ARCHIVED - Capital Cost Allowance - Accelerated Write-Off of Manufacturing and Processing Machinery and Equipment

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NO: IT-147R3

DATE: September 14, 1992

SUBJECT: INCOME TAX ACT
Capital Cost Allowance – Accelerated Write-Off of Manufacturing and Processing Machinery and Equipment

REFERENCE: Paragraph 20(1)(a) of the Income Tax Act (also subsections 1100(3), 1100(15), 1102(14), 1102(14.1), 1103(2d), 1103(2e) and 1104(9) and paragraphs 1100(1)(ta), (ze) and (zf) of the Income Tax Regulations, and Classes 29, 39 and 40 of Schedule II to the Regulations)

Notice—Bulletins do not have the force of law

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Contents

Application

This bulletin cancels and replaces Interpretation Bulletin IT-147R2, dated June 19, 1985. Current revisions are designated by vertical lines.

Summary

This bulletin discusses manufacturing and processing machinery and equipment eligible to be included in Class 29 of Schedule II, if acquired before 1988, and in either Class 39 or Class 40, if acquired after 1987. The bulletin also explains the method of calculating the maximum capital cost allowance available under the appropriate class, the requirements that must be met for property to be included in these classes, and the conditions that must be met to be eligible to claim capital cost allowance under Classes 29, 39 or 40. These classes provide write-offs at a higher rate and in a shorter time period than would otherwise be available. In addition, the bulletin explains the meaning of terms such as "primarily", "used directly or indirectly", "principal business" and "the activities of manufacturing goods for sale or lease". Subject to transitional rules, Class 29 includes only property acquired before 1988. Classes 39 and 40 have been established to contain property acquired after 1987, which would formerly have been included in Class 29. Capital cost allowance rates for Classes 39 and 40 are subject to a phased-in annual reduction from 40 per cent in 1988 to 25 per cent after 1990 for Class 39, and from 40 per cent in 1988 to 30 per cent after 1989 for Class 40. Subsection 1103(2e) of the Regulations provides that all property in Class 40 is transferred to Class 10 at the beginning of the taxpayer's first taxation year commencing after 1989, effectively eliminating Class 40 at that time.

When a Class 29 property has been disposed of in a taxation year and in any taxation year before the end of that taxation year a Class 39 or Class 40 property has been acquired, subsection 1103(2d) of the Regulations may permit a taxpayer to elect to have transferred the Class 29 property to the new class before its disposition. Footnote 1 This bulletin explains the election and its consequences.

Discussion and Interpretation

General

1. Class 29 provides for a capital cost allowance rate of 50 per cent on a straight line basis. The introduction of Classes 39 and 40 (calculated on a declining balance) effectively reduces the capital cost allowance available on Class 29 property. Subject to transitional rules described below, property acquired after 1987, which would have been included in Class 29 if acquired before 1988, will be included either in Class 39 or in Class 40. Class 39 will contain all such property except powered industrial lift trucks, portable tools described in paragraph (b) of Class 10, and property described in paragraph (f) of Class 10 that is general-purpose electronic data processing equipment and related systems software. The property so excluded from Class 39 will, when acquired before 1990, be included in Class 40 and when acquired after 1989 be included in class 10. Subsection 1103(2e) of the Regulations provides that all property in Class 40 is transferred to Class 10 immediately after the beginning of the first taxation year commencing after 1989, effectively eliminating this Class at that time.

¶ 2. Capital cost allowance for 1988, 1989 and 1990 years for Class 40 is calculated under paragraph 1100(1)(zf) on the declining balance, and the rate is 40 per cent for 1988, 35 per cent for 1989 and 30 per cent for 1990. These same rates apply to Class 39 under paragraph 1100(1)(ze) for the years 1988 to 1990, but after 1990 the rate drops to 25 per cent and remains at that level. If the taxpayers fiscal period (taxation year) does not coincide with the calendar year, the relevant annual rates of capital cost allowance are prorated based on the number of days in the taxation year that are in each calendar year.

Note: Under amendments proposed in the Federal Budget of February 25, 1992, the capital cost allowance rate for eligible manufacturing and processing machinery and equipment acquired after February 25, 1992 will be increased from 25 per cent to 30 per cent.

Property Eligible for Accelerated Write-off

3. For property to be eligible for inclusion in Class 39 or Class 40 (or Class 29 for acquisitions prior to 1988), the taxpayer must acquire or manufacture the property to be:

(a) used directly or indirectly by the taxpayer in Canada primarily in the manufacturing or processing of goods for sale or lease, or

(b) leased by certain corporations (see 15 below) to a lessee who can reasonably be expected to use, directly or indirectly, the property in Canada primarily in the manufacturing or processing of goods for sale or lease.

¶ 4. The property described in 3 above must be:

(a) property that would otherwise be included in Class 8 (such as factory machinery and equipment), other than radio-communication equipment or railway rolling stock,

(b) an oil or water storage tank,

(c) a powered industrial lift truck,

(d) electrical generating equipment described in Class 9,

(e) a portable tool described in paragraph (b) of Class 10, or

(f) general-purpose electronic data processing equipment and systems software described in paragraph (f) of Class 10.

Any property described above that is acquired after 1987 will be included in Class 39 or 40, or Class 10 as discussed in 1 and 2 above.

¶ 5. When a taxpayer acquires a property, subsection 1102(14) of the Regulations generally requires the taxpayer to place the property in the same prescribed class or separate prescribed class as that of the vendor of the property provided:

(a) the property is acquired by the taxpayer after June 17, 1987 in the course of a qualifying butterfly reorganization, as described in paragraph 55(3)(b), or

(b) the taxpayer and the vendor were not dealing at arm's length (otherwise than by a paragraph 251(5)(b) right for acquisitions after December 15, 1987) at the time the property was acquired.

Where subsection 1102(14) of the Regulations applies, property that otherwise would qualify for Class 29, of the taxpayer acquiring it, is deemed to be Class 8 property if, immediately before it was acquired, it belonged to Class 8 of the person from whom it was acquired. Anti-avoidance rules for subsection 1102(14) of the Regulations are provided in subsection 1102(20).

¶ 6. For acquisitions before June 18, 1987, subsection 1102(14) of the Regulations provides that when a property is acquired by a taxpayer from a person:

(a) in a transaction for which an election was made under subsection 85(1) or (2), 97(2) or 98(3), or section 115.1 (for taxation years beginning after 1984),

(b) in a transaction to which subsection 85(5.1) or 98(5) applies,

(c) by virtue of an amalgamation (within the meaning assigned by subsection 87(1)),

(d) as the result of the winding-up of a Canadian corporation under subsection 88(1),

(e) with whom the taxpayer was not dealing at arm's length at the time the property was acquired, or

(f) for rent or lease to the person from whom the property was acquired or to another person who, at the time the property was acquired, was not dealing at arm's length with the person from whom the property was acquired,

and that property was property of a prescribed class or separate prescribed class of the person from whom it was acquired, the property was deemed to be property of the same prescribed class or separate prescribed class of the taxpayer.

¶ 7. Subsection 1102(14.1) of the Regulations provides that when a taxpayer has acquired property of a class (say Class 29) that had been previously owned before May 26, 1976 by either the taxpayer or a person with whom the taxpayer did not deal at arm's length at the time of the acquisition, and at the time that it was previously owned it was property of a different class (say Class 8), the property is deemed to be property of the original class (i.e. Class 8). The above rule is subject to the exception, generally applicable to acquisitions after December 15, 1987, that the non-arm's length relationship was not solely as a result of a right referred to in paragraph 251(5)(b) of the Act. Unlike subsection 1102(14) of the Regulations, subsection 1102(14.1) only applies to property previously owned before May, 26,1976.

Election to Transfer Property

¶ 8. Subsection 1103(2d) of the Regulations provides for an election to allow taxpayers to transfer property from one class (the old class) to another (the new class). The election may be useful when, in a taxation year, a class 29 property has been disposed of and in any taxation year before the end of that taxation year a new Class 39 (or Class 40) property has been acquired. Footnote 2 The effect of the election is that the old property is transferred to the new class before the disposition of the property. This election may allow a taxpayer:

(a) to defer a recapture of capital cost allowance, or

(b) to increase the amount of capital cost allowance available in the year when subsection 1100(2) (the half-year rule) would otherwise have restricted the amount claimed (see the current version of IT-285, Capital Cost Allowance – General Comments , for an explanation of the half-year rule).

The election is made by letter in the tax return for the year of disposition. It must be made by the deadline for filing returns under section 150 of the Act.

Meaning of Terms

¶ 9. The term to be used (to use) directly or indirectly in 3 above refers to property acquired by the taxpayer for the purpose of being an integral and essential part of the taxpayer's or lessee's manufacturing or processing activities, as well as any ancillary equipment such as furniture and fixtures, repair and maintenance equipment and fire extinguishing equipment, which is acquired for use in those activities. Although such equipment is generally located in the manufacturing or processing plant, it may also qualify if located elsewhere. Furniture and equipment acquired by the taxpayer for use by the taxpayer or lessee primarily in activities such as selling, distribution, and administration, which are not manufacturing or processing, are not eligible for the accelerated write-off. Direct or indirect use of a computer in manufacturing or processing is considered to include direct manufacturing and processing applications, and ancillary activities such as maintaining inventory records, production scheduling, engineering design, and production control, but does not include the maintenance of financial and accounting information such as accounts receivable and payable records, general ledger accounts, payroll records, customer lists, and sales invoices and analyses.

¶ 10. When a taxpayer includes a property in Class 29, 39 or 40, the property will be accepted as having been manufactured or acquired by the taxpayer for the purpose outlined in 3 above if it is actually used for that purpose after manufacture, acquisition or after leasing, as the case may be, and provided there has not been an unreasonable delay before the property is put into use. Also, it will generally be accepted that the property was manufactured or acquired for use as described in 3 above if the property was not put to any use for an extended period of time after manufacture or acquisition, and if there are sound business reasons as to why it is not being used as originally intended (e.g. if it would be economically unsound to carry out the original intention because of unforeseen or changed circumstances).

¶ 11. The term "primarily" means "principally" or "chiefly". In establishing whether or not a particular property is used primarily in manufacturing or processing activities, generally the determining factor is the proportion of time that it is used in these activities. Property which is used more than 50 per cent of the time in manufacturing or processing activities will qualify to be included in Class 29, 39 or 40, as the case may be.

¶ 12. The manufacturing or processing activities referred to in 3 above must be carried out on goods for sale or lease, however, the manufacturer or processor of the goods does not necessarily have to be the vendor of the goods.

¶ 13. In some cases, it may be difficult to determine the amount of time that a particular piece of equipment is used in the manufacturing or processing of those goods that are for sale or lease, and those that are not for sale or lease. In such circumstances, any reasonable method of determining the primary use of the equipment will be accepted. For example, when equipment is used in two operations, an analysis of gross revenue from each operation may be helpful in determining the primary use of that equipment.

¶ 14. Subsection 1104(9) of the Regulations provides that for purposes of Classes 29 and 39, "manufacturing or processing" does not include farming, fishing, logging, construction, and specified resource activities. The current version of IT-145, Canadian Manufacturing and Processing Profits – Reduced Rate of Corporate Tax , outlines some of the specifically excluded activities as well as explains various activities which are considered to be "manufacturing or processing" within the ordinary meaning of the term.

Persons Eligible for Accelerated Write-off

15. All taxpayers are eligible to claim the accelerated write-off under Class 29, 39 or 40 on property which they manufacture or acquire for use by them in Canada primarily in manufacturing or processing of goods for sale or lease. When property is manufactured or acquired by a corporation that is leasing that property in the ordinary course of carrying on business in Canada to other taxpayers who are expected to use it as described in 3(b) above, in order for the property to qualify to be included in Class 29, 39 or 40, the corporation's principal business must be:

(a) leasing property,

(b) manufacturing property that it sells or leases,

(c) lending money,

(d) purchasing conditional sale contracts, accounts receivable, bills of sale, chattel mortgages, bills of exchange or other obligations representing part or all of the sale price of merchandise or services, or

(e) selling or servicing a type of property that it also leases, or any combination of these businesses.

¶ 16. In determining the nature of a taxpayer's principal business, the following factors will be considered:

(a) the number of employees engaged in each branch or phase of a company's operations;

(b) the amount of gross revenue from each phase of operations; and

(c) the amount of capital employed in each phase of operations.

Ordinarily, the above factors will be considered in relation only to a specific year. However, when a company's normal activities have ceased or substantially decreased, the pattern of operations over several years may be considered in deciding whether there has been only a temporary break in the normal activities of the company or an actual change in the principal business.

Other Issues

¶ 17. Generally, for acquisitions before 1988, paragraph 1100(1)(ta) of the Regulations provided that the maximum capital cost allowance that may be claimed was 25 per cent of the capital cost in the year of acquisition, 50 per cent in the next following year, and 25 per cent in the third year. In addition to the percentage of capital cost allowed in the second and third year, the taxpayer may claim, for those years, any unused portion from the preceding years. Any undepreciated capital cost for such property remaining after 1987 can continue to be claimed in this manner. As required by subsection 1100(3), when a taxation year is less than 12 months, the amount deductible under paragraph 1100(1)(ta) cannot exceed the proportion of the maximum amount otherwise allowable that the number of days in the taxation year is of 365. The treatment of property acquired after 1987 is set out in 1 and 2 above. In some circumstances, subsection 1100(15) may restrict the maximum capital cost allowance otherwise determined under paragraph 1100(1)(ta). For a discussion of subsection 1100(15) see the current version of IT-443 and Special Release, Leasing Property – Capital Cost Allowance Restrictions .

Notice—Bulletins do not have the force of law

At the Canada Customs and Revenue Agency (CCRA), we issue income tax interpretation bulletins (ITs) in order to provide technical interpretations and positions regarding certain provisions contained in income tax law. Due to their technical nature, ITs are used primarily by our staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, we offer other publications, such as tax guides and pamphlets.

While the comments in a particular paragraph in an IT may relate to provisions of the law in force at the time they were made, such comments are not a substitute for the law. The reader should, therefore, consider such comments in light of the relevant provisions of the law in force for the particular taxation year being considered, taking into account the effect of any relevant amendments to those provisions or relevant court decisions occurring after the date on which the comments were made.

Subject to the above, an interpretation or position contained in an IT generally applies as of the date on which it was published, unless otherwise specified. If there is a subsequent change in that interpretation or position and the change is beneficial to taxpayers, it is usually effective for future assessments and reassessments. If, on the other hand, the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date on which the change is published.

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If you have any comments regarding matters discussed in an IT, please send them to:

Manager, Technical Publications and Projects Section
Income Tax Rulings Directorate
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or by email at the following address: bulletins@ccra.gc.ca

Footnote 1
Modified by Correction Sheet CS 24 dated April 20, 2001.
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Footnote 2
Modified by Correction Sheet CS 24 dated April 20, 2001.
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Date modified:
2003-05-05