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NO: IT-220R2

DATE: FEBRUARY 11, 1994

SUBJECT: INCOME TAX ACT
Capital Cost Allowance - Proceeds of Disposition of Depreciable Property

REFERENCE: SPECIAL RELEASE

INTERPRETATION BULLETIN

Application

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This Special Release revises IT-220R2, dated May 25, 1990, to reflect amendments to the Income Tax Act enacted by S.C. 1991, c. 49 (former Bill C-18).

Bulletin Revisions

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1. The sentence below replaces the first sentence of paragraph 3. The revised sentence reflects the Bill C-18 amendment to subsection 20(4) that prohibits a deduction for a bad debt from the disposition of a passenger vehicle having a cost to the taxpayer of more than $20,000 (or such other prescribed amount). There is no deduction for such a bad debt since there is no income inclusion for recaptured capital cost allowance on such property. This amendment applies to bad debts established after July 13, 1990.

Subsection 20(4) may apply where a taxpayer has disposed of depreciable property (other than a timber resource property or a passenger vehicle that cost more than $20,000 or such other prescribed amount) and the proceeds of disposition have, according to section 13, been credited to the relevant class.

2. In the second sentence of paragraph 9, the reference to paragraph 13(2.1)(a) or (b) should read "paragraph 13(21.1)(a) or (b)".

3. The paragraph below replaces paragraph 11. We revised paragraph 11 to reflect the Bill C-18 amendments to the definition of cost amount (in subsection 248(1)) as it applies to depreciable property of a prescribed class. The cost amount of a depreciable property of a class is now determined without reference to the capital cost of other property in that class that was previously disposed of. In addition, when calculating the cost amount of depreciable property, the capital cost limitations in paragraphs 13(7)(b), (d) and (e) are ignored. These limitations, which are relevant for calculating capital cost allowance, should not apply when determining capital gains for depreciable property.

11. In applying this rule, it is first necessary to calculate the cost amount of both the land and the building. Cost amount is defined in subsection 248(1). In the case of land, the cost amount is its adjusted cost base. In the case of a building, the cost amount is the building's proportionate share of the undepreciated capital cost of the class that the capital cost of the building is of the capital cost of all property of that class that had not been previously disposed of. In calculating this proportionate amount, certain limitations on capital cost in subsection 13(7), which normally apply in determining the capital cost of a building, do not apply and the capital cost of a building will reflect its acquisition (or partial acquisition) at fair market value. (Normally, paragraphs 13(7)(b), (d) and (e) provide that the capital cost can be limited to an amount that is less than fair market value in cases where a non-income producing depreciable property begins to be used for producing income, where the income producing use of a depreciable property increases and where there is a non-arm's length acquisition of a depreciable property.)

If you have any comments regarding the matters discussed in this special release, please send them to:

Director, Technical Publications Division
Legislative and Intergovernmental Affairs Branch
Revenue Canada - Customs, Excise and Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8

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