13 July 2010 Internal T.I. 2009-0325971I7 - Ontario Current Cost Adjustment (OCCA)-Gov Assist

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: Should CRA change its long standing position and apply subparagraph 12(1)(x)(vi) or subsection 13(7.1) to the OCCA

Position: No

Reasons: The jurisprudence does not support a change of position.

									July 13, 2010

	Peter PK Lee						HEAQUARTERS
	Oil and Gas Industry Specialist			A. Townsend, CMA
	Calgary Tax Services Office				(905) 721-5218

									2009-032597

Ontario Current Cost Adjustment ("OCCA") - Government Assistance

This is in reply to your memorandum of June 4, 2009 asking that we reconsider our position with respect to the OCCA.

You indicated that the OCCA is a 30% deduction from taxable income for the purchase of pollution control equipment. It is in addition to the full amount of regular capital cost allowance deducted in computing income from a business. You are of the view that the reference to "any other form of assistance" in subparagraph 12(1)(x)(iv) and subsection 13(7.1) of the federal Income Tax Act ("ITA") is very broad. Therefore, there is a respectable argument that subparagraph 12(1)(x)(iv) or subsection 13(7.1) of the ITA applies to the OCCA.

OUR COMMENTS

In general term, the OCCA is a one time deduction in computing Ontario taxable income in amount of 30% of the cost of an eligible asset. An eligible asset includes prescribed pollution control equipment acquired by the corporation that meets certain conditions. The deduction is provided for in section 13 of the Ontario Corporations Tax Act ("CTA") and it is in addition to the regular capital cost allowance on the equipment. It is calculated on the cost of the equipment up to a maximum of $20 million per taxation year.

Subsection 13(7.1) of the ITA provides, among other things, that where a taxpayer has received, or is entitled to receive assistance from a government in respect of, or for the acquisition of, depreciable property, whether as a grant, subsidy, forgivable loan or deduction from tax, investment allowance or any other form of assistance, the amount of assistance that the taxpayer has received or is entitled to receive will reduce the capital cost of depreciable property.

Subject to the exceptions set forth in subparagraphs 12(1)(x)(v) to (viii) of the ITA, paragraph 12(1)(x) of the ITA provides, among other things, that any amount (other than a prescribed amount) received by a taxpayer in the year must be included in income from a business or property, if it is received from a government and can reasonably be considered to have been received as assistance whether as a grant, subsidy, forgivable loan or deduction from tax, allowance or any other form of assistance in respect of an amount included in the cost of property.

It is our view that to establish if subsection 13(7.1) of the ITA or paragraph 12(1)(x) of the ITA applies, we must first question whether a taxpayer who is eligible to a deduction under section 13 of the CTA in computing the corporation's Ontario taxable income has received (footnote 1) an amount. If so, the second question would be whether such an amount is received as assistance whether as a grant, subsidy, forgivable loan or deduction from tax, allowance or any other form of assistance in respect of an amount included in the cost of property.

In The Queen v. G.T.E. Sylvania Canada Limited, 74 DTC 6673 (F.C.A.), the taxpayer carried on a manufacturing business in the province of Quebec. The taxpayer was entitled to an incentive under the Quebec Corporations Tax Act that allowed for a one-time deduction of a percentage of the cost of new manufacturing equipment. The deduction was over and above the capital cost allowance. The Minister reassessed the taxpayer and reduced the capital cost of the assets by the amount of the tax saving resulting from this deduction. At that time, the reassessment was made under section 20(6)(h) of the former ITA. This section, among others, required the reduction in the capital cost of assets of the amount that a taxpayer had received or was entitled to receive from a government as a grant, subsidy or other government assistance in respect of or for the acquisition of the property. The Federal Court of Appeal held that the tax concession did not amount to the receipt from a government of a "grant, subsidy or other assistance". In that respect, the Court stated:

In so far as the reduction in tax is concerned, the respondent literally received nothing. If a meaning were given to the expression "received . . . other assistance" broad enough to include such a reduction in tax, the ambit of the rule in section 20(6)(h) would be such as to include a reduction effected by various allowances in the Income Tax Act itself that could not, in my view, be taken to have been intended without more explicit language. I have in mind, for example, what is commonly referred to as the "capital cost allowance that is provided for by section 11(1)(a) itself.

In response to the G.T.E. Sylvania case, subsection 13(7.1) was added to the ITA. According to the Minister's briefing notes, this section was added to clarify the government's position that government assistance includes all forms of assistance, including tax incentives and deductions from tax.

In The Queen v. British Columbia Forest Products Ltd,. 85 DTC 5577 (F.C.A.), the issue was whether an investment tax credit (ITC) pursuant to subsection 127(9) of the ITA and deducted by the taxpayer under subsection 127(5) of the ITA from tax otherwise payable should reduce the capital cost of the asset pursuant to subsection 13(7.1) of the ITA. In reaching a conclusion, the Court commented that "...one can "receive" assistance when one takes advantage of an opportunity afforded to deduct from tax an amount that one would otherwise be required to pay...". The Court concluded that the taxpayer did "receive" assistance within the terms of subsection 13(7.1) of the ITA and the cost of the assets should be reduced by the amount deducted under subsection 127(5) of the ITA.

In Tioxide Canada Inc. v. The Queen, 93 DTC 1499 (T.C.C.), approved by the F.C.A. in 96 DTC 6296, the taxpayer objected to the inclusion in income under paragraph 12(1)(x) of the ITA of a Scientific Research & Experimental Development ("SR & ED") tax credit granted under the Quebec Taxation Act. The credit was also deducted from the corporate taxpayer's "qualified expenditures" for the purpose of computing the federal ITC under subsection 127(9) and paragraph 127(11.1) (c ) of the ITA. The Quebec SR & ED tax credit provided a taxpayer who undertook SR & ED in Quebec to be deemed to have paid to the Quebec Minister of Revenue a partial payment of tax payable. The Court concluded that the amount representing tax credits directly reduced the amount of tax otherwise payable. Therefore, the Court decided that the taxpayer received an amount in the course of earning income from a business and such amount was in the form of a deduction from tax.

The Ontario Research and Development Superallowance ("Superallowance") is an incentive provided for under the CTA similar to the OCCA in that it allowed for an additional deduction in computing the Ontario taxable income over and above the cost of the eligible expenditures. In 2000, amendments were made to the ITA to add a definition of "super-allowance benefit amount" in subsection 127(9) of the ITA with specific provisions under paragraph 37(1)(d.1) to reduce this amount from Scientific Research & Experimental Development pool.

The Superallowance differed from the SR & ED incentives discussed in the British Columbia Forest Products and Tioxide cases as it was a deduction in calculating income and not a tax credit that directly reduced the tax otherwise payable.

In the present case, the OCCA, like the Superallowance, is a deduction in computing the Ontario taxable income in order to calculate the tax payable, if any, as oppose to a tax credit which directly reduces the amount of tax otherwise payable. Consequently, it would be difficult to argue that in the present situation a taxpayer has received or was entitled to receive an amount. Furthermore, it would be difficult to convince a court that the taxpayer receives an amount when the legislator needed to amend the ITA to take into account the Superallowance tax saving where paragraph 37(1)(d) of the ITA did provide for a reduction from SR & ED deductible expenditures of the amount received as government assistance.

CONCLUSION

Based on the above, it is our view that the OCCA should not be treated as an amount received or entitled to be received from a government within the meaning of subsection 13(7. 1) or paragraph 12(1)(x) of the ITA.

We trust the above comments will be of assistance to you.

Louise J. Roy, CGA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Paragraph 13(7.1) of the ITA refers to "received or is entitled to receive".