ARCHIVED - Capital Cost Allowance -- Recapture and Terminal Loss

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NO: IT-478R2

DATE: September 17, 1999

SUBJECT: INCOME TAX ACT
Capital Cost Allowance -- Recapture and Terminal Loss

REFERENCE: Subsections 13(1) and 20(16) (also subsections 8(2), 13(2), 13(3), 13(7.1), 13(7.4), 13(8), 13(9), 20(16.1), 20(16.2), 20(16.3) and 25(3); the definition of "total depreciation" and "undepreciated capital cost" in subsection 13(21); and paragraphs 8(1)(j), 8(1)(p) and 13(7)(a) of the Income Tax Act; and sections 1103 and 7307 of the Income Tax Regulations)

On November 1, 1999, Revenue Canada will begin operations as the Canada Customs and Revenue Agency.


Notice -- Bulletins do not have the force of law


Contents

Application

This bulletin replaces and cancels IT-478R, dated March 9, 1992. The effective date of a particular legislative provision discussed in this bulletin may be indicated in the Explanation of Changes section (or, in some cases, in the Discussion and Interpretation section). However, where the bulletin is silent with respect to the effective date of a particular provision, such date can be obtained from the legislation itself.

Summary

This bulletin discusses recaptures of capital cost allowance and terminal losses, which are based on the undepreciated capital cost of depreciable property of a prescribed class. Generally, if the total of all the decreases exceeds the total of all the increases to the undepreciated capital cost of a particular class as of the end of a taxation year, a recapture of that excess is included in the taxpayer's income. Recaptures are usually caused by dispositions of depreciable property, although they can also result from delayed receipts of government assistance.

If the total of all the increases exceeds the total of all the decreases to the undepreciated capital cost of the class as of the end of the year and there are no properties remaining in the class, a terminal loss is deducted in computing the taxpayer's income. If a business is discontinued, a terminal loss for a particular class of depreciable property used in the business is not available unless and until all the property in that class is disposed of.

This bulletin also discusses provisions that can alter the amount of recapture or terminal loss or affect the taxation year in which a recapture or terminal loss will occur. Rules pertaining to non-residents are also discussed, as well as other miscellaneous matters.

Discussion and Interpretation

Calculation of Undepreciated Capital Cost

¶ 1. The undepreciated capital cost (UCC) of depreciable property of a prescribed class is used as the base for claiming a deduction for capital cost allowance (CCA) for that class. The system of provisions under which UCC is calculated is also used for determining the amount that is 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. According to the definition of "undepreciated capital cost" in subsection 13(21), the UCC to a taxpayer of depreciable property of a particular class as of a particular time is equal to the amount, if any, by which the total of the increases to the UCC of the class exceeds the total of the decreases to the UCC of the class.

¶ 2. The increases to the taxpayer's UCC of a particular class are as follows (each reference to a "property" means a "depreciable property of the class"):

(a) the capital cost to the taxpayer of each property acquired before the time of the UCC calculation;

(b) each amount of CCA recapture for the class included, by virtue of section 13, in the taxpayer's income for any taxation year ending before the time of the UCC calculation;

(c) the amount of each repayment (pursuant to a legal obligation) by the taxpayer, after the taxpayer's disposition of a particular property (and before the time of the UCC calculation), of any assistance from a government, municipality or other public authority as described in subsection 13(7.1), if the repayment would have increased the capital cost of the property by virtue of paragraph 13(7.1)(d) had it occurred before the property's disposition;

(d) the amount of each repayment (pursuant to a legal obligation) by the taxpayer, after the taxpayer's disposition of a particular property (and before the time of the UCC calculation), of any inducement, assistance or other amount received and described in paragraph 12(1)(x), if such amount received previously reduced the capital cost of the property pursuant to an election under subsection 13(7.4) and the repayment would then have increased the capital cost of the property by virtue of paragraph 13(7.4)(b) had it occurred before the property's disposition; and

(e) 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.

¶ 3. The decreases to the taxpayer's UCC of a particular class are as follows (each reference to a "property" means a "depreciable property of the class"):

(a) the total depreciation (i.e., CCA) allowed to the taxpayer for the class before the time of the UCC calculation;

(b) 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 subsection 80(5), under what is commonly known as the "debt forgiveness rules";

(c) 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 following two amounts:

  • the proceeds of the property's disposition minus any disposition costs of the taxpayer, and
  • the taxpayer's capital cost of the property;

(d) 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;

(e) each amount of investment tax credit allowed to the taxpayer on a property for a taxation year which has ended before the UCC calculation and after the taxpayer's disposition of the property (note: if the UCC calculation is made prior to the 1988 taxation year, also include any investment tax credit allowed to the taxpayer for the current year before the time of the UCC calculation and after the taxpayer's disposition of the property);

(f) each amount of assistance from a government, municipality or other public authority as described in subsection 13(7.1), which the taxpayer received (or which the taxpayer was entitled to receive) after the taxpayer's disposition of a property and before the UCC calculation, in respect of or for the (previous) acquisition of the property, if such assistance would have decreased the capital cost of the property by virtue of paragraph 13(7.1)(f) had it been received before the property's disposition;

(g) with respect to a Class 28 mining property of the taxpayer (as a mine operator), the amount of income from the mine that was exempt from tax under ITAR 28, as it read prior to October 29, 1985, if the taxpayer elected under section 1100A of the Income Tax Regulations to claim accelerated CCA on that class; and

(h) 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 ¶ 2(e) added to the UCC of the class.

¶ 4. Although the definition of "undepreciated capital cost" in subsection 13(21) provides that the UCC of a class as of a 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, in actual practice most taxpayers carry forward the UCC at the end of the previous taxation 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.

Recapture of Capital Cost Allowance

¶ 5. If the total of all the decreases exceeds the total of all the increases to the UCC of a class as of the end of a taxation year, subsection 13(1) provides that this excess shall be included in computing the taxpayer's income for the year. This "CCA recapture" then becomes an increase for purposes of ¶ 2(b) when calculating the UCC of the class in a subsequent year, thus ensuring that such recapture will not be included in income again. A CCA recapture can occur in a number of different situations, as in the following examples:

(a) The proceeds (net of costs) of a property disposition in the current taxation year exceed the UCC of its class as of the end of the preceding year, which was relatively low because of CCA claims and/or previous dispositions to that point. If there are no (or insufficient) increases (e.g., property acquisitions) to the UCC of the class in the current year to offset this excess, a recapture occurs. It should be noted that a recapture can occur from a property disposition whether or not other property remains in the class at the end of the current year and also, in a case where the property disposed of was used in a business, whether or not the business ceased prior to the current year.

(b) None of the property remaining in a class is disposed of in the current taxation year. However, 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 as of the end of the preceding year, which was relatively low for the same reason or reasons given in (a). If there are no (or insufficient) increases to the UCC of the class in the current year to offset this excess, a recapture occurs.

(c) In the preceding year, all of the property of a class was disposed of and a terminal loss occurred, after which the UCC of the class was nil (see ¶ 7). 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 are no (or insufficient) increases to the UCC of the class in the current year to offset this excess, a recapture occurs.

¶ 6. If a recapture of CCA results from the disposition of property in a particular year and full payment of the proceeds of the disposition is not received in that year, the taxpayer

(a) must nevertheless include the entire amount of the CCA recapture in income for that year, and

(b) is not entitled to any reserve on the recaptured amount.

Terminal Loss

¶ 7. If, at the end of a particular taxation year,

(a) the total of all the increases exceeds the total of all the decreases to the UCC of a prescribed class, and

(b) the taxpayer no longer owns any property in that class,

subsection 20(16) provides that this excess shall be deducted in computing the taxpayer's income for the year. This is commonly referred to as claiming a "terminal loss." 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)) and thus it becomes part of the UCC decrease described in ¶ 3(a). This occurs in order to bring the UCC balance (after the terminal loss is claimed) to nil, thus preventing the terminal loss from being subsequently claimed again.

A taxpayer disposing of the remaining property of a class after ceasing a business in which the property was used, may qualify for a terminal loss even though income is no longer earned from the business at the time of the disposition.

To the extent that a terminal loss cannot be absorbed by income otherwise determined for the particular taxation year, it creates or increases a non-capital loss that can be carried forward or back to other years in accordance with section 111. For further comments on section 111, see the current version of IT-232, Losses -- Their Deductibility in the Loss Year or in Other Years.

In the case of depreciable property for which CCA was claimed in computing income from an office or employment (see paragraphs 8(1)(j) and (p) of the Act), a terminal loss cannot be claimed. 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 means of the Income Tax Regulations.

Depreciable Property Not Disposed of After Ceasing to Carry on a Business

¶ 8. If a business is discontinued, the taxpayer is not entitled to claim a terminal loss for the UCC of a particular class of depreciable property that was used in the business unless and until all the assets in the class are disposed of (see the requirement in ¶ 7(b)). Thus, for example, if the 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 Income Tax Regulations. If, on the other hand, the taxpayer commences to use 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). Such a deemed disposition could result in a CCA recapture or possibly in a terminal loss (the latter would require that no other property remain in the class).

Passenger Vehicles Costing More Than the Prescribed Amount

¶ 9. Applicable to taxation years and fiscal periods commencing after June 17, 1987 and ending after 1987, subsection 13(2) provides that an excess of the UCC decreases over the increases as of the end of a taxation year, as referred to in ¶ 5, shall not be included in income (i.e., recaptured) if it is in respect of a "passenger vehicle" (as defined in subsection 248(1)) having a cost in excess of $20,000 or such other amount as may be prescribed (see ¶ 10). To prevent the recapture of such excess in a subsequent year, it is deemed to have been included in income and thus is included in the UCC increase described in ¶ 2(b) when calculating UCC at the end of that subsequent year.

¶ 10. Applicable to taxation years and fiscal periods commencing after June 17, 1987 and ending after 1987, subsection 20(16.1) provides that an excess of the UCC increases over the decreases as of the end of a taxation year, as referred to in ¶ 7, is not deductible as a terminal loss if it is in respect of a "passenger vehicle" (as defined in subsection 248(1)) having a cost in excess of $20,000 or such other amount as may be prescribed. The terminal loss so denied is nevertheless then included in the "total depreciation" allowed (as defined in subsection 13(21)) and thus it becomes part of the UCC decrease described in ¶ 3(a). This occurs in order to reduce the UCC balance to nil.

Subsection 7307(1) of the Income Tax Regulations provides that the amount prescribed for purposes of subsection 13(2) (see ¶ 9) and subsection 20(16.1) is as follows:

  • for a passenger vehicle acquired after August 1989 and before 1991 -- the amount is $24,000;
  • for a passenger vehicle acquired after 1990 -- the amount is $24,000 plus the applicable federal and provincial sales taxes on that amount (see, however, the note immediately below).

Note: In Finance Canada's News Release 96-103, dated December 23, 1996, it was announced that for a passenger vehicle acquired in 1997, the amount would be $25,000 plus the applicable federal and provincial sales taxes on that amount. In Finance Canada's News Release 97-112, dated December 4, 1997, it was announced that for a passenger vehicle acquired in 1998, the amount would be $26,000 plus the applicable federal and provincial sales taxes on that amount. In Finance Canada's News Release 98-127, dated December 16, 1998, it was announced that for a passenger vehicle acquired in 1999, the amount would remain at $26,000 plus the applicable federal and provincial sales taxes on that amount.

For purposes of the above rules, "federal and provincial sales taxes" include the goods and services tax (GST) and the harmonized sales tax (HST).

Transfer of Depreciable Property From One Class to Another

¶ 11. Section 1103 of the Income Tax Regulations provides for elections that under prescribed conditions permit certain properties otherwise included in one class to be transferred to another class for CCA purposes. Normally, such a transfer is made to defer either immediate recapture or a terminal loss. For further comments on this provision, see the current version of IT-327, Capital Cost Allowance -- Elections Under Regulation 1103.

Rules Regarding Fiscal Period of an Individual's Business

¶ 12. Subsection 249(1) of the Act provides that an individual's taxation year is the calendar year. If an individual has a business, paragraph 249.1(1)(b) requires -- with certain exceptions, the most notable of which is for a business not carried on in Canada -- that the fiscal period of the business must coincide with the calendar year. However, an individual usually can file an election under subsection 249.1(4) not to have paragraph 249.1(1)(b) apply, in order that the individual's business can have a fiscal period that does not coincide with the calendar year.

If an individual's business has a fiscal period which does not coincide with the calendar year (i.e., because of a subsection 249.1(4) election or because the business is otherwise exempted from the application of paragraph 249.1(1)(b)), the individual's income from the business for a taxation year is, by virtue of subsection 11(1), such income for the fiscal period ending in the calendar year. However, subsection 11(1) is subject to the rules in sections 34.1 and 34.2. If the fiscal period for the individual's business does not coincide with the calendar year because of a subsection 249.1(4) election, section 34.1 contains rules the effect of which is that the income from the business is nevertheless essentially reported on a calendar year basis (using an estimated amount of such income for the calendar year). If the application of section 34.1 (or paragraph 249.1(1)(b)) has resulted in income from the business for periods totaling more than 12 months being included in the individual's income for the 1995 taxation year, section 34.2 provides, under certain circumstances, for a reserve mechanism that spreads this additional income effect over a ten-year period.

If an individual's business has a fiscal period which does not coincide with the calendar year and there is a disposition (other than a disposition occurring after the discontinuance of the business) of depreciable property which was acquired for the purpose of gaining or producing income from the business, the above-mentioned rule in subsection 11(1) -- again, subject to the above-mentioned rules in sections 34.1 and 34.2 -- applies:

  • for purposes of reporting a recapture or applying the passenger vehicle rule discussed in ¶ 9 -- this occurs by virtue of subsection 13(3), or
  • for purposes of claiming a terminal loss or applying the passenger vehicle rule discussed in ¶ 10 -- this occurs by virtue of subsection 20(16.2).

In a case where the business is discontinued and the individual later disposes of depreciable property which was acquired for the purpose of gaining or producing income from the business and which the individual has not subsequently used for another purpose,

(a) any resulting recapture is included, by virtue of subsection 13(8), in computing the individual's income for the calendar year in which the property disposition occurs;

(b) any resulting terminal loss is claimed, by virtue of subsection 20(16.3), in computing the individual's income for that calendar year; and

(c) the passenger vehicle rules discussed in ¶s 9 and 10 are applied, by virtue of subsections 13(8) and 20(16.3), respectively, in computing the individual's income for that calendar year.

¶ 13. If an individual has a business with a fiscal period that does not coincide with the calendar year -- other than by means of an election under subsection 249.1(4) (see ¶ 12) -- and if the individual has disposed of the business during a fiscal period of the business, the individual may elect under subsection 25(1) that the fiscal period of the business be deemed to have ended on the date that it ordinarily would have ended if the business had not been disposed of. (In order for the subsection 25(1) election to be valid, subsection 25(2) requires that the individual be a resident of Canada at the end of the intended deemed fiscal period-end.) If the individual can and does elect under subsection 25(1), subsection 25(3) provides that subsection 13(8) (see ¶ 12) is not applicable. As a result, a recapture or the passenger vehicle rule discussed in ¶ 9 will apply in computing the individual's income for the calendar year in which the subsection 25(1) deemed fiscal period ends, which may in some cases be different from the calendar year in which the property disposition has occurred.

Statute-Barred Years

¶ 14. The reference in ¶ 3(a) to "total depreciation allowed" 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 rendered by the Federal Court of Appeal in The Dominion of Canada General Insurance Company v. The Queen, 86 DTC 6154, [1986] 1 CTC 423. In that case, the taxpayer claimed and was allowed a particular amount as a policy reserve for the 1968 taxation year. It was subsequently determined that the taxpayer had not been entitled to the reserve; however, the Minister was by that time statute-barred from reassessing the 1968 year to disallow it. Since the taxpayer had actually deducted and been allowed the reserve for the 1968 year, the taxpayer was required to include the amount of the reserve in income for the 1969 year.) If a revision is to be made to the capital cost of a depreciable property (e.g., because of a reallocation of the total purchase price of a piece of real estate between the land and the building) acquired during a taxation year that is now statute-barred, the amount of CCA actually deducted in respect of the depreciable property in any statute-barred year will not be adjusted. Instead, the Department will recalculate the UCC as of the beginning of the first non-statute-barred year by using the revised capital cost (rather than the original capital cost) of the property for purposes of the increase described in ¶ 2(a) while continuing to use the actual CCA deducted in each statute-barred year for purposes of the decrease described in ¶ 3(a).

If this recalculation results in a reduced UCC as of the beginning of the first non-statute-barred year (i.e., because of a downward revision to the property's capital cost), the Department will make the necessary downward revisions to the CCA claimed in that first non-statute-barred year and all subsequent non-statute-barred years. If, on the other hand, the recalculation results in an increased UCC as of the beginning of the first non-statute-barred year (i.e., because of an upward revision to the property's capital cost), the Department will consider a written request from the taxpayer to make upward changes to the CCA claimed for that year and/or any subsequent non-statute-barred year, subject to the limitations set out in the current version of Information Circular 84-1, Revision of Capital Cost Allowance Claims and Other Permissive Deductions.

If the revision to the property's capital cost causes the UCC decreases to exceed the UCC increases as of the end of a year now statute-barred, the recapture of that excess amount under subsection 13(1) will not be added into the taxpayer's income for that year or a subsequent year. (However, as indicated above, CCA claimed in non-statute-barred years will be disallowed to the extent necessary.) If an excess of UCC decreases over increases arises in a non-statute-barred year, the resulting recapture will be included in the taxpayer's income for that year and all CCA claimed in that year, and in subsequent non-statute-barred years, will be reassessed accordingly.

Recapture and Terminal Loss of a Person Not Resident in Canada

¶ 15. If a taxpayer has acquired depreciable property for the purpose of gaining or producing income and commences at a later time to use 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." As a result of the application of paragraph 13(7)(a) and subsection 13(9), 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. Thus, paragraph 13(7)(a) applies to a person who is not resident in Canada when, for example, the person 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, or when, for example, the 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 in both the part of a business carried on wholly in Canada and the part carried on wholly in another country, such as could be the case for transportation equipment, will normally not be considered to be property to which subsection 13(9) applies.

¶ 16. If a disposition of property (including a deemed disposition under subsection 13(7)) of 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). A section 115.1 election may affect the amount to be included in income. Section 115.1 is discussed in the current version of the following bulletins: IT-270, Foreign Tax Credit; IT-173, Capital Gains Derived in Canada by Residents of the United States; and IT-420, Non-Residents -- Income Earned in Canada.

¶ 17. If a disposition of property (including a deemed disposition under subsection 13(7)) results in a terminal loss that pertains to income included in a non-resident's taxable income earned in Canada under subparagraph 115(1)(a)(ii) (i.e., from a business carried on by the non-resident in Canada), the terminal loss 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 the current version of IT-262, Losses of Non-Residents and Part-Year Residents. A non-resident who files an election under section 216 is entitled to claim a terminal loss if applicable. However, by virtue of paragraph 216(1)(c), such a person is not entitled to deduct a non-capital loss. The section 216 election is discussed in the current version of IT-393, Election re Tax on Rents and Timber Royalties -- Non-Residents.

Deemed Disposition on Ceasing to Be Resident in Canada

¶ 18. If a taxpayer ceases to be resident in Canada and has a deemed disposition of a depreciable property in accordance with subsection 128.1(4), a recapture of CCA or a terminal loss may result from such deemed disposition, either of which would be reported under paragraph 114(a).

Miscellaneous

¶ 19. A terminal loss that would otherwise occur for a particular taxation 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, such as, for example, subsection 13(21.1) (see the current version of IT-220, Capital Cost Allowance -- Proceeds of Disposition of Depreciable Property, for comments on that provision) or subsection 13(21.2).

¶ 20. If the "restricted farm loss" provisions of section 31 apply to restrict the amount of loss that a taxpayer may deduct in a particular taxation year in respect of a farming business, 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. The current versions of IT-232, Losses -- Their Deductibility in the Loss Year or in Other Years, and IT-322, Farm Losses, discuss the restricted farm loss provisions.


Explanation of Changes

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.

Reasons for the Revision

This bulletin is being revised to reflect legislative amendments enacted under the 5th Supplement to the Revised Statutes of Canada, 1985; S.C. 1994, c. 21; S.C. 1995, c. 21; S.C. 1996, c. 21; S.C. 1998, c. 19; and S.C. 1999, c. 22.

Legislative and Other Changes

The definitions of "total depreciation" and "undepreciated capital cost" are no longer contained in paragraphs 13(21)(e) and (f) of the Income Tax Act, respectively, but rather are arranged alphabetically in subsection 13(21). These amendments, which are only structural changes in the Act, are reflected in the revised bulletin.

¶ 2(c) discusses the increase to the UCC of a class that is made for the repayment, after the disposition of a depreciable property in the class, of assistance described in subsection 13(7.1) that was previously received with respect to the property. When discussing such repayment in the former bulletin, we included the words "where the assistance has previously reduced the capital cost of the property by virtue of paragraph 13(7.1)(f)." We have removed these words in the revised bulletin because ¶ 2(c) also includes any repayment of assistance that, instead of previously reducing the capital cost of the property by virtue of paragraph 13(7.1)(f), previously reduced the UCC of the class (as described in ¶ 3(e) of the former bulletin and ¶ 3(f) of the revised bulletin).

¶ 2(e) has been added to the bulletin to describe a UCC increase that was added to the definition of "undepreciated capital cost" for amounts payable after February 23, 1998.

¶ 3(b) now describes a UCC decrease that was added to the definition of "undepreciated capital cost" for taxation years ending after February 21, 1994. (Because the description of this UCC decrease has been included in ¶ 3(b) of the revised bulletin, former ¶s 3(b) to (f) have been renumbered as ¶s 3(c) to (g) in the revised bulletin.)

¶ 3(h) has been added to the bulletin to describe a UCC decrease that was added to the definition of "undepreciated capital cost" for amounts received after February 23, 1998.

The last part of ¶ 7 now states that a terminal loss cannot be claimed in computing income from an office or employment. This statement has been added to the bulletin for purposes of providing additional information, rather than as a result of any change in the legislation or in a departmental position.

An italicized note has been added near the end of ¶ 10 to discuss rules pertaining to passenger vehicles that were announced in News Releases issued by Finance Canada.

¶ 12 now discusses rules in paragraph 249.1(1)(b) and subsection 249.1(4), which took effect for fiscal periods beginning after 1994.

¶ 12 now indicates that subsection 11(1) is subject to the rules in sections 34.1 and 34.2. This occurred by means of an amendment to subsection 11(1) that took effect for the 1995 and subsequent taxation years. (The addition of sections 34.1 and 34.2 to the Act took effect after 1994. Subsequent amendments to sections 34.1 and 34.2 are outside the scope of this bulletin.)

¶ 12 has been revised to reflect certain amendments to the Act which were structural in nature. Under these amendments, the rules previously contained in subsection 13(3) are now contained partly in that subsection and partly in subsection 20(16.2), and the rules previously contained in subsection 13(8) are now contained partly in that subsection and partly in subsection 20(16.3).

¶ 13 now indicates that, in order for an individual to make an election under subsection 25(1) in respect of a business, subsection 249.1(4) cannot apply in respect of the business. This restriction on the operation of subsection 25(1) took effect for fiscal periods beginning after 1994.

¶ 13 now reflects the interaction of subsection 25(3) (which has not been amended) with subsection 13(8) as the latter currently reads in the Act after the structural amendment mentioned above.

¶ 17 has been revised to reflect a structural change in the Act whereby the definition of "non capital loss" was moved from paragraph 111(8)(b) and arranged alphabetically with other definitions in subsection 111(8).

¶ 18 now reflects the repeal of section 48 and the addition to the Act of section 128.1. These amendments generally took effect after 1992. It should be noted that unlike former section 48, which only pertained to capital gains and losses, section 128.1 applies also for purposes of recaptures and terminal losses. It should also be noted that, in the former bulletin, ¶ 18 was the last paragraph under the heading "Recapture and Terminal Loss of a Person Not Resident in Canada." In view of the fact that the recapture or terminal loss discussed in ¶ 18 actually occurs while the taxpayer is still a resident, the paragraph has been given a new heading of its own.

¶ 19 now makes a reference to subsection 13(21.2), which was added to the Act -- replacing subsection 85(5.1) (which was repealed) -- effective for dispositions of property occurring after April 26, 1995 (with certain transitional rules).

Changes in the revised bulletin not specifically mentioned above are changes that have been made for purposes of clarification or for purposes of providing additional information, rather than as the result of a change in the law or in a departmental position.


Notice -- Bulletins do not have the force of law

Interpretation bulletins (ITs) provide Revenue Canada's technical interpretations of income tax law. Due to their technical nature, ITs are used primarily by departmental staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, the Department offers other publications, such as tax guides and pamphlets.

While the ITs do not have the force of law, they can generally be relied upon as reflecting the Department's interpretation of the law to be applied on a consistent basis by departmental staff. In cases where an IT has not yet been revised to reflect legislative changes, readers should refer to the amended legislation and its effective date. Similarly, court decisions subsequent to the date of the IT should be considered when determining the relevancy of the comments in the IT.

An interpretation described in an IT applies as of the date the IT is published, unless otherwise specified. When there is a change in a previous interpretation and the change is beneficial to taxpayers, it is usually effective for all future assessments and reassessments. If the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date of the IT.

A change in a departmental interpretation may also be announced in the Income Tax Technical News.

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

Director, Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
Revenue Canada
Ottawa ON K1A 0L5

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