6 October 1997 External T.I. 9725035 - PROPOSED SECTION 18.1 OF THE ACT

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.

Principal Issues:

Potential application of proposed section 18.1 of the Act

Position:

Proposed section 18.1 of the Act does not apply to an expenditure for which a deduction is provided under section 20 of the Act. Discussion of proposed subsection 18.1(15) of the Act.

Reasons:

			5-972503
XXXXXXXXXX	J. Desparois, M. Fisc.

Attention: XXXXXXXXXX

October 6, 1997

Dear Sirs:

Re: XXXXXXXXXX

Further to our telephone conversation (Desparois, Vanasse/XXXXXXXXXX) of October 1, 1997, we have summarized our comments concerning the potential application of proposed section 18.1 of the Income Tax Act (the "Act") to the situation described in your letter dated September 15, 1997.

Generally, proposed section 18.1 of the Act restricts the deductibility of an otherwise deductible matchable expenditure incurred in respect of a right to receive production by prorating the deductibility of the amount of the expenditure over the economic life of the right. Proposed section 18.1 of the Act does not apply t o an expenditure for which a deduction is provided under section 20 of the Act. Therefore, if the expenditure is made for the acquisition of a depreciable asset for which a deduction is provided under paragraph 20(1)(a) of the Act, the provisions of proposed section 18.1 of the Act are not applicable. Whether an expenditure should be viewed as being on a current or capital account is a question of law which entails the consideration of all relevant facts pertaining to the particular situation. As mentioned in the Information Circular IC-70-6R3, subparagraph 15(e), no ruling will be provided when the major issue is whether a transaction should be viewed as being of an income nature or of a capital nature.

In addition, proposed subsection 18.1(15) of the Act provides an exception to the application of proposed section 18.1 of the Act. Matchable expenditures may be sheltered from the rules provided by section 18.1 of the Act if, inter alia, one of the following conditions is met:

-the expenditure does not relate to a tax shelter and none of main purposes for making the expenditure is that the taxpayer obtain a tax benefit, or

-before the end of the taxation year in which the expenditure is made, the total income inclusions of the taxpayer from the right to receive production to which the expenditure relates exceeds 80% of the expenditure.

Should you require any additional information please do not hesitate to contact us.

Yours truly,

Marc Vanasse, CA
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch