Subsection 13(1) - Recaptured depreciation
Administrative Policy
29 July 2015 Memorandum 2015-0575921I7 - Recapture arising in statute-barred years
A taxpayer added the cost of property acquired to a particular Schedule II class, and then claimed CCA on the property for numerous years including ones which now are statute-barred. CRA has now determined that such property was not depreciable property.
IT-478R2, para. 14 states:
If the revision to the property's capital cost causes the UCC decreases to exceed the UCC increases as of the end of a year now statute-barred, the recapture of that excess amount under subsection 13(1) will not be added into the taxpayer's income for that year or a subsequent year.
Is this correct? The Directorate responded:
…[T]he meaning of the word "allowed"…includes the amount of CCA claimed by the taxpayer and allowed as a deduction under paragraph 20(1)(a) for a taxation year that is statute-barred (even though such CCA deductions were unwarranted or otherwise made in error and can no longer be revised). …
If the total of all the decreases exceeds the total of all the increases to the UCC of a class as of the end of a taxation year, subsection 13(1) provides that this excess shall be included in computing the taxpayer's income for the year. The recapture of CCA that was included in the taxpayer's income then becomes a positive component in the calculation of the UCC of the particular class under element "B" in a subsequent taxation year. Unlike element "E", element "B" does not include any amount of recapture that should have been previously included in the taxpayer's income in a previous (including statute-barred) taxation year, but was not, in fact, included in income.
…[T]he CRA will not add an amount of recapture that otherwise should have been included in the taxpayer's income for a prior taxation year to a year that is beyond the normal reassessment period… . However,…where element "A" has been revised in the first non-statute-barred taxation year, such that there is an excess of UCC decreases over increases at the end of that year, an income inclusion under subsection 13(1) is necessary in order to resolve the negative UCC balance.
Accordingly…the CRA could (re)assess the particular taxpayer to include the appropriate amount of recapture in the taxpayer's income at the end of the first non-statute-barred taxation year in order to resolve the negative UCC balance. …[O]ur positions on the issues discussed in this letter will be updated…in new Income Tax Folio S3-F4-C1…due to replace IT-478R2 in the near future. …[V]iews expressed in this letter [which] represent a change in position…will apply on a prospective basis to property acquired or transactions entered into after December 31, 2015.
Subsection 13(4) - Exchanges of property
Cases
Posno v. The Queen, 89 DTC 5423 (FCTD)
An airplane was found to be a replacement property for a previous airplane of the plaintiff, notwithstanding "no evidence that the plaintiff ever elected in his return for the year." [C.R: 44(1)]
The Queen v. G.T.E. Sylvania Canada Ltd., 74 DTC 6673, [1974] CTC 751 (FCA)
A reduction in the taxpayer's Quebec income tax that was effected by an amendment to the provincial legislation did not result in the taxpayer having "received ... other assistance" for purposes of s. 20(6)(h) of the pre-1972 Act. "[T]he respondent literally received nothing."
Administrative Policy
84 C.R. - Q.85
The amendment, effective February 2, 1978, which specifically reduced the capital cost by investment tax credits, was enacted only for greater certainty.
80 C.R. - Q.44
Where a grant in respect of depreciable property to be acquired over a number of years is greater than the first costs incurred, the excess grant will reduce the first additional costs incurred after that year.
Subsection 13(4.1) - Replacement for a former property
Administrative Policy
1996 Tax Executives Institute Round Table, Q. XIV (No. 5 - 963910)
Where a taxpayer had already decided to expand its packaging operation by acquiring a second packaging machine when the existing machine was partially destroyed by fire, the requirements of s. 13(4.1)(a) would not have been met.
1 February 1990 T.I. (July 1990 Access Letter, ¶1321)
Where a taxpayer in the business of operating rest homes sold the rest homes and bought a hotel, the operation of the hotel generally would not be considered to be a similar business.
Subsection 13(5) - Reclassification of property
Administrative Policy
30 June 2000 T.I. 1999-001394 -
Where a taxpayer owns buildings that are used in an active business and subsequently leases one of those buildings, that building will be transferred to a separate class with the eventual sale proceeds being credited to that class.
10 April 1997 T.I. 970422
A building was transferred to a company in a non-arm's length transaction (so that Regulation 1102(14)(d) applied) and the company thereupon commenced to use the building for rental purposes. At the time the building commenced to be used for rental purposes it would be reclassified into a separate prescribed class in accordance with Regulation 1101(1ac) and s. 13(5) of the Act.
15 August 1990 T.I. 900372
Company A uses several buildings in an operating business, then later incorporates a subsidiary, transfers its real estate to the subsidiary on a rollover basis and the subsidiary leases the properties back to Company A. In these circumstances, s. 13(5) would apply to reclassify the properties from one class 3 pool to separate classes upon their commencement for use as rental properties.
Subsection 13(5.1) - Rules applicable
Administrative Policy
2 December 2014 Folio S4-F7-C1
1.35 Where one predecessor corporation has a leasehold interest in a property owned by a second predecessor corporation, the application of section 87 to the amalgamation will only be accepted where subsection 13(5.1) is applied concurrently as if the new corporation is the same corporation as, and a continuation of, the first mentioned predecessor corporation. In this way, the UCC of the leasehold interest is carried over to the new corporation. If and to the extent the Regulations permit, the new corporation may claim capital cost allowance in respect of the leasehold interest. The predecessor corporation may not claim a terminal loss in respect of the leasehold interest and the capital cost allowance claimed by it becomes subject to the recapture rules in the hands of the new corporation.
3 May 2000 T.I. 993323
"Subsection 13(5.1) of the Act does not require that the leasehold interest must have been included in Class 13 of Schedule II of the Regulations at the time of the acquisition."
IT-464R "Capital Cost Allowance - Leasehold Interest"
29 January 1997 T.I. 964013
Where the taxpayer had a leasehold interest in land and acquired the land, s. 13(5.1)(b) would deem the property to be depreciable property of a prescribed class. However, as there is no class in Schedule II which land came within, no claim for capital cost allowance could be made, although the land would be subject to the recapture and terminal loss provisions of the Act.
30 August 1989 T.I. AC 58003
The capital cost of a property to a taxpayer for purposes of s. 13(5.1)(b) is the capital cost after taking into account subsection 13(5.2). Accordingly, ss.13(5.1)(b) and 13(5.2)(a) do not conflict.
Subsection 13(5.2) - Deemed cost and depreciation
Administrative Policy
IT-233R "Lease-Option Agreements; Sale-Leaseback Agreements"
General discussion.
Subsection 13(5.4) - Idem [Deemed recapture]
Articles
Atlas, "Income Tax Issues in Real Estate Leasing", 1989 Corporate Management Tax Conference, p. 3:18
S.13(5.4) will only rarely apply.
Subsection 13(6) - Misclassified property
Administrative Policy
IT-190R2 "Capital Cost Allowance - Transferred and Misclassified Property".
21 November 1991 T.I. (Tax Window, No. 13, p. 5, ¶1604)
Where a taxpayer has a property which would have been in Class 34 but for the revocation of a certificate from the Ministry of Energy, Mines and Resources, and the taxpayer has claimed and been allowed capital cost allowance in the incorrect class, a direction may be made under s. 13(6) to deem the property to have been transferred to the correct class in respect of the first year which is not statute-barred.
Subsection 13(7) - Rules applicable
Paragraph 13(7)(a)
Cases
CAE Inc. v. The Queen, 2013 DTC 5084 [at 5944], 2013 FCA 92
The taxpayer, which leased flight simulators which it had manufactured, subsequently sold those simulators. The Minister denied capital cost allowance claims of the taxpayer made prior to the sales on the grounds that the simulators were inventory.
Noël JA found that as ss. 45(1)(a) and 13(7)(a) applied to conversions of capital property (including depreciable property) from income-producing use into use as inventory (as well as to conversions into personal use), the claiming of capital cost allowance in the initial years was not inconsistent with a subsequent sale of the simulators on income account. (However, two of the simulators nonetheless were inventory in the years they were being leased by the taxpayer as two airlines had options to purchase them.)
Administrative Policy
22 June 2015 Memorandum 2014-0553731I7 - Deduction of Terminal Loss - Wind-up
On the winding-up of Subco into Parentco (which had held only investments) under s. 88(1), Parentco received the "Property," which had been depreciable property owned by Subco and used in its business. Parentco did not acquire the Property for the purpose of earning income and never received income from the Property, and it was held idle for XX years before being disposed of to an arm's-length purchaser for proceeds of disposition less than its UCC.
CRA first concluded that the property retained its character as depreciable property in the hands of the parent. In then concluding that the terminal loss was not realized until the year of the sale, CRA stated:
The CRA has determined in past documents (see for example IT-478R, 9700547 and 2002-0143645) that paragraph 13(7)(a) does not apply if property remains idle since this does not constitute a "use for some other purpose". As a result…there is no deemed disposition of the Property immediately after the Wind-up… .
See summaries under Reg. 1102(14) and s. 20(1).
26 November 2013 Annual CTF Roundtable Q. , 2013-0493811C6
Respecting the statements in C.A.E. that the change of use rules apply to the conversion of inventory to depreciable property or vice versa, CRA stated that it did not agree. Among other concerns:
[I]t would be challenging for both taxpayers and the CRA to apply the change in use rules in the manner outlined by the FCA. Reporting requirements and potential tax liability for every change from inventory to (income-earning) capital use, and vice versa, could represent a significant compliance and administrative burden. …
[T]he CRA will not be changing its general position on the change in use rules as currently presented in Interpretation Bulletins IT-102R2 and IT-218R.
IT102R2 "Conversion of property, other than real property, from or to inventory" 22July 1985
8. Where capital property is converted to inventory, the action of conversion does not constitute a disposition within the meaning of paragraphs 13(21)(c) and 54(c). It is, however, recognized that the ultimate disposition of a property that was so converted may give rise to a gain or loss on capital account, a gain or loss on income account or a gain or loss that is partly capital and partly income. Accordingly, with respect to capital property that has been converted to inventory, taxpayers may calculate capital gains or losses, if any, on the basis that a notional disposition of such property occurred on the date of conversion.
IT-218R "Profit, Capital Gains and Losses from the Sale of Real Estate, including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa".
10....where real estate is converted from capital property to inventory...for real estate that is used for the purpose of gaining or producing income from a business or property, its conversion to inventory will not constitute a change in use...and the proceeds from its ultimate sale will be treated in accordance with 15 below....
12. Vacant land that is capital property used by its owner for the purpose of gaining or producing income will be considered to have been converted to inventory at the earlier of
(a) the time when the owner commences or causes the commencement of improvements thereto with a view to selling it, and
(b) the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale, provided that the taxpayer proceeds with the development of the subdivision.
Paragraph 13(7)(b)
Administrative Policy
29 June 1995 Memorandum 7-951102 -
S.13(7)(a) or (b) does not apply where a motor vehicle acquired for the purpose of producing income from employment, begins to be used for the purpose of producing business income. "However, paragraph 13(7)(d) of the Act may apply if there is a change in the proportion of the use of the motor vehicle for business purposes relative to its use to earn employment income."
Paragraph 13(7)(c)
Administrative Policy
3 March 2015 Memorandum 2014-0527841I7 F - Avantage imposable pour aéronef
In a situation where there was personal use of a corporate aircraft by the individual shareholder (Mr. A) of the "grandfather" (indirect parent) of the corporate owner of the aircraft and by Mr. A's father, CRA indicated that in accordance with ss. 13(7)(c) and (d), the capital cost of the aircraft was required to be annually apportioned between business and personal use.
See summary under s. 246(1).
September 1991 Memorandum (Tax Window, No. 9, p. 22, ¶1456)
Where there is personal use by a partner of capital property of the partnership, the partnership's entitlement to CCA in respect of the property, and to the deduction of operating costs, is limited to the portion of the capital cost of the property used in the partnership business.
Paragraph 13(7)(e)
Administrative Policy
25 September 1996 T.I. 5-962794
Where a taxpayer designated $12,000 in a s. 110.6(19) election in respect of a property that she had acquired at a cost of $10,000 and had never claimed capital cost allowance, a subsequent sale of the property for $11,000 would not result in a terminal loss.
23 May 1996 T.I. 5-960465 -
Where there is a deemed dispostion and reacquisition of property under s. 149(10), the corporation in question will not be considered to be related to itself, and it will be a question of fact whether that person is not dealing with itself at arm's length for the purposes of various provisions including s. 13(7)(e) - unless a provision such as s. 13(7)(e.1) specifically provides that the transaction is not an arm's length one.
24 June 1994 T.I. 932568 (C.T.O. "Transfer of Property to a Partner")
Because of the references in the opening of ss.13(7)(e) and 14(3) to "notwithstanding any other provision of this Act", those provisions will apply in non-arm's length situations to effectively restrict the "bump" for depreciable or eligible capital property under s. 98(5)(d).
