10 July 1991 External T.I. 911545 F - Specified Leasing 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 Sirs:

Re: Subsection 1100(1.01) of the Income Tax Regulations

This is in reply to your letter of March 27, 1991 concerning proposed subsection 1100(1.01) of the Income Tax Regulations (the "Regulations").

You have noted that when a lessor leases property that is "specified leasing property" as defined in subsection 1100(1.02) of the Regulations, the new rules do not appear to allow a taxpayer to adjust the "principal" amount for the amount of any Investment Tax Credit ("ITC"). You believe that this is not appropriate since the ITC reduces the capital cost of the leased property for determining the capital cost allowance that could otherwise be claimed.

Proposed subsection 1100(1.01) of the Regulations provides rules concerning the amount of capital cost allowance that maybe claimed in any year on specified leasing property. The capital cost allowance is limited to the lesser of the amounts (a) or (b).

While there are special rules to deal with complex arrangements in a simple lease arrangement the (a) amount is determined in the following manner. The calculation is based on the fictional assumption that a loan at prescribed rate of interest is made for the fair market value of the property at the time of entering into the lease. The actual lease payments are considered to be blended payments of interest and principal. The (a) amount is then determined as the fictional principal received for the year and all preceding years reduced by the actual capital cost previously claimed (this takes into consideration the application of subsection 1100(1.01) of the Regulations to preceding years).

The (b) amount is a calculation of the maximum amount of capital cost allowance that could be claimed in the year and preceding years on the assumption that lease and rental property restrictions did not apply nor did subsection 1100(1.01) of the Regulations.  The calculation then requires the actual capital cost allowance claimed in preceding years be deducted.

In a typical situation involving a property where capital cost allowance is claimed on a diminishing balance the (b) amount will be greater than the (a) amount for several years but eventually the (a) amount will catch up and exceed the (b) amount. This is so since the fictional principal component is at its lowest in the first few year whereas the capital cost allowance is higher in these same years. Assuming that a property is leased for its useful life a taxpayer/lessor will be allowed to claim the total amount of capital cost allowance that would have been otherwise been available in absence of this proposed Regulation. The effect of the subsection is to alter the timing of the deduction.

This legislation imposes an arbitrary limit on the capital cost allowance that may be claimed in a particular year but will eventually allow the full amount of capital cost allowance that would otherwise be available. It does not provide for any adjustment to the (a) amount for ITC. As you note, the Investment Tax Credit will be considered in the (b) amount since it reduces the amount of capital cost on which the capital cost allowance may be claimed. There are other provisions that alter the capital cost of a property for the purposes of establishing the amount of capital cost allowance that may be claimed; the receipt of a Government grant or subsidy for the property for instance. None of these provisions are considered in calculating the (a) amount but, of course, will be factors in determining the (b) amount.

As we discussed, by telephone, should you believe these proposed amendments to the Regulations have unintended results, you may wish to consult with officials of the Department of Finance. The Department of Finance has the responsibility of recommending tax policy and proposing changes to the law.

We trust these comments will be of assistance.

for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch