P. K. Tang (613) 957-2103
May 25, 1987
Dear Sirs:
This is in reply to your letter of April 7, 1987, concerning the proper application of subsection 1103(2d) of the Income Tax Regulations (the Regulations) with respect to property described in class 20 of Schedule II to the Regulations.
You point out to us a situation where a taxpayer had acquired a building after December 5, 1963, and before April 1, 1967, that satisfied all criteria described in Class 20. The building was the only property included in that Class and fully depreciated. It was sold in 1987. You are concerned as to whether or not, if there had been an acquisition of another property (a building) after May 25, 1976, that was included in Class 3, the election under subsection 1103(2d) would be available. It seems to you that the criteria set out in Class 20 may not be satisfied in full as the certificate described therein may not be obtained given the passage of time and the fact that the building must be located in a "designated area" as determined for purpose of section 71A of the former Act. Alternatively, the building's cost would not be included in the approved capital costs as defined in the Area Development Incentive Act, an act that is no longer in force.
Our Comments
Subsection 1103(2d) permits a taxpayer to transfer the property disposed of from one class to another class under certain conditions. One of the conditions is that when a taxpayer disposes of a property of a class (the former class) in Schedule II and acquired a property of another class (the present class) the property in the former class must be property that would have been included in the present class if it had been acquired by the taxpayer after the particular date referred to in the present class, and the property in the present class must be property that would have been a property included in the former class if it had been acquired by the taxpayer on or before the particular date referred to in the present class.
Subsection 1103(2d) of the Regulations was originally introduced as a result of significant changes in the classification of depreciable properties effective May 25, 1976. It was broadened in 1983 by removing the reference to May 25, 1976, so that it would apply to subsequent changes in the classification of specific properties. Therefore, it is our view that it would only apply where a specific type of property is described in two classes and it is clearly indicated that property of that description would fall within one class if acquired before a particular date and in the other class if acquired on or after that particular date. In your particular situation, the date of May 25, 1976 in class 3 to which you referred in your letter is not used in relation to a property also described in class 20 and there is no continuity of dates. Therefore, we are of the view that subsection 1103(2d) of the Regulations will not apply in your case.
Further, as you pointed out, a property acquired after April 1, 1967, could not have been included in class 20 even if it had been acquired before that date because of difficulties in meeting the criteria contained in that class. This strengthens our view that the election provided under subsection 1103(2d) would not be applicable in your circumstances.
We trust this will be of assistance to you.
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR
D. B. MORPHY
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch