(21.1)-(37)

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).

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 30^th day following the disposition…subsection 13(21.2) would simply not apply. However, if the partnership ceased to exist after the 30^th 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.

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)….

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.

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).

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.

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.

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.

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.

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.

Opco A held a building and subjacent land as nominee for Holdco 1 and Holdco 2, who had respective 33.33% and 66.67% co-ownership interests therein and who held the shares of Opco A in the same proportions. Two unrelated individuals (Mr. A and Mr. B) each owned 50% of the shares of Holdco 1, and another unrelated individual (Mr. C) wholly-owned Holdco 2.

Mrs. A and Mrs. B each held 25%, and Mrs. C held 50%, of the shares of Opco B. Opco A disposed of the property for proceeds equal to, in the case of the building, its FMV, which was lower than its undepreciated capital cost, and Holdco 1 and Holdco 2 also disposed of all of their shares of Opco A to Opco B for the shares’ nominal FMV. In finding that this transaction generated a terminal loss to Holdco 1 (unless s. 13(21.1) applied, and assuming that no corporation was subject to the de facto control of a person or group of persons), CCRA stated:

Ms. C, one of the members of the group of persons controlling Opco B, would not be affiliated with at least one member of the group of persons controlling Holdco 1 (i.e., Messrs. A and B).

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.

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.

"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'."

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.

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.

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.

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."

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).

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.

Is the long-term project election under s. 13(29 required to be filed only once? The Directorate concluded:

The Long-Term Project Election is required to be filed by a taxpayer only once, with its return for the taxation year that is referred to as the “particular year” in subsection 13(29), which would generally be the third taxation year of the project (assuming the taxpayer first acquired property that is part of the project in its first taxation year of the project).

In explaining, the Directorate stated:

Generally, the “particular year” will be the third taxation year of the project. The mid-amble of subsection 13(29) … clearly indicates that the taxpayer must file a single election with its return for the “particular year” … .

Once the Long-Term Project election has been filed with its return for the particular year, subsection 13(29) will apply in respect of the taxpayer’s “inclusion year” … [which g]enerally … will be the third and subsequent taxation years of the project where the taxpayer owns project property in that taxation year that has not yet otherwise become available for use. …

… The … current … Form T1031 suggests that the form must be filed annually. … Form T1031 is currently under review.

A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan.

Although, in fact, the acquisition occurred before 2017, the Rulings Directorate also addressed what would have happened on a post-2016 acquisition, and concluded that the amount allocated to the actuarial surplus would not have qualified as the cost of a Class 14.1 property, and instead would have been a non-deductible capital expenditure. As part of its reasoning in so concluding, it noted the specific inclusion in Class 14.1 of “goodwill.” It was not goodwill on general principles (applying the definition in TransAlta of “an unidentified intangible asset,” whereas the surplus here instead was specifically identifiable) and, furthermore, the surplus amount would also not be deemed goodwill under s. 13(35) because of failure of the condition in s. 13(35)(a) (it would represent the cost of a property, e.g., the right to apply actuarial surplus to contribution obligations under a defined benefit pension plan) and failure of the condition in s. 13(35)(c) (it was not otherwise deductible because of s. 18(1)(e) or 78(4)).

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.