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 application of subsections 237.1(1) [tax shelters] and 143.2(7) [limited-recourse debt] of the Income Tax Act to a subsection 16.1(1) joint election by a lessee and lessor.
Position: General comments given only.
Reasons: Insufficient information available to conclude. Matter should be determined in the context of an advance tax ruling submitted in accordance with IC 70-6R5.
XXXXXXXXXX 2008-026568
L. Carruthers, CA
May 2, 2008
Dear XXXXXXXXXX :
Re: Application of Subsection 143.2(7) to Subsection 16.1(1) Leases
This is in reply to your letter of January 11, 2008, in which you requested our technical interpretation of the application of subsection 143.2(7) of the Income Tax Act (the "Act") to a lease in respect of which an election has been made under subsection 16.1(1) of the Act. You expressed concern that the combined application of sections 237.1 and 143.2 of the Act, to a subsection 16.1(1) lease, would deny any capital cost allowance, on account of the proposed lease, from being deducted.
The premise of your submission was that, where the lessor has advised the lessee that deductions are available by reason of the election pursuant subsection 16.1(1) of the Act, the lease will be a tax shelter if the four-year test in section 237.1 of the Act is satisfied. Furthermore, you concluded that this test would be met in all cases because the amount of the expenditure (being the fair market value of the leased property) less the deemed limited recourse debt (being the same amount and a prescribed benefit under subsection 231(6.1) of the Income Tax Regulations) is nil. The result of which would be that the capital cost of the property is deemed to be nil pursuant to subsection 143.2(6) of the Act.
Our Comments
The particular circumstances in your letter, on which you have asked for our views, appear to represent a specific factual situation. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on specific proposed transactions other than in the form of an advance income tax ruling. However, we have considered your enquiry and provide the following comments, which are of a general nature only.
We understand your concern that an argument could be made that an election under subsection 16.1(1) of the Act would result in the application of the tax shelter rules, thereby reducing the capital cost of the relevant property pursuant to subsection 143.2(6) of the Act, and impacting the lessee's ability to claim capital cost allowance in respect of that property. We also agree that these matters involve a number of interpretative and tax policy questions.
While we understand your arguments, we have not encountered a situation similar to that which you have described and are not presently in a position to agree with your perspective concerning the tax treatment of a subsection 16.1(1) election, as it relates to the tax shelter and limited recourse debt rules. This question, in our view, would be best dealt with in the context of an advance income tax ruling request submitted in accordance with IC 70-6R5, where we would have the opportunity to fully develop our position after reviewing all of the facts and relevant agreements in a set of proposed transactions.
If this is a course of action that would interest you, we would be pleased to entertain such an application.
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
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