1 June 1990 Administrative Letter 74836 F - Computation of Resource Profits

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: Request for Technical Interpretation 24(1)

We are writing in reply to your request of March 22, 1990 for a technical interpretation of the income tax treatment  24(1)

Your concern is primarily whether the assistance should be deducted from the expenses incurred in respect of  24(1) for purposes of computing 24(1) resource profits pursuant to section 1204 of the Income Tax Regulations (the "Regulations").

FACTS

The facts and salient features of

24(1)

24(1)

OUR COMMENTS

24(1)

24(1)

In respect, we refer to Alberta and Southern Gas Co. Ltd. vs. The Queen, 76 DTC 6362 at 6368, and Wilson vs. Ward, (1930) S.C.R. 212 at 215 which state that "the essence of a loan is that the advance shall be repaid" and "a 'loan' which does not involve an obligation of repayment is a contradiction in terms", respectively.

Also, in Radio Engineering Products Ltd. vs. M.N.R., 73 DTC 5071, the appellant company was engaged in the design and development of certain communications equipment.  In 1960 the Department of Defence entered into a contract with the appellant by virtue of which it undertook to contribute up to $450,000 toward the engineering development costs (paragraph 31 of the facts of the case at page 5073) of the communications equipment.  The contract provided for repayment of the funds in the event of certain occurrences.  Kerr, J. stated at pages 5082 and 5083 that "On all the evidence I think that the character of the payment of the $450,000 was that of a contribution towards the costs of the project, and that it was not a loan or an advance in the nature of a loan of capital or a payment on capital account, although there were provisions for repayment and contingencies."  He concluded that the $450,000 should be reflected in the computation of the appellant's taxable income either as a receipt of income or as a reduction in the expenses claimed by the appellant.  Thus, the funding received by the taxpayer would not be considered as a loan to which the provisions of subsection 80(1) could be applied, but rather, as income of the taxpayer.

It is your view that if the funding was received by the taxpayer in respect of particular study costs which were capitalized as depreciable property, the funding would reduce the capital cost of the depreciable property pursuant to subsection 13(7.4) of the Act.

Subsection 13(7.4) of the Act generally provides that notwithstanding subsection 13(7.1), where a taxpayer has, in a taxation year, received an amount that would, but for this subsection, be included in his income under paragraph 12(1)(x) in respect of the cost of a depreciable property acquired by him in the year immediately following the year and the taxpayer elects under this subsection within a specified time, the capital cost to the taxpayer shall be deemed to be the capital cost otherwise determined adjusted by the amount elected by the taxpayer under subsection 13(7.4).

Consequently, if the taxpayer correctly capitalized the cost of depreciable property and included the funding pertaining thereto in income pursuant to paragraph 12(1)(x) of the Act, subsection 13(7.4) of the Act would only apply if the taxpayer so elects within the specified time as required thereunder and all of the other provisions of the subsection have been satisfied.

Repayment of the Funding

24(1)

Where the taxpayer has satisfied all of the provisions of subsection 13(7.4) of the Act and, as a consequence, the funding or portion thereof has reduced the deemed capital cost of the depreciable property would include amounts of the funding which have been repaid pursuant to a legal obligation to repay all or any portion of that amount which may reasonably be considered to be in respect of the amount elected under subsection 13(7.4) in respect of the property.

Other

24(1)

24(1)

The above comments are consistent with the Department's general comments with respect to government assistance in Interpretation Bulletin IT-273R, although admittedly, this bulletin was written prior to the introduction of paragraph 12(1)(x) in the Act.

DirectorBilingual Services and ResourceIndustries DivisionRulings Directorate