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:
Would grandfathering provisions alter the determination of the specified percentage applicable in respect of certain property qualifying for ITC.
Position:
Whether grandfathering provisions will effect the determination of the appropriate percentage in respect of a particular qualified property is a question of fact. However, where qualification under a transitional provision is in respect of property under construction on a particular date, the ability to so qualify would cease once the period of construction of that property is completed unless expressly otherwise provided.
Reasons:
Based upon the tests provided in the transitional provisions of the Act relevant to the situation under consideration and existing jurisprudence.
February 28, 2002
XXXXXXXXXX Resource Industries Section
Tax Services Office A.A. Cameron
Verification & Enforcement Division (613) 347-1361
Attention: XXXXXXXXXX
Large File Case Manager
2001-011220
Specified Percentage and Investment Tax Credit ("ITC")
We are writing further to your request for our views regarding certain "grandfathering" provisions found in the definition of "specified percentage" contained in subsection 127(9) of the Income Tax Act (the "Act"). In particular, this matter concerns certain property acquired, after 1994, primarily for use in a "prescribed offshore region" (being the region described in section 4609 of the Income Tax Regulations; the "Regulations") and whether the provisions of clause (a)(v)(C) to the above definition of specified percentage would result in such percentage being 15%, rather than 10%, in respect of that property.
Our understanding of the facts relevant to this situation is as follows:
XXXXXXXXXX.
Legislative Overview
Pursuant to subparagraph (a)(v) to the definition "specified percentage" contained in subsection 127(9) of the Act, such percentage for ITC purposes in respect of qualified property (also as defined in that subsection of the Act) which was acquired after 1994 and primarily for use in a prescribed offshore region, will be 10% but may remain at the former rate of 15% where the provisions of any of subclauses (a)(v)(C)(I) through (III) apply.
In particular, the provisions of clause (a)(V)(C) of the above definition indicate the former rate will apply:
...where the property
(I) is acquired by the taxpayer under a written agreement of purchase and sale entered into by the taxpayer before February 22, 1994,
(II) was under construction by or on behalf of the taxpayer on February 22, 1994, or
(III) is machinery or equipment that will be a fixed and integral part of property under construction by or on behalf of the taxpayer on February 22, 1994, ...
The provisions of clause (a)(v)(C) to the specified percentage definition were added to the Act as part of the legislative amendments announced with the February 22, 1994 federal Budget. Materials released with that Budget indicate that one of the goals thereof was to "restore fiscal responsibility to government" with it being indicated at page 16 of the Budget Speech that "several regionally-based tax incentives...are being reduced or eliminated, as part of our commitment to reduce subsidies to business." In particular, at page 24 of the document entitled, "Tax Measures: Supplementary Information", tabled in the House of Commons on February 22, 1994 it was indicated that the budget proposed to "reduce the Atlantic Investment Tax Credit rate from 15 per cent to 10 per cent" with it being further indicated on page 25 thereof that:
These changes will be effective for qualified expenditures made, and qualifying property acquired, after 1994 to allow taxpayers time to take these changes into account in their investment decisions. Furthermore, these changes will not affect qualifying property acquired by a taxpayer after 1994 that was under construction by the taxpayer before February 22, 1994, and SR&ED expenditures made, or qualifying property acquired, by the taxpayer pursuant to a written agreement to acquire the property, or make the expenditure, entered into by the taxpayer before February 22, 1994.
Emphasis added.
In addition, at page 61 of the above document, it is indicated in paragraph (11) of the Notice of Ways and Means Motion regarding the above changes to the "Atlantic Investment Tax Credit", that "the investment tax credit for qualified property acquired by a taxpayer for use in...the prescribed offshore region be reduced from 15% to 10% for property acquired after 1994, other than property that" met any of three specific criteria, the wording of which is, essentially, identical to that of subclauses (a)(v)(C)(I) through (III) to the definition "specified percentage" contained in subsection 127(9) of the Act as reproduced above.
Jurisprudence
In our view, although incorporated directly into the amended legislation, clause (a)(V)(C) of the above definition of specified percentage could be seen as analogous to transitional provisions accompanying legislative amendments.
The Courts have previously considered the interpretation of certain transitional provisions that have been utilized in respect of provisions of the Act. In the Clifford L. Mort case, 93 DTC 5058, the Federal Court - Trial Division (the "FC-TD") considered transitional provisions, relating to the Scientific Research Tax Credit, which were also incorporated directly into the amended legislation and turned on whether certain "arrangements, evidenced in writing" were "substantially advanced" before a specified date. Noel, J., writing for the Court, indicated at page 5064 that:
In construing those words, it must be remembered that paragraph 194(4.2)(b) is remedial in nature. It is not a taxing measure, nor is it a tax exemption measure per se. It is a measure which provides for the transition from one regime of taxation to another and which identifies, for that purpose, those who will preserve the right to proceed under the former law and those who will be governed by the new law. The obvious legislative policy behind such a measure is the protection of those who, on the faith of the existing state of the law, have, to a measurable degree, expended time, money, energy towards a specific end, in this instance, a private or public issue under the SRTC program. That measurable degree, in the case at hand, is to be determined by reference to the existence of "arrangements" for an SRTC issue which must be both in place and "substantially advanced" before October 10, 1984.
Emphasis added.
In the Trade Investments Shopping Centre Limited case, 93 DTC 5486, the FC-TD considered actual transitional provisions, i.e., those not embodied in the amended legislation, in the context of amendments to paragraph 13(21.1)(a) of the Act and which applied to dispositions which occurred "pursuant to the terms of an agreement in writing entered into on or before" a specified date. Noel, J., again writing for the Court, indicated at page 5488 under the heading "Analysis" that:
It is worth noting, to begin with, that transitional legislation is remedial in nature. In tax matters, its purpose is generally to protect taxpayers who have made certain dispositions in good faith in accordance with the law applicable at the time, by allowing them to be covered by the former law despite the coming into force of the new law.
Such provisions are necessary in tax matters since it is well established in this area that the state of the law confers no vested right for subsequent years. ...
Accordingly, when it sees fit, Parliament makes an exception to this rule by using transitional provisions to preserve the right of certain classes of taxpayers to be covered by the old law despite the new having come into effect. The scope of these transitional provisions will be more or less restrictive depending on the precise situation contemplated by the legislature in mitigating the effect of the new Act. Sometimes, Parliament will limit the protection of a transitional provision to taxpayers who have entered into firm and binding contracts based on the old law. At other times Parliament will extend this protection to taxpayers who can show that they had in view a transaction which was substantially advanced at the relevant time, though it had not yet been concluded.
In each of these cases, the scope of a transitional provision must be determined from its wording, the nature of the provision of substantive law which it has the effect of suspending and the specific situation which Parliament sought to correct by enacting it.
Emphasis added.
After noting the nature of the transitional provision at issue in that case, i.e., one which required "an agreement in writing entered into on or before" a specified date, it was indicated, at page 5489, that:
Prima facie this transitional provision is quite limited in scope in that it only applies to dispositions occurring pursuant to a contract concluded in accordance with the old Act. ...
Emphasis added.
However, the Court also noted, at page 5491, that:
Transitional provisions do not lend themselves to the scrutiny of an overly strict interpretation. It should be borne in mind that transitional provisions are secondary and incidental to the provisions of substantive law which they accompany. Unlike taxing provisions, they are not adopted as part of a coherent legislative plan in which the provisions must interrelate with one another in a logical scheme. They are ad hoc provisions the sole purpose of which is to ensure that the particular provision of substantive law which they accompany is introduced in an equitable manner. ...
Emphasis added.
More recently, in the Ainsworth Limber Co. Ltd. case, 2001 DTC 496, the Tax Court of Canada considered the transitional relief provided, in clause (a)(iv)(A) to the definition of "certified property" found in subsection 127(9) of the Act, for "property...acquired...for use in a project that was substantially advanced...as evidenced in writing, before February 22, 1994". [This clause was also added as part of the package of legislative amendments flowing from the federal Budget of that date.]
After reproduction of most of the above quotations from the Trade Investments decision, it was indicated in the decision in the Ainsworth case, at page 507, that those comments were made "in the context of a case where the transitional provision was entirely different from" that relevant to the Mort case referred to above or to the situation it was considering. It was further indicated that, while the transitional provision relevant to the Trade Investments case referred to "an agreement in writing entered into on or before" a relevant date, the transitional provisions relevant to the Mort case, as well as to the situation under consideration by the Court, utilized the terms "substantially advanced" and "evidenced in writing". As such, it was concluded that in the Trade Investments case the Court "was dealing with an entirely different and more restrictive provision".
It should be noted that, prior to so concluding that the situations could be distinguished on the basis of the nature of the transitional provision at issue, reference had been made (at page 506 of the Ainsworth Lumber decision) to the fact that the Trade Investment case had been appealed to the FCA which affirmed the decision of the FC-TD and indicated that Noel, J.'s "...analysis of the rules applicable to the interpretation of transitional tax provisions in general and the disputed provision in particular is unimpeachable."
Discussion
In our opinion, the above jurisprudence supports the view that the Courts would be likely to view the provisions of clause (a)(V)(C) of the above definition of specified percentage as analogous to transitional provisions accompanying legislative amendments. As such, it is also our view that the Courts would be likely to view the provisions of that clause as remedial in nature and would look to the tests embodied in that clause, as well as the intentions of the legislators in making the underlying legislative amendments, in reaching a decision as to how strict an interpretation should be applied thereto.
It is also our opinion that the above jurisprudence suggests that the Courts would be likely to view the transitional relief embodied in the provisions of clause (a)(V)(C) of the above definition as being relatively specific in nature. In particular, such relief expressly requires either "a written agreement of purchase and sale entered into" before the Budget date of February 22, 1994, or that a particular property be "under construction by or on behalf of the taxpayer" on that date. These tests differ from the "substantially advanced" and "evidenced in writing" tests which the Courts viewed as less "restrictive" in the Mort and Ainsworth Lumber decisions referred to above.
In addition, in our view, it is clear from above excerpts from the document entitled, "Tax Measures: Supplementary Information", from the Budget of February 22, 1994 that it was intended that the ITC rate in question be reduced from 15% to 10% effective for qualifying property acquired after 1994 subject to the specific exceptions provided. In particular, the intention was expressed that "...these changes would not affect qualifying property acquired by a taxpayer after 1994 that was under construction by the taxpayer before February 22, 1994". Given that, as noted above, the wording of subclauses (a)(v)(C)(I) through (III) as enacted in the above definition of "specified percentage" is, essentially, identical to that of the three specific criteria listed in the Notice of Ways and Means Motion which was reproduced in the above document, also provides support for the view that the intentions of the legislators had not changed subsequent to the release of that document.
Conclusions
In light of the above considerations, in our view, unless a particular property in question was acquired "under a written agreement of purchase and sale entered into...before February 22, 1994" or was itself "under construction by or on behalf of" the relevant taxpayers on that date, it could only be encompassed by the provisions of clause (a)(v)(C) to the definition of "specified percentage" found in subsection 127(9) of the Act where its acquisition relates to the completion of property under construction by or on behalf of those taxpayers on February 22, 1994 and it forms an integral part thereof.
In particular, in our view, based upon the information provided, XXXXXXXXXX would not represent property satisfying the above criteria. As such, we agree with your views that such property would not be encompassed by the provisions of clause (a)(v)(C) to the above definition of "specified percentage".
We also agree with your view that, property acquired by the taxpayers (such as that described in paragraph 2 above) XXXXXXXXXX, would be encompassed by the provisions of clause (a)(v)(C) to the above definition of "specified percentage".
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 Department'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 be sent to you for delivery to the client.
If we can be of further assistance with regard to this matter, please contact the writer.
For Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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