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: Whether the prepaid fees paid under a grain storage license agreement is ECE, prepaid rent, or something else. As described in clause XXXXXXXXXX of the Agreement, the producer does not acquire any ownership rights in the grain facility, but simply acquires a right in perpetuity to store up to XXXXXXXXXX bushels of grain per unit.
Position: It is our opinion that the $XXXXXXXXXX payment, per unit, made by the producer will be considered ECE for purposes of section 14 of the Act.
Reasons: The fees are not paid for rent but are for a right in perpetuity. Since it is not for a limited period it cannot qualify class 14 depreciable property.
April 3, 2000
Calgary Tax Services Office HEADQUARTERS
J. Gibbons
Attention: Della McKee (613) 957-2135
2000-000606
Grain Storage License Agreement
We are replying to your facsimile of February 3, 2000, concerning the income tax treatment of a grain storage license agreement. A copy of such an agreement (the "Agreement") was sent to you for comments by a local accounting firm on behalf of their client, XXXXXXXXXX (the "Taxpayer").
Facts
1. The Taxpayer plans to construct and operate an elevator facility and a grain storage facility in Alberta.
2. The storage facility will have a storage capacity of approximately XXXXXXXXXX bushels.
3. The Taxpayer will sell licenses to producers to use storage space in the facility.
4. The essential features of the sample license agreement are:
a) The license entitles the producer to a specified number of storage units - each unit having a storage capacity of XXXXXXXXXX bushels.
b) The term of the license is for XXXXXXXXXX years and for as long after the initial XXXXXXXXXX year term that the Taxpayer continues to operate the elevator and storage facility.
c) The producer must pay an up-front license fee of $XXXXXXXXXX per unit.
d) Clause XXXXXXXXXX of the Agreement contains a "put option" that allows a producer, within the first XXXXXXXXXX years of the Agreement, the option to surrender the license to the Taxpayer and receive a full refund of the license fee paid. The put option also stipulates that the Taxpayer will not be required to accept put options for more than XXXXXXXXXX % of the units from all producers in any one year, to be determined on a FIFO basis.
e) Clause XXXXXXXXXX of the Agreement states: " ...XXXXXXXXXX ...".
Question 1: Will the license be considered prepaid rent or an eligible capital expenditure ("ECE")?
Subparagraph (c)(ii) of the definition of ECE in subsection 14(5) excludes, inter alia, intangible property that is depreciable property. Accordingly, consideration must be given to whether the amount paid under the Agreement is a class 14 depreciable property. Property that is a patent, franchise, concession or license qualifies under class 14 only if it is for a "limited period." In this regard, the comments in paragraph 16 of IT-477 are relevant in this situation . This paragraph states that where renewal or extension periods are considered part of the life of the property, and where the number of such renewals or extensions is indefinite, the property is not for a limited period and does not qualify as a class 14 property. Based on these comments, it is our view that the amount paid pursuant to the Agreement does not qualify as a class 14 property.
As described in clause XXXXXXXXXX of the Agreement, the producer does not acquire any ownership rights in the grain facility, but simply acquires a right in perpetuity (clause XXXXXXXXXX) to store up to XXXXXXXXXX bushels of grain per unit with the Taxpayer. Accordingly, it is our opinion that the $XXXXXXXXXX payment, per unit, made by the producer will be considered an ECE for purposes of section 14 of the Act, rather than prepaid rent.
Question 2: How should the put option be treated for income tax purposes?
The put option (clause XXXXXXXXXX) allows a producer the option to surrender the license to the Taxpayer and receive a full refund of the license fee paid. The description for Amount E in the definition of "cumulative eligible capital" in subsection 14(5) the Act has a "mirror image test" to determine whether an amount which a taxpayer has received or may become entitled to receive in connection with a business, as a result of a disposition of property, is proceeds of the disposition of eligible capital property, resulting in an "eligible capital amount" (EC amount). The test is met where, if any payment had been made after 1971 by the taxpayer for that property, such payment would have qualified as an ECE of the taxpayer for the business under the definition of that term in subsection 14(5). In other words, a taxpayer disposing of property in connection with a business looks in the mirror to see whether, if the taxpayer were instead purchasing the property, its cost would qualify as an ECE of the taxpayer for the same business. In our view, as a result of this test, an amount received by a producer in exercising put options would be considered proceeds from the disposition of eligible capital property.
Question 3: Should the sale of the license by the Taxpayer be treated as a capital or an income transaction or will it result in an EC amount?
The test to determine whether or not a transaction results in an EC amount was discussed in our answer to question 2. Based on this test, it is our view that the sale of the license by the Taxpayer will result in an EC amount.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will then be sent to you for delivery to the client.
John Oulton
Manager
Business, Property, and Employment
Income Section III
Income Tax Rulings Directorate
Policy and Legislation Branch
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