2016-0637031E5 Capital property excludes ECP

Principal Issues: Does “capital property” include “eligible capital property”?

Position: No.

Reasons: Based on the respective definition of each term in subsection 248(1) and section 54 taking into consideration the definition of all other relevant terms including the meaning of “capital gain” and “capital loss” as assigned by section 39.

Author: Tzortzis, Chrys
Section: 248(1), 54, 39(1), 98(5)(d)

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                                                                                                                                    2016-063703
                                                                                                                                    Chrys Tzortzis, CPA, CA
June 13, 2016

Dear XXXXXXXXXX:

Re:  Eligible capital property

This is in response to your email of March 15, 2016 wherein you inquire whether or not “capital property” includes “eligible capital property”, both of which are defined under section 54 of the Income Tax Act (the “Act”).  Your inquiry is made in the context of applying the provisions that govern the “bump” under subsection 98(5) of the Act.

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Our Comments

Rulings document 9521556 discusses the meaning of both “eligible capital property” and “capital property” and notes that section 54 defines the term “capital property” to mean:

“(a) any depreciable property of the taxpayer, and
  (b) any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer;”

By virtue of subparagraph 39(1)(a)(i) of the Act, the gain from the disposition of an “eligible capital property” is excluded from the meaning of a taxpayer's “capital gain” and by virtue of subparagraph 39(1)(b)(ii), the loss from the disposition of an “eligible capital property” is excluded from the meaning of a taxpayer's “capital loss”.  Therefore, a “capital property” does not include an “eligible capital property”.

Subsection 98(5), which is a non-elective provision, contains rules which provide a tax-deferred transfer or “rollover” of a Canadian partnership's property where the partnership has ceased to exist and the transfer is to one member of the partnership who continues to carry on the business of the partnership as a sole proprietor.  As discussed in Rulings document 2014-0529231E5, the “bump” under paragraph 98(5)(c) is only available on capital property (other than depreciable property).  Prior to its repeal, paragraph 98(5)(d) governed the “bump” on depreciable property and property other than capital property.  Paragraph 98(5)(d) has been repealed applicable with respect to certain events occurring after December 4, 1985.  However, this paragraph continues to apply to certain grandfathered partnership property acquired by the partnership before December 5, 1985 but the coming-into-force rules that provide for the repeal of the provision should be consulted to determine if all the conditions are met.

Finally, please note that Budget 2016 proposes to repeal the “eligible capital property” regime, replace it with a new capital cost allowance (CCA) class available to businesses and provide rules to transfer taxpayers’ existing cumulative eligible capital pools to the new CCA class.

We trust the above comments will be of assistance.

Yours truly,

G. Moore
for Director
Partnerships & Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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