2004 Ruling 2003-0051741R3 - Capital Cost Allowance

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.

Principal Issues: The application of the available for use rules to the Licence acquired by the corporation.

Position: Paragraph 13(27)(b) of the Act will apply until the Licence is used for the purpose of earning income.

Reasons: The Licence will be acquired three years before it will used for the purpose of earning income such that paragraph 13(27)(b) of the Act will apply.

XXXXXXXXXX 2003-005174

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling

XXXXXXXXXX.

This is in response to the XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers. We acknowledge receipt of the XXXXXXXXXX amended request for an advance income tax ruling and the additional information in the XXXXXXXXXX letters. We also acknowledge receipt of the additional information provided in various e-mails and telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the above taxpayer, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) "ACO" is XXXXXXXXXX;

(b) "XCO" is XXXXXXXXXX;

(c) "YCO" is XXXXXXXXXX;

(d) "Financial Institution" is XXXXXXXXXX;

(e) "PCo" is XXXXXXXXXX;

(f) "TCo" is the XXXXXXXXXX;

(g) "Province" is the Province of XXXXXXXXXX;

(h) XXXXXXXXXX;

(i) XXXXXXXXXX;

(j) XXXXXXXXXX;

(k) "XXXXXXXXXX" is collectively the XXXXXXXXXX;

(l) XXXXXXXXXX;

(m) "XXXXXXXXXX Agreement" is the agreement to be entered into by TCo and PCo;

(n) "Facility" is the proposed XXXXXXXXXX amenities required to satisfy the requirements of the XXXXXXXXXX Agreement (XXXXXXXXXX);

(o) "Project" is the construction of, and the operation of, the Facility by PCo;

(p) "Site" is the land on which the Facility will be constructed;

(q) "Licence" is the non-exclusive licence that TCo will grant to PCo to provide PCo with rights of use and access to, on and over the Site and the Facility, for purposes of constructing the Facility and providing XXXXXXXXXX services at the Facility.

(r) "Development Period" is the period that began with the incorporation of TCo and will end when the construction of the Facility is completed. The construction of the Facility is expected to last approximately XXXXXXXXXX months after Financial Close;

(s) "Operating Period" is the period that will begin immediately after the Development Period. The Operating Period is currently proposed to last for a period of XXXXXXXXXX years;

(t) "Financial Close" is the date at which the financing arrangements, for purposes of completing the Facility as outlined in the XXXXXXXXXX Agreement, are finalized;

(u) "Practical Completion" means the completion of the construction of the Facility in accordance with the terms of the XXXXXXXXXX Agreement, and "Practical Completion Date" is the date on which Practical Completion is achieved;

(v) XXXXXXXXXX;

(w) "Bank" has the meaning assigned by subsection 248(1) of the Act;

(x) "Undepreciated capital cost" has the meaning assigned by subsection 13(21) of the Act;

(y) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(z) "ZCO" is XXXXXXXXXX; and

(aa) "XXXXXXXXXX Agreement" means the XXXXXXXXXX agreement between PCo and ZCO.

Facts

1. ACO was incorporated as XCO under the Province's Company Act on XXXXXXXXXX. The shares of ACO have always been owned by a Minister of the Province or a corporation whose shares have been owned by the Province. On XXXXXXXXXX, all of XCO's shares were transferred to the Province's Minister of XXXXXXXXXX. On XXXXXXXXXX, XCO's name was changed to ACO. ACO is a crown corporation and exempt from income tax pursuant to paragraph 149(1)(d) of the Act. ACO has therefore never filed an income tax return. XXXXXXXXXX.

2. TCo was incorporated under the Province's Company Act on XXXXXXXXXX . Currently, the shares of TCo are legally and beneficially owned by ACO and will continue to be owned by ACO during the Development Period. XXXXXXXXXX. TCo's head office will likely be in XXXXXXXXXX . TCo's tax returns will likely be sent to the XXXXXXXXXX Taxation Centre and it will likely deal with the XXXXXXXXXX Tax Services Office. XXXXXXXXXX TCo will, at all times, be a not-for-profit corporation pursuant to paragraph 149(1)(l) of the Act. XXXXXXXXXX.

3. The Financial Institution XXXXXXXXXX. The Financial Institution's business number is XXXXXXXXXX, it files its tax returns with the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office. The Financial Institution owns all of the issued and outstanding shares of PCo.

4. The XXXXXXXXXX was created under the Province's XXXXXXXXXX. The Province does not own XXXXXXXXXX. The XXXXXXXXXX is a registered charity and thus exempt from income tax pursuant to paragraph 149(1)(f) of the Act. XXXXXXXXXX.

5. XXXXXXXXXX.

6. XXXXXXXXXX.

7. The Province needs the Facility to XXXXXXXXXX. The Facility will be constructed on the Site. The Site was recently purchased by TCo from the XXXXXXXXXX.

8. PCo was incorporated as YCO under the Province's Business Corporations Act on XXXXXXXXXX. On XXXXXXXXXX, YCO changed its name to PCo. PCo is a taxable Canadian corporation. XXXXXXXXXX. PCo's head office is in XXXXXXXXXX, such that its tax returns will be sent to the XXXXXXXXXX Taxation Centre and it will deal with the XXXXXXXXXX Tax Services Office. PCo's Business Number is XXXXXXXXXX and it has not filed its first tax return.

Proposed Transactions

9. There will be two separate and distinct periods in the life of TCo. The first period is the Development Period. XXXXXXXXXX. The second period is the Operating Period, XXXXXXXXXX.

10. TCo will enter into the XXXXXXXXXX Agreement with PCo on its own account. XXXXXXXXXX.

11. The XXXXXXXXXX Agreement will outline TCo's and PCo's obligations during both the Development Period and the Operating Period. XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. From the date that the XXXXXXXXXX Agreement is entered into until the end of the Operating Period, TCo will provide PCo with the Licence. XXXXXXXXXX.

15. It is anticipated that the initial cost incurred by PCo in respect of the Licence will be approximately $XXXXXXXXXX.

16. The Licence will automatically terminate at an expiry date that is proposed to occur XXXXXXXXXX years after the Practical Completion Date of the Facility. XXXXXXXXXX.

17. XXXXXXXXXX.

18. PCo will raise the funds it will need to fund the Project. The financing will include proceeds from the issuance of shares and bonds XXXXXXXXXX. PCo will incur financing costs in obtaining the PCo Debt and will incur interest costs throughout the term of the XXXXXXXXXX Agreement. The PCo Debt will have normal commercial terms.

19. XXXXXXXXXX will provide PCo with non-repayable funding for the Project, XXXXXXXXXX.

20. XXXXXXXXXX.

21. XXXXXXXXXX.

22. Except for the XXXXXXXXXX, PCo will not receive any monies from TCo prior to the commencement of the Operating Period. TCo will pay to PCo an all-inclusive annually determined fee that will be paid periodically every year (herein referred to as the "XXXXXXXXXX Payments"). The amount of the XXXXXXXXXX Payments will be determined pursuant to a formula included in the XXXXXXXXXX Agreement. XXXXXXXXXX.

23. Upon the execution and delivery of the XXXXXXXXXX Agreement, PCo will be required to pay TCo a fee (the "TCo Payment") of $XXXXXXXXXX. The TCo Payment is a reimbursement of costs incurred by TCo prior to the execution of the Project Agreement. XXXXXXXXXX.

24. PCo will make monthly progress payments to ZCO during the Development Period. XXXXXXXXXX. The monthly progress payments are fixed and PCo will be unable to deviate from the agreed upon payment schedule provided that ZCO fulfills its obligations under the XXXXXXXXXX Agreement. XXXXXXXXXX.

Purpose of the Proposed Transactions

25. The purpose of the proposed transactions is to develop a long-term relationship between PCo and TCo XXXXXXXXXX.

26. TCo will benefit from this long-term relationship in XXXXXXXXXX.

27. PCo will benefit from this long-term relationship in that it will acquire the Licence. XXXXXXXXXX.

Rulings

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the rulings requested,

our rulings are as follows:

A. The Licence granted to PCo will be included in Class 14 of Schedule II of the Regulations.

B. For the purposes of the definition of undepreciated capital cost in subsection 13(21) of the Act, paragraph 20(1)(a) of the Act and paragraph 1100(l)(c) of the Regulations, the capital cost of the Licence will include the total of the costs incurred by PCo in respect of the Licence, XXXXXXXXXX.

C. By virtue of subsection 13(7.1) of the Act, the capital cost of the licence will be reduced by the amount of the XXXXXXXXXX, as described in paragraph 19 above. The XXXXXXXXXX will not be included in computing PCo's income.

D. For the purpose of paragraph 20(1)(a) of the Act, the capital cost of the Licence, as determined in the manner described in paragraph 24 above, will be deductible by PCo in accordance with the provisions of paragraph 1100(1)(c) of the Regulations.

E. Paragraphs 18(1)(a) and 18(1)(b) of the Act will not apply to deny PCo a deduction for all outlays and expenses incurred by PCo XXXXXXXXXX, and are not capital expenditures described in Ruling B above.

F. By virtue of subsection 13(26) of the Act, in applying the definition of undepreciated capital cost in subsection 13(21) for the purpose of paragraph 20(1)(a) and any of the Regulations made for the purpose of paragraph 20(1)(a), in computing PCo's income for a taxation year, no amount shall be included in calculating the undepreciated capital cost of the Licence before the time the Licence is considered to have become available for use by PCo.

G. For the purposes of subsection 13(26) of the Act, the Licence will be considered to have become available for use, pursuant to subsection 13(27), at the earlier of: (a) the beginning of the Operating Period, and (b) the time that is immediately after the beginning of the first taxation year of PCo that begins more than 357 days after the end of the taxation year of PCo in which the costs in respect of the Licence are incurred.

H. Provided that PCo has a legal obligation to pay interest on the PCo Debt described in paragraph 18 above, PCo will, to the extent that the interest is reasonable, be entitled to deduct, in a taxation year, the interest paid or payable (depending on the method regularly followed by PCo in computing its income) on the PCo Debt in the taxation year, pursuant to paragraph 20(1)(c) of the Act.

I. The financing costs incurred by PCo in the course of borrowing the PCo Debt will, to the extent such financing costs are reasonable in the circumstances, be deductible by PCo in accordance with paragraph 20(1)(e) of the Act.

J. Since PCo will not be entitled to, and provided PCo does not actually receive, any portion of the XXXXXXXXXX Payments, as described in paragraph 22 above, no amount will be included in determining the profit of PCo under section 9 or paragraph 12(1)(b) of the Act during or at the end of the Development Period. During the Operating Period, PCo will include the XXXXXXXXXX Payments in income in a taxation year in accordance with section 9 and paragraph 12(1)(b) of the Act.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Revenue Agency ("CRA") on May 17, 2002, and are binding on the CRA provided that the proposed transactions are initiated on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch