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: For purposes of subsection 1101(5d) of the Regulations, whether certain railway cars are "rented, leased or used by the taxpayer in Canada" in a situation where they are leased to a non-resident who will sublease them for use in both Canada and the United States.
Position: In this situation, yes.
Reasons: There is no requirement in the provision that the lessee use the railway cars in Canada or be a resident of Canada. The facts of this case indicate that the taxpayer is a resident of Canada and reports all income derived from the leasing activity in Canada. Further, the railway cars are leased under the terms of an agreement that was negotiated, executed, and administered in Canada under the laws of the Province of Ontario.
September 4, 2003
XXXXXXXXXX HEADQUARTERS
XXXXXXXXXX Tax Services Office Rrandy Hewlett, B.Comm
Verification & Enforcement Division 613-957-8973
2003-000976
Subsection 1101(5d) of the Income Tax Regulations (the "Regulations")
We are writing in response to your memorandum of March 24, 2003, wherein you asked for our opinion on an issue involving a taxpayer's classification of railway cars pursuant to the above-noted provision. We also acknowledge the additional information submitted in your memorandum of August 21, 2003.
Issue
Included in class 35 of Regulation Schedule II is "property not included in any other class that is a railway car acquired after May 25, 1976, or a rail suspension device designed to carry trailers that are designed to be hauled on both highways and railway tracks". Pursuant to subparagraph 1100(1)(a)(xxv) of the Regulations, the prescribed rate of capital cost allowance ("CCA") for class 35 property is 7%.
Subject to certain conditions, subsection 1101(5d) of the Regulations prescribes a separate class for each class 35 property that was "rented, leased or used by the taxpayer in Canada in the taxation year". In particular, paragraph 1101(5d)(f) of the Regulations prescribes a separate class for each property that is "acquired by the taxpayer after April 26, 1989 for rent or lease to another person."
Paragraph 1100(1)(z.1a) of the Regulations provides that additional CCA may be claimed under paragraph 20(1)(a) of the Income Tax Act (the "Act") by the taxpayer in respect of property for which a separate class is prescribed by paragraph 1101(5d)(f). The additional amount that may be claimed is 6% of the undepreciated capital cost of the class as of the end of the taxation year prior to making any deduction for CCA is respect of that class for the year. Therefore, the maximum rate at which CCA may be claimed in respect of each class 35 property, which has a separate prescribed class because of paragraph 1101(5d)(f) of the Regulations, is 13%.
The issue is this case concerns the meaning of the phrase "rented, leased or used by the taxpayer in Canada" in subsection 1101(5d) of the Regulations.
Facts
Our understanding of the relevant facts is as follows:
? You have recently conducted an audit of XXXXXXXXXX ("ACO"), XXXXXXXXXX.
? ACO is a Canadian resident that owns railway cars it purchased from XXXXXXXXXX ("BCO"), a corporation that deals at arm's length with ACO and is resident in the United States.
? ACO leases the railway cars to XXXXXXXXXX ("CCO"), a "special purpose entity" created in the United Kingdom that deals at arm's length with ACO. This lease agreement was negotiated, executed, and administered in Canada under the laws of the Province of Ontario.
? CCO subleases the railway cars to BCO. This sublease agreement was negotiated, executed, and administered in Canada under the laws of the Province of Ontario.
? BCO further subleases the railway cars to the Canadian branch of XXXXXXXXXX ("DCO"), a corporation that deals at arm's length with ACO and is resident in the United States. There is no information available regarding where this sublease agreement was negotiated, executed, or administered.
? DCO further subleases the railway cars to various Canadian end-users for use in Canada and the United States. There is no information available regarding where this sublease agreement was negotiated, executed, or administered.
? ACO reported in Canada all of the leasing income derived from the lease arrangement with CCO. ACO included each railway car in a separate class 35 and deducted CCA at a rate of 13%.
You asked for our opinion on whether the railways cars can be considered "rented, leased or used by the taxpayer in Canada" given the fact that ACO leases the railway cars to CCO, a non-resident, and because there is no assurance that the railway cars will be used by the end-users in Canada.
In our opinion, the wording of subsection 1101(5d) of the Regulations does not require that the particular lessee use the property in Canada or be a resident of Canada. In our view, the issue can be resolved on the basis of whether each railway car is "leased ... by the taxpayer in Canada". The facts in this situation indicate that ACO is a resident of Canada and reports all income derived from the leasing activity in Canada. Further, since the railway cars are leased under the terms of an agreement that was negotiated, executed, and administered in Canada under the laws of the Province of Ontario, we are of the view that the railway cars are leased by ACO in Canada.
We trust our comments are of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. 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 electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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