30 November 1990 Ruling 902751 F - Effect of Government Loans on Cost of Depreciable Property

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.

Dear Mr. Saberton:

This is in reply to your letter dated September 28, 1990 concerning entitlement to claim capital cost allowance ("CCA") on the full cost of depreciable property.

Your letter refers to the revised terms of repayment of a loan arrangement that was referred to in a previous letter from your Mr. Robert Fitzpatrick to which we replied on September 19, 1990. Based on the scenario described in that reply we outline our current understanding of the amended situation as follows:

1.     The federal and provincial governments have agreed to provide loans to a taxpayer to finance the acquisition of certain plant buildings, machinery and equipment to be completed by 1994.

2.     Under the terms of repayment the taxpayer will commence repayment of the loans on the earlier of 2004 and the time at which a certain amount of cumulative sales has been achieved. The amount of repayment will be based on a fixed fee of annual sales and will continue until the loan is completely repaid.

Our comments are as follows:

A.     As explained in or reply of September 19, 1990, loan received under an agreement the conditions of which provide for the possibility of forgiveness would be required to be included in income by the recipient, to the extent that the amount of the loan does not reduce the cost of depreciable property. However, a loan would not be subject to these requirements if it were considered to be unconditionally repayable. Such a loan would not be required to reduce the cost of depreciable property for CCA purposes.

B.     Whether or not a loan can be considered to be unconditionally repayable depends on a finding of fact and would require an examination of the particular loan agreement and surrounding circumstances. However, where repayments are tied to sales, the possibility that a loan is conditionally repayable remains.

We trust our comments will be of assistance to you. They are expression of our opinion only based on limited information provided and should not be construed to be an advance income tax ruling on the Department.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch