Supplies of real property v. tangible personal property (p. 10:31)
[R]eal property in British Columbia includes land, buildings and structures, and machinery, equipment, and other property that is attached to the land or buildings by some means other than their own weight. … If there is a large degree of affixation, the good either becomes incorporated into the real property as an improvement to the real property or it becomes affixed machinery. Examples of goods with a large degree of affixation are buildings and land, windows, plumbing, electrical and heating systems, and large industrial machinery that cannot be removed without damaging the structure to which it is affixed.
…It is important to determine where the dividing line is between real property and TPP because, although the construction services supplied to the facility are generally either supplies of or installation of real property, circumstances may exist in which the subcontractor supplies TPP. In those situations, the facility could be liable to pay PST.
Exemption for services to install TPP that will become real property (p. 10:31)
Taxable services include any service provided to install, assemble, repair, adjust, restore, recondition, or maintain any TPP. Not included are services provided to install TPP that will become real property on installation. Therefore, embedded labour costs within the contractor and subcontractor relationship are subject to PST to the extent that they are related to the installation or assembly of machinery, equipment, or furniture, or other items without a high degree of affixation to the facility itself.
Proxy income inclusion does not boost unit ACB (p. 10:13)
[I]f a corporate partner exceeds the permitted 1.5:1 ratio, interest expense on partnership debts owing to specified non-residents will not be denied at the partnership level but will instead be added back to the corporation's income under paragraph 12(1)(1.1). It is notable that the proxy income inclusion under this paragraph is included in the partner's income and is therefore not an allocation of actual partnership income. As a result, there is no adjustment to the ACB of the partner's partnership interest related to this income.
Application of "replicate" test to public company investors (pp. 10:23-4)
[T]he "replicate test" within the definition of "investment" in subsection 122.1(1) is sufficiently broad to potentially treat publicly traded shares of a corporate partner as an investment in a SIFT partnership….
[T]he CRA has given an example [fn 34: … 2009-0309281E5…example 4)] illustrating how the possibility of publicly traded common I shares being characterized as an investment for the purposes of the SIFT rules would be reduced if, among other factors,
- the corporation is a large corporation with other sources of income;
- the partnership earnings represent a relatively small component of the corporation's business; and
- the partnership interest is not exchangeable for shares of the corporation.
Conversely, the CRA considers that the following factors, among others, would indicate that the replicate test might be satisfied:
- the corporation is a sole-purpose corporation and has no other material business activities,
- and the corporation makes a practice of paying dividends based on its earnings from the partnership.
Use of rolling-start rule in s. 13(27)(b) to accelerate CCA (p. 10:20)
[G]iven the long duration of major construction projects, the rolling-start rule described above is frequently used to accelerate CCA claims to a time before the asset would otherwise be available for use. Under this rule, a cost incurred in 2014 would become available for use in 2016 and hence depreciable for CCA purposes. This would be the case even if the asset were not otherwise in a state where it could be used in an income-earning capacity.
Long-term project rule may permit faster CCA write-offs for long-term projects (p. 10:20)
When the creation of an asset in a major construction project is expected to extend beyond three years, a faster CCA writeoff may be available through reliance on the long-term project rules described above. Once the subsection 13(29) election is made, costs incurred in the third and subsequent years of the project that are not otherwise available for use will be deemed to be available for use up to certain limits based on tire costs incurred in the first two years. Given that some projects can exist for more than 10 years before such assets are otherwise available for use—and can require tens of billions of dollars to complete—it is generally beneficial to consider making a subsection 13(29) election to accelerate the timing of CCA deductions for a major construction project. In order for a subsection 13(29) election to be valid, a form T1031 must be completed and filed with the income tax return for the particular year to which the election relates.
Simplified overview of rule (p. 10:13)
A back-to-back loan exists when a Canadian resident has an outstanding interest-bearing debt obligation (Canadian debt) to an arm's-length lender (intermediary) if there is a debt owing by the intermediary (or a person who does not deal at arm's length with the intermediary) to a person who does not deal at arm's length with the Canadian resident (intermediary debt), and when any one of the following three conditions are met:
1) recourse of the intermediary debt is limited to the Canadian debt;
2) a strong causal connection exists between the intermediary debt and the Canadian debt; or
3) the intermediary (or a person that does not deal at arm's length with the intermediary) has a "specified right" granted by a non-resident connected to the Canadian resident, and a strong causal connection exists between the specified right and the Canadian debt.
Simplified overview of rule (p. 10:13)
[A] safe harbour exists when the intermediary debt represents less than 25 percent of the Canadian debt, which ensures that the back-to-back loan rules do not apply if the Canadian debt is funded by the intermediary mainly from sources other than a non-resident connected with the Canadian resident.
Treatment of fees as s. 20(1)(e.1) deductions (pp. 10:22-3)
It is unlikely that the initial professional fees related to the financing of a major construction project would be deductible under paragraph 20(l)(e.l). Any other annual fees, however, that can reasonably be considered to be annual costs should be annually deductible under this paragraph. Similarly, subsection 21(1) allows a taxpayer to capitalize these costs to the related depreciable property acquired….
Capitalization of financing costs (p. 10:22)
[S]ubsection 21(1) allow[s] a taxpayer to capitalize certain costs of financing to any related depreciable property acquired with the borrowed funds. Consideration should be given to capitalizing paragraph 20(1)(e) costs to the related capital property based on this elective provision.
Sale of interest in LNG project potentially a tax shelter (p. 10:25)
[A] proponent of a major construction project seeks to sell all or a portion of its interest in the project to a new investor. If the expected cash flow and tax profile of the investment is communicated to the investor by a promoter, and if the other requisite tests are met, the major construction project or partnership interest divested to the investor could be considered a tax shelter….
Deferral with choice of partnership year-end with partnership in start-up (p. 10:5)
Many major construction projects are not taxable for a number of years, and their tax exposure may grow over time as operational efficiencies are achieved. Therefore, significant tax deferral benefits may result from choosing fiscal periods for the partnership that differ from the partners' taxation year-ends.
Specifically, although the stub period accrual rules as set out in section 34.2 require the partners to include an estimate of the stub period income in their taxable income, this amount is generally determined on the basis of the prior year's income of the partnership. To the extent that taxable income associated with the major construction project is likely to increase over time, the deferral of this growth in taxable income may be possible if the fiscal period of the partnership is different from that of its partners.
Construction costs incurred for Class 14 licence (p. 10:18)
[The project] contract states that in exchange for granting the concession, the P3 [Projectco] has "agreed" to incur the costs necessary to meet its contractual obligations. Without incurring these construction costs, the P3 will not be entitled to any of the payments set out in the contract to be paid over the term of the project. …
[CRA has ruled] that the cost of building the infrastructure asset constitutes a "cost" of acquiring the concession agreement and/or non-exclusive access licence and that these costs, as such, are otherwise included in class 14.
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