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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
March 22, 1993
Deferred Income Plans SECTION HEAD OFFICE
Rulings Directorate Rulings Directorate
J.D. Brooks
Attention: Wayne Douglas 957-2103
930731
CCA & ITC Issues Raised by Halifax D.O. This is in response to your enquiry of March 15, 1993 on capital cost allowance and investment tax credits.
This enquiry from the district office seems to be a requested update of our January 31, 1979 memo to John Miller of Audit Review, Halifax D.O. on "CCA and ITC— Ship under construction". The current request may be due to available-for-use ("AFU") rules in section 13 and (for certain) the new Small Business Investment Tax Credit ("SBITC") rules in section 127.
QUESTION
The district office presented the following hypothetical consideration:
A fisherman whose year-end is December 31 reports income on the cash basis. During September of 1992 he orders a new fishing boat and puts a $10,000 deposit on it. In December of 1992, he takes delivery of the boat and pays the builder in full an additional $40,000. The boat will be first used in May of 1993 when the spring lobster season opens.
(a) When is the fisherman first able to claim C.C.A. on
the purchase?
(b) When is the fisherman first eligible to claim I.T.C.
and in what amounts considering the new temporary
small business investment tax credit?
REPLY
(a) CCA
For years, we have acknowledged that fishermen may acquire a vessel under construction to the extent the work has been paid for and the work has been completed, provided that title in fact passes (which depends on the terms and conditions of a particular contract); and therefore CCA could be claimed on a vessel under construction. In fact, class 7 specifically includes vessels under construction (other than class 41 vessels).
However, the available-for-use (AFU) rules apply to defer the time at which CCA may be claimed. According to subsection 13(27), the vessel will be considered to be available for use at the earliest of:
(a) the time at which the property is first used
by the taxpayer to earn income (which is 1993 in the
case at hand),
.
.
.
(g) where the property is acquired by a fisherman to be
used in fishing, the time at which the property has
been delivered and is capable of performing the
function for which it was acquired (which is 1992
in the case at hand).
Thus, the fisherman would be able to claim CCA in 1992, but subject to the 1/2-year rule of Reg. 1100(2)(a), or Reg. 1100(1)(v) for "Canadian vessels" (formerly called "certified vessels") as described in Reg. 1101(2a).
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(b) ITC
We have also previously acknowledged that fishermen who have acquired a vessel under construction may claim ITC with respect to the acquisition cost incurred in the year.
The temporary Small Business Investment Tax Credit (SBITC) of 10% (refer to Dept. of Finance Information Sheet 93-006, Feb. 5, 1993) is an incentive that will apply (presuming it is passed into law) to certain property acquired after Dec. 2, 1992 and before 1994. Vessels acquired by fishermen for use in fishing will qualify for the SBITC.
Pursuant to the proposed definition of "qualified small-business property" in subsection 127(9), the AFU rules are ignored for purposes of determining whether the taxpayer's property has been "acquired". In the case at hand, though, it is irrelevant that the AFU rules do not apply since the taxpayer would have met the AFU test in 1992 anyways.
What is at issue, though, is whether the vessel is considered to be acquired "after Dec. 2, 1992 and before 1994". To the extent the fisherman acquired the vessel prior to Dec. 3, 1992 (by virtue of the terms of the construction contract), it will not qualify for purposes of the SBITC. Since he paid $10,000 in Sep., 1992, it could be that he acquired 1/5 ($10,000 / ($10,000 + $40,000)) of the vessel prior to Dec. 3, 1992. In that case, only the $40,000 paid in Dec., 1992 could qualify for the SBITC. However, if the $10,000 represents only a deposit rather than a progress payment, then the asset would not be acquired until Dec., 1992 and the entire $50,000 would qualify for the SBITC.
The SBITC is in addition to existing ITCs.
As a general note (not relevant to this enquiry), it is possible that a property may qualify for SBITC in year 1 but not qualify for regular ITC until a subsequent year due to the AFU rules.
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R. Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
attach.
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