8 February 1990 Ruling 58081 F - Capital Cost of Property Eligible for Investment Tax Credit

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.

February 8, 1990

Dear Sirs:

Re:  Subsections 80(l) and 127(11.1)

We are writing in reply to your letter of May 5, 1989, wherein you requested our opinion on whether the capital cost to a taxpayer of a property eligible for investment tax credit referred to in subsection 127(11.1) of the Income Tax Act (the "Act") must be reduced by the amount of a debtor's gain on settlement of a debt referred to in subsection 80(l) of the Act which has been applied to reduce the capital cost of the property in accordance with section 5400 of the Income Tax Regulations (the "Regulations").  We regret the delay in replying to your letter.

Our Comments

Subsection 127(9) of the Act provides for the determination of a taxpayer's investment tax credit based in part on a specified percentage of the capital cost of certain eligible property acquired by the taxpayer in the year.  Paragraph I of Interpretation Bulletin IT-174R states that the term "capital cost of property" generally means the full cost to the taxpayer of acquiring the property.  Consequently, the capital cost of property is normally determined in accordance with generally accepted commercial and accounting practices on the basis of the particular facts and circumstances surrounding its acquisition.

However, as indicated in paragraph 8 of IT-l74R, "in certain circumstances the capital cost of depreciable property may be determined or altered by special provisions in the Act".  These specific statutory rules for determining the capital cost of the property will override the generally accepted accounting principles normally used.  A debtor's gain on settlement of a debt under section 80 of the Act is listed on page 3 of IT-174R as a provision of the Act which will alter the capital cost of depreciable property otherwise determined.  Paragraph 7 of IT-33lR indicates that "The general rule is that all such deeming provisions (referred to in IT-174R) are applicable in establishing the capital cost for investment tax credit purposes".  However, subject to the application of any tax avoidance provisions that may be warranted, this general rule was not intended to apply where those deeming provisions alter the capital cost of a property effective as of a date subsequent to the year of purchase of the property (as opposed to being effective in the year of purchase of the property).  Section 5400 of the Regulations and paragraph 5 of IT-293R indicate that any adjustment required under section 80 of the Act is made at the time during the taxation year when the debt or obligation is settled or extinguished.

It is our opinion that where a gain is applied by a debtor in accordance with paragraph 5400(l)(a) of the Regulations to reduce the capital cost of a depreciable property in the same taxation year in which the property is acquired by the taxpayer, the capital cost for the purposes of paragraphs 127(11.1) (a) and (b) and paragraph (a) of the definition of investment tax credit in subsection 127(9) of the Act will be reduced by the amount of that gain.  This will be the result regardless of whether the debt forgiven relates to the depreciable property acquired. However, where a gain is applied to reduce the capital cost of a depreciable property in a taxation year subsequent to the taxation year in which the property was acquired, the capital cost for investment tax credit purposes will not be reduced by the amount of the gain applied to reduce the capital cost of that depreciable property.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, is not binding on Revenue Canada, Taxation.

We trust these comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch