7 October 1990 Income Tax Severed Letter - Available-for-use Rules

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.

To: RALBER
Date: October 5, 1990
From: RTHOMP
Subject: AVAILABLE FOR USE RULES

Drew Burnett, Current Amendments, called asking for an interpretation of these rules as they apply to ITC. Under 13(27)(c) & (28)(d) a t/p is considered to have acquired property immediately before disposition if none of the other times occur earlier. Under 127(11.2) a t/p is deemed not to have acquired a property before it becomes available for use applying those provisions without reference to the paras mentioned. Where property is disposed of without being put to use the transferor clearly gets no ITC. Drew thinks that the transferee can because the property has in fact not been used and by virtue of the deeming provision in (11.2) the transferor didn't acquire it for purposes of sec 127. This it is not possible to say that it was acquired for use by anyone so the transferor fits the requirements.

RESPONSE FROM RALBER

The sections referred to above in the July 13, 1990 Technical Amendments as well as the Explanatory Notes were reviewed. The Explanatory Noes do not help in the interpretation of these provisions. HOWEVER in my view the interpretation of the qualification for ITC based on the available for use rules read without reference to the 13(27)(d) and 13(28)(d) relating to the time that is immediately before disposition would result in the second acquirer being entitled to claim the ITC where the property is disposed of before any of the other provisions of 27 and 28 kick in. This is based on the wording of section 127(11.2) whereby: "For the purposes of this section and section 127.1, property described in subparagraph (1)(i) of the definition `investment tax credit' in subsection (9) [[[[[[which includes qualified property, qualified transportation equipment, qualified construction equipment, approved project property or certified property acquired in the year]]]]] shall be deemed not to have been acquired ... by a taxpayer before the property is considered to have become available for use by the taxpayer determined without reference to paragraphs 13(27)(c) and 28(d)."

Paragraph 18 of IT-331R has always caused some taxpayer concern with respect to the second acquiring taxpayer not being entitled to ITC on assets which had previously been purchased by another company but which had not been used by that other company. This paragraph indicates that: "The property must not only be new when acquired by the taxpayer but it must not have been acquired for use or lease or for any purpose whatever by any previous owner. As a result of these requirements, if a property that has been used or was acquired for a use (even though unused) is transferred to a new owner, eligibility for the investment tax credit is not transferable. IN SUCH A SITUATION THE FORMER OWNER REMAINS ELIGIBLE FOR THIS CREDIT PROVIDED THE OTHER REQUIREMENTS ARE SATISFIED." The new available for use rules and the interpretation provided by Drew with respect to ITC would indicate that now the original acquiring taxpayer would not be entitled to ITC because the asset was not available-for-use and thus by virtue of 127(11.2) would be deemed not to have been acquired for purposes of section 127 and that the second acquiring taxpayer would be entitled to ITC only in the limited situation noted.

HOWEVER WHERE THE TWO-YEAR `ROLLING START' PARAGRAPHS OF 13(27)(b) AND 13(28)(c) apply we would still need to look to paragraph 18 even though the original acquirer had not yet used the asset though they had acquired it "to be used". Paragraph 19 of IT-331R (see below) may also be applicable. Paragraph 19 goes on to say that: "The Department considers that a property was acquired "to be used" or "for use" where it was actually used within a reasonable period of time after it was acquired. Where the property has not been put to any use for an extended period of time after it was acquired or, if used, not for its intended use, the property may still be considered acquired "to be used" or "for use" if the taxpayer can show sound business reasons as to why it is not being used as originally intended". This paragraph may be used to allow the original acquirer to claim ITC if they had sound business reasons why if was not being used within the two-year rolling start period.

CONCLUSION

I agree with Drew's interpretation with respect to his particular scenario, i.e., where the original acquirer disposes of the asset before the asset becomes available-for-use then the second acquirer is entitled to ITC [[[[and paragraph 18 and 19 of IT-331R are not applicable. HOWEVER, where an asset is available-for-use paragraph 18 and 19 of the IT would still be applicable.]]]]]