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D.S. Delorey (613) 957-2129
March 20, 1986
Dear Sirs:
This is in reply to your letter of December 18, 1985 concerning the application of paragraph 12(1)(f) of the Income Tax Act (the "Act") to the following situation:
1. A corporation has a building which is damaged by fire in its 1984 taxation year.
2. The costs incurred to repair the damage caused by the fire were all incurred in the corporation's 1984 taxation year and were expensed for income tax purposes.
3. In its 1985 taxation year, the corporation receives insurance proceeds which are in excess of the amount expended upon the repairs in the previous taxation year.
Since depreciable property is involved, paragraph 12(1)(f) of the Act should be read in conjunction with subparagraph 13(21)(d)(vi) of the Act, not in conjunction with subparagraph 54(h)(vi) of the Act as suggested in your letter. The words "within the year" contained in subparagraph 12(1)(f)(i) of the Act refer to a taxation year in which the repairs are made and in which an amount is to be included in income, not to the year in which the insurance proceeds become payable, as suggested in your letter. The words "amount payable" mean the amount of the settlement as finally determined. Accordingly, if the amount became payable in 1985, the corporation in the above described situation would include in its 1984 income, pursuant to paragraph 12(1)(f) of the Act, the amount expended within its 1984 taxation year to repair the damage. Pursuant to subparagraph 13(21)(d)(vi) of the Act, the excess of the amount received over the amount expended to repair the damage will represent 1985 proceeds of disposition.
We trust that the above comments will be of assistance.
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
12(1)(f)