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, in computing the "equity amount" under subsection 18(5) of the Act, a taxpayer should include the original acquisition cost in respect of eligible capital property or the "cost amount" within the meaning assigned by subsection 248(1) of the Act.
Position: The original acquisition cost of eligible capital property should be taken into account in computing the "equity amount".
Reasons: Interpretation of the definition of "equity amount" in subsection 18(5) of the Act and CRA's prior position.
XXXXXXXXXX
2014-052663
V. Anissimov
(416) 973-3049
July 22, 2014
Dear XXXXXXXXXX:
Re: Meaning of cost in respect of eligible capital property for the purpose of the definition of "equity amount" in subsection 18(5) of the Act
We are writing in response to your emails, the latest of which was dated February 18, 2014, in which you requested our view whether, for the purposes of subparagraph (c)(i) in the definition of "equity amount" in subsection 18(5) of the Income Tax Act (the "Act"), the cost of intangible property that is used by a non-resident corporation in its business carried on in Canada and treated for tax purposes as eligible capital property (within the meaning assigned by section 54 of the Act) means the "cost amount" in respect of such intangible property (within the meaning assigned by subsection 248(1) of the Act) or its original acquisition cost.
Our comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Ruling.
Pursuant to paragraph (c) in the definition of "equity amount" in subsection 18(5) of the Act, in the case of a non-resident corporation carrying on a business in Canada, the "equity amount" of the corporation means 40% of the cost, on an averaged basis, of the property owned by the corporation and used by it in the year in, or held by it in the year in the course of, carrying on business less the outstanding debts of the corporation that relate to its Canadian activities and that are not included in its outstanding debts to specified non-residents.
As indicated in our document 2013-0513761E5, it is our view that the term cost in the definition of "equity amount" in subsection 18(5) of the Act means the original acquisition cost of property. Even though the above referenced document focuses primarily on depreciable property, our view expressed in that document similarly applies to eligible capital property.
As such, the term cost used in the definition of "equity amount" has a different meaning in respect of eligible capital property than the "cost amount" in respect of such property. The "cost amount" at any time of a particular eligible capital property in respect of a business is defined in subsection 248(1) of the Act (paragraph (d) of the definition therein) as four thirds of the cumulative eligible capital of the taxpayer in respect of the business at that time (computed without reference to subsection 14(3) of the Act) prorated for the fair market value of that property over the fair market value of all the eligible capital property of the taxpayer at that time. Therefore, in a situation, for example, where deductions for cumulative eligible capital amounts have been claimed pursuant to paragraph 20(1)(b) of the Act from the cumulative eligible capital balance, the "cost amount" in respect of a particular eligible capital property would be different from the original acquisition cost of such property and, therefore, different than the cost of this property for the purpose of computing the "equity amount" under subsection 18(5) of the Act.
We trust our comments will be of assistance.
Yours truly,
Lori Michele Carruthers CPA, CA
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
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