24 July 1991 T.I. (Tax Window, No. 8, p. 18, ¶1430)
Where the aggregate of all gains realized by an individual on the transfer of various capital properties exceeds the capital gains exemption claimed under s. 110.6, the individual may designate for purposes of s. 13(7)(e)(i) the assets to which the exemption applies.
29 December 1989 T.I. (May 1990 Access Letter, ¶1223)
Where depreciable property is transferred from the partnership to Opco, the depreciables would not be considered to be transferred from the individual partners some of whom were at arm's length and some of whom were not at arm's length. Instead, all the depreciables would be treated as being transferred in either an arm's length transaction or a non-arm's length transaction.
Subsection 13(7.1) - Deemed capital cost of certain property
Cases
Prince Albert Pulp Co. Ltd. v. The Queen, 92 DTC 6189 (FCA)
In finding that the reduction of capital cost pursuant to s. 13(7.1) occurs in the year in respect of which the investment tax credit was utilized, rather than the subsequent year in which the return was filed claiming that credit, Hugessen J.A. stated (p. 6190):
"On their ordinary meaning the words 'has deducted' and 'deducted' in subsection 13(7.1) refer to operations effected in respect of the taxation year to which those deductions were applied, notwithstanding that the actual mathematical operations themselves may have taken place at a subsequent time."
Canadian Pacific Ltd. v. The Queen, 88 DTC 6265, [1988] 1 CTC 429 (FCA)
S.36 does not preclude the application of s. 13(7.1). The capital cost of expenditures that were deemed to be additions to classes of depreciable property by s. 36 were reduced by the amount of government assistance received.
The Queen v. AEL Microtel Ltd., 86 DTC 6348, [1986] 2 CTC 108 (FCA)
Although development incentives paid pursuant to the Regional Development Incentives Act (Canada) (the "RDIA") for the acquisition of manufacturing facilities were based on the number of jobs created as well as on the approved capital cost of the new facility, the full amount of the incentives were paid "in respect of" the acquisition by the taxpayer of the facilities. Under the RDIA, "there are no separate criteria for the payment of development incentives directly referable to job creation."
Consumers' Gas Co. Ltd. v. The Queen, 86 DTC 6132, [1986] 1 CTC 380 (FCTD), aff'd 87 DTC 5008, [1987] 1 CTC 79 (FCA)
Reimbursements received by the taxpayer from governmental authorities for relocating its pipelines at their request did not constitute "assistance" because it was never reimbursed for more than the costs which it incurred.
The Queen v. British Columbia Forest Products Ltd., 85 DTC 5577, [1986] 1CTC 1 (FCA)
"Parliament has expressly contemplated that a taxpayer may 'receive' assistance from a government in the form of a 'deduction from tax.'" The taxpayer's capital cost of depreciable properly accordingly was reduced by investment tax credits. (Pre-1978 version of s. 13(7.1)).
Consumers' Gas Company Ltd. v. The Queen, 82 DTC 6300, [1982] CTC 339 (FCTD), aff'd , 84 DTC 6058, [1984] CTC 83 (FCA)
Amounts received from government (and private) sources to compensate in whole or in part for the cost of relocating pipelines were not a "grant, subsidy or other assistance" within the meaning of former s. 13(7)(e).
Fonthill Lumber Ltd. v. The Queen, 81 DTC 5333, [1981] CTC 406 (FCTD)
The amount of a government forgivable loan is deducted from the capital cost at the time that the conditions for forgiving the loan are met, not at the time that the funds were advanced. (s.13(7)(e))
Ottawa Valley Power Co. v. MNR, 69 DTC 5166, [1969] CTC 242 (Ex Ct), aff'd 70 DTC 6223, [1970] CTC 305, [1970] S.C.R. 941
S.20(6)(h) of the pre-1972 Act did not apply where Ontario Hydro, at its own cost, expended approximately $1.9 million to convert the facilities of the taxpayer for the supply of 60 cycle power rather than 25 cycle power, given that the rule had no application to a case where a public authority actually granted to a taxpayer capital property for use in its business at no cost to him and given that the rule could have no application to "ordinary business arrangements between a public authority and a taxpayer in a situation where the public authority carries on a business and has transactions with a member of the public in the same kind as the transactions that any other person engaged in such a business would have with such a member of the public" (p. 5171).
Administrative Policy
31 January 2013 Memorandum 2012-0466641I7 F - Réduction du coût en capital d'un bien
The entitlement to the Quebec investment tax credit does not arise until the very end of the taxation year in which the eligible expenditures were incurred. After referring to the stipulation therein that the reduction under s. 13(7.1)(f) occurs for assistance to which the taxpayer is entitled before the particular time, CRA concluded (TaxInterpretations translation):
Consequently, the reduction in capital cost of property must occur in the course of the taxation year following that in the course of which a taxpayer incurred eligible expenditures respecting the Quebec ITC....
12 October 1992 T.I. 5-922359 -
S. "13(7.1) of the Act does not apply in general in respect of business arrangements between a public authority and a taxpayer where the public authority carries on a business and enters into transactions with a taxpayer of the same kind as the transactions that any other person engaged in such a business would have for business reasons."
19 September 1990 Memorandum 902190
A government loan which is unconditionally repayable would not constitute government assistance for purposes of s. 13(7.1). However, where a repayment was conditional upon achieving a projected sales level, the loan would not be considered to be unconditionally repayable.
Subsection 13(7.4) - Deemed capital cost
See Also
GMAC Leaseco Corporation v. The Queen, 2015 TCC 146
GMAC received "support payments" from GMC in order to inflate the residual values stated in its leases of cars to GMC customers, thereby reducing the lease payments but resulting in a likely loss on lease termination. GMAC was obligated to pay GMC to the extent that the net amount of such losses was less than the support payments previously received.
Graham J found that the support payments were not earned until lease termination (when the repayment obligation could be quantified. GMAC argued that because the support payments were not earned when received, the exclusion in s. 12(1)(x)(v) for income receipts did not apply, so that s. 13(7.4) election to exclude those amounts from income, and apply them instead to the UCC of its Class 10 assets, had been validly made. Graham J found (at para. 40) that for the same reason that a support payment was unearned (i.e., there was "no legal right to keep the amount,") it also was not received for s. 12(1)(x) purposes. He also questioned (in f.n. 10) whether the s. 13(7.4) elections would have been available in any event because the "support payments were received to replace lost income rather than in respect of the cost of the vehicles."
See summaries under s. 9 – timing, s. 12(1)(x), s. 9 – compensation payments, and s. 9 – computation of profit.
Administrative Policy
4 May 1992 Tax Executive's Roundtable, Question 11 (December 1992 Access Letter, p. 48)
RC does not insist on any particular format for the election, but requires some positive indication that the election has been made.
27 February 1991 Memorandum (Tax Window, Prelim. No. 3, p. 25, ¶1131; July 1991 Access Letter)
If an inducement payment can be used at the sole discretion of the taxpayer to reduce the cost of current capital expenditures, the amount will be included in the taxpayer's income under s. 12(1)(x) and no election will be permitted under s. 13(7.4).
IT-273R2, "Government Assistance - General Comments," para. 12
the election should be made by means of a signed letter accompanying the applicable tax return.
Subsection 13(7.5) - Deemed capital cost
Paragraph 13(7.5)(b)
Administrative Policy
27 March 2014 T.I. 2014-0520941E5 F - Industrial mineral mine and related expenditures
The costs of a temporary access road to a quarry would not be considered to be in respect of a "specified temporary access road" as defined in Reg. 1104(2), and would qualify under Class 17. If it did not otherwise qualify as depreciable property on the basis of being constructed on leased land, it would be deemed to be depreciable property under s. 13(7.5)(b) as it would be prescribed property under Reg. 1102(14.3).
25 January 2012 T.I. 2011-0426921E5 -
general summary of s. 13(7.5)(b) without specific guidance given.
Subsection 13(9)
Administrative Policy
16 September 2011 T.I. 2010-038357 -
where depreciable equipment used in the Canadian branch of a US corporation is moved to its US head office, s. 13(9) will apply to cause s. 13(7)(a) to deem the equipment to be disposed of and reacquired at FMV.
Subsection 13(16) - Election concerning vessel
Administrative Policy
16 August 1995 T.I. 951240 (C.T.O. "Vessels - Partial Disposition & 13(16) Election")
A partial disposition of a vessel will qualify as a disposition of a vessel for purposes of s. 13(16).