27 November 1989 Ruling 73733A F - Regulation 4600(2)(h)

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.

Subject: Regulation 4600(2)(h) I.T.C. on Logging Roadways and Bridges

We are writing in response to your memo dated March 13, 1989, wherein you requested our opinion whether a bridge constructed as part of a logging road system would meet the definition of "qualified property" as that expression is used at subsection 127(9) of the Act, with regards to earning investment tax credits and as to whether the subsurface construction of the road itself qualifies for such credits.

Background

(a)       In order to exploit their timber limits or cutting rights, logging operations must build (or cause to be built on their behalf) extensive networks of roads.  Such roads are now generally built to relatively high standards, due to the size and weight of modern logging trucks and trailers, and the volume of traffic.

(b)       Essentially, logging roads are assigned one of two principal designations which indicate the standard of their construction:

(i)     Main Roads - which are built to a high standard so as to accommodate the large, off-highway vehicles. They have a life expectancy of ten (10) years or more and are treated as capital expenditures by the company; and

(ii)      Operating Roads - which have life expectancy of one (1) to three (3) years, are built as inexpensive as possible and the expenditures which relate to these roads are treated as expenses of the year (see paragraph 7 in IT-501).  These roads are branches off of the main roads and are necessary in order to access a specific timber area.

(c)       In building a logging road, the trees must first be logged off the right-of-way and their stumps removed.  Small hills are removed and small depressions are filled to provide an acceptable grade and alignment.  In mountainous areas, extensive engineering and blasting along slopes or cliff faces may be needed.  Where small streams are crossed, culverts are placed to permit the water to flow under the road.  Larger streams or rivers require the construction of bridges.

(d)       The subsurface of the road is them prepared by excavation and the placing of enough crushed rock to provide a firm foundation for the road depending on whether firm or marshy terrain is being encountered.  Finally, a top surface of gravel is put in place and graded.  Logging roads are not usually paved.

(e)       The cost of all this construction (i.e. stump removal, blasting, filling, culverts, bridges, subsurface, gravel and grading) is included for income tax purposes in either Class 10(n) or Class 15 of Schedule II to the Regulations.

(f)       For many years, it had been an accepted practice that taxpayers not treat any of these costs as earning investment tax credits because of the exclusionary words found at paragraph 4600(2)(h) of the Regulations, "other than a roadway".

(g)       You informed us in your memorandum that some taxpayers in British Columbia, Quebec and New Brunswick have recently been attempting to claim investment tax credits on the cost of building bridges and the subsurface construction of logging roads.  It is their contention that the exclusion of roadway from the definition of "prescribed machinery and equipment" at paragraph 4600(2)(h) of the Regulations, only refers to the surface of the road and not the other components of building the road such as culverts, bridges, subsurface construction, blasting and filling costs.  Which costs amount to millions of dollars and make up the better part of the road construction expense.

Our Opinion

As explained in IT-501, roads, bridges and culverts are defined to be immovable wood assets which are capitalized if they have life expectancy greater than three (3) years, and are classified at the option of the taxpayer as property included in Class 10(n), 15, 1 or 17.

Property in Class 10(n) or 15 qualify for investment tax credits under paragraph 4600(2)(h) of the Regulations unless it is excluded by the words "other than a roadway".  It should be noted that roads and bridges in other industries are included in Classes 17 and 1, respectively, and do not earn investment tax credits.

The term roadway is not defined in the Act.  However, Websters Third New International Dictionary (unabridged) provides the following definitions:

1.     a:  the strip of land through which a road is constructed and which is physically altered b: Road; (specify): the part of a road over which the vehicular traffic travels;

2.     the right of way of a railroad with tracks, structures and appurtenances necessary for the operation of trains; or

3.     the part of a bridge used by vehicles.

The french word for "roadway", chaussé is used in the french Act and essentially has a similar meaning.

Robert

1.     Elevation de terre servant à retenir l'eau d'une riviére, d'un étang.

2.        Levée de terre, talus servant de chemin.

3.        Partie médianne d'une voie publique.

4.        Long écueil sous-marin.

Petit Larousse, illustré (1988)

     Partie de la voie publique amenagée pour la circulation. Levée de terre pour retenir l'eau d'une rivière, d'un étang, pour servir de chemin. Long écueil dépassant peu le niveau de la mer. This version includes an illustrated cross section of a chaussée which includes the earth base to the top surface.

Road building is considered by the forestry industry to be an entirely separate division and a great deal of energy in both manpower and expense is attributed by the industry in their construction.  When the industry refers to roads, bridges are considered to be an integral part thereof.  This is evident upon reference to several industry magazine articles and advertisements by road and bridge builders.

In Nova v. The Queen, 87 C.T.C 265 (FCTD), Dubé, J stated "... The Act (Income Tax Act) must be construed according to its own definitions, or the ordinary meaning of the words used, or the common usage by the people in the relevant industry."

Using this conceptual approach, we are of the opinion that all expenses relating to the building of a logging road, including subsurface construction, culverts and bridges should be excluded from earning investment tax credits since they are part of a roadway as this interpretation is in unison with the object and spirit of the Act.

At the specific request of the district offices listed below we are sending them a copy of this memorandum.

DirectorBilingual ServicesIndustries DivisionRulings Directorate

c.c.     Mr. Bertrand AyotteQuebec District Office

     Mr. Clovis DorvalQuebec District Office

     Mr. Morris JolicoeurSudbury District Office