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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Several issues related to subparagraph (a.1)(i) of class 17, contained in Schedule II of the Income Tax Regulations:
(1) What does acquired mean?
(2) If the asset is acquired before February 28, 2000, but is not available for use until February 28, 2000 or some time thereafter, will it be included in class 1 or class 17?
(3) If capital additions were made after February 27, 2000 to eligible electrical generating equipment acquired before February 28, 2000, would the addition be included in class 1 or class 17?
(4) How will the disposition of an electrical generating unit after February 27, 2000 have to be reported for CCA purposes where part of the cost is included in Class 1 and another part is included Class 17?
Position:
(1) The date on which legal title to it is obtained, or the date on which the taxpayer has all the incidents of ownership, if legal title remains with the owner.
(2) Class 17.
(3) Class 17.
(4) Reasonable allocation of proceeds of disposition.
Reasons:
(1) IT-285R2.
(2) Subsection 13(26).
(3) Regulation 1102(19)
(4) IT-220R2 and section 68.
XXXXXXXXXX 2001-010379
Randy Hewlett, B.Comm.
December 7, 2001
Dear Sir or Madam:
Re: Technical Interpretation - Class 17(a.1)
We are writing in response to your letter dated September 27, 2001, wherein you requested our opinion on several issues related to subparagraph (a.1)(i) of class 17, contained in Schedule II of the Income Tax Regulations (the Regulations).
Paragraph (a.1) of class 17 is applicable to property acquired after February 27, 2000. Subparagraph (a.1)(i) includes "property (other than a building or other structure) acquired after February 27, 2000 that has not been used for any purpose whatever before it was acquired by the taxpayer and that is electrical generating equipment (other than electrical generating equipment described in any of paragraphs (f) to (h) of Class 8).
Electrical generating equipment acquired prior to February 28, 2000 was included in class 1, by virtue of paragraph (k) thereof. Class 1 has a capital cost allowance (CCA) rate of 4%, whereas class 17 has a CCA rate of 8%.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments to each of the following questions you pose with respect to how the new class will apply to electrical generating equipment acquired after February 27, 2000:
(1) What does acquired mean?
As noted in paragraph 17 of Interpretation Bulletin IT-285R2 Capital Cost Allowance - General Comments, dated March 31, 1994, a taxpayer will be considered to have acquired a depreciable property at the earlier of:
(a) the date on which title to it is obtained, and
(b) the date on which the taxpayer has all the incidents of ownership such as possession, use, and risk, even though legal title remains with the vendor as security for the purchase price (as is commercial practice under a conditional sale agreement).
In order that the cost of an asset may fall within a specified class, the purchaser must have a current ownership right in the asset itself and not merely rights under a contract, of which the asset is the subject, to acquire it in the future.
(2) If the asset is acquired before February 28, 2000, but is not available for use until some time after February 27, 2000, will it be included in class 1 or class 17?
The date of acquisition will determine the classification under Schedule II of the Regulations, and consequently the appropriate rate of CCA under Part XI of the Regulations. The "available for use" rules in subsection 13(26) of the Income Tax Act (the Act) have no bearing on the determination of the appropriate CCA class of an asset. Subsection 13(26) of the Act merely excludes an amount in respect of the capital cost of the property from the definition of "undepreciated capital cost" contained in subsection 13(21), for the purposes of claiming CCA under paragraph 20(1)(a). Therefore, electrical generating equipment acquired prior to February 28, 2000 that is not then available for use, will be included in class 1.
(3) If capital additions were made after February 27, 2000 to eligible electrical generating equipment acquired before February 28, 2000, would such additions be included in class 1 or class 17?
Any alteration or addition to electrical generating equipment that is included in class 1 which occurs after February 27, 2000, will be deemed to be an addition to class 17 in accordance with subsection 1102(19) of the Regulations.
(4) How will the disposition of an electrical generating unit after February 27, 2000 have to be reported for CCA purposes where part of the cost is included in Class 1 and another part is included in Class 17?
Where a taxpayer disposes of a property that may be included in two or more classes, the proceeds of disposition must be allocated to each of the classes on a reasonable basis. Paragraphs 4 to 8 of Interpretation Bulletin IT-220R2 Capital Cost Allowance - Proceeds of Disposition of Depreciable Property, dated May 25, 1990, discuss this issue. Where the whole consideration is set forth in an agreement as a lump-sum, section 68 of the Act can apply to re-allocate the consideration between the various kinds or classes of property where the values specified are considered unreasonable.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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