Subsection 13(21.1) - Disposition of building
See Also
9136-6872 Quebec v. The Queen, 2010 TCC 91, 2010 DTC 1263 [at 3833]
Paragraph 13(21.1)(b) applies as long as land is not disposed of in the same year as a building on the land.
The taxpayer purchased a building property in order to demolish the building and replace it with a new building that it could lease out. The taxpayer was deemed to have proceeds of disposition on the demolished building, in accordance with s. 13(21.1)(b).
Administrative Policy
11 March 2013 T.I. 2012-469231E5 F
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).
Subsection 13(21.2) - Loss on certain transfers
Administrative Policy
2 April 2015 T.I. 2015-0571501E5 F - Perte sur certains transferts
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 (TaxInterpretations):
[I]f the partnership ceased to exist before the 30th day following the disposition…subsection 13(21.2) would simply not apply. However, if the partnership ceased to exist after the 30th 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 portions of it income taking into account such CCA.
11 March 2013 T.I. 2012-469231E5 F
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)….
3 January 2013 T.I. 2012-0460011E5 - Subsection 13(21.2)
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.
7 January 2013 T.I. 2012-0452611E5 - Subsection 13(21.2)
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.
2010 Ruling 2009-0347301R3 -
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.
21 March 2007 T.I. 2004-0091061E5 -
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.
25 July 2005 T.I. 2005-0125501E5
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.
2003 APFF Roundtable Q. 14, 2003-003009
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.
1999 TEI Round Table, Q. XXII 992951
Where Aco transfers depreciable property to an affiliated corporation (Bco), the terminal loss of Aco will cease to be suspended when Bco ceases to be affiliated with ACo.
Subsection 13(26) - Restriction on deduction before available for use
Administrative Policy
1993 December Tax Executive Institute Roundtable Q. , 5-932784
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.
Subsection 13(27) - Interpretation — available for use
Administrative Policy
18 October 2011 T.I. 2011-040138
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.
1993 December Tax Executive Institute Roundtable Q. , 5-932784
"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'."
21 April 1993 T.I. (Tax Window, No. 31, p. 9, ¶2518)
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.
15 April 1992 T.I. (Tax Window, No. 18, p. 13, ¶1846)
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.
November 1991 Memorandum (Tax Window, No. 12, p. 19, ¶1567)
A machine is "available for use" if it is capable of producing a commercially saleable product or extensive alterations are required to bring it up to its designed capacity.
24 June 1991 T.I. (Tax Window, No. 4, p. 14, ¶1314)
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.
90 C.P.T.J. - Q.15
A well must be tied into a gas gathering system which in turn must be connected to a commercial gas plant in order to meet the requirements of ss.13(27)(a) or (b).
Articles
Sinclair, "Depreciable Property: A Review of Recent Legislative Developments", 1991 Conference Report, c. 26.
Paragraph 13(27)(b)
Articles
Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.
Use of rolling-start rule in s. 13(27)(b) to accelerate CCA (p. 10:20)
[G]iven the long duration of major construction projects, the rolling-start rule described above is frequently used to accelerate CCA claims to a time before the asset would otherwise be available for use. Under this rule, a cost incurred in 2014 would become available for use in 2016 and hence depreciable for CCA purposes. This would be the case even if the asset were not otherwise in a state where it could be used in an income-earning capacity.
Paragraph 13(27)(d)
See Also
Morley v. The Queen, 2004 DTC 2604, 2004 TCC 280, briefly aff'd 2006 DTC 6351, 2006 FCA 171
Software allegedly acquired by a partnership in 1993 was not available for use in that year given that no sales of the software were ever made (let alone in 1993) and the software was not used in 1993 to create business solutions for potential clients (s.13(27(a)), given that it was not clear that the software was delivered to the partnership as the partnership did not have access to the source code (s.13(27)(d)(i)) and given that the software was not complete and functional in 1993 (s.13(27)(d)(ii)).
Brown v. The Queen, 2001 DTC 1094, Docket: 97-3264-IT-G (TCC), aff'd 2003 DTC 5298 (FCA)
A partnership acquired game "engines" (i.e., programs that would become functional games when graphic "shells" were added) at the end of 1993. The taxpayer successfully submitted that developers of the games constituted the "other persons" referred to in s. 13(27)(d)(ii), with the result that it was not relevant that the engines were not delivered to the vendor of the software or the partnership at the end of 1993. In addition, the developers, as the "other persons", used the engines to create game shells so that games could then be sold commercially. Rip T.C.J. stated:
"I do not believe that it is necessary, nor desirable, to import a reasonable expectation of profit test into the available for use rules. The words commercially 'saleable' should be given their ordinary meaning of being capable of being sold commercially."
Subsection 13(28) - Idem [Interpretation — available for use]
Administrative Policy
19 December 2003 Memorandum 2003-003534 -
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."
16 October 1992 Memorandum 922845 (September 1993 Access Letter, p. 406, ¶C9-284)
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).
22 April 1992 Memorandum 920983 (May 1993 Access Letter, p. 191, ¶C20-069)
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.
Subsection 13(29) - Idem [Interpretation — available for use]
Articles
Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.
Long-term project rule may permit faster CCA write-offs for long-term projects (p. 10:20)
When the creation of an asset in a major construction project is expected to extend beyond three years, a faster CCA writeoff may be available through reliance on the long-term project rules described above. Once the subsection 13(29) election is made, costs incurred in the third and subsequent years of the project that are not otherwise available for use will be deemed to be available for use up to certain limits based on tire costs incurred in the first two years. Given that some projects can exist for more than 10 years before such assets are otherwise available for use—and can require tens of billions of dollars to complete—it is generally beneficial to consider making a subsection 13(29) election to accelerate the timing of CCA deductions for a major construction project. In order for a subsection 13(29) election to be valid, a form T1031 must be completed and filed with the income tax return for the particular year to which the election relates.
Commentary
Loss suspension
S. 13(21.2) applies to suspend a terminal loss on a disposition of depreciable property by a person or partnership (referred to as the transferor) where on the 30th day after the disposition, the property is owned by (or subject to a right to acquire of) a person or partnership who is affiliated with the transferor or is the transferor itself (in either case, referred to as the "subsequent owner." Affiliated status is defined in [pin type="page" href="1515"]s. 251.1[/pin].
Where the terminal loss is suspended under this rule, the transferor is deemed under s. 13(21.1)(e)(iii) to own depreciable property that was acquired before the year in question and which has a capital cost reflecting the denied terminal loss. (To be somewhat more precise, the transferor is deemed to dispose of each depreciable property for proceeds of disposition equal to the portion of the undepreciated capital cost of the relevant class which is applicable to that property based on its relative fair market value - but not exceeding its capital cost - and the excess of that amount over the fair market value of the depreciable property represents the deemed capital cost of the notional depreciable property to the transferor.) As indicated in the December 1997 Technical Notes of the Department of Finance, the intent of this rule is that "the transferor will be permitted to claim capital cost allowance (CCA) after the transfer on the difference between the transferred property's tax cost and the transferor's proceeds of disposition otherwise determined." Consistently with this intent that the transferor be permitted to claim CCA on the notional depreciable property, the rule in s. 13(21.2)(e)(iv) provides that the transferor is deemed to satisfy the available for use rules in [pin type="subtopic" href="430-Section1326"]s. 13(26)[/pin] et seq in the year of disposition if by that year the property has become available for use by the subsequent owner.
The notional depreciable property arising under s. 13(21.1)(e)(iii) is of the same class as the property that in fact was disposed of. Accordingly, where the transferor disposes of all the properties in a depreciable class to both an affiliated and unaffiliated person, the requirement under s. 20(16)(b) that there be no properties left in the class at the end of the year in order to claim a terminal loss, generally will not be satisfied, so that no terminal loss will be realized in respect of the disposition to either person. See [pin type="node_head" href="430-2012-469231E5_21_2"]11 March 2013 T.I. 2012-469231E5[/pin].
Where the transferor amalgamates with another corporation owning depreciable property of the same type as the depreciable property of the transferor held as notional depreciable property, those two pools of depreciable will be held in separate classes of depreciable property if they were used in separate businesses ([pin type="node_head" href="430-25July2005"]25 July 2005 T.I. 2005-0125501E5[/pin]).
Release events
This notional depreciable property will be deemed to be disposed of by the transferor for purposes of the depreciable property rules in sections 13 and 20 immediately before the first to occur of the various release events listed in s. 13(21.2)(e)(iii). These release events are:
For example, where a corporation (Aco) transfers depreciable property to an affiliated corporation (Bco), the suspended terminal loss of (Aco), as reduced by CCA claims, will cease to be suspended under the first release event when Bco ceases to be affiliated with Aco ([pin type="node_head" href="430-QXXII"]ACo1999 TEI Round Table, Q. XXII 992951[/pin]).
Partnership windings-up
Were a transferor partnership ceases to exist after the disposition of the depreciable property, the partnership is deemed to not have ceased to exist for purposes of s. 13(21.2), and each person who was a member of the partnership before it would otherwise cease to exist is treated as having remained a member of the partnership for this purpose, until immediately before the occurrence of a release event: s. 13(21.2)(f). CRA has stated that the approximately equivalent rule in [pin type="subtopic" href="625-Section4034"]s. 40(3.4)[/pin] is intended to ensure that a previously suspended loss of a partnership can be reported on the occurrence of a release event notwithstanding an intervening winding-up of the partnership, so that "former partners of the partnership who were members of the partnership immediately before it was wound up will be allowed to claim their share of the deferred loss as allocated to them pursuant to the rules in subsection 96(1)": ([pin type="node_head" href="625-Q8"]2010 Conference Report CRA Round Table, Q. 8[/pin]).
Where [pin type="subtopic" href="891-Section985"]s. 98(5)[/pin] applies to the winding-up of a partnership, [pin type="subtopic" href="891-Section985"]s. 98(5)[/pin](f) deems each property of the partnership to have been disposed of for its cost amount - even where the fair market value is lower. Accordingly, the suspended loss rule does not apply to depreciable property on such winding-up ([pin type="node_head" href="430-0347301R3"]2010 Ruling 2009-0347301R3[/pin]). (Most or all of the accrued terminal loss effectively will become an accrued terminal loss of the (former) "proprietor" partner under [pin type="subtopic" href="891-Section985"]s. 98(5)[/pin](e).)
Trust windings-up
There is no similar rule respecting a trust which ceases to exist. Accordingly, an accrued terminal loss on a trust's depreciable property which is distributed to the beneficiaries on the trust's winding-up, will not be suspended given that on the 30th day after the winding-up the trust, the owner(s) of the depreciable property will not be affiliated with the trust (which, instead, will have ceased to exist) ([pin type="node_head" href="430-21March2007"]21 March 2007 T.I. 2004-0091061E5[/pin]).
Corporate windings-up
Where s. 13(21.2) has applied to suspend a terminal loss of a subsidiary and it is then wound-up into its corporate parent as described in [pin type="page" href="868"]s. 88(1)[/pin], the parent will be deemed (by [pin type="page" href="868"]ss. 88(1)(e.2)[/pin] and [pin type="subtopic" href="864-872"]87(2)[/pin](g.3)) to be a continuation of the subsidiary so that the deemed depreciable property of the subsidiary will be deemed to continue to be held by the parent until the occurrence of a release event [pin type="node_head" href="430-Q14"](2003 APFF Round Table Q. 14 2003-003009[/pin]).
Where a transferor is a corporation which is wound-up otherwise than under [pin type="page" href="868"]s. 88(1)[/pin], there will be a release event at the time of the commencement of the winding-up (the fifth release event listed above) rather than when that corporation ceases to be affiliated with the subsequent owner when its existence is terminated on filing of articles of dissolution or the corporate equivalent (which would engage the first release event listed above). CRA likely would consider the winding-up to commence when any formal positive corporate step is taken to that end, e.g., passing a shareholder's resolution authorizing the commencement of voluntary dissolution proceedings (IT-126R2, para. 2).
Preservation of accrued recapture
The capital cost of the (actual) property to the subsequent owner for purposes of the CCA/recapture of depreciation rules is deemed to be its capital cost to the transferor; and the difference between this capital cost and the fair market value of the property at the time of the disposition is deemed to have been deducted as CCA, so that (leaving aside complications where not all the depreciable property of a class was disposed of) the initial undepreciated capital cost of the property to the subsequent owner is equal to its fair market value at the time of disposition: s. 13(21.2)(e)(iv).