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 an AITC could be claimed by a lessee where the lessee and lessor make an election under subsection 16.1(l) of the Act based on the position in Rulings Document 2011-041781?
Reasons: Not in accordance with the meaning of "qualified property" in subsection 127(9) of the Act. The administrative position in paragraph 72 of IT-151R5 was inadvertently extended in Rulings Document 2011-041781 to the definition of "qualified property". This was as a result of a misunderstanding of the technical concern that paragraph 72 of IT-151R5 was trying to address in respect of ITCs for SR&ED.
May 14, 2012
Re: Meaning of Qualified Property
This is in reply to your letter of March 20, 2012, wherein you requested our views on whether a taxpayer can claim an “investment tax credit” (“ITC”) under subsection 127(5) of the Income Tax Act (the “Act”) on tangible property that is subject to a joint election made in prescribed form pursuant to section 16.1 of the Act.
More specifically, in your letter, you indicate that a taxpayer (“Lessee”) will lease certain new tangible property from another person (“Lessor”). You further indicate that the leased property would clearly be considered as a “qualified property”, as defined in subsection 127(9) of the Act, of the Lessee if the Lessee had simply purchased the property directly for use by it rather than enter into a lease arrangement. The Lessee and Lessor will make a joint election in prescribed form in accordance with the rules set out in subsection 16.1(1) of the Act and the Lessor will agree not to claim any ITC on the leased property. You refer to an administrative position described in a recent Technical Interpretation 2011-041781 as support that the Lessee in your particular situation should be allowed to claim the ITC and ask that we confirm that this will be the case.
Section 16.1 of the Act provides certain rules which may apply to a lessee of tangible property, other than prescribed property, where such property is leased for a term of more than one year from an arm’s length person who is resident in Canada or who carries on business through a permanent establishment in Canada. The general effect of the deeming rules in section 16.1 of the Act is that the lessee will be considered to have acquired the subject property from the lessor at a cost equal to its fair market value at that time and to have borrowed money from the lessor equal to that fair market value if the appropriate election is made. However, these rules are relevant only for the purpose of computing a particular lessee’s income under Part I and do not affect the computation of amounts, such as ITCs, that reduce the lessee’s income taxes otherwise payable. Accordingly, a lessee is not considered to have acquired a qualified property by virtue of making an election under subsection 16.1(1) of the Act, such that the lessee would not be able to claim an ITC in respect of such property.
Notwithstanding the above, in Technical Interpretation 2011-041781 we indicated that an ITC could be claimed by the first lessee of a new tangible property as qualified property in the circumstances described above provided all the other conditions set out in the definition of qualified property were met by the particular lessee. The position in Technical Interpretation 2011-041781 was essentially extrapolated from the administrative position for a lessee claiming an ITC in respect of expenditures incurred in respect of scientific research and experimental development (“SR&ED”) as described in paragraph 72 of IT-151R5 and, in particular, the following statement contained therein:
“…when a lessor acquires new property which has yet to be leased and then jointly elects under section 16.1 with the first lessee of the property, the property will not be considered to have been used or acquired for use or lease, for any purpose whatever before the lessee acquired the leasehold interest in the property.”
Upon further review, it now appears that we inadvertently extended the position described in paragraph 72 of IT-151R5 for SR&ED expenditures to the definition of qualified property and that such extension is not in accordance with the law or our understanding of the tax policy. Accordingly, we can confirm that the administrative position in Technical Interpretation 2011-041781, as it pertains to a lessee being able to claim an ITC on leased property as qualified property by virtue of making an election under subsection 16.1(1) of the Act, is being revoked effective immediately and we sincerely apologize for any confusion or misunderstanding that we may have caused.
Capital Transactions Section
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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