21 April 1993 Income Tax Severed Letter 9308977 - CCA, ITC, SBITC—Fishermen—Available-for-use

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.

                                                 April 21, 1993

  Atlantic Regional Office                       HEAD OFFICE
                                                 Rulings Directorate
        Attention:  Brian Granby                 J.D. Brooks
                                                 957-2103

                                                 930897
  CCA & ITC Issues

This is in reply to a recent enquiry from the Halifax D.O. concerning the available-for-use ("AFU") rules in section 13 and the new Small Business Investment Tax Credit ("SBITC") rules to be added to section 127 of the Income Tax Act. We are forwarding the reply to you since it is our understanding that you wish to distribute it to the various offices in your region.

This reply will serve to update our January 23, 1979 memo to J.R. Miller of Audit Review, Halifax D.O. on "CCA and ITC— Ship under construction".

You 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 (we assumed
        December 31), 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?

Our Comments

(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), and

        (h)   where the property is a vessel for which one or more permits,
              certificates or licences are required to be obtained, the time
              at which all such permits, certificates or licences have
              been obtained  (your question did not state any relevant
              facts).

Where the vessel requires a permit, certificate or licence in order to be operated legally, it is our view that the vessel could not be considered to be capable of performing the function for which it was acquired until such permit, certificate or licence is obtained.

Thus, in your example, provided that the vessel was licensed in 1992 and was otherwise capable of performing the function for which it was acquired when it was delivered, the fisherman would be entitled to claim CCA in 1992. The fisherman's claim for CCA would be 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).

(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. Pursuant to subsection 127(11.2) which was added in 1991, the AFU rules now apply in determining the time at which a taxpayer can claim ITC.

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.

Qualifying property acquired (here, the AFU rules are ignored for purposes of determining whether the taxpayer's property has been "acquired") after December 2, 1992 and before 1994 is eligible for the SBITC. However, in determining when the SBITC can be claimed, the AFU rules do apply. For example, if the fisherman in the example obtained legal ownership on December 31, 1992 but the boat was not "available for use" until 1993, the vessel would qualify in 1992 for the SBITC but no claim could be made for the SBITC until 1993.

To the extent the fisherman acquired the vessel prior to December 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 September, 1992, it could be that he acquired 1/5 ($10,000 / ($10,000 + $40,000)) of the vessel prior to December 3, 1992. In that case, only the $40,000 paid in December, 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 December, 1992 and the entire $50,000 would qualify for the SBITC.

In terms of calculation, the SBITC is in addition to existing ITCs. A fisherman may be able to claim a maximum ITC of 25%, made up of 15% for a "qualified property" acquired primarily for use in the Atlantic Region and 10% for a "qualified small-business property" acquired after December 2, 1992 and before 1994.

R. Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch