2 December 1996 External T.I. 9621265 - ALTERNATE & SPARE PARTS.

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 alternate and spare parts could be included in Class 34 & 43.1?

Position:

Alternate parts may be included in Class 34 or 43.1.

Spare parts to be expensed when used.

Reasons:

Donohue Normick Inc., 96 DTC 6061.

									962126
XXXXXXXXXX							Wm. P. Guglich

Attention: XXXXXXXXXX

December 2, 1996

Dear Sirs:

Re: Class 34/43.1 Capital Cost Allowance

This is in reply to your letter of June 10, 1996 concerning the position in the Class 43 Technical Guide, issued by Natural Resources Canada that: "operating and capital spare parts and components inventoried in support of the qualifying system" are ineligible for inclusion in proposed Class 43.1 of the Income Tax Regulations.

It is your view that the recent Donohue Normick Inc. case, (96 DTC 6061) raises some doubts regarding this position and that the criteria described in that case should also apply to Class 34 and 43.1 property.

You suggest that if the alternate parts, in a cogeneration project, meet the criteria described in the Donohue Normick Inc. case, such parts could be reclassified from Class 1 to 34 even though the Class 34 certificate issued for the project did not include those parts.

OUR COMMENTS

As discussed, in our telephone conversation (XXXXXXXXXX\Guglich), the Class 34 Technical Guidelines were issued before the decision in the Donohue Normick Inc. case was delivered. We agree, that although the Donohue Normick Inc. case was in respect of Class 29, the criteria described therein would apply, mutatis mutandis, to Class 34 and 43.1.

We draw your attention to the fact that the assets in question in the Donohue Normick Inc. case were alternative and not spare parts. In particular, please refer to criteria 5 at page 6063 wherein Hugessen, J.A. states: "the parts were to alternate with identical parts already installed in the paper machine; they were in fact "alternative" rather than "spare" parts". Evidence presented in the case indicates that the alternate parts were intended to replace other identical parts that are an integral part of the paper machine and that must be repaired or otherwise reconditioned from time to time. Since the paper machine generally operated 24 hours a day, seven days a week, it was for all practical purposes impossible to stop the machine for the maintenance of those parts. Periodically the parts in the machine were taken out and replaced with the alternate parts. After the old parts were repaired or retooled they become the alternate parts ready to be placed in the machine when the parts that were currently in the machine required maintenance.

The alternate parts described in the Donohue Normick Inc. case above are to be distinguished from spare parts which are stored on a shelf in case they are needed for repair or maintenance, but might never be used. Spare parts would, in our view, be expensed when used.

Specific property can only be included in Class 34 if a certificate in respect of the property has been issued by Natural Resources Canada. If, in your opinion, any specific property is eligible for inclusion in Class 34 please contact Richard Fry at Natural Resources Canada (telephone no. 613-996-0890). However, please note that proposed draft regulation Class 34(k) requires that the certificate must be issued no later then two years after the property is acquired. Alternatively if, in your opinion, any specific property that is currently included in Class 1 is eligible for inclusion in Class 43.1 you may wish to refer to subsection 13(5) of the Income Tax Act which provides rules for transfer of property from one Class to another Class.

For your information we enclose; Information Circular 84-1 respecting "Revision of Capital Cost Allowance Claims and other Permissive Deductions" and Interpretation Bulletin IT-190R2 respecting "Capital Cost Allowance - Transferred and Misclassified Property".

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch