R.P. Laramy (613)957-2746
May 11, 1988
Dear Sir:
Re: Subsections 13(5.1) and 13(5.2) of the Income Tax Act (the "Act")
This is in reply to your letter of March 30, 1988 concerning the application of the above-captioned subsections.
In the hypothetical situation you posed, C Co. exercises an option ant acquires a freehold interest in certain land and buildings. The option price is less than the fair market value of the lent ant buildings at the time of the acquisition. Prior to acquiring ownership of the lent and buildings, C Co. held a leasehold interest in the property which was included in class 13. Furthermore, during the period of the lease, capital cost allowance was claimed and rental payments were made for the use of the property.
It is your opinion that subsections 13(5.1) and 13(5.2) are both applicable. You note that paragraph 13(5.1)(b) deems the acquired property to be depreciable property of a prescribed class, but it fails to specify the prescribed class to which the property would belong. In light of this, you believe that the land and the buildings should have separate prescribed classes, and the relevant costs (ie. the capital cost and the capital cost allowance claims of the leasehold interest, the rental payments, and the option price) should be allocated to these separate classes.
Assuming the lease arrangement itself did not constitute a sale, we agree that subsections 13(5.1) and 13(5.2) are both applicable in the situation outlined above. While these subsections provide the rules for determining the deemed costs of the property and the adjustments required to the total depreciation, they do not provide rules for determining allocations between the land and buildings. In our view the relevant costs should be allocated between the land and buildings based on the facts of the situation. Factors such as the circumstances relating to the acquisition of the lease, the values of the land and buildings at the time the lease was originally entered into, at the time the lease was acquired by C Co., and at the time the option was exercised, the nature of the leasehold improvements, and the circumstances relating to the granting and exercising of the option, would be relevant in making the allocation.
The correct prescribed class, or classes, for the buildings would be determined by Schedule II to the Income Tax Regulations. The land would be deemed to be depreciable property of a prescribed c1888 by paragraph 13(5.1)(b). As Schedule II to the Regulations does not contain a prescribed class for land so deemed, no claim for capital cost allowance would be available. However, the land would be subject to the provisions of the Act which deal with recapture and terminal losses.
The above comments deal with a hypothetical situation and are not binding on the Department.
We trust this information will be of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate