Principal Issues: [TaxInterpretations translation] Can a buyer who obtains possession of property under an instalment sale claim capital cost allowance on the property as soon as the buyer takes possession?
Position: Yes.
Reasons: Insofar as, at the time of taking possession of the property, the buyer also obtains the right of use, the right to collect the fruits and the risk of loss associated with the property.
XXXXXXXXXX 2007-023755
November 10, 2008
Dear Sir,
Subject: Capital cost allowance in an instalment sale context
This is further to your letter of May 29, 2007 in which you asked us, in the context of an instalment sale, whether the purchaser may claim capital cost allowance (CCA) on depreciable property where the full purchase price has not yet been paid.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
As explained in Information Circular 70-6r5, it is not the Directorate’s practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. Furthermore, when it comes to determining whether a completed transaction has received appropriate 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.
Article 1745 of the Civil Code of Québec ("CCQ"), which governs instalment sales, reads as follows:
An instalment sale is a term sale by which the seller reserves ownership of the property until full payment of the sale price.
Generally, under the definition of "depreciable property" in subsection 13(21), a taxpayer may claim CCA in respect of a property acquired by the taxpayer in a particular year and owned by the taxpayer at the end of the year.
Paragraph 17 of Interpretation Bulletin IT-285R2 provides that a taxpayer will be considered to have acquired depreciable property at the earlier of:
(a) the date on which title to it is obtained, and
(b) the date on which the taxpayer has all the incidents of ownership such as possession, use, and risk, even though legal title remains in the vendor as security for the purchase price (as is commercial practice under a conditional sale agreement).
Thus, to the extent that a purchaser, in the context of an instalment sale, obtains possession, the right of use and the right to collect the fruits of a property and also assumes the risk of loss, the Canada Revenue Agency ("CRA") will consider that the purchaser will be able to claim capital cost allowance when the purchaser takes possession of the property. Similarly, in the event that the vendor takes back the property, the CRA will apply the rules for the seizure of property in sections 79 and 79.1.
At the same time, in the circumstances described above, the CRA is of the view that the vendor will have disposed of the property at the time the purchaser obtains possession of it, the right of use and the right to collect its fruits.
These comments are not advance income tax rulings and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding on us.
Best regards,
François Bordeleau
Manager
Business and Partnerships Section.