16 May 1990 Internal T.I. 80347 F - Investment Tax Credit Entitlement

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:  Re 24(1) Notices of Objection 1983 and 1984

We are writing in response to your memorandum of January 15, 1990 in which you have requested our further consideration and comments with respect to a memorandum we issued on January 13, 1989, to the Ottawa District Office.

Our understanding of the facts is as follows:

Facts

24(1)

24(1)

New Information

24(1)

Issues

The issues are:

24(1)

Your Views

You agree with our original opinion that 24(1)

Even if the properties are considered to be inventory, you the Department's policy as described in paragraph 16 of IT-102R is to recognize them as depreciable property:

     Where stock in trade is transferred temporarily from the taxpayer's inventory for the purpose of renting the property on a short-term basis...the property may be classed as capital property while it is being rented.

While you admit that the policy in IT-102R contemplates businesses principally involved in buying and selling for profit, the fact that the taxpayer's principal business is leasing would, in your view, only strengthen the position that the acquisitions in question were capital expenditures.

You add that this result is not offensive to the spirit of the legislation, since the properties are used in acceptable activities and the ITC may be claimed neither by 24(1) customers, nor by the Lessors.

Our Views

In our view, the principal issue to be is "who, if anyone is entitled to the ITC on the      24(1)  Subsection 127(5) allows a taxpayer to deduct from the his tax otherwise payable for the year, within certain parameters, his ITC.  "ITC" is defined in subsection 127(9) and reads, in part, as follows:

     "investment tax credit" of a taxpayer at the end of a taxation year means the amount, if any, by which the aggregate of

a)     the aggregate of all amounts each of which is the specified percentage of

(i)     the capital cost to him of a qualified property, qualified transportation equipment, qualified construction equipment, approved project property or certified property acquired by him in the year....,

Three observations can be made with respect to this definition. Firstly, the property must have a capital cost; secondly, it must be a type of property listed in the subparagraph; and thirdly, it must be acquired by him in the year.

The term "capital cost" is not defined in the Act.  It is used in the definition of adjusted cost base at subparagraph 54(a)(i) with reference to depreciable property.  Therefore, it follows that the property has to be depreciable property to the taxpayer at the time it is acquired.  It is necessary to determine whether  24(1)

The Ottawa District Office has taken the position that the property  24(1)

Inventory is defined in subsection 248(1) to mean "a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year".  This definition is very broad and could even be construed to include depreciable property (if it were not for paragraph 1102(1)(b) of the Regulations), as well as property that is more traditionally thought of as inventory.  As this definition is so broad, one must look elsewhere to determine if an item is inventory.

Wilson and Wilson Ltd. v MNR 60 DTC 1018 (Ex.Ct.) is a case involving the recognition of income for a contractor.  Briefly, the taxpayer in that case entered into contracts to install sewers and water systems.  In some contracts it supplied materials and, in others materials were supplied to it.  We note the following from pages 1023 and 1024 of the reasons for judgement in response to the Minister's submission regarding expenses and inventory:

     It seems to me that the question of valuation of inventory on hand at the beginning and end of the taxation year does not arise in this case.  In most of the contracts, the materials are provided by the owner or main contractor, the appellant providing only services; in such cases no inventories are maintained by the appellant.  As I understand the evidence, the appellant, when it has contracted to supply pipe and other materials, immediately places its order for the precise amount and the particular material required in order to fulfill its contract and no more. In most cases the materials are supplied to it on the job as needed.  It does not stockpile inventory for later sale, but only as needed for the particular contract which it has already entered into and by which the price  of materials has been definitely fixed.  The cost of materials is of importance in computing the appellant's profits but that matter will be disposed of later.  The rise or fall in value of the materials is of no importance to the appellant, the purchase and sale price of all such materials having been already fixed.  In my view, the  question of valuation of inventory, is in this case not relevant in computing the appellant's income, ...

The court held that all job costs, which included the cost of the materials, were deductible in full in the year in which they were made or incurred, and not in any subsequent year.

The Wilson and Wilson Ltd. case was decided on the basis of a definition of inventory as "property the value of which is relevant in computing a taxpayer's income from a business for a taxation year".  That definition was amended in 1955 to its present form.  It is unlikely that the same decision would be reached today.

24(1)

21(1)(b)

24(1)

"Depreciable property" is defined in paragraph 13(21)(b) of the Act  as follows:

     "depreciable property" of a taxpayer as of any time in a taxation year means property acquired by the taxpayer in respect of which he has been allowed, or, if he owned the property at the end of the year, would be entitled to a deduction under regulations made under paragraph 20(1)(a) in computing income for that year or a previous taxation year.

24(1)

Generally, for taxpayers other than lessors, ITCs are earned at the time of acquiring the qualified property, i.e., when the taxpayer has title or all the incidents to title.  The department's position is outlined in paragraph 6 of IT 331R as follows:

     A credit is "earned" when properties are acquired or certain expenditures are made.

It is clear that it is not necessary for a taxpayer to own the property at the end of the year to be entitled to the ITC.  Any ITC claimed will be credited to the applicable CCA pool reducing the undepreciated capital cost ("UCC") of the pool and possibly resulting in recapture.

The ITC earned by a lessor is somewhat more restrictive.  As outlined in paragraphs 20 and 21 of IT-331R, the lessor must acquire the property to be leased and the property must be leased before the equipment is considered to qualify for the ITC.

These requirements suggest the following timing of transactions for  24(1) to be eligible for the ITC on a particular piece of qualified 24(1)

24(1) has acquired the property;

2.     the property is to be leased;

3.     the property is leased i.e., 24(1) and its customer have done everything required for lease payments to commence (e.g., the new equipment is available for the customer's use); and

4.     the sale to the Lessor takes place after the lease has commenced

Where these criteria are not met 24(1) will not be eligible for the ITC.

The above criteria are all questions of fact and can only be determined by examining all the documentation with respect 24(1)

We trust these further comments will be useful for your purpose. As requested, we are returning your materials with this memorandum.

for ChiefLeasing & Financing SectionRulings Directorate