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: Whether the term "cost" in the definition of "equity amount" in subsection 18(5) of the Act, as applicable to depreciable property, takes into account any depreciation claimed in respect of the property.
Position: No.
Reasons: The term "cost" used in the definition of "equity amount" means the original acquisition cost of the property.
XXXXXXXXXX
2013-051376
V. Anissimov
(416) 973-3049
June 4, 2014
Dear XXXXXXXXXX:
Re: Meaning of "cost" in the definition of "equity amount" in subsection 18(5) of the Act
We are writing in response to your email of November 28, 2013, in which you requested our view as to the meaning of the term "cost" in respect of depreciable property for the purposes of subparagraph (c)(i) in the definition of "equity amount" in subsection 18(5) of the Income Tax Act (the "Act").
Our comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Ruling.
Pursuant to paragraph (c) in the definition of "equity amount" in subsection 18(5) of the Act, in the case of a corporation or trust that is not resident in Canada, including a corporation or trust that files a return under Part I in accordance with subsection 216(1) in respect of the year, the equity amount of the corporation or the trust means 40% of the amount, if any, by which
(i) the average of all amounts each of which is the cost of a property, other than an interest as a member of a partnership, owned by the corporation or trust at the beginning of a calendar month that ends in the year
(A) that is used by the corporation or trust in the year in, or held by it in the year in the course of, carrying on business in Canada, or
(B) that is an interest in real property, or a real right in immovables, in Canada, or an interest in, or for civil law a right in, timber resource properties and timber limits, in Canada, and in respect of which the corporation or trust files a return under Part I in accordance with subsection 216(1) in respect of the year,
Exceeds
(ii) the average of all amounts each of which is the total of all amounts outstanding, at the beginning of a calendar month that ends in the year, as or on account of a debt or other obligation to pay an amount that was payable by the corporation or trust that may reasonably be regarded as relating to a business carried on by it in Canada or to an interest or right described in clause (i)(B), other than a debt or obligation that is included in the outstanding debts to specified non-residents of the corporation or trust.
The term "cost" used in subparagraph (i) above is not defined in the Act. Therefore, one must look to jurisprudence and ordinary commercial principles to determine its meaning. Generally, the Canada Revenue Agency considers the "cost" of property to include the amount laid down to acquire such property. This is, in our view, consistent with the applicable jurisprudence. For example, in The Queen v. Canada Trustco Mortgage Company (2005 DTC 5523), the Supreme Court of Canada stated at paragraph 74 that "[t]extually, the CCA provisions use "cost" in the well-established sense of the amount paid to acquire the assets. Contextually, other provisions of the Act support this interpretation." Further, in The Queen. v. Stirling (85 DTC 5199), the Federal Court of Appeal stated that "
the word "cost"
means the price that the taxpayer gave up in order to get the asset
"
Therefore, in our view, the term "cost" for the purposes of the definition of "equity amount" in subsection 18(5) of the Act means the original acquisition cost of a property. As a result, in the case of depreciable property, any amortization claimed in respect of the property should not, in our view, be taken into account in determining the "cost" of such property for purposes of the thin capitalization rules.
We trust our comments will be of assistance.
Yours truly,
Lori Michele Carruthers CPA, CA,
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
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