9 December 1981 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.

MEMORANDUM DATE: DEC 9 1981

TO- VANCOUVER DISTRICT OFFICE

Attention: G.R. Paulson
                 Basic Files
                  Section 142-51

FROM - HEAD OFFICE Corporate Rulings Directorate G.R. White 593-6201

RE: XXXX

This is in reply to your memorandum of May 19, 1981. Our understanding of the facts is as follows:

1. 2. XXXX 3.

CASE I

A gas collecting and scrubbing system amounting to XXXX has been installed in order to reduce emissions of arsenic and fluorine compounds into the atmosphere from the refinery. Environment Canada has, in principle, accepted the project for the purposes of paragraph (d) of Class 27. The. taxpayer has claimed Class 10(k) treatment, included it in the earned depletion base and reflected it as qualified property for investment tax credit purposes.

CASE II

A new lead smelter feed plant has been constructed amounting to XXXX. Included therein is pollution equipment amounting to XXXX. A description of the process and use of the pollution equipment is as follows:

XXXX

The taxpayer has applied for Class 27 treatment, which application is in process. The tax treatment is the same as Case I above.

You have requested our opinion on whether the pollution equipment referred to above is:

(a) Eligible for inclusion in the earned depletion base;

(b) Eligible for the investment tax credit if approval has been obtained for Class 24 or 27 treatment, although the taxpayer has treated the property as Class 10(k); and

(c) Eligible for the investment tax credit if no approval has been obtained for Class 24 or Class 27 treatment.

The pollution equipment described in Cases I and II above could reasonably be described as ((acquired for the purpose of gaining or producing income from a mine)) and would be equipment described in Class 10(k). (The equipment might also fit the description of property described in Classes 24 or 27.) If the taxpayer chooses to classify such property as Class 10(k) it would be eligible for inclusion in the earned depletion base because it is considered to be used in the processing of the ore after extraction, as required in Regulation 1205(b).

The rationale for our opinion that pollution equipment in a smelter is not only acquired for the purpose of gaining or producing income from a mine, but is also acquired for the purpose of processing ore, and accordingly is eligible for inclusion in Regulation 1205(b), is the intent of the provision in Regulation 1205(b). The intention was to give an equivalent incentive in respect of depreciable property required for the processing activity carried on in gaining or producing income from a mine to that given to the manufacturing industry through Class 29 treatment.

Paragraph 5 of IT-336 describes the practice to be followed where the intention is ultimately to claim Classes 24 and 27 treatment. In the cases described above, the property would be included in Class 10(k) prior to the year in which evidence of acceptance, referred to in Class 24 or 27, by the Minister is obtained. In the year acceptance is obtained, the property would be transferred to Classes 24 or 27 and a revision of prior years' claims requested. In the case of Class 10(k) property, this would require a revision of a prior year's depletion claim as well as capital cost allowance.

The Departmental practice with respect to pollution equipment which is property described in Class 10(k) is that a taxpayer may choose, initially, to treat the pollution equipment as Class 10(k) property or as property of Class 24 or 27 (as the case may be), with the following implications:

Class 10(k) property is "prescribed machinery and equipment" by virtue of Regulation 4600(2)(g) and Classes 24 and 27 property are also prescribed machinery and equipment by virtue of Regulation 4600(2)(k). Since we consider that the property is to be used primarily in processing ore which is a designated activity then the property becomes qualified property regardless of whether it is in Class 10(k), 24 or 27, and as such is eligible for the investment tax credit.

You have also asked our opinion on whether power operated moveable equipment acquired for use in a smelter should be considered to be property described in Class 10(a), in Class 22 or in Class 28? You note that if such equipment is included in Class 10(a) or Class 22, it would not be eligible for inclusion in the earned depletion base.

XXXX

Power operated moveable equipment acquired for use in a smelter is property described in Class 10(k). We refer you to paragraphs 5, 6 and 8 of IT-469 dated February 16, 1981 which state "if an asset is used in mining or logging, that use would indicate that it was acquired for such purpose and therefore is required to be included in Class 10 or Class 28" even though such assets are designated to be used in excavating, moving, placing or compacting earth, rock, concrete or asphalt." and "the extended definition of income from a mine provided by Regulation 1104(5) and (6) prevents the inclusion in Class 22 of equipment used in any stage of mineral production to the prime metal stage or its equivalent."

In our opinion, the equipment listed in (a), (b), (c) and (f) above meets the above description. Class 28 is not applicable since we understand the modernization program would not qualify as a major expansion, as defined in paragraph (a) (ii) of Class 28.

The Zoom Man Lift and Water-Blasting Unit used for maintenance would also be included in Class 10(k) and for the same reasons. They were acquired for gaining or producing income from a mine, and where such equipment is described in one of paragraphs (k) to (o), (r) or (t) of Class 10 it is included in Class 10 since those paragraphs override other classes because of the words preceding Class 10(g) "and property that would otherwise be included in another class that is". The capital cost of these assets, in our opinion, is eligible for inclusion in the earned depletion base under Regulation 1205(b), since the assets are used in the maintenance of assets used for processing, and such a use is not considered to be too remote from the actual processing to be considered part of it.

Although the assets in (a), (b), (c) and (g) are included in Class 10(k), on the basis of your facts, we are unable to determine whether they should be included in the earned depletion base (E.D.B.). Such inclusion must be determined on the basis of the principal use to which the assets are put. If, for example, the first front-end loader is used to carry hot zinc bars and lead pigs to a cooling area, we would agree that the capital cost thereof be included in the E.D.B. since this would be the final step in the processing. On the other hand, if the loader were used to rearrange inventory or to load trucks or railway cars for shipment, we feel that it would not qualify for inclusion in the E.D.B. since it is not engaged in the processing activity. If the second loader is used to move concentrate from the stockpile to the smelter, it would qualify for inclusion in the E.D.B., but not if it were engaged in a simple warehousing function. If the third loader is used in a construction activity such as carrying fire brick to rebuild a furnace liner, it would qualify for inclusion in the E.D.B., but not if it were engaged in new construction. If the grader is used to improve roads which are used to carry concentrate and hot metal to and from the smelter it would also qualify. We hope the rationale outlined above will be adequate for you to make the appropriate determination in respect of these assets.

Chief Mines, Oil & Forest Industries Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch