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.
JAN 10 1989
Application Opinions Phil Jolie 957-3590
Hydro Quebec—"Public Authority"
The Montreal District Office has requested our assistance in determining the tax treatment to be accorded to XXXX in respect of payments it received from Hydro Quebec in the period 1983-1985. The payments were reimbursements of XXXX cost of refitting and/or adding to its production facilities so as to increase its consumption of electricity.
If Hydro is a "public authority", then subsection 13(7.1) requires that the payment reduce XXXX cost base of the assets in respect of which the payments were made. If, on the other hand, Hydro is not a public authority, then the payments are tax-free to XXXX if they are on account of capital. We have been informed that the payments by Hydro in connection with this program involved many customers and totalled over $300 million.
Attached are copies of two memos dealing with Hydro's status. In one, dated September 4, 1986, the Bilingual Services Section expressed the opinion that Hydro was a public authority. The other, dated January 12, 1988 from the Appeals Branch, quotes an officer of that same section as saying that Hydro is not acting as a public authority because it was only doing what any commercial supplier of a product would do.
If the capacity in which a public authority undertakes a certain transaction is relevant for the purposes of subsection 13(7.1), we would like to comment on the second memorandum. In our opinion, its logic is not conclusive. While it is true that some commercial suppliers of energy made similar inducement payments for purely business reasons, it is also true that several government agencies made payments to aid in reducing the consumption of fossil fuels. These latter payments were unquestionably made with no commercial purpose, in the payors' capacity as public authorities. The capacity in which Hydro acted must be determined based on the facts of the case; we should not simply assume that its motives were commercial. On the other hand, if a public authority is always considered as such regardless of its motives in a particular transaction, it is not necessary to determine those motives.
Because many taxpayers are affected by the decision and the dollar value is high, we request that you consider the question and give us your opinion as to whether or not Hydro Quebec is a public authority as that term is used in subsection 13(7.1). We will issue a direction to the field to ensure that the position is applied consistently, to the extent possible.
J. Daman Acting Director Audit Applications Division
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