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.
Principal Issues: 1. Whether an investment tax credit can be claimed by the lessee when both the lessee and lessor make an election under subsection 16.1(1) to have the leased property treated as a purchase and loan. 2. Whether certain leased property used in the construction of roads and/or railway lines leading to an iron ore mine would be considered qualified property as the term is defined in subsection 127(9) of the Act.
Position: 1.Yes 2. Probably not.
Reasons: 1. Administrative position. 2. The building of roads or a railway line would not appear to be an activity that would be considered as extracting minerals or processing ore.
XXXXXXXXXX
2011-041781
S. D'Angelo
(613)952-5803
October 6, 2011
XXXXXXXXXX
Re: Leased Property and Investment Tax Credit
This is in response to your correspondence of August 19, 2011, wherein you requested our views on whether an investment tax credit ("ITC") under subsection 127(5) of the Income Tax Act (the "Act") would be available to a lessee who is deemed to have acquired a particular depreciable property from a lessor pursuant to an election under subsection 16.1(1) of the Act.
While all the facts in your correspondence have not been repeated herein, we understand that you are concerned with the condition in the definition of "qualified property" in subsection 127(9) of the Act which requires, inter alia, that the particular property must not have been used, or acquired for use or lease, for any purposes whatever, before it was acquired by the taxpayer. You have also asked if such property would meet one of the conditions set out in paragraph (c) of the definition of "qualified property" if it was solely and directly used in the construction of roads and/or railway lines leading to an iron ore mine that was owned and operated by the particular lessee in Canada.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular (IC) 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office ("TSO"). Copies of the Canada Revenue Agency's ("CRA") publications and a listing of TSOs are available on the CRA's website. We are however, prepared to provide the following general comments, which may be of assistance.
In order for depreciable property to be eligible for an ITC it must meet each of the specific requirements set out in the definition of "qualified property" in subsection 127(9) of the Act. For instance, the first requirement is that the particular property must be a prescribed building or prescribed machinery and equipment as described in section 4600 of the Income Tax Regulations (the "Regulations"). The second requirement is that the particular property must not have been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer. The third requirement is that such property must be used in Canada by the taxpayer for an accepted purpose described in paragraph (c) or (c.1) of the definition of "qualified property". Whether a particular property meets each of these requirements remains a question of fact.
Notwithstanding the above, where a lessor acquires a depreciable property that has never been used or leased by any person before the time it is leased to a particular lessee and the lessor and lessee have made a valid election in respect of that property pursuant to subsection 16.1(1) of the Act, the fact that paragraph 16.1(1)(b) of the Act deems the lessee to have acquired the particular property from the lessor for its fair market value, would not, in and of itself, mean that the second requirement described above could never be met by the particular lessee.
You have raised several arguments in your correspondence that the terms "extracting minerals" and "processing" in subparagraphs (c)(v) and (c)(vi) of the definition of "qualified property" under subsection 127(9) of the Act should be given a broad meaning so as to include the construction of roads and/or railway lines leading to a mine. Whether or not a taxpayer is using depreciable property in Canada for an accepted purpose described in paragraph 127(9)(c) or (c.1) remains a question of fact that can only be resolved once all the relevant information pertaining to the particular situation is known. Generally speaking, it would appear that the construction of roads and/or railway lines would not ordinarily be considered as being an activity that is akin to extracting minerals and processing ore.
We trust our comments will be of assistance.
Yours truly
Sandy Parnanzone
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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