APR 22 1988
SPECIALTY RULINGS DIRECTORATE M.D. Praulins (613) 957-9225
Effectiveness of Subsection 13(21.1) when Paragraph 79(c) Determines Proceeds of Disposition
This is in reply to your memorandum dated October 30, 1987, in which you request our comments on the application of subsection 13(21.1) of the Income Tax act (the "Act") in a situation where the proceeds of disposition of both the land and building are determined pursuant to paragraph 79(c) of the Act and these proceeds are greater than the fair market value of the land and building immediately before their disposition.
Based on the information provided in your memorandum and further to the telephone discussion with Mr. S. Lee on December 7 and December 8, 1987, we are prepared to offer you our general comments.
Our Comments
We are in agreement with the result obtained in the example attached to your memorandum. The results obtained appear to give a result contrary to that intended by the legislation.
We reviewed the Budget Papers tabled in the House of Commons on November 12, 1981, by the Honourable Allan J. MacEachen, the then Deputy Prime Minister and Minister of Finance. The following explanation regarding terminal losses was obtained from the Supplementary Information and Notice of Ways and Means Motions on the Budget, at page 37:
TERMINAL LOSSES
Currently when a taxpayer demolishes a building, any unclaimed capital cost allowance is deductible as a terminal loss. Often buildings are demolished because the land on which they stand would be more valuable if used for another purpose. The tax treatment is inappropriate, since the decline in the value of the demolished building is deductible in full but the gain in the value of the land is only half taxable as a capital gain. The tax rules thus provide an indirect incentive to demolish buildings. To correct this, the budget modifies the terminal loss rules to deny a full deduction for demolitions or other dispositions of buildings after November 12, 1981. Where the same taxpayer has another building before the end of the taxation year following that when the loss arises, the loss will be added to its capital cost and depreciated. Otherwise the terminal loss will be added to the cost base of any land owned by the taxpayer and thus half of the loss will offset the capital gain when the land is eventually sold. In any other case, one-half of the loss on destruction of the building will be treated as a business loss, deductible in the year. This measure will lend support to the preservation of historic buildings.
As you note, the reference to "proceeds of disposition" in paragraph 13(21.1)(a) of the Act, when 79(c) is relevant, appears to produce results contrary to those intended by the Minister of Finance.
We have written to the Current Amendments Division of our Branch concerning this anomaly and the matter has been brought to the attention of the Department of Finance for their further action. However, should Finance consider it appropriate to correct this matter we do not expect that they will make it retroactive from the date the matter is introduced into Parliament. Relieving amendments frequently are made retroactive but changes that are more onerous for taxpayers seldom, if ever, have retroactive effect.
In view of the above we think it would be appropriate to proceed to deal with the particular files involved on the basis of your interpretation with which we agree.
ORIGINAL SIGNED BY Wm. R. McColm for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch