8 June 1993 External T.I. 9315705 F - Leasing Properties and R&D

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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Section 16.1 of the Income Tax Act (the "Act")

This letter is further to our letter to you dated May 7, 1993 wherein we provided a technical interpretation regarding the application of subsection 127(9) of the Act in the situation where a lessee's deemed cost of a property, arising from an election under section 16.1 of the Act, qualifies as a scientific research and experimental development ("SR&ED") capital expenditure under subparagraph 37(1)(b)(i) of the Act.

You will recall that in our letter dated May 7, 1993 we stated that:

     "For purposes of calculating the investment tax credit of a lessee who has jointly elected with the lessor under section 16.1 of the Act, we must look at the definition of qualified expenditure which excludes a prescribed expenditure. Subparagraph 2902(b)(iii) of the Income Tax Regulations (the "Regulations") refers to an expenditure of a capital nature incurred by a taxpayer (the lessee) in respect of the acquisition of property that has been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer. In the particular situation you have described in your letter, the property was precisely acquired for lease by the lessor. Consequently, the property is a prescribed expenditure for the lessee and, therefore, is precluded from being a qualified expenditure for investment tax credit purposes."

In addition, we had mentioned that we would raise this matter with the Department of Finance, as this would deprive the taxpayer of an investment tax credit to which he would have been entitled, had he not elected under section 16.1 of the Act.

We have since obtained the opinion of the Department of Finance and we would mention that, from a tax policy perspective, it was not intended that subparagraph 2902(b)(iii) of the Regulations apply where a lessor acquires new property which has yet to be leased and then elects with the first lessee of the property under section 16.1 of the Act.

As a result, we are of the opinion that the exception provided in paragraph 2902(b)(i) of the Regulations would apply and that, in the particular situation described in your letter of December 2, 1992, we would, on an administrative basis, not consider the leased property to have been used, or acquired for use or lease, for any purpose whatever before it was acquired by the lessee for the purposes of subparagraph 2902(b)(iii) of the Regulations.

We trust that our comments will be of assistance to you.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch