of disposition would be deemed by subsection 20(1) of the ITAR to be an amount equal to the total of the capital cost to the corporation of the property ($200,000) and the amount, if any, by which the proceeds of disposition otherwise determined ($350,000) exceeded 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).
Particular Situation #2
Mr. X's death would trigger a deemed disposition of the immovable for proceeds of disposition equal to its FMV immediately before his death pursuant to subsection 70(5). The proceeds of disposition of the building, as otherwise determined, that Mr. X would be deemed to have received immediately before his death pursuant to paragraph 70(5)(a) would be $350,000, being its FMV.
Subsection 20(1) of the ITAR would apply to deem the proceeds of disposition of the building to be an amount equal to the total of Mr. X's capital cost of the property ($200,000) and the amount, if any, by which the proceeds of disposition otherwise determined ($350,000) exceeded the FMV of the building on valuation day ($250,000). Thus, 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 section 54 and subsection 26(3) of the ITAR, would be $150,000.
Under paragraph 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.
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)
In closing, please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R4 of January 29, 2001, it is not binding on the CCRA with respect to any particular factual situation.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Industrial Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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