Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance
Series 3: Property, Investments and Savings Plans
Folio 4: Capital Cost Allowance
Chapter 1: General Discussion of Capital Cost Allowance
Legislative changes enacted on June 21, 2019 by Bill C-97, Budget Implementation Act, 2019, No. 1, S.C. 2019, c. 29, provide for temporary enhanced first-year CCA measures: the accelerated investment incentive (AII) and, the temporary enhanced first-year CCA rate of 100% for zero-emission vehicles (ZEV).
More information is available on the Accelerated Investment Incentive and Zero-Emission Vehicles web pages.
Legislative changes enacted on June 29, 2021 by Bill C-30, Budget Implementation Act, 2021, No. 1, S.C. 2021, c. 23, provide various technical amendments relating to the AII rules and CCA for ZEV, including a temporary enhanced first-year CCA rate of 100% for eligible zero-emission automotive equipment and vehicles that do not benefit from the enhanced first-year CCA rate provided by Classes 54 and 55 by introducing new Class 56.
More information is available on the Department of Finance web pages Business Investment in Zero-Emission Automotive Vehicles and Equipment and Expanding Tax Support for Business Investment in Zero-Emission Vehicles web pages.
Legislative changes enacted on June 23, 2022 by Bill C-19, Budget Implementation Act, 2022, No. 1, S.C. 2022, c. 10, provide for temporary immediate expensing, in respect of immediate expensing property (IEP) acquired by an eligible person or partnership (EPOP) after April 18, 2021, or after December 31, 2021, and becomes available for use before January 1, 2024, or January 1, 2025, depending on the nature of the EPOP.
For more information, refer to the Department of Finance web page Expansion of the Eligibility for Tax Support for Business Investments.
An update to this Chapter is being prepared for publication.
Capital cost allowance (CCA) replaces accounting depreciation for income tax purposes. A taxpayer who acquires and uses depreciable property to earn income from a business or property is generally entitled to claim a portion of the capital cost over time as a deduction from such income. This is because depreciable property typically wears out or becomes obsolete over time. Under the CCA system, depreciable property is grouped into classes and the CCA is calculated using a prescribed rate that generally reflects the useful life of the assets included in that class. The undepreciated capital cost (UCC) of a particular class at any time represents the capital cost of all property included in that class (whether or not still owned), less the total CCA previously claimed for all years and the net proceeds (or capital cost if less) from any dispositions before that time.
This Chapter discusses the CCA system in general terms and addresses some of the more common issues encountered by taxpayers. This includes determining whether an expenditure is capital in nature and establishing the time at which depreciable property is considered to have been acquired. This Chapter also looks at the various factors that may adjust a property’s capital cost and whether a separate class might be required under the Income Tax Regulations. It also reviews certain restrictions which may limit or delay the taxpayer’s CCA deduction, such as the available-for-use rules, the half-year rule, and the rules in respect of a short fiscal period. This Chapter discusses the tax implications of disposing of depreciable property and the possibility of a recapture of CCA or a terminal loss. Certain provisions of the Income Tax Act may also alter the amount of recapture or terminal loss, or determine the tax year in which these will occur. This Chapter also deals with the rules for computing the UCC of depreciable property that has been transferred from one class to another class under various circumstances.
This Chapter is intended for readers who have a general understanding of the Income Tax Act. Those taxpayers seeking a less technical overview may prefer to first review the resources available on the Canada Revenue Agency (CRA) website, many of which can be found at Claiming capital cost allowance (CCA).
The CRA issues income tax folios to provide a summary of technical interpretations and positions regarding certain provisions contained in income tax law. Due to their technical nature, folios are used primarily by tax specialists and other individuals who have an interest in tax matters. While each paragraph in a chapter of a folio may relate to provisions of the law in force at the time it was written (see the Application section) the information provided is not a substitute for the law. The reader should, therefore, consider the chapter's information in light of the relevant provisions of the law in force for the particular tax year being considered.
The CRA may have published additional guidance and detailed filing instructions on matters discussed in this Chapter and other topics that may be of interest. See the CRA’s Forms and publications web page for this and other topics that may be of interest.
Table of contents
- Discussion and interpretation
- Capital cost allowance
- Capital cost of property
- Undepreciated capital cost
- Dispositions of depreciable property
- Recapture and terminal loss
- Classes of depreciable property
Discussion and interpretation
1.1 A taxpayer cannot deduct the cost of a capital expenditure in computing income from a business or property. This is because paragraph 18(1)(b) prohibits the deduction of any outlay, loss or replacement of capital, payment on account of capital or any allowance for depreciation, obsolescence or depletion, unless specifically allowed in Part I of the Act. However, since a depreciable property wears out or becomes obsolete over time, paragraph 20(1)(a) permits a deduction for part of the capital cost of that property, as allowed by Regulation. The amount that is allowed by Regulation is commonly known as capital cost allowance (CCA).
Capital versus current expenditures
1.2 The Act and Regulations do not define what constitutes a capital expenditure. However, the guidelines discussed in ¶1.4 to 1.12 can help determine whether an expenditure is capital in nature or deductible on income account as a current expense. No single guideline is determinative. All of them are relevant and each should be considered in relation to the other rather than as separate tests. The purpose of the expenditure from a practical and business perspective should also be taken into account. Ultimately, whether an expense is incurred on account of income or capital is a determination that can only be made after the facts have been considered.
1.3 In the event that an expenditure includes both current and capital elements and these can be identified, an appropriate allocation of the expenditure is necessary. Where only a minor part of the expenditure is of a capital nature, the CRA's practice is to treat the whole expenditure as a current expense.
1.4 An expenditure will normally be considered capital in nature if it brings into existence an asset or advantage that has an enduring benefit. For example, the cost of replacing a building's exterior wood siding at the end of its useful life with new vinyl siding is likely a capital expense because it is substantially different from what it replaced and has an enduring benefit. However, some items might have a relatively short useful life. A recurring expenditure for the replacement or renewal of such an item is an indication that the expenditure is of a current nature. For example, the cost of periodically repainting the wood siding from the previous example is likely a current expense.
Maintenance or capital improvement
1.5 Where an expenditure made in respect of a property serves only to restore it to its original condition, that fact is one indication that the expenditure is of a current nature. For example, the cost to repair or replace wood steps with wood steps would typically be a current maintenance expense. However, the cost of replacing wood steps with concrete steps is a capital expenditure because it improves the property beyond its original condition.
1.6 A repair often involves some degree of improvement in technology, materials or workmanship. This does not necessarily mean the cost of the repair is a capital expenditure. For example, the cost of replacing a window with one that has a higher insulation value may still be a current expense if it otherwise qualifies. Whether the market value of the property is increased as a result is not a major factor in characterizing the expenditure.
1.7 Determining whether the cost of a particular repair or replacement constitutes a current or capital expense requires an examination of the facts in each individual case. Such an examination must take into account whether the replacement is substantially different from what it replaced along with a consideration of the other guidelines outlined in this section.
Integral part or separate asset
1.8 Another point to consider is whether the expenditure is made to repair a part of a property (generally a current expense) or whether it is made to acquire a property that is itself a separate asset (generally a capital outlay). For example, the cost of replacing the rudder or propeller of a ship is typically regarded as a current expense. While a rudder or propeller might be purchased as a separate asset, it is an integral part of the ship and there is no overall betterment to the ship on its replacement. Similarly, the cost of replacing electrical wiring that is part of a building is a current expense as long as the rewiring does not improve the property beyond its original condition. On the other hand, the cost of replacing a lathe in a factory is regarded as a capital expenditure, because the lathe is not an integral part of the factory but is a separate asset. Between such clear-cut cases there are others where a replaced item may be an essential part of a whole property yet not an integral part of it. Where such difficulties are encountered, other factors such as relative values must be taken into account.
1.9 It may be necessary to consider the amount of the expenditure in relation to:
- the value of the whole property;
- the previous average maintenance and repair costs or other expenses; and
- annual profits.
This is particularly so when the replacement itself is purchased as a separate asset. For example, a spark plug in an automobile engine could be regarded as a separate asset, but one would normally treat the cost of replacing it as a current maintenance expense since its value is low when compared to the cost of the automobile. However, where the engine in an automobile is replaced, it is not only likely that such a replacement will substantially improve or prolong the useful life of the automobile, but the cost is also likely to be substantial in relation to the total value of the property of which the engine forms a part. In such a case, the expenditure would likely be regarded as capital in nature.
1.10 The relationship between the expenditure and the value of the whole property is not necessarily decisive in other situations. For example, a major repair job may be an accumulation of lesser jobs whose cost would have been classified as current expenses if each had been done when the need first arose. The fact that these jobs were not done earlier does not change the nature of the work when it is done, regardless of the total cost.
Readying a used property for rental or other use
1.11 Costs to ready depreciable property for use are generally capital expenditures. Likewise, a taxpayer might acquire used property that needs repairs or replacements to put it in suitable condition for use. The cost of such work is regarded as capital in nature even though, in other circumstances, it might be treated as a current expense. For example, the cost to renovate a newly-acquired property in order to ready the property for rental use would normally be considered on account of capital.
Anticipation of sale
1.12 Repairs made in anticipation of the sale of a property or as a condition of the sale are generally regarded as capital in nature. On the other hand, where the repairs would have been made in any event and the sale was negotiated during the course of the repairs, or after their completion, the cost should be classified as though no sale was contemplated.
Capital cost allowance
Overview of CCA
1.13 Under Part XI of the Regulations, a taxpayer's depreciable property is grouped into various classes. The classes are described in Schedule II of the Regulations. The maximum rate of CCA allowed is prescribed for each class in subsection 1100(1) of the Regulations. In most cases, CCA is calculated on a diminishing balance basis and expressed as a percentage of the undepreciated capital cost (UCC) of the class at year-end. In general terms, the UCC of a particular class at any time represents the capital cost of all property included in that class (whether or not still owned), less the total CCA previously claimed for all years and the net proceeds (or capital cost if less) from any dispositions before that time. The UCC calculation provisions are also used for determining amounts to be included in income under subsection 13(1) of the Act as a recapture of CCA or amounts to be deducted from income under subsection 20(16) of the Act as a terminal loss.
1.14 CCA rates for the majority of classes are found in paragraph 1100(1)(a) of the Regulations and are generally intended to reflect the average useful life of assets in that class. The remaining paragraphs of subsection 1100(1) set out a number of special rates applicable to specific types of property and certain additional accelerated allowances. For a number of classes set out in Schedule II, section 1101 provides that each property has to be included in a separate class.
1.15 In general, a taxpayer may deduct any amount of CCA up to the maximum available for the year. Where a taxpayer deducts less than the maximum CCA for the year, the excess is not carried over, but rather remains part of the UCC balance available for future years. The taxpayer must also take into consideration any restrictions such as those mentioned in ¶1.21, ¶1.38, ¶1.42 and ¶1.57, or restrictions on certain types of property such as rental or leasing property (subsections 1100(11) to (20) of the Regulations) or specified leasing property (subsections 1100(1.1) to (1.3) of the Regulations).
1.16 Property will meet the definition of depreciable property in subsection 13(21) when CCA is or may be claimed under paragraph 20(1)(a) in respect of the property and in computing the taxpayer's income from business or property for the year (or a preceding year). In order to claim CCA, the property must be:
- owned by the taxpayer;
- included within the description of a prescribed class in Schedule II or Part XI of the Regulations; and
- available for use.
Exclusions from depreciable property
1.17 There are a number of properties that are specifically excluded from the classes of depreciable property described in Schedule II and Part XI of the Regulations. For example, section 1102 of the Regulations excludes property:
- that is not acquired for the purpose of gaining or producing income;
- that is described in the taxpayer's inventory;
- the cost of which is otherwise deductible in computing the taxpayer's income (if the Act were read without reference to sections 66 to 66.4);
- the cost of which is included in the taxpayer's Canadian renewable and conservation expense;
- the cost of which has been deducted as a scientific research and experimental development expense; and
- that is land.
Capital expenditures that are an eligible capital expenditure or a Class 14.1 property
1.18 A taxpayer might incur costs for architectural and engineering services used in preparing plans and estimates for a new building or for other construction work of a capital nature. Such costs are capital expenditures that would normally be added to a particular class and be eligible for CCA. If the work for which the plans and estimates were prepared is not carried out, the related expenditures, if incurred prior to January 1, 2017, may qualify as an eligible capital expenditure, for which an allowance is permitted by virtue of paragraph 20(1)(b). More information about eligible capital expenditures is available in Interpretation Bulletin IT-143R3, Meaning of Eligible Capital Expenditure. However, if the related expenditures are incurred after December 31, 2016, the expenditures may qualify as Class 14.1 property. It is also possible that certain expenditures related to investigating the suitability of a site may be deducted as a current expense (see ¶1.19).
Capital expenditures that are specifically deductible
1.19 In computing a taxpayer's income from business (but not income from property with the exception of paragraph 20(1)(aa) which also applies to income from property), amounts that would otherwise be considered capital expenditures may be deductible as a current expense under certain provisions of the Act. These provisions include:
- Paragraph 20(1)(aa) – landscaping of grounds (see Interpretation Bulletin IT-485, Cost of Clearing or Levelling Land);
- Paragraph 20(1)(cc) – making representations to certain governmental bodies or agencies (see paragraph 11 of Interpretation Bulletin IT-99R5 (Consolidated), Legal and Accounting Fees);
- Paragraph 20(1)(dd) – investigating the suitability of a site for a building (see Interpretation Bulletin IT-350R, Investigation of Site); and
- Paragraph 20(1)(ee) – utility service connections (see paragraph 10 of Interpretation Bulletin IT-482R, Pipelines).
Where an otherwise capital amount has been deducted in computing income from a business, this amount is not included in the capital cost of property.
Depreciable property versus inventory assets
1.20 A taxpayer might deal in a particular type of inventory and also use that kind of property for some other purpose. For example, a taxpayer may both sell and rent or lease property of the same kind. In such cases, all proceeds from the sale of property that has been rented or leased will constitute income of the taxpayer from the sale of inventory unless certain conditions are met. The CRA's views in this regard are discussed in Interpretation Bulletin IT-102R2, Conversion of Property, other than Real Property, From or To Inventory.
1.21 CCA may be claimed only for property:
- owned by the taxpayer;
- deemed to be owned by the taxpayer; or
- in which the taxpayer has a leasehold interest.
A taxpayer who acquires or holds property as an agent or nominee for another person cannot claim CCA for such property.
1.22 A taxpayer does not need to hold legal title to a property in order to claim CCA. CCA may be claimed by the beneficial owner of a property if that person has all the incidents of title, such as possession, use and risk. The concept of beneficial ownership, including a discussion of ownership issues under the civil law in the province of Québec, can be found in ¶2.79 to 2.87 of Income Tax Folio S1-F3-C2, Principal Residence.
Where ownership is not acquired
1.23 Where a taxpayer incurs a cost in respect of a capital asset, the taxpayer normally acquires ownership of, or a leasehold interest in, that asset either at the time the cost was incurred or at some later date. However, in some circumstances a taxpayer might incur a cost in respect of a property without acquiring a freehold or leasehold interest in that property. This might occur, for example, where a taxpayer's asset is incorporated as an integral part into a property owned by another person. In general, CCA cannot be claimed by a taxpayer who does not own or otherwise have a leasehold interest in the property.
1.24 Subsection 13(7.5) of the Act provides for an exception to this rule in respect of the cost of certain properties prescribed under subsections 1102(14.2) and 1102(14.3) of the Regulations. The cost of such prescribed property, or of the right to use such prescribed property, is deemed to be the taxpayer's cost of depreciable property. Subsection 13(7.5) is discussed further in ¶1.48 to 1.49.
1.25 In calculating the income of a partnership, subsection 96(1) of the Act and subsection 1102(1a) of the Regulations require that partnership property (including depreciable property) be accounted for as if it were owned at the partnership level.
Election for leased property
1.26 Subsection 16.1(1) provides special rules to allow a lessee to claim CCA on certain property (other than property prescribed by section 8200 of the Regulations) leased for a term of more than one year. Where the lessor and lessee jointly elect in a prescribed form, the lessee will be deemed to have acquired the tangible property (or corporeal property under civil law) at the particular time the lease commenced, at a cost equal to its fair market value at that time. For tax purposes, the rental payments made under the lease will be treated not as rent but as blended payments of principal and interest on a notional loan in accordance with paragraph 16.1(1)(c). To the extent that the property is used to earn income, the lessee will be able to claim CCA in respect of the property (subject to the normal rules, such as the half-year rule) and deduct the interest portion of each payment in respect of the notional loan. When the lease is either cancelled, expired or assigned, the lessee will be treated as having disposed of the property and the rules in paragraph 16.1(1)(f) will apply to determine the amount of any resulting recapture or terminal loss. The joint election is made by filing Form T2145, Election in Respect of the Leasing of Property, or Form T2146, Election in Respect of Assigned Leases or Subleased Property, with both the lessor and lessee's income tax return for the year in which the lease agreement is made.
Date of acquisition
1.27 Subject to the available-for-use rules, the date on which depreciable property is acquired may influence the classification of certain property under Schedule II of the Regulations. This consequently determines the appropriate rate of CCA. For example, certain manufacturing and processing machinery and equipment may fall into Class 29 with a 50% straight-line CCA rate. However, for eligible assets acquired after 2015 and before 2026, Class 29 has been replaced with a new CCA Class 53 that has a 50% declining-balance CCA rate and is subject to the half-year rule. The date of acquisition would also be important in a situation where a taxpayer's year-end intervenes between the date they ordered depreciable property and the date it was delivered in usable condition.
Date on which property is acquired
1.28 Generally, a taxpayer will be considered to have acquired a depreciable property at the earlier of:
- the date on which title to it is obtained; and
- the date on which the taxpayer has all the incidents of ownership such as possession, use, and risk, even if the vendor retains legal title as security for the purchase price (as is commercial practice under a conditional sale agreement).
In order that the cost of an asset may fall within a specified class, the purchaser must have a current ownership right in the asset itself and not merely rights under a contract to acquire the asset in the future.
1.29 The legal relationship between the vendor and the purchaser of a property should be reviewed when determining whether a taxpayer has acquired depreciable property. For example, where chattels or movables are being acquired, the relevant sale of goods legislation would be applicable. Each province and territory has a Sale of Goods Act establishing substantially the same rules for ownership rights to assets bought and sold. The province of Québec has similar provisions in the Civil Code of Québec governing the sale of both movable and immovable property. The basic rule is that property is acquired by a purchaser at the time the parties to the contract intend it to be acquired. Their intention would be evidenced by the terms of the contract, the conduct of the parties and any other relevant circumstances.
1.30 However, if the intention of the parties is not evidenced as discussed above, the following rules apply to determine when ownership of a property is acquired:
- Where there is an unconditional contract for the sale of a specific asset in a deliverable state, property will be acquired by the purchaser when the contract is made. It is immaterial whether the time of payment or delivery or both are postponed.
- If there is a contract for the sale of a specific asset and the seller is bound to do something to the asset to put it into a deliverable state, then ownership of the property is not acquired until the seller has satisfied any outstanding conditions and the purchaser has been notified. This is also the case where the asset is in a deliverable state, but the seller must weigh, measure, test or do some other act or thing to ascertain the price.
1.31 For the purpose of ¶1.29 and 1.30, ownership cannot be acquired unless the asset exists and, even then, only if it is a specific asset that can be identified as the object of the contract. For example, this requirement is not met by a contract for the purchase of machinery which is described simply as being of a certain make and model. It would be met if the machinery is further identified by its serial number, since only one particular machine can be so described. It should be noted that it is customary in some industries, such as the automotive and other heavy equipment manufacturing industry, to issue purchase contracts that describe the property as being of a certain make, model and even serial number at a time when the property does not exist but is scheduled for production. Under this type of contract, the purchaser acquires the property when the property has been produced and the purchaser has knowledge that it is in a deliverable state.
Available for use
1.32 Despite having been acquired by the taxpayer, CCA cannot be claimed on depreciable property until such time as the property is available for use. The available-for-use rules in subsections 13(26) to (32) of the Act differ between buildings and property other than buildings.
When a building is available for use
1.33 Under subsection 13(28), a building or part of a building usually becomes available for use by a taxpayer at the earliest of:
- the time when all or substantially all of the building is first used by the taxpayer for the purpose for which it was acquired;
- the time the construction, renovation or alteration of the building is complete;
- the time immediately after the beginning of the second tax year after the year in which the building was acquired (the two-year rolling-start rule – in which case the half-year rule does not apply, as discussed in ¶1.39); or
- the time immediately before the taxpayer disposes of the building.
For the purpose of the available-for-use rules, a renovation, alteration or addition to a particular building is considered a separate building (see ¶1.122).
Company A owns a Class 1 building that is used to earn business income. Near the end of Year 1, the company started construction of a major addition to the building. The construction of the addition continued for the next several years and was completed in Year 4, at which time the addition was first used by Company A for the purpose for which it was intended. Company A incurred the following construction costs:
- $10 million in Year 1;
- $50 million in Year 2;
- $75 million in Year 3; and
- $15 million in Year 4.
The long-term election under subsection 13(29) and discussed in ¶1.37 is not made.
- The two-year rolling-start rule in paragraph 13(28)(c) will apply such that the $10 million spent by Company A in Year 1 is available for CCA purposes in Year 3. The half-year rule does not apply (see ¶1.39).
- The $50 million spent in Year 2 is available in Year 4. The half-year rule does not apply.
- As the building was completed and first used to earn income in Year 4, the combined $90 million spent in Year 3 and Year 4 is also available in Year 4. However, these costs are subject to the half-year rule because the two-year rolling-start rule does not apply.
When property other than a building is available for use
1.34 Under subsection 13(27), depreciable property, other than a building or a part of a building, usually becomes available for use at the earliest of:
- the time when the taxpayer first uses the property for the purpose of earning income;
- the time immediately after the beginning of the second tax year after the year in which the property was acquired (the two-year rolling-start rule – in which case the half-year rule does not apply, as discussed in ¶1.39);
- the time immediately before the taxpayer disposes of the property; or
- the date the property is delivered or made available to the taxpayer and is capable of producing a commercially saleable product or service, or of performing the function for which it was acquired.
Company B purchased specialized machinery for use in its manufacturing business. The machinery, which was capable of producing commercially saleable parts used in the assembly process, was delivered and installed in Year 1. However, the company did not complete construction of the manufacturing facility until Year 2, at which time the production line was put into service.
Although the machinery was not used in the production line until Year 2, it was capable of producing a commercially saleable product in Year 1. Therefore, the earliest time at which CCA can be claimed is Year 1 (subject to the half-year rule).
When a leasehold interest is available for use
1.35 A leasehold interest is the interest of a tenant in any leased tangible property, such as a building, and includes any capital improvements or alterations. A tenant who leases property acquires a leasehold interest in that property regardless of whether any capital cost is incurred in respect of that interest. However, CCA may not be claimed on the leasehold interest unless a capital cost has actually been incurred by the tenant in respect of the leased property.
1.36 In general, capital costs in respect of leasehold improvements are included in Class 13 of Schedule II of the Regulations. However, subsection 1102(5) of the Regulations requires the cost of a building or other structure to be added to Class 1 (or Class 3) in certain circumstances rather than to Class 13. Although subsection 1102(5) of the Regulations applies for the purposes of Schedule II of the Regulations, it does not deem the leasehold interest to be a building or part thereof for the general purposes of the Act. This means that even though a taxpayer may erect a building on leased land, it will still be considered property (other than a building or part thereof) acquired by the taxpayer within the meaning of subsection 13(27) of the Act for the purpose of the available-for-use rules. More information on subsection 1102(5) can be found in Interpretation Bulletin IT-464R, Capital Cost Allowance—Leasehold Interests.
1.37 Subsection 13(29) provides an election in respect of property acquired for use in a long-term project. The property can be a building, but not a building that is used or to be used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent. Under this election, the general available-for-use rules will be applied to all project-related expenditures made in the year in which the project property was first acquired and in the following year. However, in the third and subsequent years, the application of the available-for-use rules to expenditures made as part of the project will be limited so that only those expenditures in any year in excess of certain threshold amounts will be subject to the available-for-use rules. Those expenditures exempted from the application of the available-for-use rules through this mechanism will be subject to the half-year rule. For more information on the subsection 13(29) election, as well as detailed examples, see Form T1031, Subsection 13(29) Election in Respect of Certain Depreciable Properties, Acquired for use in a Long Term Project.
1.38 Subsection 1100(2) of the Regulations limits CCA in the tax year of acquisition of most depreciable property. The claim is limited to the amount otherwise available less one-half of the CCA attributable to net acquisitions in the year, determined on a class by class basis. The term net acquisitions means cost of acquisitions in the year in excess of that year's net proceeds of disposition (or capital cost, if less). Where the lesser of net proceeds of disposition and capital cost of property of a particular class in a tax year exceeds the costs of all additions to the same class in that year, the rule has no effect.
1.39 The half-year rule generally applies to the cost of property that was acquired or became available for use during the year. However, where property, including a building or part of a building, becomes available for use under the two-year rolling-start rule, the half-year rule will not apply in the first year in which the CCA is deductible in respect of the property (see Example 1 as well as ¶1.33 and 1.34).
Exclusions from the half-year rule
1.40 Under subsection 1100(2) of the Regulations, the following properties are specifically excluded from the application of the half-year rule:
- Class 12 property (thus preserving the availability of 100% write-off in the year of acquisition) except:
- a motion picture film or video tape that is a television commercial message,
- Class 12(o) computer software (not systems software or certain property described in Class 12(s)),
- a certified feature film or certified production,
- a die, jig, pattern, mould or last, and
- the cutting or shaping part in a machine;
- Class 14 patents, franchises, concessions and licences;
- property included in Class 15 acquired for the purpose of cutting and removing merchantable timber;
- the following properties to which special 50% rules apply:
- property of Classes 24, 27, 29 and 34 to which paragraphs 1100(1)(t) and (ta) of the Regulations apply (see Income Tax Folio S4-F15-C1, Manufacturing and Processing); and
- certain leasehold property of Class 13 to which paragraph 1100(1)(b) of the Regulations applies (see the current version of Interpretation Bulletin IT-464, Capital Cost Allowance—Leasehold Interests);
- Canadian vessels and other property to which paragraph 1100(1)(v) of the Regulations applies (see Interpretation Bulletin IT-267R2, Capital Cost Allowance—Vessels);
- specified leasing property of a corporation that was throughout the year a corporation described in subsection 1100(16) of the Regulations;
- property that was deemed to have been acquired by the taxpayer in a preceding tax year under paragraph 16.1(1)(b) in respect of a lease to which the property was subject immediately before the taxpayer last acquired the property;
- certain electronic data processing equipment and systems software of Class 52 for which a 100% write off is available in the year of acquisition; and
- property considered to have become available for use by the taxpayer in the year by reason of the two-year rolling-start rule in paragraph 13(27)(b) or 13(28)(c).
1.41 The half-year rule might not apply where there is an acquisition of property in certain non-arm's-length transactions (undertaken otherwise than by virtue of a right referred to in paragraph 251(5)(b)) and in the course of certain corporate reorganizations. These exclusions are contained in subsection 1100(2.2) of the Regulations and apply to a transferee only if:
- the property was depreciable property of the transferor, and was owned continuously by that person, either from November 12, 1981 or from a date that was at least 364 days before the end of the transferee's tax year in which they acquired the property, to the date of acquisition; or
- the property was previously exempted from the half-year rule because of the application of subsection 1100(2.1) or 1100(2.2) of the Regulations (at the time when the transferor originally acquired the property).
More information on paragraph 251(5)(b) can be found in Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length.
Mr. C is the controlling shareholder of a corporation which has a tax year ending on December 31. On November 1, 2015, Mr. C sold depreciable property to the corporation. He had owned the property since December 15, 2014.
The property would be excluded from the half-year rule because Mr. C and the corporation do not operate at arm's length and Mr. C had owned the property continuously from a date (December 15, 2014) that was at least 364 days before the end of the corporation's tax year in which the corporation acquired the property (December 31, 2015), until it was acquired by the corporation.
The facts are as described in Scenario A except that Mr. C acquired the property on June 30, 2015 from his father.
Both Mr. C and the corporation would be exempt from the application of the half-year rule on their acquisitions, provided:
- the property was depreciable property of the father;
- the father acquired it at least 364 days before the end of Mr. C's 2015 tax year; and
- the father owned it continuously until it was acquired by Mr. C.
Short tax year
1.42 Subsection 249(1) defines a taxation year for purposes of the Act. For an individual, the taxation year is the calendar year. In the case of a corporation or Canadian resident partnership, a taxation year is its fiscal period, which may or may not coincide with the calendar year. In some cases, a taxpayer's tax year may be shorter than 12 months, such as when a new business starts or when a business stops. If a taxpayer's tax year is less than 12 months, subsection 1100(3) of the Regulations restricts the taxpayer's CCA claims to that portion of the maximum amount otherwise allowable multiplied by the number of days in the tax year divided by 365. This applies to all of the properties described in subsection 1100(1) of the Regulations, except:
- Class 14 patents, franchises, concessions and licences — 1100(1)(c);
- timber limits and cutting rights — 1100(1)(e);
- property included in Class 15 acquired for the purpose of cutting and removing merchantable timber — 1100(1)(f);
- industrial mineral mines — 1100(1)(g);
- certified productions — 1100(1)(l);
- Canadian film or video productions — 1100(1)(m);
- Class 28 mining equipment — 1100(1)(w) and 1100(1)(x);
- Class 41 mining equipment — 1100(1)(y);
- property for more than one mine — 1100(1)(ya);
- year 2000 computer hardware and systems software — 1100(1)(zg); and
- year 2000 computer software — 1100(1)(zh).
1.43 The adjustment for a short-fiscal period applies in addition to the half-year rule. For example, if an asset is acquired in a tax year of six month's duration, in effect, only one-quarter (approximately) of the maximum annual rate of CCA that would normally be available for that asset will be allowed in that tax year.
1.44 A taxpayer may own two properties that are described in the same class of Schedule II of the Regulations. Where one of the properties is acquired for the purpose of earning income from a particular business and the other property is acquired for the purpose of earning income from a separate business or from the property, subsection 1101(1) of the Regulations prescribes a separate class for each property. More information is available in Interpretation Bulletin IT-206R, Separate Businesses.
Capital cost of property
Meaning of capital cost
1.45 The term capital cost of property generally means the taxpayer's full cost of acquiring the property and includes:
- legal, accounting, engineering or other fees incurred to acquire the property;
- site preparation, delivery, installation, testing or other costs incurred to put the property into service; and
- in the case of a property a taxpayer manufactures for their own use, material, labour and overhead costs reasonably attributable to the property, but not any profit which might have been earned had the asset been sold.
1.46 Subsection 18(3.1) of the Act denies the deduction, on a current basis, of certain outlays and expenses that are attributable to the period of, and related to, the construction, renovation or alteration of a building or in respect of the ownership of the related land. These outlays and expenses (commonly referred to as soft costs) include legal and accounting fees, interest, property taxes and other similar costs. Soft costs are required to be added to the cost or capital cost, as the case may be, of the building to which they relate. The related land consists of the land under the building or land that is:
- immediately adjacent to such land;
- used (or intended to be used) for a parking area, driveway, yard, garden, or any other similar use; and
- necessary for the use (or intended use) of the building.
More information on soft costs, including a possible exception to this rule in the case of rental buildings, is available in Chapter 3 of the T4036 Rental Income Guide.
1.47 In some cases a person may acquire depreciable property for consideration that includes a transfer of other property (for example, a trade-in). Subsection 13(33) provides that for property acquired after November of 1992 the portion of the cost attributable to the transfer shall not exceed the fair market value of the transferred property.
Deemed capital cost
1.48 A taxpayer may incur a cost on account of capital for the building of, for the right to use, or in respect of, a prescribed property owned by some other person. Effective after March 6, 1996, subsection 13(7.5) deems the taxpayer to have acquired the property at a capital cost equal to that cost.
In order to be able to establish a sports arena at a particular location, a taxpayer builds a road to the arena at a cost of $10 million. The road is owned by the municipality in which the arena is located, but the municipality provides the taxpayer with exclusive access to two parts of the road indefinitely. The fair market values of these access rights are $200,000 and $300,000.
- The taxpayer is deemed under paragraph 13(7.5)(b) to have acquired a road (Class 17 property) at a cost equal to $10 million.
- The access rights are considered to be part of the capital cost of the road (Class 17) because of paragraph 13(7.5)(c). The capital costs of these rights are considered to be $200,000 and $300,000, respectively.
1.49 Subsections 1102(14.2) and 1102(14.3) of the Regulations list the property prescribed for the purpose of subsection 13(7.5) of the Act. Prescribed property includes surface construction such as roads, bridges, sidewalks and parking areas. If the other person's property is not property described in subsections 1102(14.2) or 1102(14.3) of the Regulations, or if the cost was incurred before March 7, 1996, such cost would generally be a non-deductible, non-depreciable capital outlay that qualifies as an eligible capital expenditure if the cost was incurred before January 1, 2017. However, if the cost was incurred after December 31, 2016, such cost would generally be a Class 14.1 property. For more information on this topic, see ¶1.24 of this Chapter and ¶30 of Interpretation Bulletin IT-143R3.
1.50 If a property is acquired in a transaction requiring payment in a foreign currency, including property situated in a foreign country and used to earn income, the cost of the property should be expressed in Canadian dollars. This would be subject to the functional currency election referred to in ¶1.51. Generally, the relevant spot rate on the date of acquisition should be used to convert the amount to Canadian dollars. However, payments on account of the purchase price made before the date of acquisition should be converted to Canadian dollars using the relevant spot rate on the dates of such payments. For these purposes, the relevant spot rate is generally defined in subsection 261(1) as the foreign exchange rate quoted by the Bank of Canada for the particular day (or, if the particular day is before March 1, 2017, quoted by the Bank of Canada for noon on the particular day) or another exchange rate acceptable to the CRA. (Additional details about determining a relevant spot rate can be found in ¶1.3 to 1.6.1 of Income Tax Folio S5-F4-C1, Income Tax Reporting Currency.) Foreign exchange gains and losses on payments made after the date of acquisition do not form part of the capital cost of the property.
1.51 Under certain conditions, a corporation resident in Canada can elect to report for tax purposes in a currency other than Canadian dollars. In this situation, the rules in section 261 should be considered in determining or converting the cost of the property. For more information, see Income Tax Folio S5-F4-C1.
1.52 After 1992, where a taxpayer becomes a resident in Canada and owns depreciable property in a foreign country, pursuant to paragraphs 128.1(1)(b) and (c), the taxpayer is deemed to dispose of such property at the fair market value proceeds immediately prior to becoming a resident and then reacquire the property for the same amount. As a result, the capital cost of such depreciable property for CCA purposes is the fair market value of the property determined immediately before the time the taxpayer becomes a resident in Canada and is expressed in Canadian dollars. This rule does not apply to a trust to which subsection 128.1(1.1) applies or to an individual in respect of the property listed in subparagraphs 128.1(1)(b)(i) to (iv).
1.53 Where the taxpayer is a corporation or a trust, paragraph 128.1(1)(a) deems the taxpayer's tax year to have ended immediately before the taxpayer becomes a resident in Canada and a new tax year to have commenced at the particular time the taxpayer becomes resident in Canada. Although these rules apply after 1992, section 128.1 may apply earlier in respect of a corporation electing to be subject to subsection 250(5.1) for tax years before 1993. In this case, it will apply from the corporation's time of continuation.
1.54 Prior to 1993, in cases where a taxpayer became a resident in Canada and owned depreciable property in a foreign country, which is property that was and continued to be used to earn income in that foreign country, the capital cost of that property for CCA purposes is its cost. The cost of such depreciable property is converted to Canadian dollars in the manner explained in ¶1.50. The capital cost is not reduced by any depreciation allowances recognized by that foreign country.
Costs of demolition
1.55 If an old building used by a taxpayer for a long time to earn income is demolished to build a new one, the cost of demolition is not considered to be part of the capital cost of the new building (unless the taxpayer so desires), but may be deducted as an expense in the year.
1.56 Alternatively, a taxpayer might purchase real estate that includes a building and tear down the building relatively soon after the purchase. The question arises as to whether the building should be classed as depreciable property. If the building is demolished by the purchaser without having been used to earn income, the building cannot be regarded as depreciable property. Also, where the building is used to earn income for only a short time prior to demolition, it is likely that the building will not be regarded as depreciable property unless the taxpayer can clearly establish that the prime intention on acquiring the building was for the purpose of gaining or producing income. The CRA's practice with respect to the costs of demolishing a building incidentally acquired on obtaining a site is discussed further in Interpretation Bulletin IT-485.
Buildings and other structures
1.57 Where a building or other structure is being erected by or for a taxpayer on land owned by the taxpayer, or where a taxpayer erects, makes an addition to or makes alterations to a building or other structure to which paragraph 1102(5)(a) of the Regulations applies, the taxpayer is considered to have acquired a building or other structure, at any particular time, to the extent of:
- the construction costs incurred by the taxpayer to that time, including the cost to the taxpayer of materials that have been put in place, but not including holdbacks that constitute a conditional liability (for example, a holdback which requires that the work be approved by the taxpayer's architect or engineer before payment), or
- progress billings received by the taxpayer to that time, net of any holdbacks that constitute a conditional liability.
Although a building or other structure (or part thereof) that is under construction may be considered to have been acquired, the taxpayer's CCA claim will still be subject to the available-for-use rules.
Reduction of capital cost
Assistance or inducements
1.58 A taxpayer may receive, or become entitled to receive, assistance or an inducement in respect of, or for the acquisition of, depreciable property. In such cases, the capital cost of the property for which the assistance or inducement is received may have to be reduced or the amount of the assistance included in income. See Interpretation Bulletin IT-273R2, Government Assistance—General Comments, if any form of assistance, including a forgiven debt obligation under section 80, has been received or if there is a repayment of assistance.
1.59 Where a taxpayer acquires depreciable property and at a later date the vendor agrees to reduce the amount owing under a negotiated adjustment of the purchase price, the capital cost of the property is reduced by the amount of the reduction at the beginning of the tax year in which the price adjustment took place. As a result of the reduction to the capital cost of the property, the UCC of the class of the property is reduced by the same amount and at the same time (see ¶1.8 and 1.9 of Income Tax Folio S4-F3-C1, Price Adjustment Clauses, for more information on the consequences arising from the application of a price adjustment clause). If the adjustment can be established to be a true forgiveness of debt, rather than a reduction in the purchase price, the debt forgiveness rules in section 80 will apply.
Other considerations related to capital cost
1.60 In certain circumstances, the capital cost of depreciable property may be determined or altered by special provisions in the Act. For example, there are special rules in paragraph 13(7)(e) applicable to depreciable property acquired from a person or partnership with whom the taxpayer did not deal at arm's length. In such cases, the purchaser's capital cost of the property for CCA purposes will correspond to the seller's cost increased by one-half of the capital gain.
1.61 The following table lists some other provisions that may determine or alter capital cost and the publications that provide details of their application.
|13(7)||Conversion of property to and from inventory||IT-102R2|
|13(7)(e), 85||Non-arm's-length acquisition, transfer of property to a corporation||IT-291R3|
|13(7)(g)||Passenger vehicle cost in excess of $20,000||IT-521R|
|13(7.1)||Receipt of inducements or other forms of assistance||IT-273R2|
|220(1)(a), (aa)||Cost of clearing or levelling land||IT-485|
|44||Replacement property, expropriation of property||Folio S3-F3-C1|
|69(1)||Property acquired in a non-arm's-length transaction||Folio S4-F3-C1|
|69(1)||Property acquired as a gift or from inheritance||IT-209R|
|74.1||Transfer of property to a spouse or common-law partner||IT-511R|
|80||Debtor's gain on settlement of debt||IT-293R|
|98(3)||Distribution of property on cessation of partnership||IT-471R|
|107(2)||Property distributed by trust to a capital beneficiary||IT-209R|
Undepreciated capital cost
1.62 The undepreciated capital cost to a taxpayer of depreciable property of a prescribed class at any time is determined by a formula in subsection 13(21). The UCC is equal to the amount, if any, by which the total of the increases to the UCC of the class (elements A to D.1) exceeds the total of the decreases to the UCC of the class (elements E to K). The UCC of a class of depreciable property will change each time an event occurs that affects one of the components of the calculation.
1.63 The UCC of a particular class of depreciable property is used as the base for claiming a CCA deduction. It is a cumulative account of all additions, dispositions and CCA claims for that class. The UCC calculation provisions are also used for determining the amount to be included in income under subsection 13(1) as a recapture of CCA or the amount to be deducted from income under subsection 20(16) as a terminal loss.
Increases to UCC
1.64 The factors that increase a taxpayer's UCC of a particular class are described by elements A to D.1 in the formula in subsection 13(21). In this discussion, a property means a depreciable property of the particular class. The elements are:
A: the capital cost to the taxpayer of each property acquired before the time of the UCC calculation;
B: any CCA recapture for the class included in the taxpayer's income for any tax year ending before the time of the UCC calculation;
C: any legally required repayment of assistance made after the disposition of a particular property, that would have otherwise increased the capital cost of the property under paragraph 13(7.1)(d);
D: any legally required repayment of an inducement, assistance or any other amount contemplated in paragraph 12(1)(x) received by the taxpayer after the disposition of a particular property, that otherwise would have increased the capital cost of the property under paragraph 13(7.4)(b); and
D.1: each amount payable after February 23, 1998 and paid by the taxpayer before the time of the UCC calculation as or on account of a proposed or existing countervailing or anti-dumping duty on a particular property.
Decreases to UCC
1.65 The factors that decrease a taxpayer's UCC of a particular class are described by elements E to K in the formula in subsection 13(21). As above, a property means a depreciable property of the particular class. The elements are:
E: the total depreciation (CCA) allowed to the taxpayer for the class before the time of the UCC calculation, including any terminal loss;
E.1: any amount by which the taxpayer's UCC for the class is required (otherwise than because of a reduction in the taxpayer's capital cost of depreciable property) to be reduced at or before the time of the UCC calculation because of the debt forgiveness rules in subsection 80(5);
F: for each disposition of a property of the taxpayer (other than a timber resource property) that has occurred before the time of the UCC calculation, the lesser of:
- the proceeds of the property's disposition minus any disposition costs of the taxpayer, and
- the taxpayer's capital cost of the property;
G: for each disposition of a timber resource property of the taxpayer that has occurred before the time of the UCC calculation, the proceeds of the property's disposition minus any disposition costs of the taxpayer;
H: with respect to a Class 28 mining property of a mine operator, the amount of income from the mine that was exempt from tax under section 28 of the Income Tax Application Rules, as it read prior to October 29, 1985, if the taxpayer elected under section 1100A of the Regulations to claim accelerated CCA on that class;
I: each amount of investment tax credit allowed to the taxpayer on a property for a tax year which has ended before the UCC calculation and after the taxpayer's disposition of the property;
J: each amount of assistance the taxpayer received (or was entitled to receive) after the disposition of a property, if such assistance would have decreased the capital cost of the property by virtue of paragraph 13(7.1)(f); and
K: each amount received by the taxpayer after February 23, 1998 and before the time of the UCC calculation in respect of a refund of an amount described in element D.1 added to the UCC of the class.
1.66 The definition of UCC in subsection 13(21) provides that the UCC of a class at any particular time is calculated as the excess (if any) of all the increases over all the decreases to that UCC which have occurred since the inception of the class. However, in actual practice most taxpayers carry forward the UCC at the end of the previous tax year as the UCC at the beginning of the current year. If this is done, the taxpayer then needs only to add and subtract the increases and decreases for the current year for purposes of calculating the UCC at the end of the current year. More information on how to calculate the UCC and CCA in this manner can be found in Chapter 4 of Guide T4002, Business and Professional Income.
Dispositions of depreciable property
1.67 A disposition of depreciable property represents a decrease under element F in the calculation of UCC. Such a disposition is also subject to the provisions of the Act dealing with capital gains and losses. Where any depreciable property is disposed of for proceeds in excess of the capital cost to the taxpayer, that disposition may give rise to a capital gain as determined by paragraph 39(1)(a) of the Act, subject to the special transitional rules provided by section 20 of the Income Tax Application Rules. However, any loss on the disposition of depreciable property is specifically excluded from a taxpayer's capital loss by paragraph 39(1)(b) of the Act and as a result no deduction is permitted for such losses.
Meaning of disposition and proceeds of disposition
1.68 The term disposition is defined in subsection 248(1) for the purposes of the Act. A disposition includes any transaction or event entitling a taxpayer to proceeds of disposition of property.
1.69 The term proceeds of disposition is defined:
- in subsection 13(21), for purposes of sections 13 and 20 and the regulations made under paragraph 20(1)(a) applicable to provisions dealing with depreciable property; and
- in section 54, for the purpose of subdivision c of Division B of Part I of the Act applicable to the disposition of capital property (including depreciable property).
These definitions are not all-inclusive. It is possible that there may be other circumstances in which a disposition takes place. It is also possible for there to be proceeds of disposition in a form other than those listed in subsection 13(21) or section 54.
1.70 In certain circumstances, the disposition or the proceeds of disposition of depreciable property may be determined by special provisions in the Act. For example, subsections 13(4) and 44(1) permit a taxpayer to elect to defer the recognition of income or capital gains where a former property is involuntarily disposed of. A deferral may also be available if a former business property is voluntarily disposed of, and a replacement property is acquired. Where all the applicable conditions are met, these rules allow taxpayers that have disposed of property to relocate businesses without incurring immediate tax consequences.
1.71 The following table lists some other provisions that may determine or alter the proceeds of disposition and the publications that provide details of their application.
|3(b)||Capital gains and losses on disposition of business property by an individual||Guide T4037|
|13(7)||Conversion of property, other than real property, from and to inventory||IT-102R2|
Compensation for loss of property used in a business
|13(21)||Disposition—absence of consideration||IT-460|
|40(2)||Principal residence||Folio S1-F3-C2|
|44||Replacement property, exchanges of property||Folio S3-F3-C1|
|50(1)||Capital debts established to be bad debts||IT-159R3|
|70||Intergenerational transfers of farm or fishing property on death||IT-349R3|
|73(3.1)||Inter vivos transfer of farm or fishing property to child||IT-268R4|
|74.1(1)||Transfer and loans of property to a spouse or common law partner||IT-511R|
|74.1(2)||Transfers and loans of property to a related minor|
|85||Transfer of property to a corporation||IT-291R3|
Partial dispositions of property
1.72 It may be necessary to compute the gain or loss from the disposition of part of a property. A disposition of part of a property may refer either to the disposition of a physical part of the property or to the disposition of an undivided interest in the property. Section 43 provides that the adjusted cost base (ACB) of the whole property immediately before the disposition must be allocated on a reasonable basis between the part disposed of and the part kept. Section 54 defines ACB for all purposes of the Act. Where the property is depreciable property, section 54 defines the ACB to mean the capital cost of the property but makes no provision for adjustments made under section 53. The determination of a property's capital cost in various circumstances is addressed in ¶1.45.
Where the capital cost of the part disposed of can be ascertained
1.73 Where a taxpayer disposes of only part of a property of a prescribed class (other than a timber resource property as defined in subsection 13(21)), the capital cost of the part disposed of must be determined for the purpose of calculating:
- the amount of any recaptured depreciation; and
- the UCC of the property remaining in the class.
To accomplish this, the apportionment rule in section 43 should be used. No reduction of the capital cost referred to in element A of the definition of UCC will be required as a result of a partial disposition. This is because element A refers to the capital cost of all property in a prescribed class that has been acquired before the time the UCC is calculated. This would include property that has previously been disposed of in whole or in part.
1.74 Example 5 illustrates the application of the principles outlined above in a situation where the taxpayer disposes of a physical part of a depreciable property (other than a timber resource property) and the capital cost of the part disposed of and of the part retained is ascertainable with accuracy.
A taxpayer with a fiscal period ending May 31 owns a depreciable property, which is the sole property in its class. The CCA schedule as of May 31, 2014 shows the following:
|Capital cost of property in the class||$15,000|
|Less: Total CCA allowed||($10,000)|
|UCC of the class||$5,000|
Event #1: On June 1, 2014 the taxpayer sold one-half of the property for $17,000. The capital cost of the part disposed of is 50% of the capital cost of the whole property immediately before the sale. The taxpayer incurred $1,000 in selling costs.
Question: What is the capital gain on the date of sale, and what are the UCC and any recaptured depreciation at year-end?
|Proceeds of disposition, June 1, 2014||$17,000|
Capital cost of part sold immediately before disposition per section 43 ($7,500) and
Selling expenses ($1,000)
|Capital gain (paragraph 39(1)(a))||$8,500|
|Capital cost of all property in class (element A)||$15,000|
|Add: Recaptured CCA in previous tax years (element B)||NIL|
|Less: Total CCA allowed prior to year end (element E)||($10,000)|
|Less: The lesser of the two following amounts (element F):
|Recaptured CCA (subsection 13(1))||($2,500)|
|UCC of the class||NIL|
Event #2: On July 1, 2015, the taxpayer sells the remaining one-half of the property for $18,000. The capital cost of the remaining part, per (a) above, is 50% of the capital cost of the whole property. The taxpayer incurred $1,200 in selling expenses.
Question: What is the capital gain on the date of sale and what are the UCC and any recaptured CCA at the year-end?
|Proceeds of disposition, June 1, 2015||$18,000|
Capital cost of part sold immediately before disposition per section 43 ($7,500) and
Selling expenses ($1,200)
|Capital gain (paragraph 39(1)(a))||$9,300|
|Capital cost of all property in class (element A)||$15,000|
|Add: Recaptured CCA in previous tax years (element B)||$2,500|
|Less: Total CCA allowed prior to year end (element E)||($10,000)|
|Less: The lesser of the two following amounts (element F):
|Recaptured CCA (subsection 13(1))||($7,500)|
|UCC of the class||NIL|
Where the capital cost of the part disposed of cannot be ascertained with accuracy
1.75 In some cases, where the taxpayer disposes of part of a depreciable property (other than a timber resource property), the capital cost of the part disposed of cannot be ascertained. When this is so, section 43 requires that the attribution of a portion of the capital cost of the whole property to the part sold be reasonable.
1.76 One method that could be used to determine the proportionate share of the capital cost of a depreciable property is to use a pro rata calculation based on the current fair market values. This calculation is illustrated in Example 6.
The capital cost of a taxpayer's depreciable property is $42,000. The taxpayer disposes of a part of the property for $18,000. On the date of the disposition, the remaining part was valued at $66,000.
The capital cost of the part disposed of for purposes of paragraph (b) of element F of the definition of UCC is $9,000:
$18,000 × [$42,000 / ($18,000 + $66,000)] = $9,000
1.77 The method outlined in Example 6 for the pro rata apportionment of the capital cost of a depreciable property would not be reasonable in all circumstances. Where, for instance, the value of different parts of the same property cannot be established, it will be a question of fact as to what is a reasonable allocation of the capital cost of the whole property to the part disposed of and the part retained. Further, where a taxpayer incurs an expenditure before the disposition that is wholly attributable to one specific part of the property, it would be unreasonable to make a pro rata apportionment without first excluding the amount of that expenditure from the capital cost. After the apportionment is made, the amount of the expenditure would then be added back to the capital cost of the part disposed of or retained, as the case may be.
Part disposition of a timber resource property
1.78 Where a taxpayer disposes of only a part of a timber resource property (as defined in subsection 13(21)) it will not be necessary to apply the section 43 apportionment rule. A taxpayer's capital gain does not include any gain on the disposition of timber resource property by reason of subparagraph 39(1)(a)(iv). Instead, element G of the definition of UCC requires that the net proceeds of disposition of all or part of a timber resource property should reduce the taxpayer's UCC of Class 33 of Schedule II to the Regulations. Under subsection 13(1), any negative balance determined in respect of the UCC at the end of a tax year will be included in computing the taxpayer's income for the year.
Deemed disposition on ceasing to be resident in Canada
1.79 A taxpayer who ceases to be a resident of Canada is deemed by subsection 128.1(4) to have disposed of certain types of property at their fair market value. They are also deemed to have immediately reacquired the property for the same amount. A capital gain, a recapture of CCA or a terminal loss may result from such a deemed disposition. Any of these would be taken into account when computing the taxpayer's income. More information on emigrating is available on the CRA website on the pages Leaving Canada (emigrants) and Residency of a Corporation.
Allocation of amounts in consideration for property, services or restrictive covenants
1.80 Section 68 applies to the allocation of an amount received or receivable where the amount is partly consideration for property, services or restrictive covenants, and partly consideration for something else. It allows the CRA to modify the allocation of the proceeds of disposition when it determines that the allocation is not reasonable. As it pertains to depreciable property, the provisions of section 68 can apply to consideration for:
- both depreciable and non-depreciable property;
- depreciable properties included in two or more prescribed classes; or
- depreciable property and something other than property, such as services, or a restrictive covenant as defined in subsection 56.4(1).
Section 68 does not apply to a grant of a restrictive covenant made in writing by a taxpayer before February 27, 2004 between the taxpayer and a person with whom the taxpayer deals at arm's length.
1.81 The allocation must be reasonable in relation to the relative positions of the two parties to the transaction. The allocation should also be based on the facts of the particular case and have regard to the fair market value of the properties or services involved. A re-allocation of consideration between the various kinds or classes of property or services may be made by the CRA if some or all of the values specified are considered unreasonable. This can occur even where a value is specified in an agreement for each class or kind of property or service and the total consideration for the whole sale is reasonable. However, where the parties are dealing at arm's length, the agreement reached is a good indication that the allocation specified is reasonable. A taxpayer's allocation is further supported where there is evidence of hard bargaining between the parties in arriving at that allocation. However, this may not always be the case – see ¶1.86 for comments on the application of subsection 13(21.1).
Combined consideration for real estate
1.82 Section 68 applies to the allocation of lump sum proceeds of disposition between land and building. As illustrated in Example 7, the CRA will consider matters from the perspective of both the vendor and the purchaser.
Mr. C owns a commercial property from which he runs a business. He purchases the commercial property next door for $330,000. The purchased property includes land and an old warehouse. The building is in need of significant repair, but was still being used by the vendor to store goods. Similar-sized vacant land in the area was valued at about $300,000. Mr. C has no interest in the building, but he is willing to pay a premium for the land because of the proximity to his existing business.
Shortly after completing the purchase, Mr. C demolishes the building to construct an expanded parking area to service his adjacent property. He attributes the entire lump-sum purchase price of $330,000 solely to the land.
It may be reasonable to conclude that the purchase was essentially one of land and that the price was in consideration only of land, even though the building was still usable and may have had some value to the vendor. The fact that Mr. C demolished the building shortly after the acquisition would be taken into account in determining whether the allocation of the purchase price was reasonable. However, based on the value of similar vacant land in the area, it might be more reasonable to conclude that the $30,000 paid in excess over the fair market value of the land was in respect of the building. In other words, despite the purchaser's special reason for wanting the particular property, the demolition alone would not be regarded as conclusive evidence that the purchase price was solely in consideration of land. If this is found to be the case, section 68 will deem the purchaser to have paid the excess amount for the building.
1.83 If a building is demolished without being used for the purpose of gaining or producing income, it would likely not be depreciable property in the purchaser's hands by reason of paragraph 1102(1)(c) of the Regulations. Accordingly, the purchaser would not be entitled to CCA or a terminal loss. Instead, the demolition of the building would be considered a disposition and may result in a capital loss in the purchaser's hands.
1.84 Where a building is not demolished immediately after being purchased, the facts of each case will determine whether any part of the price was in respect of the building and whether the property was depreciable property. In addition to the fair market value of the properties involved, the CRA will consider other factors, such as:
- the length of time prior to demolition and whether the building was income-producing;
- any maintenance or repairs made to the building;
- the amount of income earned;
- renewal of leases, if any, and the length of the renewal; and
- the costs of breaking leases, if any.
Deemed proceeds of disposition of a building
1.85 In certain cases, when a building is sold for proceeds that are less than its proportionate share of the UCC of its class, the Act provides special rules to allocate proceeds of disposition between land and buildings. These rules restrict the potential terminal loss and might result in a recapture of any CCA previously taken.
1.86 Where the proceeds from the building's sale (including proceeds determined by the application of section 68) are less than the lesser of the cost amount and the capital cost of the building immediately before disposition, the rules in paragraph 13(21.1)(a) or 13(21.1)(b) will apply. However, these provisions will not apply where the land on which the building is situated has always been owned by a person dealing at arm's length with the owner of the building.
Disposal of land and building in the same year
1.87 Paragraph 13(21.1)(a) applies where both a building and land are disposed of in the same tax year, although not necessarily simultaneously. In this context, land includes land subjacent to, or immediately contiguous to and necessary for the use of the building (related land). Under this paragraph, the combined proceeds must be allocated between the building and land. This is primarily to ensure that no loss will be claimed in respect of the disposition of the building unless it is determined that no gain is reported on the land component.
1.88 Paragraph 13(21.1)(a) may also apply in the circumstance where related land is disposed of by a person not dealing at arm's length with the building owner. However, this will be the case only if the disposition occurs in a period coinciding with the building owner’s tax year that includes the time of disposition of the building.
1.89 In applying this rule, it is first necessary to calculate the cost amount of both the land and the building. Pursuant to the definition in subsection 248(1), the cost amount of land is the ACB. In the case of a building, the cost amount is determined as follows:
- If the building was the only property in the class, the cost amount is the UCC of the class before the building was disposed of; or
- If there is more than one property in the class, the cost amount of each property is calculated as:
(X/Y) x Z
X is the capital cost of the property
Y is the capital cost of all properties in the class that have not been previously disposed of
Z is the UCC of the class
1.90 Normally, paragraphs 13(7)(b), (d) and (e) provide that the capital cost of depreciable property can be limited to an amount that is less than fair market value in cases when:
- a non-income-producing depreciable property begins to be used for producing income;
- the proportion of the income producing use of a depreciable property increases; or
- there is a non-arm's-length acquisition of a depreciable property.
However, in determining the proportionate share of a building's UCC using the formula in ¶1.89, these limits do not apply. Instead, the capital cost of a building will reflect its acquisition (or partial acquisition) at fair market value.
1.91 In accordance with paragraph 13(21.1)(a), the proceeds of disposition of a building at a particular time are deemed to be the lesser of A and B where:
A = the amount, if any, by which
- the aggregate of:
- the fair market value of the building at the particular time, and
- the fair market value of the land immediately before its disposition
- the lesser of:
- the fair market value of the land immediately before its disposition, and
- the cost amount of the land otherwise determined less capital gains arising upon dispositions of the land within the three preceding years between the taxpayer and non-arm's-length parties
B = the greater of:
- the fair market value of the building at the particular time, and
- the lesser of
- the cost amount of the building, and
- the capital cost to the taxpayer of the building immediately before its disposition.
1.92 Once the proceeds of disposition of the building have been determined, the proceeds of disposition of the related land are then deemed to be the amount by which the combined proceeds of disposition of the land and building exceed the deemed proceeds of disposition of the building (as computed in ¶1.91). The purchaser's cost amount of land (ACB) is determined without reference to subsection 13(21.1). Example 8 illustrates the application of the rules in paragraph 13(21.1)(a).
A taxpayer sells a building and the land on which it sits in 2015 for a total of $500,000. Each property has the following attributes:
Capital cost $200,000
Cost amount (UCC) $180,000
Fair market value (FMV) $400,000
The deemed proceeds of disposition of the building are calculated under paragraph 13(21.1)(a) as the lesser of A and B where:
A = the amount, if any, by which:
- FMV building ($100,000) + FMV land ($400,000)
- the lesser of FMV land ($400,000) and ACB land ($300,000)
A = ($100,000 + $400,000) - $300,000
A = $200,000
B = The greater of:
- FMV building ($100,000); and
- The lesser of cost amount building ($180,000) and capital cost building ($200,000)
B = The greater of $100,000 and $180,000
B = $180,000
The deemed proceeds of disposition of the building = the lesser of A ($200,000) and B ($180,000).
The deemed proceeds of disposition of the building therefore = $180,000.
The proceeds of disposition for the land are deemed to be the amount by which:
The combined proceeds of disposition of the land and building ($500,000)
The deemed proceeds of disposition of the building (B above) ($180,000)
Deemed proceeds of disposition for the land:
$500,000 - $180,000 = $320,000
1.93 Where the land disposed of exceeds that necessary for the use of the building, paragraph 13(21.1)(a) is considered to apply only in respect of the portion of the land necessary for the use of the building. In such cases, a reasonable allocation of the total proceeds and the total cost for tax purposes of the land between the necessary and excess portions is required for the calculations described above.
Disposal of land and building in different years
1.94 Paragraph 13(21.1)(b) provides a second rule where the related land necessary for the use of the building is not disposed of in the same tax year as the building. The rule will apply where the land was owned at any time before the disposition of the building by the taxpayer, or by a person with whom the taxpayer was not dealing at arm's length. The deemed proceeds of disposition of the building for purposes of determining the UCC of the property remaining in the class (or the terminal loss if the building is the last property in the class) are calculated as A + B where:
A = The proceeds of disposition (POD) otherwise determined,
B = ½ of the amount by which the greater of the cost amount (UCC) and the fair market value of the building exceeds the proceeds of disposition otherwise determined.
The proceeds of disposition of the land are not reduced under this rule. Example 9 illustrates the rules in paragraph 13(21.1)(b).
In 2014, a taxpayer sells a building that is a rental property for $100,000. The taxpayer sells the land for $400,000 in the following year.
Fair market value (FMV) $100,000
Capital cost $200,000
Cost amount (UCC) $180,000
The deemed proceeds of disposition of the building are calculated under paragraph 13(21.1)(b) as the total of A + B, where:
A = the proceeds of disposition (POD) otherwise determined ($100,000)
A = $100,000
B = ½ of the amount by which the greater of:
- Cost amount (UCC) ($180,000); and
- FMV of building ($100,000)
The POD otherwise determined (A) ($100,000)
B = ½ of (180,000 – 100,000)
B = $40,000
The deemed proceeds of disposition of the building are A ($100,000) + B ($40,000) = $140,000, resulting in a reduced terminal loss of $40,000 ($180,000 - $140,000).
Recapture and terminal loss
Recapture of CCA
1.95 The UCC to a taxpayer of depreciable property of a prescribed class as of any time is equal to the amount, if any, by which the total of the increases to the UCC of the class (elements A to D.1 in the subsection 13(21) definition) exceeds the total of the decreases to the UCC of the class (elements E to K in the definition). If the total of all the decreases exceeds the total of all the increases to the UCC of a class at the end of a tax year, subsection 13(1) provides that this excess (the negative UCC balance), commonly referred to as recapture, shall be included in computing the taxpayer's income for the year. The recapture is then added to element B, as described in ¶1.64, so that when the UCC of the class is calculated in a subsequent year, recapture will not be included in income again.
1.96 Recapture can occur in a number of different situations, such as the following:
- The net proceeds of a property disposed of in the current tax year exceed the UCC of its class at the end of the preceding year, which was relatively low because of CCA claims or previous dispositions to that point. If there is an insufficient increase (for example, property acquisitions) to the UCC of the class in the current year to offset this excess, recapture occurs. It should be noted that recapture can occur from a property disposition whether or not other property remains in the class at the end of the current year. It can also arise where the property disposed of was used in a business, whether or not the business ceased prior to the current year.
- None of the property remaining in a class is disposed of in the current tax year, but an amount of government assistance is received in the year with respect to a property of the class disposed of in a previous year. The amount so received exceeds the UCC of the class at the end of the preceding year, which was relatively low for the same reason or reasons given in (a). If there is an insufficient increase to the UCC of the class in the current year to offset this excess, recapture occurs.
- In the preceding year, all of the property of a class was disposed of and a terminal loss occurred, such that the UCC of the class was nil. Then an amount of government assistance is received in the current year with respect to a property previously disposed of. Since the amount so received exceeds the nil UCC, if there is an insufficient increase to the UCC of the class in the current year to offset this excess, recapture occurs.
1.97 If a recapture of CCA results from the disposition of property in a particular year but full payment is not received in that year, the taxpayer must nevertheless include the entire amount of the CCA recapture in income for that year. There is no entitlement to any reserve on the recaptured amount.
1.98 At the end of a particular tax year, the total of all the increases to the UCC of a prescribed class might exceed the total of all the decreases. Where the taxpayer no longer owns any property in that class, subsection 20(16) provides that the excess (the positive UCC balance), commonly referred to as a terminal loss, shall be deducted in computing the taxpayer's income for the year. Subsection 20(16) also provides that no CCA may be claimed under paragraph 20(1)(a) for that class for the year. A terminal loss that is deducted under subsection 20(16) is then included in the total depreciation allowed as defined in subsection 13(21). It then becomes part of the UCC decreases in element E of the definition of UCC, as described in ¶1.65, so that the UCC balance (after the terminal loss is claimed) is reduced to nil. This prevents the possibility of claiming the terminal loss again in a subsequent period.
1.99 To the extent that a terminal loss cannot be used to reduce income otherwise determined for the particular tax year, it will create or increase a non-capital loss that can be carried forward or back to other years in accordance with section 111. Further information on losses can be found in Interpretation Bulletin IT-232R3, Losses—Their Deductibility in the Loss Year or in Other Years.
Depreciable property not disposed of after ceasing to carry on a business
1.100 There might still be property remaining in a particular class at the time a taxpayer ceases carrying on business. In this case, the taxpayer may qualify to claim a terminal loss when the property is disposed of even though income is no longer earned from the business at the time of the disposition. However, the taxpayer may not do so unless all the assets in the particular class are disposed of. This means that if a taxpayer retains property of the class without using it for any other purpose, no terminal loss in respect of the class can be claimed. Furthermore, the taxpayer is not entitled to claim CCA on the property in any subsequent year unless it is used in that year to earn income from a business or property as required for purposes of a deduction under paragraph 20(1)(a) of the Act and subsection 1100(1) of the Regulations. If, on the other hand, the taxpayer starts using the property for a non-income-producing purpose, there is a deemed disposition of the property at that time at its fair market value pursuant to paragraph 13(7)(a) of the Act. Such a deemed disposition could result in a CCA recapture or possibly in a terminal loss where no other property remains in the class.
No terminal loss for employees
1.101 A terminal loss cannot be claimed in the case of depreciable property for which CCA was claimed in computing income from an office or employment (see paragraphs 8(1)(j) motor vehicle and aircraft costs and 8(1)(p) musical instrument costs). This is because subsection 8(2) restricts the deductions that can be claimed in computing income from an office or employment to those permitted by section 8, and a deduction for a terminal loss is not permitted by that section. Paragraphs 8(1)(j) and (p) provide for the deduction of such part of the capital cost of certain types of depreciable property "as is allowed by regulation," but a terminal loss is not allowed by the Regulations.
Restricted farm loss and terminal loss
1.102 The restricted farm loss provisions of section 31 restrict the amount of losses that a taxpayer may deduct in a particular tax year in respect of a farming business. If section 31 applies, and in the same year the taxpayer has a terminal loss from the disposition of depreciable property used in that business, the terminal loss forms part of the loss for the year that is subject to those restricted farm loss provisions. Interpretation Bulletin IT-232R3 and Interpretation Bulletin IT-322R, Farm Losses, discuss the restricted farm loss provisions.
1.103 A terminal loss that would otherwise occur for a particular tax year may be eliminated for that year by a provision in the Act which modifies the amount of the proceeds of disposition of a depreciable property in certain circumstances. This may occur, for example, as a consequence of the rules in subsection 13(21.1) or the stop-loss rules under subsection 13(21.2).
Passenger vehicles costing more than the prescribed amount
1.104 For CCA purposes, paragraph 13(7)(g) sets a prescribed limit on the capital cost of a passenger vehicle that is owned by a taxpayer and used to earn income. Subsection 248(1) defines passenger vehicle for purposes of the Act. Passenger vehicles having a cost in excess of the prescribed limit are included in Class 10.1 of Schedule II to the Regulations, depreciable at a rate of 30% on a declining balance basis. Subsection 1101(1af) of the Regulations prescribes a separate class for each Class 10.1 vehicle. There are also special rules in respect of recapture and terminal loss.
No recapture on the disposition of a Class 10.1 passenger vehicle
1.105 Subsection 13(2) provides that the excess of the UCC decreases over the increases as of the end of a tax year shall not be included in income if it is in respect of a Class 10.1 passenger vehicle. To prevent the recapture of the excess in a subsequent year, the excess is deemed to have been included in income and is therefore included in the UCC increases described in ¶1.64 when calculating the UCC at the end of that subsequent year. This is reflected in element B of the definition of UCC in subsection 13(21).
No terminal loss on the disposition of a Class 10.1 passenger vehicle
1.106 Subsection 20(16.1) of the Act provides that an excess of the UCC increases over the decreases as of the end of a tax year is not deductible as a terminal loss if it is in respect of a Class 10.1 passenger vehicle. However, subsection 1100(2.5) of the Regulations provides that if a taxpayer owns a Class 10.1 passenger vehicle at the beginning of a particular year and disposes of it before the end of that year, they may take a deduction equal to 50% of the CCA deduction that would have otherwise been available in respect of the vehicle for that particular year had they not disposed of it. The terminal loss so denied is nevertheless included in the total depreciation allowed (as defined in subsection 13(21) of the Act and included in element E of the definition of UCC) and becomes part of the UCC decreases described in paragraph ¶1.65. This occurs in order to reduce the UCC balance to nil. Further information on passenger vehicles and Class 10.1 is available in Interpretation Bulletin IT-521R, Motor Vehicle Expenses Claimed by Self-Employed Individuals.
Recapture and terminal loss of a person not resident in Canada
1.107 If a taxpayer has acquired depreciable property for the purpose of gaining or producing income and later starts using it for some other purpose, paragraph 13(7)(a) provides for a deemed disposition of the property at fair market value. In applying paragraph 13(7)(a) in respect of a person not resident in Canada, subsection 13(9) provides that a reference to "gaining or producing income" in relation to a business is to be read as a reference to "gaining or producing income from a business wholly carried on in Canada or such part of a business as is wholly carried on in Canada."
1.108 Accordingly, if a person not resident in Canada changes the use of property from a use in a business, or part of a business, wholly carried on in Canada to a use for some other purpose, there is a deemed disposition of the property at its fair market value at the time of the change. Paragraph 13(7)(a) will therefore apply to a non-resident who carries on a business both in Canada and in another country and transfers to the other country a property used in the part of the business wholly carried on in Canada. Another example is when a person becomes a non-resident and subsequently transfers to another country a property used in a business wholly carried on in Canada. A property that is used both in a part of a business carried on wholly in Canada, and also in a part of a business carried on wholly in another country, will normally not be considered to be property to which subsection 13(9) applies. This could be the case for transportation equipment.
1.109 If a disposition of property by a person not resident in Canada results in a recapture of CCA, the recapture is included in the non-resident's income by virtue of subparagraph 115(1)(a)(ii) or 115(1)(a)(iii.2). This treatment will also apply to a deemed disposition under subsection 13(7).
1.110 The inclusion of the recapture in the income of the non-resident may be affected by subsection 115.1(1). This subsection allows a taxpayer to defer tax in Canada in a situation where an income tax treaty with a foreign country provides a particular mechanism for avoiding double taxation. The deferral is achieved through execution of an agreement between the Minister and the taxpayer. Such an agreement will govern the taxation of the taxpayer and must be made in accordance with a provision of a tax treaty. Section 115.1 is discussed further in Income Tax Folio S5-F2-C1, Foreign Tax Credit and Interpretation Bulletins IT-173R2SR, Capital Gains Derived in Canada by Residents of the United States and IT-420R3SR, Non-Residents—Income Earned in Canada. Reference can also be made to Information Circular IC71-17R5, Guidance on Competent Authority Assistance Under Canada's Tax Conventions.
1.111 A disposition of property by a non-resident, including a deemed disposition under subsection 13(7), may result in a terminal loss. Provided the terminal loss pertains to income included in a non-resident's taxable income earned in Canada under subparagraph 115(1)(a)(ii) (that is, from a business carried on by the non-resident in Canada), it may be deducted by the non-resident in determining taxable income earned in Canada under subsection 115(1). If a non-capital loss (this term is defined in subsection 111(8) and modified by subsection 111(9) for non-residents of Canada) results in this situation, see Interpretation Bulletin IT-262R2, Losses of Non-Residents and Part-Year Residents.
1.112 If a non-resident filed an election under section 216 to pay Part I tax on income from real or immovable property in Canada and subsequently disposes of the property for which CCA was previously claimed on a section 216 return, the recapture of that CCA must be reported on a section 216 return. If the disposition of the property results in a terminal loss, this loss may be claimed by the non-resident on a section 216 return. However, by virtue of paragraph 216(5)(c), such a person is not entitled to deduct a non-capital loss. The section 216 election is discussed in Guide T4144 Income Tax Guide for Electing Under Section 216.
1.113 It may be necessary to revise the capital cost of a depreciable property acquired during a tax year that is now statute-barred. This might occur, for example, because of a reallocation of the total purchase price of a piece of real estate between land and buildings or where an error was made by claiming CCA on a property that is not considered depreciable property. In such cases, the capital cost and the amount of CCA actually deducted in respect of the depreciable property in any statute-barred year will not be adjusted unless one of the conditions described in paragraph 152(4)(a) applies. Instead, the CRA will recalculate the UCC as of the beginning of the first non-statute-barred year by using the revised capital cost of the property (rather than the original capital cost) for purposes of element A of the definition of UCC. The actual CCA deducted in each statute-barred year will still be used for purposes of element E of the definition of UCC.
1.114 If there is a downward revision to the property's capital cost, this recalculation will result in a reduced UCC as of the beginning of the first non-statute-barred year. In this event, the CRA will make the necessary downward revisions to the CCA claimed in that first non-statute-barred year and all subsequent non-statute-barred years. On the other hand, an upward revision to the property's capital cost will result in an increased UCC as of the beginning of the first non-statute-barred year. In such cases, the taxpayer must make a written request to make upward changes to the CCA claimed for any affected non-statute-barred year. The CRA will consider the taxpayer's request, which is subject to the limitations set out in Information Circular 84-1, Revision of Capital Cost Allowance Claims and Other Permissive Deductions.
1.115 In some cases, a revision to a property's capital cost might result in the UCC decreases to exceed the UCC increases as of the end of a tax year that is now statute-barred. Provided paragraph 152(4)(a) does not apply, the recapture of the excess amount will not be added into the taxpayer's income for that or a subsequent statute-barred year. However, if an excess of UCC decreases over increases still exists at the end of the first non-statute-barred tax year, an income inclusion under subsection 13(1) will be necessary in order to resolve the negative UCC balance. All CCA claimed in that year, and in subsequent non-statute-barred years, will be reassessed accordingly. This treatment applies to property acquired or transactions entered into to acquire property after December 31, 2015.
1.116 It should be noted that the reference to total depreciation allowed in element E of the definition of UCC in subsection 13(21) is considered to be a reference to the amount of CCA actually deducted and allowed in computing the taxpayer's income. This position is based on an extension of the reasoning of the decision of the Federal Court of Appeal in The Dominion of Canada General Insurance Company v. The Queen, 86 DTC 6154,  1 CTC 423.
