20 September 2001 External T.I. 2001-0067815 - Class 43.1 - "Ancillary to"

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 certain expenditures would qualify for inclusion in Class 43.1.

Position:

Involves questions of fact to be determined with reference to the circumstances relevant to a particular situation as well as through consultation with Natural Resources Canada.

Reasons:

Nature of the determination as well as the requirements of subsection 13(18.1).

XXXXXXXXXX 								2001-006781
A. A. Cameron
(613) 347-1361
September 20, 2001

Dear XXXXXXXXXX:

Re: Class 43.1 in Schedule II to the Income Tax Regulations (the "Regulations")

We are writing in response to your facsimile transmission wherein you requested "clarification pertaining to the Class 43.1 treatment of certain sub-systems within an eligible plant" and asked the following questions:

1. Are overhead cranes that service eligible assets (e.g. steam turbines) deemed eligible?

2. Do fire protection systems for eligible assets (e.g. steam turbines) qualify for class 43.1?

3. Do fire protection systems for ineligible assets (e.g. cooling towers) qualify for class 43.1?

4. Do fees and/or permits necessary for the operation and/or construction of an eligible plant qualify?

5. Does interest paid during construction on funding for the procurement and/or construction of an eligible plant qualify?

6. Is the intent of Class 43.1 to include any and all sub-systems that are necessary for the safe and efficient operation of an eligible plant?

In particular, you have indicated that you "...would like confirmation of the eligibility of these systems and confirmation that the 'intent' of the [Class 43.1] guidelines is that when a component is deemed eligible, for example a steam turbine, it is not only the component that is eligible but the required supporting systems of said component which are necessary for its safe and efficient operation."

Our Comments

Queries regarding the income tax consequences associated with completed transactions should be addressed to the relevant tax services office. Confirmation as to the income tax consequences arising in respect of proposed transactions are only provided in the context of a written request for an advance income tax ruling. For more information concerning advance income tax rulings, please refer to Information Circular 70-6R4 dated January 29, 2001, issued by the Canada Customs and Revenue Agency. Nevertheless, we can provide you with the following general comments.

The appropriate treatment for income tax purposes of outlays made by a taxpayer, as well as the determination of the Class in Schedule II to the Regulations to which the cost of property acquired by a taxpayer may be classified, are questions of fact involving the application of the provisions of the Income Tax Act (the "Act") and the Regulations to the facts of the particular situation under consideration.

Subject to the provisions of section 1102 of the Regulations, a property acquired by a taxpayer may constitute a "depreciable property" (within the meaning assigned that term in subsection 13(21) of the Act), of the taxpayer. In our view, the "capital cost" of a depreciable property generally means the full cost to the taxpayer of acquiring the property including legal, accounting, engineering or other fees incurred to acquire the property (subject to a provision of the Act expressly allowing a deduction in respect thereof). Where the relevant requirements under section 21 of the Act are satisfied, a taxpayer may be able to elect to add to the capital cost of depreciable property certain interest and financing costs in respect of borrowed money used to acquire the depreciable property or relating to the amount payable for that property.

Property that is part of a system that generates electrical or electrical and heat energy from qualifying fuel sources, where the relevant requirements of paragraphs (b) and (c) to Class 43.1 are otherwise satisfied, can qualify for inclusion in that Class provided it is property, other than reconditioned or remanufactured equipment, that:

i) would otherwise be included in Class 1, 2 or 8 of Schedule II to the Regulations;

ii) is described in paragraph (a) to Class 43.1; and

iii) is not expressly excluded from that paragraph by the post-amble thereto.

It would be a question of fact whether a particular property under consideration would otherwise be included in Class 1, 2 or 8 of Schedule II to the Regulations and would not be expressly excluded from paragraph (a) to Class 43.1 pursuant to the post-amble thereto. However, assuming such tests were satisfied, the determination to be made is whether the property is described in any of subparagraphs (a)(i) through (a)(v) to Class 43.1.

Subparagraphs (a)(i) through (a)(iii) to Class 43.1 refer to electrical generating equipment; equipment that generates both electrical and heat energy; and certain heat generating or recovery equipment. Subparagraph (a)(iv) to Class 43.1 refers to "control, feedwater and condensate systems and other equipment, where that property is ancillary to equipment described in subparagraph (i), (ii), or (iii)" to paragraph (a) to Class 43.1. Subparagraph (a)(v) to Class 43.1 refers to an addition to a property described in any of the preceding four subparagraphs.

As such, except for an "addition" described in subparagraph (a)(v) to Class 43.1, property which is not integral to or a component part of the equipment referred to in any of subparagraphs (a)(i) through (a)(iii) to Class 43.1 would have to be equipment "ancillary to" equipment described in any of those three subparagraphs in order to be encompassed by paragraph (a) to Class 43.1.

The word "ancillary" is commonly defined in dictionaries to mean "subordinate" or "auxiliary". In general terms, the context of subparagraph (a)(iv) to Class 43.1, is that of electrical/heat generating or heat recovery equipment described in subparagraphs (a)(i) through (iii) to Class 43.1 that is part of a "system" or "enhanced combined cycle system" described in paragraph (c) to that Class (such equipment being "Qualified Equipment" assuming the requirements of Class 43.1 are otherwise satisfied).

The factors discussed above suggest that, equipment "ancillary to" Qualified Equipment for purposes of subparagraph (a)(iv) to Class 43.1 would be that which would be subordinate or auxiliary to the Qualified Equipment from the perspective of people conversant with the use of such equipment as part of a "system" or "enhanced combined cycle system" described in paragraph (c) to Class 43.1.

Whether or not particular equipment would be "ancillary to" Qualified Equipment for the purposes of subparagraph (a)(iv) to Class 43.1 in a given situation would have to be determined from the facts of the situation under consideration. As such determination may involve engineering or scientific matters, it would be made with reference to the Technical Guide to Class 43.1 published by the Department of Natural Resources and in consultation with officials from that Department. It should be noted that, pursuant to subsection 13(18.1) of the Act, the above Technical Guide applies conclusively with respect to engineering and scientific matters for the purpose of determining whether property meets the criteria set out in the Regulations regarding Class 43.1.

We would note that comments in the above Technical Guide concerning eligible / ineligible assets of "systems" or "enhanced combined cycle systems" qualifying under paragraph (c) to Class 43.1, indicate that not all assets associated with Qualifying Equipment are considered eligible assets, i.e., not all of such assets should be considered "ancillary to" such equipment for purposes of subparagraph (a)(iv) to Class 43.1. For example, while working platforms that primarily serve qualifying generating equipment are indicated to be eligible, working platforms that serve the surrounding structure are considered ineligible. In addition, while components of a fuel-handling system whose primary function is to increase the heat value of the combustible portion of the fuel by certain processes are indicated to be eligible, components of the fuel-processing system that do not themselves increase the heat value of the combustible organic fuel (e.g., front-end loaders and conveyor belts) are considered ineligible.

In accordance with paragraph 22 of Information Circular IC 70-6R4, the comments contained herein are not income tax rulings and are not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch