24 October 2000 External T.I. 2000-0050945 - LEASING PROPERTY CONCRETE READY-MIXERS

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 concrete ready-mixers are "exempt property" and therefore, a "prescribed property" for purposes of section 16.1.

Position: No

Reasons: Similar to court decision

XXXXXXXXXX 2000-005094
N. L. Storry
Attention: XXXXXXXXXX

October 24, 2000

Dear Sirs:

Re: Request For Technical Interpretation - Section 16.1 Election"

This is in reply to your facsimile of October 11, 2000, wherein you requested an interpretation with respect to section 16.1 of the Income Tax Act (the "Act") and Regulations 8200 and 1100(1.13)(a) of the Act as they apply to concrete ready-mixers.

Section 16.1 of the Act provides leasing property rules which may apply in computing the income of a lessee of tangible property, other than prescribed property, leased for a term of more than one year from an arm's length person who is resident in Canada or who carries on business through a permanent establishment in Canada. For the purposes of section 16.1 of the Act, "prescribed property" is defined in Regulation 8200 and includes "exempt property" as defined in Regulation 1100(1.13)(a). Regulation 1100(1.13)(a) includes in the definition of "exempt property," "a truck or tractor that is designed for hauling freight on highways."

In The Queen v. Nowsco Well Service Ltd., 90 DTC 6312, (the "Nowsco case") the court stated, with reference to assets of the taxpayer described as "cement trucks, frac pumpers and similar automotive equipment", that while perhaps initially the vehicles used by the taxpayer were "designed for use on highways or streets" their design was so modified for purposes of their utilization, that the limited design purpose was of minimal importance. Their primary purpose was to become parts of an integrated process for the cementing and/or stimulation of oil or gas wells. The same reasoning was also used in The Queen v. Halliburton Services Ltd, 90 DTC 6320, which had similar facts. In Terroco Industries Ltd. V. MNR, 93 DTC 1, (the "Terroco case") the Tax Court of Canada decided that the truck upon which a "hot oil unit" was mounted was an "integral part" of such unit as 90% of the truck engine's operating time was in a stationary position providing power to that unit. In view of the modifications made by the taxpayer, the truck could not be considered to have been "designed for use on highways or streets" within such phrase in paragraph 4600(2)(e) of the Regulations.

In the Cumberland Ready Mix Ltd. v. The Queen, 94 DTC 6079, (the "Cumberland case") the court stated "true, they have a chassis and an engine and they are operated on the highways and streets, but in my opinion, that use is ancillary to the main purpose, namely to process and deliver concrete for Cumberland's customers. The chassis and engine of the truck have been substantially modified so as to become assimilated with the hopper (or stone slinger mechanism), thus becoming one new piece of equipment. This equipment has as its primary purpose to operate off-highway on construction sites or at the plant...It is this primary purpose for which the vehicles are designed. The mixers have as their primary purpose to be a piece of prescribed machinery or equipment in the business of Cumberland Ready Mix and therefore should qualify for the investment tax credits rejected by the Minister." The Court decided that cement trucks, i.e., a truck cab and chassis on which a concrete mixer was mounted, are "qualified property" for ITC purposes. The Court apparently agreed that the vehicles were not "designed for use on streets and highways" based upon the "primary purpose test" found in the Nowsco case and the Terroco case; the "primary purpose" of such vehicles being to process and deliver concrete to the taxpayer's customers.

Based on the above-noted decisions from the Courts, when determining the purpose for which a vehicle was designed, we must look further than the vehicles initial purpose and apply the "primary purpose test." After applying this test in the Cumberland case, the court decided that Cumberland's concrete ready-mix trucks had a primary purpose other than for use on streets and highways. It is our opinion that, in general, concrete trucks are designed for use on highways and streets. However, if the trucks are substantially modified to process and deliver concrete to customers such that the trucks' primary purpose is to operate off-highway on construction sites or at the plant, then the concrete ready-mixers are not "exempt property" as defined in Regulation 1100(1.13)(a) and therefore, not a "prescribed property" pursuant to Regulation 8200 of the Act.

We trust these comments will be of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch