2016-0666901E5 New Class 14.1 and replacement property rules

Principal Issues: What are the replacement property rules for former ECP disposed of after January 1, 2017?

Position: The replacement property rules in 13(4) and 44(1) will be applicable to certain disposition where all requirements are met.

Reasons: See reasons.

Author: Ryer, Andrea
Section: 14(6), 13(4), 44(1), 13(38)(d)

XXXXXXXXXX                                                                                                                              2016-066690
                                                                                                                                                      A. Ryer
November 4, 2016

Dear XXXXXXXXXX:

Re: New Class 14.1 and Replacement Property Rules

We are writing in response to your enquiry, dated September 20, 2016, wherein you requested our views on the application of proposed legislation relating to the repeal of the existing eligible capital property (ECP) regime and its replacement with a new capital cost allowance class, Class 14.1 of Schedule II to the Regulations. The current version of the proposed rules is contained in the Notice of Ways and Means Motion tabled on October 21, 2016.

You are concerned that following the proposed repealed of the ECP rules effective January 1, 2017, there will not be suitable replacement property rules applicable to dispositions of former ECP in certain circumstances. For example, you indicate that there will be no replacement property provisions applicable to a voluntary disposition of farm quota occurring after January 1, 2017, or to a disposition of farm quota that occurs prior to January 1, 2017 if the replacement property is not acquired before that date.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (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.

Under current subsection 14(6) of the Act, a taxpayer may elect to avoid the reduction in a positive cumulative eligible capital balance (or the creation of a negative balance) that may otherwise result from the disposition of an ECP. In order to make this election, the taxpayer must dispose of an ECP and reinvest all or part of the proceeds of disposition in a replacement property before the end of the year following the disposition.

Subsection 14(6) is similar to the rules in subsections 13(4) and 44(1) of the Act, which permit a taxpayer to defer recognition of recapture or capital gains on certain exchanges of depreciable capital property. Subsection 14(6) may apply where a taxpayer has disposed (voluntarily or otherwise) of ECP and acquires a “replacement property” within the specified time period. In contrast, subsections 13(4) and 44(1) are limited to certain involuntary dispositions of depreciable capital property or dispositions of former property that qualifies as “former business property”.

By virtue of paragraphs 13(4)(a) and 44(1)(a) of the Act, subsections 13(4) and 44(1) may apply to dispositions of depreciable capital property where the proceeds of disposition are compensation for property unlawfully taken, compensation for property destroyed, or compensation for property taken under statutory authority.

In the case of a voluntary disposition, subsections 13(4) and 44(1) will only apply if the former property was immediately before the disposition a former business property as defined in subsection 248(1) of the Act. One of the characteristics of a former business property is that the property is real or immovable property or an interest therein. As ECP, and consequently, property included in new Class 14.1, is generally intangible property, we agree that such property will generally not be former business property.

We trust these comments will be of assistance to you.

Sincerely,

Michael Cooke, CPA, CA
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate

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