31 May 1994 External T.I. 9413655 - INVESTMENT TAX CREDIT (SR&ED)

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.

				941365

XXXXXXXXXX		F.B. Fontaine 

Attention: XXXXXXXXXX

May 31, 1994

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter dated May 23, 1994 concerning whether a mainframe computer system acquired by

XXXXXXXXXX

Based on the comments in paragraph 21 of Information Circular 70-6R2, we are unable to provide confirmation of the income tax consequences of the particular situation that you described. However, we are prepared to offer the following general comments:

1.In order for a taxpayer to be entitled to the ITC on property used for SR&ED, the property must not be a "prescribed property". Under subparagraph 2902(b)(iii) of the Income Tax Regulations, prescribed property includes "property that has been used or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer". Notwithstanding, paragraph 24 of Interpretation Bulletin IT-331R provides that used equipment that was renovated, where such renovations were so significant, would qualify for the ITC, provided that the other eligibility requirements are met.

2.The Bulletin does not explain the meaning of significant. However, based on the ordinary meaning of the word "significant" and the phrase in the paragraph "when acquired by the taxpayer can be said to be new", it is our expectation, given that computer technology changes rapidly, that the renovations would go beyond the simple replacement of worn parts to the point where the renovations bring the equipment to the current state-of-the-art. In our view, renovations that are merely performance related enhancements that do not change the essential nature of the equipment would not qualify. Where, among other things, a considerable number of parts of an equipment, compared to the total number of parts comprising the equipment as a whole and a number of major parts of the equipment, compared with other parts that are considered to be minor in number, effect or importance have been replaced with new parts or parts that have been rebuilt as new (such that the same useful life will be produced as a newly manufactured equipment), it is our opinion that the equipment would generally be considered to be new for the purposes of paragraph 24 of IT-331R.

3.Based on paragraphs 1 and 2 above, whether the work described in the second paragraph above to a computer system could be described as significant is a question of fact which can only be determined by an expert in the field of computer technology. The Department may require the assistance of outside expertise in making such a determination in any given circumstances. However, based on the limited time in which a response to your letter is required, the Department is unable to make such a determination at this time.

We regret that our reply cannot be more favourable in this instance.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch