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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether a rapid transit car, that is a railway car, leased to a common carrier that operates a railway system is included in class 8 of schedule II.
Position TAKEN:
If acquired after May 25, 1976 they would be included in class 35 and depending on the circumstances may also qualify for additional allowances.
Reasons FOR POSITION TAKEN:
A rapid transit car that is part of a railway system is excluded from class 8.
941607
XXXXXXXXXX B.Kerr
Attention: XXXXXXXXXX
December 13, 1994
Dear Sirs:
Re: Class 8(k) of Schedule II of the Income Tax Regulations
This is in response to your letter of June 21, 1994, wherein you requested a technical interpretation of the term "railway system".
In this regard you have asked us to confirm the following:
1.That a rapid transit car that does not ride on a track with rails flush with the roadway, would not be considered to be part of a tramway.
2.That the exclusion from class 8(k) in respect of a rapid transit car that is part of a railway system will not apply to a rapid transit car that is owned by a lessor and leased to a common carrier that operates a railway system. You are relying on the Department's interpretation as previously published in Interpretation Bulletin IT-318 that dealt with railways where it stated that class 4 of the Regulations includes property of a "railway system" or a part thereof. However, it also stated that "where a taxpayer acquires assets and leases them to the operator of a railway system, he is not required to include any such assets in class 4. Instead, they are included in the prescribed classes in which they are otherwise described." Since class 4 includes railway cars that are part of a "railway system" you have concluded that the effect of this is to confirm that "if a rail car is owned by a lessor and leased to a common carrier, it will not be viewed as part of a railway system" and have requested that we confirm that this is still our view.
3.That a rapid transit car that is included in class 8(k) is also a "railway car" if it otherwise meets the ordinary meaning of a railway car.
In coming to your conclusions you have also relied on the ordinary meaning of the terms "tramway" and "railway car".
The determination of whether a rapid transit car would be considered part of a "tramway" or "railway system" or to be a "railway car" is a question of fact that can only be determined by reviewing all the facts and circumstances of a particular situation and its proper class would also depend on its date of acquisition, characteristics, ownership and use. Since you have not provided us with this type of information we can only provide general comments.
The general rules regarding capital cost allowance in respect of most property are contained in paragraph 1100(1)(a) and their classification in Schedule II of the Regulations. Specific rules regarding capital cost allowance in respect of railway cars, track, trestles and related property are contained in the provisions of Regulations 1100(1)(z) to (zc) and 1101(5d) to (5f) which provide for additional allowances and separate classes. Such properties may fall within class 1, 4, 6, 8, 10, 28 or 35 of Schedule II depending on the circumstances. Additional allowances may also be available if certain conditions are met.
For example, subject to exceptions, class 4 includes property not otherwise included in another class that is a railway system or part thereof that was acquired after 1958 and before May 26, 1976, and a tramway or trolley bus system or a part thereof. Paragraph (k) of class 8 in Schedule II of the Regulations includes property not included in class 2, 7, 9, 11 or 30 that is a rapid transit car that is used for the purpose of public transportation within a metropolitan area and is not part of a railway system. Property not included in any other class that is a railway car acquired after May 25, 1976 would be included in class 35. Railway cars included in class 35 may also be eligible for additional allowances as provided for under Regulations 1100(1)(z) to (z.1b) depending on their date of acquisition, ownership and use. For this purpose the railway cars are classified in accordance with the provisions of Regulation 1101(5d) and (d.1).
Interpretation Bulletin IT-318 was issued in 1976 prior to the introduction of the complex rules and subsequent amendments to the major provisions of the Regulations in 1978, 1991 and 1994 concerning railways. IT-318 was therefore cancelled in 1979. In addition, the bulletin was issued prior to the acceptance by the courts of the "modern rule" as the only approach to statutory interpretation. Accordingly the views expressed in that bulletin are no longer relevant.
The current most widely held approach is the modern principle of statutory construction as summarized by E.A. Driedger in his book The Construction of Statutes (2nd edition), Butterworths, 1983 where at page 87 he states:
"Today there is only one principle or approach, namely words of an Act are to be read in their entire context in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament."
This was accepted by the Courts in the Stubart Investments case (84 DTC 6305) and has been referred to in several subsequent cases.
Subsection 1104(2) of the Income Tax regulations provides the following definitions:
"railway system" includes a railway owned or operated by a common carrier, together with all buildings, rolling stock, equipment and other properties pertaining thereto, but does not include a tramway.
"tramway or trolley bus system" includes the buildings, structures, rolling stock, general plant and equipment pertaining thereto and where buses other than trolley buses are operated in connection therewith includes the properties pertaining to those bus operations.
The Railway Act defines the following terms:
"railway" means any railway that the company has authority to construct or operate, and includes all branches, extensions, sidings, stations, depots, wharfs, rolling stock, equipment, stores, property real or personal, and works connected therewith and also any railway bridge, tunnel or other structure that the company is authorized to construct; and except where the context is inapplicable includes street railway and tramway.
"rolling stock" includes any locomotive, engine, motor car, tender, snow-plough, flanger, and every description of car or of railway equipment designed for movement on its wheels over or upon the rails or track of the company.
"train" includes any engine, locomotive or other rolling stock.
The Concise Oxford Dictionary, seventh edition, defines the following words:
"in" 1....with respect to;...concerned with or pertaining to...
"respect" 1. reference, relation...3. particular, detail, point, aspect...
"pertain" v.i belong as part. appendage, or accessory, to; be appropriate (to); have reference or relate to.
"tram" (car) passenger car running on rails laid in public road; four-wheeled car used in coal-mines... (lines) rails for tramcar...(road) road with wooden, stone, or metal wheel-tracks, (way) (1) tram road, (2) rails for tramcar
"railway" 1. track or set of tracks of steel rails for passage of trains of carriages or trucks drawn by locomotive engine and conveying passengers and goods...3. track on which wheels run...4...road laid with rails for carts etc.
"rapid" 1...(transit) high speed urban transit of passengers.
"rail" 4. (car) self-propelled railway coach.
"car" 1.wheeled vehicle (of specified type;...tramcar); motor car, railway carriage or van...
We have included the words "in" and "respect" since in the case of Gene A. Nowegijick v. Her Majesty the Queen, (83 DTC 5041) at page 5045, Dickson, J stated:
"The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to", or "in connection with." The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters."
In 1973, the government initiated an intensive review of the capital cost allowance system. The first changes resulting from this review were introduced in the federal budget of May 25, 1976 where at pages 23-24 of Budget Paper C under the heading Changes in Rate System it states:
"As noted above, assets are generally classified under the present system by their type rather than by the industry in which they are used, and it has been concluded that this general emphasis should be continued.
As an exception to this general approach certain assets used in a railway system...have been grouped together and entitled to a composite rate of 6 per cent...Experience has demonstrated however, that this composite rate approach does not adequately reflect the changing mix of assets which can occur over the years. In these industries the proportion of short-lived assets has tended to become more important. Accordingly it is proposed that the present composite rate be discontinued and that future asset acquisitions be broken into the more usual categories which apply to other industries.
In the case of the railways, the present composite rate of 6 per cent would be replaced by 4 per cent for the track system, 10 per cent for the locomotives, 7 per cent for the rolling stock and the usual rates for other assets such as buildings, equipment, etc. As part of this change, the rates of 10 per cent and 20 per cent which can apply at present to a tank car under class 6 or to leased rolling stock or locomotive under class 8 respectively, would no longer apply."
We note that the additional allowances for Railway track and related property were first introduced in 1978 (SOR/78-137 dated February 10, 1978).
Subsequently in the budget speech on April 10th 1978, then Minister of Finance, the Honourable Jean Chretien stated:
"major investments are needed in the railway transportation system to improve efficiency and restrain cost increases. More modern equipment is required in many area of railway operations including signalling, track and equipment maintenance, motive power and rolling stock.
An additional straight line capital cost allowance of 6 per cent will provided on all railway system assets acquired...New investment stimulated by this measure will benefit suppliers of railway equipment, including Canadian producers of rail locomotives and cars..."
Although the specified leasing property rules exempt property including a railway car, included in the regulatory impact analysis statement that was attached to the Income Tax Regulation amendment (SOR/91-196 dated March 14, 1991) was the following statement:
"...In response to consultations, railway cars will also be exempt from the new rules but the CCA rate for railway cars owned by taxpayers other than common carriers will be reduced by 2 percentage points."
Then in a news release dated December 6, 1991, (91-133) concerning the transportation sector, included in the announcements by then Finance Minister, the Honourable Don Mazankowski was the following measure:
"adjustment of Capital Cost Allowance (CCA) rates to better reflect actual depreciation experience: by increasing the CCA rate...from 7 to 10 per cent for railway cars; and from 4 to 10 percent for track and other specified Class 1 rail assets."
The release also indicated that these increases would be implemented through the use of an "additional allowance" for common carriers.
In our view, based on the meanings of all of the words described above, a rapid transit car as described by you would not be part of a tramway, but would appear to be part of a "railway system" and provided, as suggested by you, that it would otherwise be a "railway car" within the ordinary meaning of that term it would be a railway car for the purposes of the Regulations. It is also our view, based on the above comments concerning the amendments to the Regulations in the case of railway cars, that it was intended that all railway cars be included in class 35 and that they be distinguished based on the date of acquisition, ownership and use as reflected by the numerous different additional allowances for such property.
Accordingly, a rapid transit car that is a railway car would not fall into class 8(k), as you suggest, since it is part of a railway system. Instead it would fall within class 35 if acquired after May 25, 1976, or class 4 if acquired after 1958 but before May 25, 1976. In addition, in the case of a class 35 asset depending on the date of acquisition, ownership and use, it may also qualify for an additional allowance in accordance with the provisions of the Regulations pertaining to "railway cars" and it would also be exempt property for the purposes of the specified leasing property rules by virtue of Regulation 1100(1.13)(viii).
As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.
We trust that these comments will be of assistance.
Yours truly,
A.M. Brake
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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