20 June 1988 Income Tax Severed Letter 7-2849 - [Investment Tax Credit]

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.

JUN 20 1988

Head Office Specialty Rulings Directorate C.R. Bowen (613)957-2094 Investment Tax Credit

We are writing in reply to your memorandum of May 6, 1988, wherein you requested our opinion on the income tax treatment of investment tax credits claimed in several hypothetical situations presented by the Sydney District Office. Prior to commenting on your examples, we have provided a general overview of the application of subsections 13(7.1) and 40(3), 88 well as paragraphs 12(1)(t) and 13(21)(f) of the Income Tax Act (the "Act") which may be helpful in your response to the Sydney District Office.

General Overview

Where a taxpayer has not disposed of a depreciable property before the end of his taxation year, the deemed capital cost to him of that property {a determined in accordance with subsection 13(7.1)(or subsection 13(7.4) when applicable). As a result, the capital cost of a depreciable property otherwise determined is reduced by i) the assistance the taxpayer has received (or is entitled to receive) in respect of that property and 2) the investment tax credit ("ITC") deducted from tax otherwise payable in respect of that property. Where the assistance is equal to the capital cost of the property otherwise determined, the deemed capital coat will be reduces to zero. As the deemed cost of the property can't become negative, ITC claimed in the year of acquisition of that property or in a subsequent taxation year but prior to its disposal will be included in income under paragraph 12(1)(t) in the taxation year in which the ITC is claimed.

Where the taxpayer has deducted ITC from tax otherwise payable in a taxation year after the depreciable property has been disposed of, but while other property remains at the end of the particular year in the class to which the property belonged, subparagraph 13(21)(f)(vii) will apply to reduce the underpreciated capital cost ("UCC") of that class by the amount of ITC deducted in the year. The result will either be a recapture or reduction of future capital cost allowance. However, where there is no property in the class at the end of the year in which the ITC is claimed, paragraph 12(1)(t) will apply to include the amount of ITC in income.

In general, capital gains and losses are computed as the difference between the proceeds of disposition of the property leas the expenses of disposition and the adjusted cost base of that property to the taxpayer at the time of diaposition. Adjusted coat base la defined In paragraph 54(a) to mean, in the case of depreciable property, the capital cost of the property and, in the cave of any other property, its coat to the taxpayer as adjusted by section 53. Subsection 40(3) provides that If at a particular time the sum of all amounts which are to be subtracted in computing the adjusted coat base of a property under subsection 53(2) exceeds the cost of the property plus all amounts added under subsection 53(1), the excess is deemed at once to be a gain from the disposition of the property. However, section 53 and subsection 40(3) are applicable only to property other than depreciable property.

Specific Examples

In the examples presented, a corporation with a December 31 year-end purchased a clear 29 asset on Hay 1, 1985 for $200,000, and the asset qualified for ITC at a rate of 50%. On the same day, the taxpayer received a government grant of $200,000 relating to the purchase of the asset. As the property was acquired prior to May 23, 1985, paragraph 127(11.1)(b) will not apply to reduce the capital cost of the property eligible for ITC by the amount of government assistance received. The income tax treatment of ITC for situations 1 to 6 outlined in your memo are indicated below.

Situation 1

a) Assumptions

1985 taxation year ITC claimed in 1985 related to the new asset purchased is $40,000 UCC of class 29 as at January 1, 1985 - $1,000,000 The new asset is on hand as at December 31, 1985.

b) Income tax treatment

i) UCC of class 29
UCC as at January 1, 1985                           $1,000,000
Plus: Deemed coat of new asset which equals                                  
                     Capital cost        200,000
                     Less: assistance   (200,000)
                     Deemed capital cost                 NIL
UCC prior to CCA claim                             $1,000,000
ii) Paragraph 12(1)(t) amount
included in 1985 income                               $40,000

iii) There is no capital gain as the asset has not been disposed of.

Situation 2

a) Assumptions

1985 taxation year ITC claimed in 1985 related to the new asset purchased is $40,000 UCC of class 29 as at January 1, 1985 - Nil - The new asset is on hand as at December 31, 1985.

b) Income tax treatment

i) UCC of class 29
UCC as at January 1, 1985                                  Nil
Plus: Deemed-cost of new asset which equals:
     Capital coat                200,000
     Less: assistance           (200,000)
     Deemed capital cost                                   Nil
     UCC prior to CCA claim                                Nil

ii) Paragraph-12(1)(t) amount
included in 1985 income                                $40,000

iii) There is no capital gain as the asset has not been disposed of.

Situation 3

a) Assumptions

1986 taxation year

The new asset is sold in 1985 for $100,QOO, but other class 29 assets are on hand at the end of 1986. capital gain of $100,000 is reported in 1985 from the sale of the new asset. UCC of class 29 as at January 1, 1986 - Nil ITC claimed in 1986 related to the asset purchased in 1985 is $40,000.

b) Income tax treatment

i) UCC of class 29
UCC as at January 1, 1986                   Nil
Less: ITC claimed                        (40,000)
Plus: Recapture                           40,000
UCC as at December 31, 1986                 0

The recapture of S40 000 1. included in 1986 income.

ii) There is a capital gain of $100,000 in 1985 calculated in accordance with paragraph 39(1)(a) and subparagraph 40(1)(a)(1) of the Act However, there is no capital gain in 1986

Situation 4

a) Assumptions

1986 taxation year The new asset He sold in 1986 for $100,000, but other class 29 assets are on hand at the end of 1986. UCC of c1888 29 as at January 1, 1986 is Nil ITC claimed in 1986 related to the asset purchased in 1985 is $40,000

b) Income tax treatment

i) UCC of class 29
UCC as at January 1, 1986               Nil
Less ITC claimed                     ($40.000)
Less Lower of deemed capital cost
(Nil) or proceeds of disposition
($100,000) for asset sold                Nil
Plus Recapture                         40,000
UCC as at December 31, 1986               0

The recapture of $40,000 is included in 1986 income.

ii) There is a capital gain of $100,000 in 1986

Situation 5

a) Assumptions

The same facts as in situation 3 except there are no class 29 assets on hand at the year-end

b) Income tax treatment

i) There is no impact on the UCC of class 29 in 1986

ii) Paragraph 12(1)(t) amount included in income in 1986 is $40,000

iii) There is no capital gain in 1986 from the disposition of the asset in 1985

Situation 6

a) Assumptions

The same facts as in situation 4 except there are no class 29 assets on hand at the year-end.

b) Income tax treatment

i) There is no impact on the UCC of class 29 in 1986.

ii) Paragraph 12(1)(t) amount included in income in 1986 is $40,000.

ii) There is a capital gain of $100,000 in 1986.

We trust the foregoing comments will be of assistance to you in replying to the Sydney District Office.

Yours truly,

ORIGINAL SIGNED BY B.W. DATH

Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch