November 13, 1987 Christopher Higgins Tel. (613) 957-2097E
Esther Dirksen Section 143-32
ATTENTION Business Audit
This is in reply to your memorandum of July 14, 1987 concerning the application of Regulation 1101(1) and subsection 13(5) of the Income Tax Act ("the Act") when a company ceases to operate a business and commences a separate business using assets from the old business.
You have provided us with the following facts:
XXX
DISTRICT OFFICE POSITION
It is your view that Regulation 1101(1) is applicable and therefore you are proposing to transfer the office furniture assets from the XXX business C.C.A. class to the XXX business C.C.A. class using the provisions of subsection 13(5) of the Act. In your opinion, this transfer of property in would trigger a terminal loss in XXX as no assets would remain in the business Class 8 C.C.A. pool.
TAXPAYER'S POSITION
The taxpayer's representative is of the view that Regulation 1101(1) is not applicable as it only applies to newly "acquired" properties. However, the representative agrees that the two operations are separate businesses for tax purposes.
RULINGS POSITION
It is our view that subsection 13(5) of the Act would apply on the basis that the property in question is misclassified by virtue of Regulation 1101(1) and should be transferred to its proper class pursuant to subsection 13(6) of the Act.
Regulation 1101(1) states that "where more than one property of a taxpayer is described in the same class in Schedule II and where
(a) one of the properties was acquired for the purposes of gaining or producing income from a business, and
(b) one of the properties was acquired for the purpose of gaining or producing income from another business or from the property, a separate class is hereby prescribed for the properties that
(c) were acquired for the purpose of gaining or producing income from each business; and
(d) would otherwise be included in the class.
Requiring capital cost allowance to be taken separately for each of the taxpayer's businesses is consistent with the basic intent of paragraph 4(1)(a) and subsection 20(1) of the Act. Paragraph 4(1)(a) states that a taxpayers' income is to be calculated separately for each source including each business. Subsection 20(1) provides that deductions, including capital cost allowance may only be deducted from income from a business or property to the extent that they are wholly or partially "applicable to that source". Regulation 1101(1) was drafted to concur with the objectives of paragraph 4(1)(a) and subsection 20(1) of the Act.
The taxpayer has a Class 8 ending U.C.C. balance of, XXX relating to his former business. The application of paragraph 4(1)(a) and subsection 20(1) would certainly not allow the taxpayer to deduct this inherent terminal loss (via increased C.C.A. claims) in computing income from his new business. Also, the referral in paragraph 13(7)(a) to a business could be interpreted as meaning a specific business and the subsequent use of the furniture in another business could be considered as being used for some other purpose resulting in a deemed disposition at that time. (i.e. XXX
Based on the above, we support your position on the applicability of Regulation 1101(1) and subsection 13(6) of the Act. The transfer from the incorrect class to the correct class is determined by subsection 13(5). As XXX was a loss year for and no determination of this loss was requested by them, the Department can apply subsection 13(6) in XXX resulting in a terminal loss by virtue of subsection 20(16). As a result XXX non-capital loss will increase from the amount originally determine
Original Signed by Original signe par T. Harris
Chief Merchandising, Manufacturing and Construction Section Small Business and General Division Specialty Ruling Directorate Legislative and Intergovernmental Affairs Branch