2016-0664451E5 ECP Rules

Principal Issues: Application of proposed subsections 13(38) and 13(42).

Position: See analysis.

Reasons: Comments given.

Author: Couvrette, Amanda
Section: 14(3); 14(5); 13(38); 13(42)

XXXXXXXXXX                                                                                                                            Amanda Couvrette
                                                                                                                                                    2016-066445
November 9, 2016

Dear XXXXXXXXXX,

Subject:  Proposed Eligible Capital Property Rules

We are writing in response to your recent inquiry concerning the proposed amendments to the Income Tax Act (“the Act”) tabled by the Department of Finance on October 21, 2016, regarding the repeal and replacement of the eligible capital property (“ECP”) rules contained in section 14 with rules for a new capital cost allowance class (Class 14.1) (the “proposed rules”).

Briefly, we understand your specific concern is with the application of subsections 13(38) and 13(42) contained in the proposed rules in the following hypothetical fact situation.

Assume a corporation acquired an ECP, as that term is defined in subsection 14(5), from a non-arm’s length taxpayer (the “transferor”) for its fair market value (“FMV”) of $1,000,000 prior to January 1, 2017.  At that time, the transferor claimed a $1,000,000 capital gains exemption (“CGE”) pursuant to subsections 110.6(2) and (2.2).  Under the existing ECP rules, subsection 14(3) applied to reduce the corporation’s eligible capital expenditure (“ECE”), within the meaning of subsection 14(5), by 4/3 of the total of all amounts that may reasonably be considered to have been claimed as a CGE in respect of the disposition of that property by the transferor or any other disposition of that property before that time.  Consequently, the corporation’s ECE was reduced to nil.

Under the existing ECP rules, when the corporation subsequently disposed of the property, subsection 14(3) would provide for the redetermination of the amount above which generally resulted in a reversal of the reduction in respect of section 110.6 deductions.

In the case at hand, the corporation intends to sell the property to an arm’s-length person on January 2, 2017, for the property’s FMV of $2,000,000.  The corporation’s tax year straddles January 1, 2017.

Under the proposed rules, 4/3 of the corporation’s cumulative eligible capital (“CEC”) pool at the end of the day on December 31, 2016, essentially becomes the capital cost of the property included in new Class 14.1 at the beginning of the day on January 1, 2017.  As there is no disposition prior to January 1, 2017, there will be no ECE redetermination pursuant to subsection 14(3).  Therefore, since the corporation’s CEC pool was nil, both the capital cost and undepreciated capital cost would also be nil.

You have asked us to confirm whether proposed paragraph 13(42)(a) would apply to increase the capital cost of the property in this situation.

Our comments

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 a particular transaction 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 IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Generally speaking, proposed paragraph 13(42)(a) provides a special rule where the taxpayer’s cost was reduced as a result of variable A in the definition of CEC in former subsection 14(5) in respect of a property and the property has not been disposed of.  Proposed paragraph 13(42)(a) provides that for the purposes of the Act and its regulations (other than section 13, section 20, and any regulations made for the purposes of paragraph 20(1)(a)), if the amount determined for variable A in the definition of CEC in subsection 14(5) would have been increased immediately before 2017 if the property had been disposed of immediately before that time, the capital cost of the property is deemed to be increased by 4/3 of the amount of that increase.

Therefore, given that the provisions of subsection 14(3) must be taken into account when determining the amount for variable A in the definition of CEC in subsection 14(5), it is our view that there would be an increase to the capital cost of such Class 14.1 property in respect of the business at the beginning of 2017 as a result of the application of proposed paragraph 13(42)(a).

We trust these comments will be of assistance.

Yours truly

Katie Robinson, C.P.A., C.A.
Acting Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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