G.C. Boehmer 993-6201
January 21, 1986
Re: Application of Subsections 85(1) and 85(5) of the Income Tax Act (the "Act")
This is in reply to your letter of December 9, 1985 wherein you requested certain technical interpretations with respect to the above referenced provisions of the Act.
As your letter deals with a fact situation and proposed transactions, your request should be the subject of an advance income tax ruling. We are, however, prepared to offer the following comments which, as explained in Information Circular 70-6R issued December 18, 1978 by the Department of National Revenue, do not constitute advance income tax rulings and which are not binding on the Department.
Our understanding of the facts is that Company A made an expenditure of a capital nature to which it was entitled to a deduction under paragraph 37(1)(b) of the Act. Company A proposes to transfer the property, acquired with the expenditures so made, to Company B. In respect of this transfer, Company A and Company B will jointly elect pursuant to the provisions of subsection 85(1) of the Act.
In our opinion the property to be transferred from Company A to Company B is depreciable property, within the meaning of paragraph 13(21)(b) of the Act, of a prescribed class for the purposes of the Act, notwithstanding paragraph 1102(1)(d) of the Income Tax Act Regulations. In particular, for the purposes of subparagraph 85(1)(e)(i) of the Act, the undepreciated capital cost to Company A of the property is equal to the cost of the property to Company A less the amount deducted by it in the year or in previous years under paragraph 37(1)(b) of the Act in respect of the property.
For the purposes of sections 13 and 20 of the Act, subsection 85(5) of the Act will apply on the transfer of the property from Company A to Company B so that the deemed capital cost of the property to Company B will be equal to the cost of the property to Company A and the amount that was deducted by Company A under paragraph 37(1)(b) of the Act that was, by virtue of subsection 37(6) of the Act, deemed to have been claimed by Company A under regulations made under paragraph 20(1)(a) of the Act, will be deemed to have been deducted by Company B, in respect of the property, under regulations made under paragraph 20(1)(a) of the Act. Accordingly, if Company B subsequently sells the property that it acquires from Company A, the provisions of subsection 13(1) may apply on that subsequent sale.
With respect to your enquiry as to the effective date of a sale, we refer you Interpretation Bulletin IT-170R "Sale of Property - When Included in Income Computation" issued on August 25, 1980.
We emphasize that the above comments do not constitute income tax rulings and are not binding on the Department.
Our comments are based on the Act in its present form and do not take into account any of the proposed amendments contained in Bill C-84 tabled in the House of Commons by the Minister of Finance on November 26, 1985.
We trust this information will be of assistance to you.
Yours truly,
C.S
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch