Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
An individual who has made an election pursuant to 110.6(19) with respect to a depreciable property, transfers the property to a corporation and makes an election under section 85. What is the capital cost of the property for the corporation and the ACB of the shares received by the individual?
Position:
Corporation lose the bump-up of capital cost of property. ACB of shares is the agreed amount.
Reasons:
85(1), 85(5), 13(7), 39(1)(a)
5-963642
XXXXXXXXXX Robert Gagnon
Attention: XXXXXXXXXX
August 7, 1997
Dear Sir:
Re: Interaction Between Paragraph 13(7)(e), Section 85 and Subsection 110.6(19) of the Act
This is in reply to your letter of October 30, 1996 wherein you requested our opinion concerning the determination of the capital cost of depreciable property for purposes of calculating the capital gain. You describe the following situation.
An individual ("Mr. X") has made an election pursuant to subsection 110.6(19) of the Act with respect to a building that is a depreciable property and a non-qualifying property (as defined in subsection 110.6(1) of the Act). The capital cost of the building prior to the application of subsections 110.6(19) and 110.6(21) of the Income Tax Act ("Act") is $10. The undepreciated capital cost is $7. The deemed capital cost of the building pursuant to subsections 110.6(19) and 110.6(21) of the Act is $13.
Mr. X transfers the building to a corporation in exchange for common shares of the corporation and makes an election under subsection 85(1) of the Act. The agreed amount is $7 in order to avoid any recapture of depreciation.
Questions raised
You ask whether the capital cost of $13, that would be used for purposes of calculating the capital gain on a disposition of the building by Mr. X, becomes the capital cost of the building for the corporation for purposes of calculating the capital gain on a disposition of the property by the corporation? You also ask whether the adjusted cost base of the common shares received by Mr. X is increased from $7 to $10?
Where an individual transfers a depreciable property to a corporation in exchange for common shares of the corporation and the individual makes the election under subsection 85(1) of the Act, the cost of the shares pursuant to paragraph 85(1)(h) of the Act is equal to the agreed amount in respect of the depreciable property. Where a taxpayer has made an election under subsection 110.6(19) of the Act in respect of a depreciable property that is a non-qualifying property (as defined in subsection 110.6(1) of the Act), the increase of the capital cost of the property that results from subsection 110.6(19) and 110.6(21) of the Act is not transferred to the shares, unless the agreed amount under subsection 85(1) of the Act is equal to the capital cost of the property as determined under 110.6(21) of the Act. However, the taxpayer could have a recapture of depreciation.
In the situation described above, the cost of the common shares pursuant to paragraph 85(1)(h) of the Act is $7. The cost of the common shares would be $13 if the agreed amount were $13, but the taxpayer would have a recapture of depreciation of $3.
Where a taxpayer, who has elected under subsection 110.6(19) of the Act in respect of a depreciable property that is a non-qualifying property, transfers the property to a corporation and makes the election under subsection 85(1) of the Act at an agreed amount equal to the undepreciated capital cost of the property, the capital cost of the depreciable property to the corporation is equal to the agreed amount for the purposes of subdivision c of the Act and the amount determined under subsection 85(5) of the Act for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a) of the Act.
The capital cost to the transferor of the depreciable property is the deemed capital cost under subsections 110.6(19) and (21) of the Act. Where the agreed amount under 85(1) of the Act is equal to the undepreciated capital cost of the depreciable property and the capital cost to the transferor (as determined under 110.6(19) and 110.6(21)) exceeds the transferor's proceeds of disposition (agreed amount), paragraph 85(5)(a) will apply such that the capital cost of the depreciable property to the corporation will be deemed to be, for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a) of the Act, the capital cost of the property to the transferor. Paragraph 13(7)(e) of the Act would not apply to modify the capital cost of the depreciable property to the corporation since the cost of the property to the corporation ($7) would not exceed the capital cost to the transferor. Moreover, as you pointed out, this provision does not apply for capital gain purposes.
In the situation described above, the capital cost of the depreciable property to the corporation is $13 pursuant to subsection 85(5) of the Act for the purposes of calculating the recapture of depreciation when the property is sold. This is an anomaly because the corporation could be taxable on a recapture of depreciation of $6 even though Mr. X has claimed only $3 of depreciation. We have forwarded this issue to the attention of the Department of Finance for their consideration. The capital cost and adjusted cost base for the purposes of calculating the capital gain on a disposition of the building by the corporation is $7. However, the amount of any capital gain from the disposition of the depreciable property does not include pursuant to paragraph 39(1)(a) of the Act, the amount of any recapture of depreciation included in the income of the corporation.
The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R3 dated December 30, 1997, is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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