Anonymised, illustrative composite. The parent file's floor on cash boot applies to shares. Roll depreciable equipment into a buyer's corporation instead, and section 85 sets a different floor — one that turns the same cash into fully taxable recapture.
At a glance
A trucking company rolled its entire tractor-and-trailer fleet — every asset in the relevant CCA class — into the buyer’s newly incorporated acquisition company under an s.85 rollover, in exchange for $3,000,000 cash and $1,200,000 of rollover shares in the acquisition company, fair market value $4,200,000 in total. The parties jointly elected under s.85(1), on the assumption that the mechanics would work the way they had on a share rollover the same advisors had recently closed — see the parent file, where cash boot on rollover shares triggered an immediate capital gain the moment it exceeded the vendor’s adjusted cost base.
The parent file’s floor, s.85(1)(c.1), is expressly limited to “capital property (other than depreciable property of a prescribed class).” A fleet of trucks and trailers is depreciable property of a prescribed class — the exact category c.1 carves out. Modelling this rollover on the parent file’s mechanics would have applied the wrong floor, and more importantly, assumed the wrong kind of income.
Fair market value of the fleet: $4,200,000. Cash: $3,000,000. Rollover shares: $1,200,000. Original capital cost of the fleet: $3,800,000. Undepreciated capital cost of the class immediately before the disposition: $1,050,000 — the fleet had been substantially depreciated over its working life. Those last two figures do no work at all in a share rollover; here they decide the character of every dollar of gain.
s.85(1)(e) provides the depreciable-property floor: where the property “was depreciable property of a prescribed class of the taxpayer and the amount that, but for this paragraph, would be the proceeds of disposition thereof is less than the least of (i) the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition, (ii) the cost to the taxpayer of the property, and (iii) the fair market value of the property… the amount agreed on… shall… be deemed to be the least of the amounts described in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii).”
Read the unit. Subparagraph (i) is a class-level figure — “all property of that class,” not the cost or value of this one truck or trailer. Because the whole fleet was disposed of together here, the class’s undepreciated capital cost and this disposition’s undepreciated capital cost are the same number, $1,050,000 — but that will not be true on a partial disposition of a class, where treating a single asset’s figures as the class figures is exactly the wrong-unit error this corpus keeps finding.
On these facts, the floor did not end up doing independent work. s.85(1)(b) — the same boot floor as the parent file — already forces the elected amount up to the fair market value of the cash boot, $3,000,000, “irrespective of the amount actually so agreed on.” Since $3,000,000 already exceeds the s.85(1)(e) floor of $1,050,000, paragraph (e) is satisfied without adding anything further; it only would have mattered here if the cash boot had been smaller than the class’s undepreciated capital cost.
What paragraph (e) does change is what happens once the $3,000,000 is deemed proceeds. Depreciable property does not simply produce a capital gain the way the parent file’s shares did. The excess of the amount credited against the class — capped at the property’s original cost — over the class’s undepreciated capital cost is recapture, included in full in income under s.13(1): “If, at the end of a taxation year, the total of the amounts determined for E to K in the definition undepreciated capital cost… exceeds the total of the amounts determined for A to D.1 in that definition… the excess shall be included in computing the taxpayer’s income of the year.” Only proceeds above the property’s original cost produce a capital gain on top of the recapture; here, $3,000,000 of deemed proceeds sits below the $3,800,000 original cost, so there is no capital gain component at all — every dollar of the $1,950,000 gap between the $3,000,000 credited to the class and the $1,050,000 undepreciated capital cost ($3,000,000 − $1,050,000) is recapture, taxed as fully includible ordinary income.
The return was filed on $1,950,000 of recapture, fully included in income, with no capital gain reported on the disposition at all — correct on these numbers, since the deemed proceeds never exceeded the fleet’s original cost. The rollover shares carried whatever value the FMV-to-boot gap left them, exactly as in the parent file; what changed was the character of the immediate inclusion, not its existence.
Had the file been modelled on the parent’s share-rollover mechanics — capital gain, 50% inclusion — the return would have reported roughly $975,000 of taxable income on the $1,950,000 gain-like amount instead of the full $1,950,000 a recapture characterisation actually requires. That is not a rounding error; it understates taxable income by close to half, on a filing position CRA would not simply accept on the basis that the parties had modelled it on a different provision.
The tell is the word “capital property” doing double duty. Shares are capital property. So is a fleet of trucks, in the everyday sense — but s.85(1)(c.1) draws its own line at “capital property (other than depreciable property of a prescribed class),” and a rollover of equipment, vehicles or any other CCA-class asset sits on the far side of that line, under a different paragraph with a different consequence.
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