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: When is property first used to earn income
Position: question of fact
Reasons: question of fact
2000-005925
XXXXXXXXXX Denise Dalphy
(613) 957-9231
Attention: XXXXXXXXXX
December 14, 2000
Re: Available for Use - Paragraph 13(27)(a) of the Income Tax Act (the "Act")
We are writing in reply to your letter dated November 24, 2000 wherein you inquire about whether certain properties have become "available for use" within the meaning of subsection 13(27) of the Act.
You have described a situation where a Canadian resource company (the "Company") is developing a mine in a remote area of Canada. It has been determined from extensive feasibility studies that the potential output of the mine is sufficient to enable the company to earn significant profits in the future. All significant permits have been received and the company plans to commence production on completion of the development.
You have provided us with the following additional information:
"In order to develop the mine, the Company puts in place the required infrastructure; for example, it constructs an airplane landing strip, build roads and install fuel tanks and fueling equipment on site."
"The purpose of the landing strip, roads and fuel depot is to transport staff members, contract workers, equipment and supplies to and from the mine site."
"During the development period, airplanes are taking off and landing on the air strip and large trucks are traveling on the roads. Fuel is shipped into and drawn out of the fuel depot. These facilities are in the usual sense, being "used"."
" The purpose of the landing strip, roads and equipment is to assist in developing the Company's mine. The Company is, in fact, using it for this purpose. The development stage is an integral part of a mine's business cycle and income earning ability. Without the air strips, roads and other equipment, there would be no operating mine and thus, no income earning potential, which would otherwise exist. As a result, there is a very strong and direct relationship between the use of the fixed assets and the Company's income earning activities."
You have further advised that all of the fixed assets belong to a prescribed class in Schedule II of the Income Tax Regulations (the "Regulations"). You inquire whether the fixed assets are "used" by the Company "for the purpose of earning income" within the meaning of paragraph 13(27)(a) of the Act.
It appears that the transaction described in your letter relates to an actual transaction. Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following comments which are of a general nature.
Whether or not a particular asset is used, and when a particular depreciable asset is "first used", by a taxpayer "for the purpose of earning income" are questions of fact to be decided on the basis of all information relevant to the situation.
The word "used" is not defined in the Act, and we therefore would rely on the general meaning of this word. The Oxford English Dictionary, Second Edition, defines the words "used" and "use" as meaning respectively "that is or has been made use of; utilized", "the act of employing a thing for any (esp. a profitable) purpose, the fact, state or condition of being so employed; utilization or employment for or with some aim or purpose, application or conversion to some (esp. good or useful) end". Accordingly, if a particular property is "used" in the normal sense of that word, it would be considered to have been "used" for the purposes of paragraph 13(27)(a) of the Act.
Whether a particular property has been used by a taxpayer "for the purpose of earning income" is also a question of fact, and the test is somewhat similar to the tests in paragraph 18(1)(a) of the Act, paragraph 1102(1)(c) of the Regulations and in the definition of "eligible capital expenditure" in paragraph 14(5)(b) of the Act. The fact that an expenditure has been incurred in the exploration or development phase of a mineral resource would not, in itself, preclude the expense from being considered to have been incurred or used "for the purpose of earning income".
Finally, the above comments do not necessarily mean that we have opined on the proper classification of the above expenses. Whether an expense is classified as CEE, CDE, ECE, an operating expense, or a depreciable capital property must be determined on the basis of the relevant provisions of the Act, and all facts surrounding the acquisition and use of a particular property. Of course, however, if a particular property is in fact a depreciable capital property, the expense incurred for that property will be neither CEE nor CDE.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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