29 October 2013 External T.I. 2013-0489911E5 - Disposition of CRCE intangibles

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 the intangible CRCE derived property could be rolled over under s.85(1) or 97(2)?

Position: No

Reasons: Facts and law

XXXXXXXXXX
2013-048991
Lata Agarwal, CMA, MBA

October 29, 2013

Dear XXXXXXXXXX:

Re: Canadian Renewable and Conservation Expense ("CRCE") and "eligible capital property"

This is in response to your correspondence of May 9, 2013, wherein you enquire as to whether certain intangible expenditures would qualify as "eligible capital property" under section 54 of the Income Tax Act (the "Act") and would therefore be considered as "eligible property" under subsection 85(1.1) for purposes of the tax-deferred elections under subsections 85(1) and 97(2).

In particular, you advise that a developer of electricity generation projects (the "Developer") will often transfer the contracts and development work (the "Intangible Expenditures") associated with its project to another taxpayer who would then secure construction financing and complete the building of the plant. It is your view that the Intangible Expenditures would generally be considered as intangible property and should qualify as eligible capital property. However, your concern arises from the fact that the Intangible Expenditures were treated by the Developer as CRCE which is Canadian exploration expense ("CEE") under the definition of that term in subsection 66.1(6). You note that paragraph 66(12.1)(a) provides that any consideration receivable by a taxpayer for property or services the cost of which was originally treated as CEE is deducted from the cumulative Canadian exploration expense ("CCEE") balance under subsection 66.1(6). You request our views as to whether the Intangible Expenditures would qualify as eligible capital property.

Our Comments

The situation referred to in your correspondence appears to relate to actual transactions. Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office ("TSO") during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.

We assume that the projects would meet the requirements under section 1219 of the Income Tax Regulations such that the Developer would be eligible to treat the Intangible Expenditures as CRCE and CEE. The Developer will add the CEE incurred in the year to its CCEE balance and may deduct an amount, under subsections 66.1(2) or 66.1(3), with respect to that balance in computing its income for the year. Paragraph 66(12.1)(a) provides special rules that apply where a taxpayer receives an amount that represents a recovery of CEE and ensures that the amount is deducted from the CCEE balance.

Further, we note that the term "eligible capital property" is defined under section 54 to mean any property a part of the proceeds of disposition of which would qualify as an "eligible capital amount" ("ECA") in respect of a business. ECA is described, under subsection 14(1), as the amount under element "E" of the definition "cumulative eligible capital" under subsection 14(5) and specifically excludes an amount that is included in computing the taxpayer's income or deducted in computing any balance of undeducted outlays, expenses or other amounts for the year or a preceding taxation year. Since paragraph 66(12.1)(a) clearly provides that the amount receivable by the Developer as proceeds of disposition of the Intangible Expenditures will reduce its CCEE balance, the amount will not qualify as an ECA. Consequently, the Intangible Expenditures will not be considered as eligible capital property.

We trust that these comments will be of assistance.

Yours truly,

Fiona Harrison, C.P.A., C.A.
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch