4 July 1989 Ruling 73733 F - Regulation 4600(2)(h) I.T.C. on Logging Roadways

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.

Subject:  Regulation 4600(2)(h) I.T.C. on Logging Roadways and Bridges

We have been requested by Industry Studies to comment on whether the definition of "prescribed machinery and equipment" found at paragraph 4600(2)(h) of the Regulations includes the subsurface construction of roadways and bridges which form part of a roadway system used in the logging industry.

In order to aid us in determining the proper treatment of logging roads and bridges with respect to earning investment tax credits, we request Finance's comments on the matter.

Nature of the Problem

(a)       In order to exploit their timber limits or cutting rights, logging operators must build (or cause to be build on their behalf) extensive networks of roads. Such roads are now generally built to quite high standards, because of the size and weight of modern logging trucks and trailers, and the volume of traffic.

(b)       Essentially logging roads are assigned one of two principal designations which indicated the standard of their construction:

(i)     Main Roads are built to a high standard so as to accommodate the large, off-highway loads. The have a life expectancy of ten (10) years or more and are capital expenditures to the company; and

(ii)      Operating Roads which have a life expectancy of one (1) to three (3) years, are built as inexpensive as possible and the expenditures which related to these roads are treated as expenses of the year (see paragraph 7 in IT-501). These roads are branches off of the main roads and are necessary in order to access a specific timber area which will invariably be fully worked in a matter of three (3) years.

(c)       In building a logging road, the trees must first be logged of the right-of-way and stumps removed. Small hills are removed and small depressions are filled, to provide an acceptable grade and alignment. In mountainous areas, extensive engineering and blasting along slopes or cliff faces may be needed. Where small steams are crossed, culverts are placed to permit the water to flow under the road. Larger streams or rivers require the construction of bridges.

(d)       The subsurface is then prepared by excavation and the placing of enough crushed rock to provide a firm foundation for the road depending on whether firm or marshy terrain is being encountered. Finally, a top surface of gravel is placed and graded. Logging roads are not usually paved.

(e)      The cost of all this construction (i.e. stump removal, blasting, filling, culverts, bridges, subsurface, gravel and grading) is included for income tax purposes in either Class 10(n) or Class 15 of Schedule II to the Regulations.

(f)       For many years, it had been the accepted practice that taxpayers not treat any of these costs as earning I.T.C., because of the exclusionary wording in paragraph 4600(2)(h) of the Regulations, "other than a roadway".

(g)       Some taxpayers in British Columbia, Quebec and New Brunswick have been attempting to claim I.T.C. on the cost of building bridges and the subsurface construction of the roadway. It is their contention that the exclusion of roadway from the definition of "prescribed machinery and equipment" at paragraph 4600(2)(h) of the Regulations only refers to the surface of the road and not the other components of building the road such as culverts, bridges, subsurface construction, blasting and filling costs.

Our Opinion

As explained in IT-501, roads, bridges and culverts are defined to be immovable wood assets which are capitalized if they have a live expectancy greater than three (3) years, and are classified at the option of the taxpayer as property included in Class 10(n), 15, 1 or 17.

Property in Class 10(n) or 15 qualify for I.T.C. under paragraph 4600(2)(h) of the Regulations unless it is excluded by the words "other than a roadway". It should be noted that roads and bridges in other industries are included in Classes 17 and 1, respectively, and do not earn I.T.C.

The term roadway is not defined in the Act. However, Websters Third New International Dictionary (unabridged)  provides the following definitions:

1.     a: the strip of land through which a road is constructed and which is physically altered b: Road; (specif): the part of a road over which the vehicular traffic travels;

2.     the right of way of a railroad with tracks, structures and appurtenances necessary for the operation of trains; or

3.     the part of a bridge used by vehicles.

The french word for "roadway", chaussée is used in the french Act and essentially has a similar meaning.

Robert

1.     Elévation de terre servant à retenir l'eau d'une riviére, d'un étang.

2.     Levée de terre, talus servant de chemin.

3.     Partie médianne d'une voie publique.

4.     Long écueil sous-marin.

Petit Larousse, illustré (1988)

     Partie de la voie publique amenagée pour la circulation. Levée de terre pour retenir l'eau d'une riviére, d'un étang, pour servir de chemin. Long écueil dépassant peu le niveau de la mer. This version includes an illustrated cross section of a chaussée which includes the earth base to the top surface.

Road building is considered by the industry to be an entirely separate division and a great deal of energy in both the manpower and expense is attributed by the industry n their construction.  When the industry refers to roads, bridges are considered to be an integral part thereof. This is evident upon reference to several industry magazine articles and advertisements by road and bridge builders.

In Nova v. The Queen, Dubé, J stated "...The Act (income Tax Act) must be construed according to its own definitions, or the ordinary meaning of the words used, or the common usage by the people in the relevant industry".

Using this conceptual approach, we are of the opinion that all expenses relating to the building of a road, including subsurface construction, culverts and bridges should be excluded from earning investment tax credits since they are part of a roadway as this expression is defined in the logging industry.

Although we feel our opinion drawn from the facts is in unison with the spirit of the Act, we thought it appropriate to request Finance's viewpoint.

Director GeneralRulings DirectorateLegislative and IntergovernmentalAffairs Branch