| 920784 | |
| 24(1) | J.D. Brooks |
| (613) 957-2103 |
19(1)
June 23,1992
Dear Sirs:
Re: Capital Cost Allowance Section 1102 of the Income Tax Regulations (the "Regulations")
This is in reply to your letter of March 13, 1992 in which you requested our opinion on the interaction of Regulations 1102(1)(c) and 1102(14), and whether inactive assets are automatically converted to inventory. It is apparent that the circumstances outlined in your letter involve actual taxpayers who are contemplating specific proposed transactions. That being so, it would be appropriate for you to request an advance income tax ruling in order for the taxpayers to receive assurance as to the tax consequences of their proposed transactions. Please refer to Information Circular 70-6R2 dated September 28, 1990 for information regarding advance rulings. Although we are unable to provide any opinion in respect of the specific case you have described, we have set out below some comments of a general nature which relate to the matters raised.
Our comments
Interpretation Bulletin 172R provides some relevant commentary. It is stated in paragraph 6 of the bulletin that "where, at a particular time, an individual ceases to carry on a business when certain of its depreciable properties have not been disposed of and after that time no use whatever is made of them, paragraph 13(7)(a) does not apply to deem that a disposition has been made." This result would be the same whether the taxpayer was an individual or a corporation, and whether the taxpayer remained in business or ceased to carry on business. Thus, mothballing of depreciable assets does not automatically result in a change of use. See the comments in subparagraph 3 of Interpretation Bulletin 102R2 but note that exceptions occur. If, for instance, the purchase and sale of used machinery became a business, there would likely be a conversion to inventory. Thus, depreciable property of a taxpayer that was used in the taxpayer's business and was property of a particular class would continue to be property of that particular class even after it ceases to be used in the business, subject to the foregoing comments.
Subsection 1102(14) of the Regulations is a specific rule that applies on the transfer of certain types of property in the circumstances of that subsection, with the result that the property becomes, in the transferee's hands, property of a prescribed class in which it may not otherwise belong. For example, a class 6 frame building would remain in class 6 under the rules in Regulation 1102(14) even though, if obtained in some other manner, it would fall into class 1. Similarly, where a taxpayer acquires property for a purpose other than that of gaining or producing income, Regulation 1102(2)(c) generally applies to exclude such property from Schedule II; but where such property is acquired from a person with whom the taxpayer does not deal at arm's length, Regulation 1102(14) would normally apply to deem the property to be property of the same class as the class in which it was last included by the transferor. However, capital cost allowance would not be available to a transferee if it could be shown that the property was not acquired by the taxpayer for the purpose of gaining or producing income. On a subsequent transfer of the property back to the original owner, Regulation 1102(14) may have application; however, if there had been a change of use in the interval, the rule in Regulation 1102(14) would only apply to the last prescribed class designation.
As indicated earlier, these comments represent an expression of opinion and, as stated in Information Circular 70-6R dated September 28, 1990, are not binding on the Department.
Yours truly,
A.G. Thornleyfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch