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:
The application of section 16.1 of the Act and subsection 1100(2.21), 1102(14), 1103(2d), 1102(14.1) and section 8200 of the Regulations in respect of property that was subject to sale/leaseback transaction.
Position:
Provided general comments and technical interpretations of the relevant provisions that would be more appropriate to a hypothetical situation.
Reasons:
Situation could be a completed transaction which should be addressed to the tax services office or may be a proposed transaction in which case an advance ruling should be requested.
XXXXXXXXXX F.B. Fontaine
2000-000288
Attention: XXXXXXXXXX
August 22,2000
Dear Sirs:
Re: Sale/Leaseback Transaction
Subsection 16.1(1) of the Income Tax Act (the "Act")
This is in reply to your letter dated January 7, 2000 in which you requested a technical interpretation in respect of the following situation:
(a) A taxpayer owner of property entered into a sale leaseback transaction with an arm's-length party (the "lessor") in which ownership of the leased property will not revert to the taxpayer (the "lessee");
(b) The property is a processing facility which originally constituted class 3 and 8 assets acquired prior to 1970 with modifications and additions thereto that qualified for classes 29, 39 and 43 treatment as manufacturing and processing equipment;
(c) The lessor and lessee made a joint election under subsection 16.1(1) of the Act in respect of the leased property;
(d) The lessee will include the property in the appropriate prescribed class for capital cost allowance purposes.
You indicated that current assessing practice allows all additions to the facility as class 43 property and raised certain questions concerning the classification of the leased property pursuant to subsection 16.1 of the Act as it relates to subsections 1100(2.21), 1102(14), 1103(2d), 1102(14.1) and section 8200 of the Income Tax Regulations (the "Regulations").
The situation that you described appears to be an actual fact situation that relates to specific taxpayers. Whether or not the situation is a completed or proposed transaction, we would refer you to paragraph 22 of Information Circular 70-6R3 (the "Circular") which outlines the procedure to be followed in respect of such transaction. Accordingly, while we are unable to provide the income tax effects of the particular situation, we are prepared to offer the following general comments subject to paragraphs 14 to 17 of IT-233R.
1. Subsection 1100(2.21) of the Regulations applies where a provision of the Act deems a taxpayer to have disposed of a property and acquired or reacquired the property. In this case, the acquisition or reacquisition is deemed, for the purposes of subsection 1104(14.1) and certain other provisions of the Regulations, to have been made from a non-arm's length person. Paragraph 16.1(1)(b) of the Act does not deem a taxpayer to have disposed of and acquired or reacquired a property. Accordingly, subsection 1100(2.21) of the Regulations would not apply in respect of a property, in circumstances where a provision of the Act, such as paragraph 16.1(1)(b), deems a taxpayer only to have acquired the property.
2. Paragraph 251(1)(b) of the Act states that it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length. Accordingly, whether a taxpayer who transfers property (the "transferor") to another taxpayer (the "transferee") at a particular time, can be considered, at that time, to be dealing with each other at arm's length would depend on a finding of fact. Provided that paragraph 1102(14)(a) of the Regulations does not otherwise apply, where the transferor and the transferee are not related and are in fact dealing at arm's length, it is our opinion that subsection 1102(14) of the Regulations would not apply to require that a property transferred to the transferee from the transferor be property of the same prescribed class of the transferor.
3. Subsection 1103(2d) of the Regulations provides for an election to allow taxpayers to transfer property from one class ("former class") to another class ("present class"). A taxpayer will be eligible to elect under subsection 1103(2d) where (i) the particular property in the former class is property that would have been included in the present class, if it had been acquired by the taxpayer at the time "new property" is acquired, or (ii) the new property in the present class is property that would have been included in the former class, if it had been acquired by the taxpayer at the time the particular property was acquired.
Among other things, where,
(i) the property of the former class (such as class 29) is disposed of in a taxation year and the new property (such as class 43) was acquired in any taxation year before the end of the taxation year in which the former property was disposed of, and
(ii) the election in respect of the transfer of the property from the former class to the present class is made in the year of disposition of the former property,
the transfer (of class 29) would be considered to be made (to class 43) before such disposition. Such election applies to both arm's length and non-arm's length dispositions of property.
4. Subsection 1102(14.1) of the Regulations basically deals with a taxpayer who has acquired property of a present class after May 25, 1976 that the taxpayer (or a non-arms' length party, in certain cases) had previously owned prior to May 26, 1976 and included in a different class (the "former class"). In such a case, the property so acquired will be included in the former class.
For certain purposes of the Act, it is generally accepted that substantial and significant alterations made to property that materially improve the property beyond its original condition would be considered to be of a capital nature and, the costs of such alterations may be eligible for certain tax incentives that normally would apply to new property. Whether in a given set of circumstances, certain alterations or renovations to property could be considered to have created a new or different property would be a question of fact involving the nature of the particular property, knowledge and a physical inspection of the property and the extent to which the alterations can be described as "substantial" and "significant". Any such determination would be the responsibility of the tax services office.
5. In circumstances where a taxpayer previously owned property in classes 3, 8, 29, 39 and 43 of Schedule II of the Regulations which subsequently became the subject of a sale and lease back transaction in which the taxpayer becomes the lessee of all the property, it is our view that, where the election described in section 16.1 was duly filed, paragraph 16.1(1)(b) of the Act would apply only in respect of the property described in classes 8 (other than general purpose office furniture and office equipment), 29, 39 and 43 and not the property described in class 3, as the latter property as well as the class 8 property described in brackets above would be "prescribed property", pursuant to section 8200 of the Regulations. In this situation, it is also our view that subsection 1102(14.1) may apply to require that the property deemed to have been acquired under section 16.1 of the Act by the lessee be included in the former class when it was previously owned by the taxpayer.
Similarly, it is our opinion that the lessor of the property would be prevented from claiming a building that was included in class 3 of Schedule II of the Regulations as "specified leasing property", as the term is defined under subsection 1100(1.11) of the Regulations, since such property would be considered to be "exempt property" under subparagraph 1100(1.13)(a)(vi) of the Regulations. A building that was included in class 3 of Schedule II of the Regulations when acquired by the taxpayer prior to the sale/lease transaction would never be eligible to be classified as class 29, 39 or class 43 property. Accordingly, any class 29, 39 or 43 property that the lessor acquired from the taxpayer under that transaction would not include a class 3 building.
The above opinions are our best interpretation of the law as it applies generally. They may , however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 22 of the Circular, written opinions are not advance income tax rulings and, accordingly, are not binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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...cont'd
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