Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] How does the CRA treat the Quebec capital cost tax credit?
Position: The Quebec capital cost tax credit is an inducement payment and represents government assistance. It is not to be included in income under paragraph 12(1)(x) but, rather, reduces the capital cost of the property that generated the credit. Under paragraph 127(11.1)(b), the capital cost of the property that generated the credit must also be reduced to reflect the government assistance.
Reasons: Income Tax Act.
2006-021264
XXXXXXXXXX Nancy Turgeon, CGA
(613) 957-2082
January 22, 2007
Dear Madam,
Subject: Request for technical interpretation: subsection 13(7.1)
This is in response to your letter of October 25, 2006, regarding the tax treatment of the Quebec capital tax credit.
Background
In your letter you stated the following facts:
Under sections 1135.1 and following of the Québec Taxation Act ("QTA"), a corporation that makes a qualified investment during a taxation year may benefit from a non-refundable capital tax credit, for such taxation year, equal to 5% of the amount of the qualified investment. For the purposes of that credit, a qualified investment is defined as amounts paid for the acquisition of new manufacturing and processing equipment included in Class 43. The credit is applied against the capital tax but cannot exceed the capital tax payable for that taxation year. The excess may be carried forward to subsequent taxation years to reduce the capital tax payable for those years.
As a general rule, subject to the exceptions expressly provided for in the Act, an amount of government assistance is taxable to the taxpayer who receives it. Pursuant to subsection 13(7.1) of the Income Tax Act (the "Act"), such an amount is applied against the capital cost of depreciable property to the extent that it is received "in respect of, or for the acquisition of, depreciable property". If that is not the case, the amount of assistance must be included in the taxpayer's income by virtue of paragraph 12(1)(x).
Questions
1. Does the amount of the tax credit based on capital cost represent an inducement payment to be included in the taxpayer's income under paragraph 12(1)(x), in accordance with the position of Revenu Québec?
2. If the answer to the first question is no, does the amount received as a tax credit based on capital cost instead represent assistance from a government received in respect of depreciable property to be applied against the capital cost of depreciable property pursuant to subsection 13(7.1)?
3. Does the tax credit based on capital cost constitute government assistance "that can reasonably be considered to be in respect of, or for the acquisition of, the property" for the purposes of paragraph 127(11.1)(b)? In other words, should the capital cost tax credit reduce the capital cost of the property for the purpose of calculating the investment tax credit to the extent that the property that gave rise to the two credits is the same?
4. To the extent that the tax credit based on capital cost constitutes government assistance for the purposes of the Act, when is it considered to be received and when is it required to be included in the taxpayer's income pursuant to paragraph 12(1)(x), or applied against the cost of depreciable property pursuant to subsection 13(7.1), depending on the circumstances?
Analysis
Written confirmation of the tax consequences of specific transactions is provided by the Directorate only if the transactions are proposed and are the subject of an advance income tax ruling request. Where the transactions have been carried out, the request for information should be addressed to the appropriate Tax Services Office. However, we are prepared to provide the following comments.
Questions 1 and 2
The Quebec capital tax credit is an inducement payment and represents government assistance as described in paragraph 7 of IT-273R2. It is not to be included in income under paragraph 12(1)(x) but rather is to be applied against the capital cost of the property that generated the credit under subsection 13(7.1) as set out in paragraphs 4 and 8 of IT-273R2.
Question 3
For the purposes of the investment tax credit, paragraph 127(11.1)(b) requires that the capital cost of the property that generated the credit also be reduced to take into account the government assistance.
Question 4
These reductions must be recognized when the capital tax credit is received. Income Tax Technical News No. 29, dated July 14, 2003, provides the following clarification on this issue:
We are now of the opinion that a tax credit or a reduction in the tax calculation is considered to be received at the earliest of:
- when the amount is applied as a reduction of instalment payments to be paid by the taxpayer, if it is credited to his instalment account by the fiscal authorities; or
- when all the conditions for its receipt are met, at the earliest of:
- when it reduces the tax payable for a taxation year, or
- when it is paid, if it allows for or increases a tax refund.
We hope that these comments are of assistance.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© His Majesty the King in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté le Roi du Chef du Canada, 2007
Email this Content