Income Tax Interpretation Bulletin

Capital Cost Allowance - Transferred and Misclassified Property

NO: IT-190R2

DATE: December 29, 1989

SUBJECT: INCOME TAX ACT
Capital Cost Allowance - Transferred and Misclassified Property

REFERENCE: Subsections 13(5) and (6) (also section 1103 of the Regulations)

Application This bulletin cancels and replaces Interpretation Bulletin IT-190R dated February 20, l980. The comments herein on subsection 13(5) apply to taxation years and fiscal periods commencing after June 17, 1987 that end after 1987. Where it is necessary to apply subsection 13(5) for a prior year or period, please refer to the law itself. Current revisions are designated by vertical lines.

Summary This bulletin deals with the rules for computing the undepreciated capital cost of property of a prescribed class that has been transferred from one class to another class. It also deals with the direction the Minister may make where property has not been properly classified by a taxpayer.

Discussion and Interpretation

1. Subsection 13(5) contains the rules for computing the undepreciated capital cost of property of a prescribed class that has been transferred from one class to another. Generally, the rules in 13(5) apply where:

See the current version of IT-464 for a discussion on subsection 13(5.1) where a taxpayer, who has a leasehold interest in a property, acquires ownership of that property.

2. Paragraph 13(5)(a) deems the transferred property to be depreciable property of the class to which the property is transferred (hereinafter referred to as the "other class") and not depreciable property of the class in which the transferred property formerly was included (hereinafter referred to as the "former class"). This provides for the transfer of the capital cost of the property to the other class.

3. Under paragraph 13(5)(b) an amount is determined that is then excluded in computing the total depreciation allowed to a taxpayer for property of the former class and is included in computing the total depreciation allowed to the taxpayer for property of the other class. The amount calculated is usually the total of all capital cost allowance claimed by the taxpayer on the transferred property before the year of transfer (see 4 below). However, in order to prevent a recapture from occurring in the former class, where the excess of the original capital cost of the transferred property over the undepreciated capital cost of the former class immediately before the transfer is greater than the amount calculated in the previous sentence, then this excess is used instead.

4. In the calculation of the depreciation previously claimed on the transferred property, the rate to be used, pursuant to 13(5)(b)(ii), is the effective rate deducted in respect of the former class in a particular year. Where, for example, in one taxation year a taxpayer claimed and was allowed, on a class having a 20 per cent maximum rate, only $125 on an undepreciated capital cost of $1,000, the effective rate deducted was 12.5 per cent. It is this rate of 12.5 per cent that is used in determining the amount of depreciation allowed in that year on property later transferred to another class.

5. 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 as of which the transfer is to be made. For example, subsection 13(5) would not apply to a property in class 8 disposed of in a taxation year prior to the taxation year in respect of which the Minister has made a direction under subsection 13(6) (see 6 below) concerning the property. Accordingly, proceeds from disposition of property that was in an incorrect class at the time it was disposed of, remain as a credit to that class.

6. Where a taxpayer has misclassified depreciable property or should have reclassified it pursuant to a change in the Act or the Regulations or because of a change in its use in the income earning process, and has claimed and been allowed capital cost allowance in the incorrect class, the Department may reassess the years involved to correct the misclassification and the capital cost allowance in the incorrect class. However, if such a correction has not been made, the Minister may make a direction in respect of a taxation year under subsection 13(6) to deem the 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.

7. If a taxpayer requests that a correction be made beginning with the first year in which the misclassified property was acquired or became misclassified and subsection 152(4) does not prevent reassessment of any years involved, reassessments will ordinarily be made to correct the capital cost allowances claimed in those years and no direction will be required under subsection 13(6). Also, see the current version of Information Circular 84-1 where a taxpayer acquired a property of one class which after "certification" qualifies for inclusion in another class.

8. The Director-Taxation in a District Taxation Office may exercise the power of the Minister under subsection 13(6) pursuant to subsection 900(2) of the Income Tax Regulations.