Classes of depreciable property
1.117 A taxpayer cannot claim CCA in respect of a property unless it fits within the description of a class in Schedule II or Part XI of the Regulations. However, it is possible that tangible capital property is not specifically covered in any class. Such property may not be placed in what may appear to be the most appropriate class. Rather, it is included in Class 8 of Schedule II, unless it is excluded by the specific Class 8 exceptions or by section 1102 of the Regulations. In general, property that is excluded is not depreciable property and no CCA is available for that property. Further information on Class 8 is available in Interpretation Bulletin IT-472, Capital cost allowance—Class 8 Property. Some of the exclusions under section 1102 of the Regulations are discussed in ¶1.17.
Certain words may have wider meanings
1.118 Certain words in the Regulations used to describe properties may have wider meanings than those ordinarily attributed to them. For example, automotive equipment in Class 10 may include outboard motors, motorhomes, self-propelled sprayers, all-terrain vehicles, and air cushion vehicles popularly known as hovercraft.
1.119 The following table lists a number of publications that provide more information about particular types of property.
|Buildings or other structures||IT-79R3|
|Contractor's moveable equipment||IT-306R2|
|Gas and oil exploration and production equipment||IT-476R|
|Industrial mineral mines||IT-492|
|Manufacturing and processing machinery and equipment||Folio S4-F15-C1|
|Patents, franchises, concessions and licences||IT-477|
|Rental properties - $50,000 or more||IT-274R|
Property that would otherwise be included in a CCA class
1.120 The phrase "property that would otherwise be included in" appears in several classes in Schedule II, which could lead to uncertainty as to the class in which a particular property belongs. If a property is described in more than one class and the phrase mentioned above appears in only one of those classes, the property must be included in the class in which the phrase appears. However, if the phrase appears in more than one class that describes the property, the taxpayer may choose from among those in which the phrase appears. Of course, the other requirements of the chosen class must be met. A taxpayer might choose the class allowing the greater CCA or could choose another class to avoid immediate recapture of CCA on the disposition of other property of that class.
Property not included in any other CCA class
1.121 The phrase, "not included in any other class", appears frequently in Schedule II. A property may be included in a class in which such phrase appears only if it is not described in another class within Schedule II or any separate class established under Part XI of the Regulations. If this phrase appears in all classes in which a property is described, the taxpayer may choose from among them.
Additions and alterations to property
1.122 An addition or alteration might be made to a property that would have been in a different class if the property had been acquired at the time the addition or alteration was made. In such cases, subsection 1102(19) of the Regulations deems the addition or alteration to be included in that different class. Where such property is disposed of, the proceeds of disposition must be allocated to each of the classes on a reasonable basis.
Transferred and misclassified property
1.123 Subsection 13(5) contains the rules for computing the UCC of property of a prescribed class that has been transferred from one class to another. Generally, the rules in subsection 13(5) apply where:
- a transfer between two classes is necessary because of an amendment to the Act or Regulations;
- misclassified property is transferred to its proper class pursuant to subsection 13(6);
- a taxpayer makes an election under section 1103 of the Regulations to include all depreciable property in a particular class or to transfer certain depreciable property between classes; or
- property that has been properly included in a class is subsequently transferred to another class because of a change of its use in the income-earning process.
1.124 Subsection 13(5.1) provides a similar rule that applies where a taxpayer who has a leasehold interest in a property acquires a freehold ownership of that property. For further information, see ¶11 of Interpretation Bulletin IT-464R.
Transfer of capital cost
1.125 Paragraph 13(5)(a) deems transferred property:
- to be depreciable property of the class to which the property is transferred (the new class); and
- not to be depreciable property of the class in which it was previously included (the old class).
This effectively provides for the transfer of the capital cost to the new class.
1.126 Paragraph 13(5)(b) adjusts the total depreciation in respect of both the old and the new class. This effectively transfers the CCA previously claimed in respect of the property. The greater of the two following amounts is deducted from the total depreciation allowed for the old class and added to the total depreciation allowed for the new class:
- the total of all CCA claimed by the taxpayer on the transferred property before the year of transfer; and
- the excess, if any, of the original capital cost of the transferred property over the UCC of the old class immediately before the transfer.
Property was purchased in 2013 and had an original capital cost of $8,000. The property is transferred from Class 8 (20%) to Class 46 (30%) in 2015. Assume the total CCA claimed in respect of the Class 8 property is $2,240 and the UCC of Class 46 before the transfer is nil.
|Description||Class 8||Class 46|
|UCC balance before transfer||$5,760||$ nil|
|Capital cost of the property transferred (element A)||($8,000)||$8,000|
The greater of (a) or (b) is deducted from the total CCA of the old class and added to the total CCA of the new class (element E):
The greater of (a) and (b)
|UCC balance after transfer||$ nil||$5,760|
1.127 Subparagraph 13(5)(b)(ii) establishes the rate to be used to calculate the depreciation previously claimed on the transferred property. That rate is the effective rate of CCA deducted in respect of the old class in a particular year. Consider a scenario in which a class has a 20% maximum rate. If a taxpayer claims $125 on a UCC of $1,000, the effective rate is 12.5%. It is this 12.5% rate that should be used to determine the amount of depreciation allowed in that year on property later transferred to another class.
1.128 The rules in subsection 13(5) concerning transfers of property apply only to the property that is in the taxpayer's possession on the date of transfer. For example, subsection 13(5) would not apply to a Class 8 property disposed of prior to the tax year in which the Minister directs a transfer under subsection 13(6). Accordingly, proceeds from the disposition of property that was in an incorrect class at the time it was disposed of remain as a credit to that class.
1.129 Subsection 1102(14) of the Regulations generally applies where depreciable property is acquired by a taxpayer (the purchaser) from a person with whom the taxpayer is not dealing at arm's length (the vendor). Subject to the application of the non-arm's-length exception in subsection 1102(20) of the Regulations, when, immediately before the property was acquired, the depreciable property was property of a prescribed class or a separate prescribed class of the vendor, it is deemed to be property of that same prescribed class or separate prescribed class of the purchaser.
1.130 It sometimes happens that a taxpayer claims and is allowed CCA as a result of the property being placed in an incorrect class. This can arise where:
- the taxpayer has misclassified depreciable property;
- the taxpayer should have reclassified property pursuant to a change in the Act or the Regulations; or
- there was a change in a property's use in the income-earning process.
The CRA may reassess the years involved to correct the misclassification and the CCA claimed. However, if such a correction has not been made, the Minister may make a direction under subsection 13(6) in respect of a tax year to deem a property to be of the incorrect class for the years prior to the year for which direction is made and to be transferred to the correct class beginning in the year for which the direction is made. Only property that was still on hand at the beginning of the year in respect of which a direction is made is transferred.
1.131 A taxpayer can request that a correction be made beginning with the first year in which the misclassified property was acquired or became misclassified. If subsection 152(4) does not prevent reassessment of any years involved, reassessments will ordinarily be made to correct the CCA claimed in those years and no direction will be required under subsection 13(6). See Information Circular IC 84-1, where a taxpayer acquired a property of one class which after certification qualifies for inclusion in another class.
Election to include properties
1.132 Section 1103 of the Regulations contains elections that, under certain conditions, permit a taxpayer to transfer property otherwise included in one class to another class. Normally such a transfer is made to defer either immediate recapture or a terminal loss. For example, under subsection 1103(1) of the Regulations, a taxpayer may elect to transfer all properties otherwise included in Classes 2 through 12 (excluding Class 10.1) to Class 1 provided that all such properties were acquired for the purpose of gaining or producing income from the same business. The election affects all properties on hand at the commencement of the tax year for which the election is made, as well as any such property acquired during that year.
Manufacturing and processing machinery and equipment
1.133 Machinery and equipment acquired by a taxpayer after February 25, 1992 to be used directly or indirectly by the taxpayer in Canada primarily (more than 50%) in manufacturing or processing of goods for sale or lease is generally included in Class 43. Class 43 has a CCA rate of 30% on a declining-balance basis. However, if acquired after March 18, 2007 and before 2016, a taxpayer may elect to include such property in Class 29, which has a CCA rate of 50% on a straight-line basis subject to the limitations described in paragraph 1100(1)(ta) of the Regulations. The taxpayer is not required to file an election to include such property in Class 43.
1.134 Under subsection 1102(16.1) of the Regulations a taxpayer may also elect to include in Class 29 certain manufacturing and processing machinery and equipment acquired after March 18, 2007 and before 2016 that would otherwise be included in Class 43.1 or 43.2. The election is to be made by way of a letter attached to the taxpayer's return of income filed in accordance with section 150 for the tax year in which the property is acquired.
1.135 Machinery and equipment acquired by a taxpayer after 2015 and before 2026 primarily for use in Canada for the manufacturing and processing of goods for sale or lease that would have been included in Class 29, will be included in Class 53. Class 53 has a 50% declining-balance CCA rate and is subject to the half-year rule. Further information on the CCA rules for certain manufacturing and processing machinery and equipment is available in Income Tax Folio S4-F15-C1, Manufacturing and Processing.
This updated Chapter, which may be referenced as S3-F4-C1, is effective February 27, 2019.
When it was first published on December 9, 2016, it replaced and cancelled Interpretation Bulletins IT-285R2, Capital Cost Allowance – General Comments; IT-418, Capital Cost Allowance – Partial Dispositions of Property; IT-220R2(SR), Capital Cost Allowance - Proceeds of Disposition of Depreciable Property; IT-220R2, Capital Cost Allowance – Proceeds of Disposition of Depreciable Property; IT-190R2, Capital Cost Allowance – Transferred and Misclassified Property; IT-128R, Capital Cost Allowance – Depreciable Property; and IT-478R2, Capital Cost Allowance – Recapture and Terminal Loss.
The history of updates to this Chapter as well as any technical updates from the cancelled interpretation bulletins can be viewed in the Chapter History page.
Except as otherwise noted, all statutory references herein are references to the provisions of the Income Tax Act R.S.C. 1985 c.1, (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended.
Links to jurisprudence are provided through CanLII.
Income tax folios are available in electronic format only.
Sections 43, 54 adjusted cost base, 68 and 249.1; subsections 8(2), 13(1), 13(2), 13(3), 13(5), 13(5.1), 13(6), 13(7), 13(7.1), 13(7.4), 13(7.5), 13(8), 13(9), 13(21) depreciable property, total depreciation, proceeds of disposition and undepreciated capital cost, 13(21.1), 13(26), 13(27), 13(28), 13(29), 13(33), 16.1(1), 18(3.1) to 18(3.7), 20(1), 20(4), 20(4.1), 20(16), 20(16.1), 20(16.2), 20(16.3), 25(3), 39(1), 50(1), 248(1) cost amount, disposition, and 249(1); paragraphs 8(1)(j), 8(1)(p), 12(1)(i), 18(1)(b), 20(1)(a), and 40(1)(b) of the Act and sections 1100A, 1102, 1103 and 7307; subsections 1100(1), 1100(2.1), 1100(2.2), 1100(3), 1101(1), 1101(1af), 1102(1a), 1102(5), 1102(14), 1102(14.3), 1102(16.1) and 1102(19) of Part XI of the Regulations; Schedule II of the Regulations; and section 20 of the Income Tax Application Rules.
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