1601. Depreciable assets: connected persons
February 2008 – Issue 102
The Income Tax Act contains a number of similar provisions, albeit scattered, dealing with the purchase of depreciable property from connected persons. They are essentially specific anti-avoidance rules. The purpose of these rules (most of which pre-date capital gains tax in the Eighth Schedule) is to prevent tax-free or low-taxed sales between connected persons of depreciable property, followed by high depreciation rates. The current rules are not uniform. The anti-avoidance rules may be harsh, especially in view of the fact that connected person sales of depreciable property can no longer occur tax-free due to the introduction of the capital gains tax. In many instances, the transferor is subject to tax without the base cost of the transferee obtaining any recognition of this new reality.
A new section 23J is intended to eliminate all the scattered depreciable property connected person regimes in favour of a single guideline under one new section. While the old rules limited depreciable cost to the lower of the connected seller’s cost or the market value at the time of the connected person sale, the new rule gives credit to intervening taxation arising from the connected person sale. More specifically, the depreciable tax cost for the connected person purchaser will equal the sum of:
· the cost (taking into account any subsequent tax adjustments) of the depreciable asset to the connected seller; plus · all ordinary revenue triggered upon the connected person sale as well as any inclusion stemming from the capital gain triggered on the sale. The rule for connected person sales will apply to all depreciable assets as defined in section 1 of the Act. The current definition, also used in provisions such as section 11(o) and 24M, is clarified.The new definition covers assets that:
· are eligible for a depreciation allowance; · can calculate that allowance wholly or partly determined with reference to the cost to the taxpayer or a connected person (so as to account for the depreciable asset connected person rules). Debts owing are excluded.Deneys Reitz
IT Act:S 1 definition of "depreciable assets",
Editorial comment: This item is only a brief summary of the complex rules in relation to transactions relating to depreciable assets between connected persons
