Pursuant to a certain provision of the Income Tax Act (“ITA”), if in the transfer of depreciable property between related parties, the actual cost to the transferee would otherwise exceed the capital cost (for tax purposes) to the transferor, the capital cost to the transferee is limited to the sum of the capital cost to transferor and the transferor’s taxable capital gain on the property minus any related capital gains deduction claim by the transferor. It prevents an increase in the depreciable base of property where the transferor benefits from the half-taxation of capital gains and possibly the capital gains exemption. If the capital cost to the transferee would otherwise be less than the original cost to the transferor, the property is treated as having been acquired by the transferee at the transferor’s capital cost.
In a recent technical interpretation, the Canada Revenue Agency (“CRA”) was asked to consider the applicability of this provision where the property is deemed disposed of, and reacquired by a trust, such as when the 21 year rule applies. CRA indicated that the trust is not related to itself, and would be considered to be a dealing at arm’s length with itself. As such the provision would not apply.
CRA was asked to consider a trust making a disposition to a beneficiary under the ITA such the property is deemed disposed of by the trust and acquired by the beneficiary for fair market value (i.e. exceeding the capital cost of the transferor). As a trust is deemed not act at arm’s length with its beneficiaries, CRA believed that the provision may apply on the basis that the beneficiary acquired the property from the trust.
In cases where the distribution of assets from a personal trust is conditional on the assumption of the trust’s debt by the beneficiary, the roll-out of assets at cost would likely apply provided the assumption of the debt by the beneficiary does not impact the status of the personal trust. This assumes no election to have the transfer take place at fair market value.