Principal Issues: [TaxInterpretations translation] 1. Does paragraph 13(21.1)(b) apply where a corporation incurs a terminal loss on a demolished building and the land on which the building was situated has not been disposed of?
2. Does the amount disallowed as a terminal loss under paragraph 13(21.1)(b) adjust the cost of a newly constructed building or the adjusted cost base of the land on which the building was demolished?
Position: 1. Yes
2. No
Reasons: 1. Application of paragraph 13(21.1)(b).
2. Not allowed by the Act.
XXXXXXXXXX 2007-022225 Lucie Allaire, LL.B., CGA July 25, 2007
Dear Sir,
Subject: Demolition of a building
This is in response to your letter of January 22, 2007 requesting our opinion on the application of paragraph 13(21.1)(b) of the Income Tax Act (the "Act") to the demolition of a building.
Specifically, you described a situation where your client, a Canadian-controlled private corporation, owned a building and the subjacent land that was used to operate a motel. The corporation demolished the building, realized a terminal loss and, on the same land, erected a new building with a cost in excess of $50,000, which was placed in a separate class for tax purposes. The new building is leased on a long-term basis to an unrelated party.
You wish to know whether paragraph 13(21.1)(b) applies to the situation described above. If paragraph 13(21.1)(b) applies, you wish to know if the disallowed terminal loss is added to the adjusted cost base of the new building or land.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
The situation indicated in your submission appears to relate to an actual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, 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. These comments may, however, under certain circumstances, not apply to your particular situation.
Paragraph 13(21.1)(b) applies where a taxpayer, whose building is demolished in a taxation year, does not dispose in that year of the land subjacent to, or immediately contiguous to and necessary for the use of, the building. For the purposes of paragraph 13(21.1)(b), the land must have been owned at any time before the disposition of the building by the taxpayer or by a person with whom the taxpayer did not deal at arm’s length. In such a case, the deemed proceeds of disposition of the building, for the purpose of determining the terminal loss, if the building is the last property in the class, are then equal to the proceeds otherwise determined plus one-half of the amount by which the greater of the cost amount of the building and the fair market value of the building exceeds the proceeds of disposition.
Furthermore, where a building is demolished and the land subjacent to the building is not disposed of, subsection 13(21.1) generally reduces the amount of the terminal loss to one-half of the amount otherwise calculated.
Paragraph 13(21.1)(b) will apply where the subjacent land is disposed of in a taxation year other than the one in which the building is demolished.
Regarding your second question, there is no provision in the Act that allows for a terminal loss denied under paragraph 13(21.1)(b) to be added to the adjusted cost base of the building or land.
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.
Best regards,
François Bordeleau, Advocate
Interim Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.