7 December 1999 External T.I. 1999-0012185 - Term-shared use equipment

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Does CCRA have a position or published guidelines as to when first and second term shared-use-equipment would be considered to have been "converted to commercial use" for the purposes of subsection 127(27).

Position:

The law regarding first and second term shared-use-equipment is to provide ITC on property used primarily on SR&ED and also used, to a lesser extent, for other purposes. Where such property is used all or substantially all for non-SR&ED purposes with a view to profit from such use, the property will be considered to have been converted to commercial use. That position is included in a paper prepared by the Audit Directorate on the subject matter and is available on the Internet at http://www.rc.gc.ca/.

Reasons:

The intention of the law regarding the use of first and second term shared use equipment required the property to be used in SR&ED as confirmed verbally with Finance. The dictionary meaning assigned to the term "converted to commercial use" .

TAX EXECUTIVES INSTITUTE INC.

Liaison Meeting - December 7, 1999

Question XXXII

Does Revenue Canada have a position or published guidelines about whether or when "First and Second Term Shared-Use-Equipment" used primarily in the prosecution of SR&ED will be considered to be "converted to commercial use" for purposes of subsection 127(27) and the related recapture provisions?

Response

The law in respect of first and second term shared-use-equipment was meant to provide ITC on such property where the property was used in SR&ED and also was used, to a lesser extent, in other activities (in general terms a 50%-90% usage in SR&ED). Where there is a conversion in the use of the property from SR&ED to commercial, subsection 127(27) of the Income Tax Act will require the recapture of the ITC earned in respect of the property. Subsection 127(27) is applicable to conversions of property that occur after February 23, 1998.

A paper entitled How to calculate the amount of Investment Tax Credit (ITC) recaptured when a property is disposed of or converted to commercial use has been prepared on this subject by the SR&ED Directorate and is available on our web site at http://www.ccra-adrc.gc.ca. In response to the question above, the position of the Canada Customs and Revenue Agency is that ITCs on first and second term shared-use-equipment will not be recaptured unless the usage of the equipment for SR&ED becomes only incidental. That is, there will be recapture in respect of ITCs on shared-use-equipment when the property has been all or substantially all converted to commercial use.

F.B. Fontaine
992959
November 22, 1999