| 19(1) | File No. 5-8490 |
| M. Eisner | |
| (613) 957-2138 |
November 14, 1989
Dear Sirs:
This is in reply to your letter of July 31, 1989 concerning proposed Regulation 1103(2d).
In your letter, you have outlined the following hypothetical situation:
1. Company A has a fiscal period ending December 31.
2. In 1985, Company A acquired two Class 22 Assets (A and B) at a cost of $100 each. At the end of 1987, the undepreciated capital cost of Class 22 is $30.
3. In 1988, Company A acquired a class 38 asset at a cost of $50 and disposed of asset A for $90.
4. Pursuant to paragraphs (a) to (d) of Regulation 1103(2d), Company A was eligible to transfer asset A to Class 38 from Class 22.
On the assumption that a valid election is filed under Regulation 1103(2d) in respect of asset A, you have asked us whether it is possible for the amount of $30 to be transferred form Class 22 to Class 38 to reduce a recapture of capital cost allowance resulting from the disposition of asset A.
The rules relating to the transfer of a depreciable property from one prescribed class to another are set out in subsection 13(5). Pursuant to paragraph 13(5)(a), the capital cost of asset A is deducted from Class 22 and added to Class 38. Under paragraph 13(5)(b), an amount equal to the greater of the amount, by which the capital cost of asset A exceeds the undepreciated capital cost of property of Class 22 immediately before the transfer ($100-$30) and the total of all capital cost allowance deducted in respect of asset A immediately before the transfer ($100-$15), is included in computing the total depreciation of Class 38 and deducted in computing the total depreciation of Class 22.
In our view, it would follow that the net effect of the transfer is that the undepreciated capital cost of Class 39 would be increased by the amount of $15 rather than $30.
As an additional comment, we note that the above view is based on the assumption that Regulation 1103(2d) will be enacted as set out in "Draft Income Tax Regulations, Legislation and Explanatory Notes" which was released by the Department of Finance in December, 1987.
We trust that you will find these comments to be of assistance.
Yours truly,
for DirectorBusiness and General divisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch