5 September 1985 Income Tax Severed Letter

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.

XXXX

Specialized Audit Division C. Lamarche Tel. (613) 996-9986 Ref. 444-323

Sept. 5, 1985

Dear Sir:

RE: Saskatchewan Livestock Investment Tax Credits

We apologize for the delay in replying to your letter dated June 29, 1985 concerning the above-mentioned credits.

The assessment notices issued for 1984 indicate that these amounts are to be reported as 1985 income. You ask us whether this Division agrees that the credits in question are to be reported as income from farming. You point out that this is not the treatment required by this Department for the venture Capital Tax Credit, and you have been advised by the Saskatoon District Office to ignore that credit when calculating the AC3 of shares giving rise thereto.

The District office in question has indicated that Revenue Canada considers that the livestock credits are part of the selling price of the livestock, and that section 54 of Notice of Ways and Means Motion of May 1985 requires that the credits be taken into farm income. You disagree since that section contains the expression "except to the extent that it reduces the cost of related ...expense". You mention that only income tax is reduced. Finally, you fail to see why the two goals of the tax credits which are: (1) "reduce your provincial income tax to zero" and (2) "bring jobs and economic wealth back to Saskatchewan", should create income from farming.

Our comments on these matters are as follows:

1. We have noted that the XXXX message, which was attached to your letter, indicates that the program allows "the people of Saskatchewan the opportunity to participate in livestock feeding in Saskatchewan at reduced costs and risk". The tax credits under the program are the following, subject to a $100 deductible:

"Cattle - $25.00 per steer, heifer, virgin bull Swine - $ 3.00 per hog Lambs - $ 2.00 per lamb"

2. The Department's position on government deductions from tax, and other forms of government assistance, is covered in Interpretation Bulletin IT-273R (copy attached). Paragraphs 2 to 4 and 6 thereof are particularly relevant. Essentially, these paragraphs state that, if an amount of government assistance is related to an income deficiency or to specific expenses of the taxpayer, it is added to income or deducted from specific expenses in the absence of legislation to the contrary. This determination is said to be a question of fact and, in making it, one of the principal factors which may be properly considered is the purpose or intention for which the assistance was provided. All other available information is also to be considered.

3. In view of the above, the information that you have submitted and, particularly, the comments in 1. above, we consider that this government assistance in fact reduces the feeding costs of the live- stock. Accordingly, the tax credits in question should be taken into farming income or deducted from farm operating expenses.

4. With respect to the recent budget, we read section 54 of the notice of Ways and Means Motion of May (1985) as giving rise to legislation that will apply to amounts received after May 22, 1985 as an inducement or reimbursement in respect of an expense incurred, with the effect that such amounts would be included in income. The exception therein reflects in our opinion nothing more than the intent to avoid double taxation, i.e. the inclusion in income of amounts which would also have reduced some expense or the capital cost of a taxpayer's property.

5. You have also raised the question of the tax treatment to be given to the Saskatchewan Venture Capital Tax Credits. We understand that these tax credits are available to individuals and are based on 30% of their equity investments in venture capital corporations (V.C.C.'s). The federal Income Tax Act provides for a specific tax treatment of these credits. In accordance with clause 53(2)(k)(i)(c) of the Act, the credits do not reduce the AC3 of the prescribed V.C.C. shares if their disposition gives rise to a capital gain or loss. However, by virtue of paragraph 40(2)(i) of the Act, these credits would reduce the capital loss that could result from the subsequent disposition of the said shares.

Do not hesitate to contact C. Lamarche if you wish to discuss any of the above .

Yours sincerely,

Section Chief Audit Applications Section Audit Directorate Policy and Systems Branch

HAE 4006-3-9(1), 28(1), 40(2)(i) and 53(2)(k)

c.c. Ray Sladek, Saskatoon District Office Mark Siegel, Non-Corporate Rulings Division, Legislation Branch John Chsesan, Assessing Division, Policy and Systems Branch P. Pinkus, Director, Provincial and International Relations Legislation Branch