21 January 2008 External T.I. 2007-0256101E5 - Receipt of grant from Aboriginal Business Canada

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: What is the proper tax treatment of a grant received from Aboriginal Business Canada?

Position: If the grant is not otherwise included in income or applied to reduce an expense or the cost of property, i.e., unless one of the exceptions in subparagraphs 12(1)(x)(v) to (viii) applies, paragraph 12(1)(x) would bring the amount of the grant into income in the year received.

Reasons: Paragraph 2 of IT-273R2

XXXXXXXXXX 								2007-025610
L. Carruthers, CA
January 21, 2008

Dear XXXXXXXXXX :

Re: Income Tax Treatment of an Aborginal Business Canada Grant

This is in reply to your letter of September 26, 2007, wherein you asked our assistance to clarify the tax treatment, pursuant to the Income Tax Act (the "Act"), of an amount received by an incorporated business from Aboriginal Business Canada. The grant relates to capital and operating costs, as well as advertising, legal and accounting costs of a XXXXXXXXXX centre.

Our Comments

Your request appears to be a factual situation relating to a completed transaction. This Directorate does not give written confirmation of the tax implications inherent in a completed transaction. The Canada Revenue Agency's (the "CRA's") tax services offices consider requests for written interpretations on completed transactions. However, we have considered your enquiry and, in accordance with the guidelines set out in paragraph 22 of Information Circular IC 70-6R5 dated May 17, 2002, issued by the CRA, we provide the following comments.

You have asked for clarification concerning the tax treatment of government assistance received in the form of a grant from Aboriginal Business Canada. For the CRA's detailed views on the taxation of government assistance, see the current version of Interpretation Bulletin IT-273, Government Assistance - General Comments. This bulletin is available on our website at http://www.cra-arc.gc.ca/E/pub/tp/it273r2/README.html. The following comments are of a general nature only.

As noted in paragraph two of IT-273R2:

"¶ 2. When assistance is received in the course of earning income from a business or property, the application of well-accepted business principles for the purpose of calculating profit or loss under section 9 commonly requires the cost of an asset or the amount of an expense to be reduced by any reimbursement or similar payment that relates to the acquisition of the asset or the expense incurred."

"If the application of well-accepted business principles relating to the calculation of profit or loss for the purpose of section 9 does not require the government assistance to be included in income, or to reduce the cost or capital cost of a property or the amount deductible as an expense, a specific provision of the Income Tax Act, such as paragraph 12(1)(t), 12(1)(x), 12(1)(x.1) or 28(1)(d) (which refers to amounts deferred under section 80.3), or subparagraph 56(1)(a)(vi), may apply to require the amount to be included in income."

Paragraph 12(1)(x) of the Act generally requires the inclusion in the calculation of a taxpayer's income for the year, of amounts (other than prescribed amounts) received by the taxpayer in the year as assistance in respect of an outlay or expense or the cost of a property, unless one of the exceptions in subparagraphs 12(1)(x)(v) to (viii) applies to the amount of the grant.

For the purpose of paragraph 12(1)(x) of the Act, and pursuant to section 7300 of the Income Tax Regulations, "prescribed amount" means:

• an amount paid, inter alia, to a corporation where "the purpose of the corporation is to provide loans, loan guarantees, bridge financing..."; or
• prescribed assistance within the meaning assigned by section 6702 of the Regulations, which generally relates to the acquisition of shares or the receipt of a tax credit.

In our view, the grant described above would not be a prescribed amount and, therefore, paragraph 12(1)(x) of the Act would apply to include the grant in income, unless one of the exceptions in subparagraphs 12(1)(x)(v) to (viii) applies to the amount.

Pursuant to subparagraphs 12(1)(x)(v) and (vi) of the Act, amounts which, under well-accepted business principles, are otherwise included in income or used to reduce an outlay or expense or the capital cost of property, are not subject to income inclusion under paragraph 12(1)(x). As noted in paragraphs four and five of IT-273R2, generally, when a taxpayer receives or is entitled to receive government assistance in respect of depreciable property, subsection 13(7.1) applies to reduce the capital cost of the property by the amount of the assistance, and when a taxpayer receives or is entitled to receive government assistance in respect of non-depreciable property, paragraph 53(2)(k) normally applies to reduce the adjusted cost base of the property.

Pursuant to subparagraph 12(1)(x)(vii) of the Act, amounts which, by election, are used to reduce an outlay or expense or to reduce the capital cost of property, are not subject to income inclusion under paragraph 12(1)(x). This exception was noted by the Court in Hill v. The Queen 94 DTC 1078:

"Under paragraph 12(1)(x), there must be included in computing income any amount received which can reasonably be regarded as an inducement or as a reimbursement in respect of an expense or the cost of property unless the recipient elects under subsection 13(7.4) to apply a portion of the amount to reduce the cost of depreciable property or elects under subsection 53(2.1) to apply a portion of the amount to reduce the cost of capital property."

Further to the subsection 13(7.4) election noted above, subsection 12(2.2) of the Act provides that a taxpayer who, in a taxation year, receives an amount that would be included under paragraph 12(1)(x) of the Act in computing the taxpayer's income for the year in respect of an outlay or expense made or incurred by the taxpayer before the end of the following taxation year, may elect to reduce the amount of the expense. The election must, among other things, be made no later than the day on which the taxpayer must file a tax return for the taxation year in which the amount was received.

Pursuant to subparagraph 12(1)(x)(viii) of the Act, amounts that can reasonably be considered to be in respect of the acquisition, by the payer, of an interest in the taxpayer, or the taxpayer's business or property, are not subject to income inclusion under paragraph 12(1)(x). This exception is not relevant to the grant received in this situation.

In summary, if the grant is not otherwise included in income or applied to reduce an expense or the cost of property as described in the exceptions in subparagraphs 12(1)(x)(v) to (viii), paragraph 12(1)(x) would bring the amount of the grant into income in the year received.

We trust that our comments will be of assistance.

Yours truly,

R.A. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate