21 September 1995 External T.I. 9522805 - COST BASE REDUCTIONS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Timing of capital cost reduction

Position TAKEN:

See response

Reasons FOR POSITION TAKEN:

Wording of the Act

		952280
XXXXXXXXXX		Michael Cooke

Attention: XXXXXXXXXX

September 21, 1995

Dear Sirs:

Re: Subsection 13(7.4) of the Income Tax Act (Act)

This is in reply to your letter of August 21, 1995, regarding the timing of the cost amount reduction for an election under subsection 13(7.4) of the Act where the particular property was acquired in one of the three taxation years immediately preceding the receipt of the inducement.

You requested our views as to whether in such a situation we would consider that the election would operate to retroactively reduce the capital cost of the particular property from the date of the original acquisition of the property. If this were the case, then amended claims for capital cost allowance (cca) would be required for the preceding taxation years affected by the election. It is your view that the capital cost reduction will take place in the taxation year the inducement is received.

Subsection 13(7.4) permits a taxpayer to elect to reduce the capital cost of a depreciable property by the amount of any related inducement that is required to be included in the taxpayer's income pursuant to paragraph 12(1)(x) of the Act. This reduction is based on the amount by which the total of the capital cost of the particular property, as otherwise determined, applying the provisions of subsection 13(7.1) of the Act, where necessary, and repayments of previously elected amounts in respect of that property which exceed the least of the following:

(i) the amount received;

(ii) the capital cost of the property as otherwise determined; and

(iii) nil, where the property was disposed of before the year.

It is our view that subsection 13(7.4) does not have retroactive application. This is due to the fact that cca is calculated on the undepreciated capital cost (ucc) of an asset pool immediately before the end of the particular taxation year. Where such an election is made the ucc for earlier taxation years would not be affected by such a reduction.

We trust our comments will be of assistance to you.

Yours truly,

F. Lee Workman
Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch