Principal Issues: [TaxInterpretations translation] If a depreciable property is not used to earn income from a business for a particular taxation year, how should the taxpayer treat the positive UCC balance?
Position: The taxpayer will be able to continue to claim CCA until the property is disposed of.
Reasons: Income Tax Act.
XXXXXXXXXX 2010-035488
June 11, 2010
Dear Sir,
Subject: Tax treatment of the remaining undepreciated capital cost balance
This responds to your letter dated January 14, 2010, regarding the tax treatment of the balance of the undepreciated capital cost ("UCC") for a Canadian film and video production ("CFVP").
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where a corporation operated a film production business. The corporation capitalized its production costs in Class 10 of Schedule II to the Income Tax Regulations (the "Regulations") and claimed capital cost allowance ("CCA") pursuant to paragraph 20(1)(a).
Where, for a given taxation year, the CFVP no longer generates any income, you wish to know how the corporation should treat the balance of the UCC in Class 10.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received adequate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments, however, may not apply to your particular situation in certain circumstances.
Generally, where a taxpayer having acquired property for the purpose of gaining or producing income, has commenced at a later time to use it for some other purpose, subsection 45(1) deems the taxpayer to have disposed of the property at the time of the change in use for proceeds equal to its fair market value at that time. The taxpayer is also deemed to have reacquired the property at a cost equal to that fair market value. In the case of depreciable property, one of the effects of subsection 45(1) is to reduce the UCC of the depreciation class in which the property is included by an amount equal to the lesser of the proceeds of disposition of the property and the capital cost to the taxpayer of the property.
In your situation, if the CFVP ceases to be used to earn income, the corporation is deemed to have disposed of it for an amount equal to the lesser of the proceeds of disposition of the property and its capital cost.
Subsection 20(16) provides that a taxpayer may deduct - at the end of a taxation year - an amount as a terminal loss in respect of a class in Schedule II to the Regulations to the extent that:
- the total of all amounts used to determine A to D in the definition undepreciated capital cost in subsection 13(21) in respect of a taxpayer’s depreciable property of a particular class exceeds the total of all amounts used to determine E to J in that definition in respect of that property, and
- the taxpayer no longer owns any property of that class.
In this case, to the extent that the CFVP was the only depreciable property included in Class 10, the change in use of the CFVP results in no property being included in Class 10. If there is a positive UCC balance in the class after deducting the lesser of the proceeds of disposition of the CFVP and its capital cost, we are of the view that the corporation can claim a terminal loss on that balance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.