19 May 1998 External T.I. 9730795 - DISPOSITION OF DEPRECIABLE PROPERTY

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: Does subsection 1102(14) of the Regulations apply where there is a non-arm's length acquisition of depreciable property previously included in Class 34 or Class 43.1?

Position: Yes, subject to the application of subsection 1102(20) of the Regulations.

Reasons: Subject to the application of subsection 1102(20) of the Regulations, subsection 1102(14) of the Regulations applies "for the purposes of this Part and Schedule II" such that it overrides the specific provisions of each of Class 34 and Class 43.1.

973079
XXXXXXXXXX A. Seidel
(613) 957-8974

Attention: XXXXXXXXXX

May 19, 1998

Dear Sirs:

Re: Non-Arm’s Length Transfer of Depreciable Property

This is in reply to your letter dated November 17, 1997 in which you requested our views with respect to the application of subsection 1102(14) of the Income Tax Regulations (the “Regulations”) in the situation where there is a non-arm’s length acquisition of depreciable property previously included in Class 34 or Class 43.1 of Schedule II of the Regulations.

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R3 ("IC 70-6R3") dated December 30, 1996. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to the application of subsection 1102(14) of the Regulations which may be of some assistance.

Subject to transitional relief, Class 34 of Schedule II of the Regulations was amended to exclude from the class property acquired after February 21, 1994. Class 34 was also amended to provide a deadline for obtaining the certification required by the class.

The September 16, 1997 Finance Canada News Release included amendments to draft subparagraphs (b)(iii) and (e)(iii) for Class 43.1 of Schedule II of the Regulations applicable, subject to the coming into force provisions, to property acquired after June 26, 1996. They are replaced by the following:

“(iii) has not been used for any purpose before it was acquired by the taxpayer unless

(A) the property was depreciable property described in Class 34 or 43.1 of the person from whom it was acquired, and

(B) the property was acquired by the taxpayer not more than five years after it became available for use for the purpose of subsection 13(26) of the Act by the person from whom it was acquired and remains at the same site in Canada as that at which that person used the property,” .....

In general, subsection 1102(14) of the Regulations is “For the purposes of this Part and Schedule II” and, pursuant to subparagraph 1102(14)(d) of the Regulations, applies in those situations where depreciable property is acquired by a taxpayer from a person with whom the taxpayer is not dealing at arm's length. In those situations where the depreciable property was property of a prescribed class or a separate prescribed class of the vendor, the depreciable property is deemed to be property of that same prescribed class or separate prescribed class, as the case may be, of the purchaser. Therefore, subject to the application of subsection 1102(20) of the Regulations, a property subject to the application of subsection 1102(14) of the Regulations remains in the same class in Schedule II after it has been acquired from a person with whom the purchaser is not dealing at arm's length.

Notwithstanding the amendments to Class 34, the acquisition of existing Class 34 property from a vendor with whom the purchaser does not deal at arm’s length will continue to be subject to the provisions of subsection 1102(14) of the Regulations, including those acquisitions occurring after February 21, 1994.

Class 43.1 of Schedule II of the Regulations, as proposed, will also be subject to the provisions of subsection 1102(14) of the Regulations. Therefore, an acquisition of Class 43.1 property from a vendor with whom the purchaser does not deal at arm’s length will continue to be property included in Class 43.1 of Schedule II even in those situations where the acquisition occurs after the five year limit in subparagraphs (b)(iii) and (e)(iii) of Class 43.1.

These comments are provided in accordance with the guidelines set out in paragraph 22 of IC 70-6R3 and are therefore not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch