18 October 1989 Income Tax Severed Letter 7-4370 - Cape Breton Investment Tax Credit — capitalized interest treatment

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

We are writing in reply to your memorandum of September 20, 1989. In your memorandum you requested our comments related to a letter which you intend to send to XXX.

In the letter you state that the interest incurred on funds borrowed for the acquisition of equipment or other depreciable property, other than a building under construction, renovation, or alteration, must be excluded from the capital cost of the asset in computing the related investment tax credit ("ITC"). This statement is based on the fact that paragraph 127(11.1)(a) of the Income Tax Act (the "Act") specifically excludes, for ITC computation, an amount which was added to the capital cost of a depreciable asset under section 21 of the Act, namely the cost of borrowed money, and that no such exclusion exists for amounts added to the capital cost of a building under construction by virtue of subsection 18(3.1) of the Act.

Our Comments

In our opinion, the capital cost of property will generally be determined based upon generally accepted accounting principles ("CAP"), however where specific provisions of the Act provide for amounts to be added to or deducted from a property's cost in determining its capital cost, those provisions will take precedence over GAP. The applicable provisions mentioned in your letter are:

• a) Subsections 18(3.1) and (3.2) of the Act, which clearly indicate that in determining the capital cost of a building interest paid or payable by a taxpayer in respect of borrowed money used in the construction, renovation or alteration of the building is to be added to the capital cost of the building for purposes of the Act. An exception to this requirement is contained in subsection 18(3.4) of the Act where the taxpayer is a corporation or a partnership of which each member is a corporation, and whose business is throughout the year the leasing, rental or sale, or any combination thereof, of real property held by it to or for a person with whom it deals at arm's length. The exception applies to a specified percentage of the outlays, with the percentage decreasing each year until 1992 at which time no exception will apply. As taxpayers to which this exception applies may attempt to capitalize interest in order to receive an increased ITC, we recommend that your letter contain a reference to subsection 18(3.4) of the Act pointing out that subsection 18(3.1) of the Act will not apply where subsection 18(3.4) of the Act applies.
• b) Subsection 21(1) of the Act, which allows a taxpayer to elect to capitalize interest outlays related to the acquisition of any depreciable property. This election generally applies to equipment and similar assets, however, it could also apply to interest related to the acquisition of a building (e.g., where a completed building was acquired at the beginning of the taxation year subsection 21(1) of the Act would allow all interest for the remainder of the year to be capitalized). As such, situations may exist where paragraph 127(11.1) (a) of the Act will result in a building having a different capital cost for purposes of the ITC. We recommend that paragraph 1 on page 2 of your letter be rephrased to state that interest incurred on funds borrowed for the acquisition of equipment, buildings (other than buildings under construction, renovation or alteration) or other depreciable property which has been added to the capital cost of the property pursuant to an election under subsection 21(1) of the Act is excluded from the capital cost of the property for purposes of calculating the ITC. Generally only interest which has been added to the capital cost of a building pursuant to subsection 18(3.1) of the Act will increase the amount of the ITC.

We trust our comments will be of assistance.