12 September 1989 Income Tax Severed Letter 7-3669

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.

We have been asked for our interpretation as to whether new vessels used within Canada's 200 nautical mile fishing limit, but beyond the 12 nautical mile territorial waters of Canada will be used "in Canada" for purposes of the definition of qualified property under subsection 127(9) of the Income Tax Act (the "Act") and therefore, will be eligible for investment tax credit ("ITC"). The request involved a vessel used solely for fishing and a vessel that is a factory freezer trawler designed both for fishing and for processing. In both situations, the vessel is based from and lands its catch in a Canadian port.

As per the attached letter dated October 16, 1981, from Non-Corporate Rulings Division and as discussed with Drew Burnett of Current Amendments and Regulations Division, our Department has an administrative position whereby the rate of ITC available for a fishing vessel used within the 12 nautical mile limit is determined by the rate applicable to the location of the business of the taxpayer. However, this position has normally been followed for purposes of determining whether a vessel is used in a province for purposes of subparagraph (a)(iii) of the definition "specified percentage" in subsection 127(9). According to J.R. Miller, Chief of Audit Review in the Halifax District Office, no firm position has been taken for fishing activities outside the 12 mile limit. As a result, it is likely that taxpayers are currently claiming ITC on fishing vessels and factory freezer trawlers used beyond that limit.

The definition of qualified property requires that the property be used by the taxpayer "in Canada". As per paragraph 4 of Interpretation Bulletin IT-494, the term "in Canada" includes the territorial sea of Canada which, in general terms, embraces the water and airspace within what is known as the 12 nautical mile limit. However, the term does not include the area of water off the coastline of Canada outside the 12 nautical mile limit, notwithstanding the 200 nautical mile fishing limit (see attached memo dated July 18, 1980). In the court case Mersey Seafoods Limited v. M.N.R. [[1985] 2 C.T.C. 2485] (85 DTC 731), the Department took the position that processing activities which took place on board a vessel outside the 12 nautical mile limit were not carried out "in Canada". The judge agreed with our position after an extensive review of documents available on this matter. Two letters issued recently by Specialty Rulings Directorate dated September 11, 1987 and August 17, 1987 also confirmed this position, but dealt with the term "in Canada" as it relates to the employment and rental payments. In addition, neither section 255 of the Act, which expands the definition of "Canada" for purposes of mineral, oil, and gas activities, nor section 5 of the Income Tax Conventions Interpretation Act defining the meaning of the word "Canada" are relevant to the operation of a vessel. Based on the above, it was our opinion that fishing vessels and factory freezer trawlers used beyond the 12 nautical mile limit are not used in Canada (or in a province), and are not eligible for any ITC.

The ineligibility for ITC affects all fishing vessels and factory freezer trawlers (some of which are designed for both fishing and processing) used within Canada's 200 mile limit acquired before 1989, as well as those acquired after 1988 in the Maritime provinces. For your information, this issue had been referred to the Audit Applications Division. They indicated that they were unwilling to take an administrative position to allow the vessels used beyond the 12 mile limit to qualify for ITC as this position would be contrary to existing legislation.

We understand that the current legislation may not necessarily reflect the intent of the Department of Finance. We would appreciate the Department of Finance's comments as to the intent of the ITC program with respect to fishing vessels and factory freezer trawlers used within Canada's 200 mile limit and whether a legislative change may be forthcoming.