24 October 2008 External T.I. 2008-0278791E5 - Investment Tax Credit on Farm Equipment

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: Whether a taxpayer in similar circumstances as the manufacturer referred to in documents 2002-0122357 and 2002-0149987 would be entitled to claim the investment tax credit with respect to the farm equipment.

Position: General comments.

Reasons: Missing information.

								2008-027879
XXXXXXXXXX 							André Gallant
(613) 957-8961
October 24, 2008

Dear XXXXXXXXXX :

Re: Whether Manufacturer in Farm Equipment Entitled to ITC

This is in response to your email of May 7, 2008 regarding whether a manufacturer would be entitled to the investment tax credit (the "ITC") in a situation similar to that described in technical interpretation 2002-0122357.

Document 2002-0122357 dealt with a situation where a dealer acquires equipment from a manufacturer, leases some of the equipment to its customers and, pursuant to a financing arrangement with the manufacturer regarding the acquisition of equipment inventory, assigns the leases and the title to the related equipment ("Assigned Equipment") to the manufacturer. It was concluded that the dealer was not entitled to the ITC in respect of the Assigned Equipment because, based on the facts under consideration, the Assigned Equipment was inventory, as opposed to depreciable capital property, in the dealer's hands.

Since document 2002-0122357 remained silent as to whether the manufacturer referred to therein was entitled to the ITC in respect of the Assigned Equipment, you are asking whether a manufacturer in a similar situation would be entitled to the ITC in respect of the assigned equipment.

Your Position

If a dealer is not entitled to claim the ITC and the equipment otherwise qualifies, for purposes of the definition of "qualified property" in subsection 127(9) of the Income Tax Act (the "Act"), as "prescribed machinery and equipment" pursuant to subsection 4600(2) of the Income Tax Regulations (the "Regulations"), the manufacturer should be entitled to claim the ITC. In your view, where a dealer has leased the equipment to customers, it cannot be said that this equipment has "been used, or acquired for use or lease, for any purpose whatever" as contemplated by the definition of "qualified property" in subsection 127(9) of the Act.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.

We generally share your view that in a situation where a dealer is not entitled to claim the ITC on equipment assigned to a manufacturer pursuant to a financing arrangement, it would appear to make common sense that the manufacturer is entitled to the ITC in respect of the assigned equipment. Nevertheless, we must point out that all of the conditions for claiming the ITC in respect of a property must be satisfied before a claim can be made whether by the dealer or the manufacturer. It is unclear from the facts in the scenario described in document 2002-0122357 whether or not the manufacturer in that scenario satisfied the conditions for claiming the ITC.

As indicated, in order for a property to qualify as a "qualified property" it must meet certain requirements. One such requirement is that the property must be a prescribed building or prescribed machinery and equipment as described in section 4600 of the Regulations, which in effect requires that the property be depreciable property to the taxpayer. Whether a property is inventory or depreciable property is a question of fact as also discussed in IT-102R2, and can only be determined after looking at all the relevant documents and surrounding circumstances. In document 2002-0122357 the conclusion was that the equipment was inventory in the hands of the dealer and accordingly was not eligible for ITC.

Another requirement is that the property must be "new" in that it cannot have "been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer" (mid-amble preceding paragraph (c) of the definition of "qualified property" in subsection 127(9)). Again, this is a question of fact and can only be determined after reviewing all the relevant documents and surrounding circumstances of the case under consideration.

According to Bowman J. (as he then was), where an equipment is tested by the manufacturer before being delivered to the dealership, or tested by a prospective purchaser before being purchased, such testing would not constitute a "use" for the purposes of the definition of "qualified property" in subsection 127(9) of the Act: Stevenson et al. v. The Queen, 2001 DTC 1019 at paragraphs 19-22 (TCC), referring to Beaubier J. in Whyte v. R., [1999] 4 CTC 2678 (TCC). Where, however, a farming equipment was leased to another farmer in return for $10,000, such equipment was considered to have "been used, or acquired for use or lease, for any purpose whatever" before it was acquired by the taxpayer: Miller v. The Queen, 2000 DTC 2535 (TCC), per Beaubier J., also referred to by Bowman J. in Stevenson et al., at paragraph 21.

Not all equipment acquired by a dealer from a manufacturer is automatically ineligible for the ITC. Also the fact that a dealer is not entitled to the ITC in respect of a property leased to its customers because the property is inventory in the dealer's hands does not automatically result in the manufacturer being entitled to the ITC where the lease and title to the equipment is assigned by the dealer to the manufacture pursuant to an inventory financing arrangement; for example, a manufacturer would be ineligible to claim the ITC if beneficial ownership of the equipment is retained by the dealer.

This is illustrated in the case Good Equipment Limited v. The Queen, 2008 DTC 2527. In this case, which involved a dealer's entitlement to the ITC, a dealer acquired equipment from a manufacturer, leased the equipment and then, pursuant to a financing arrangement, assigned the lease and title to the equipment to the manufacturer. The Tax Court of Canada concluded, based on the facts of the case, that the dealer was entitled to the ITC in respect of the leased equipment on the basis that the equipment was capital property and not inventory in the hands of the dealer and that the dealer retained beneficial ownership of the equipment when the lease and title to the equipment was transferred to the manufacturer pursuant to the financing arrangement.

We trust that the foregoing comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch