Does a share buyer keep the company’s undepreciated capital cost?

Undepreciated capital cost, or UCC, is worked out class by class for the taxpayer that owns the depreciable property; subsection 111(5.1) itself speaks of the UCC “to the taxpayer”. The CRA’s folio describes the UCC of a class as the capital cost of all property included in that class, less the total capital cost allowance previously claimed and the net proceeds (or capital cost if less) from any dispositions. Nothing in that description refers to who holds the shares.

The rule when control is acquired

Subsection 111(5.1) applies if a taxpayer is subject to a loss restriction event at a given time. Under paragraph 251.2(2)(a), a corporation is subject to one if control of it is acquired by a person or group of persons. The subsection also asks a further question, reading the Act without reference to subsection 13(24): would the UCC of depreciable property of a prescribed class immediately before that time have exceeded the total of the fair market value of all the property of that class immediately before that time and the amount for that class otherwise allowed under the capital cost allowance regulations or deductible under subsection 20(16) for the taxation year that ended immediately before that time? If so, the excess is to be deducted in computing income for that year and is deemed to have been allowed in respect of property of that class under those regulations. The subsection is subject to subsection 111(5.5).

Where the rule stops

Subsection 111(5.5) switches off paragraphs 111(4)(c) to (f) and subsections 111(5.1) to (5.3) if, at that time, the taxpayer becomes or ceases to be exempt from tax under Part I of the Act on its taxable income. It also provides that if it can reasonably be considered that the main reason for the loss restriction event is to cause paragraph 111(4)(d) or any of subsections (5.1) to (5.3) to apply, that provision and paragraph 111(4)(e) do not apply, and paragraph 111(4)(c) as well where the provision is paragraph 111(4)(d). Separately, subsection 256(7) sets out cases where control of a corporation is deemed not to have been acquired, and others where it is deemed to have been; ask the tax adviser whether it touches the purchase.

What to check or ask

• Does the purchase count as an acquisition of control under subsection 256(7), or is it caught by one of its exceptions?
• For each CCA class, how does the corporation’s UCC compare with the fair market value of the property in it?
• Has the seller’s accountant looked at the year that ended immediately before the control change, since the deduction falls there?

An asset purchase works differently, because the buyer’s own pools begin from what the buyer acquires; see how the tax cost bump works in an asset purchase. The related rule on why a share purchase gives no tax basis step-up covers the price side.