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.
January 6, 1989
HEAD OFFICE Specialty Rulings Directorate C.R. Bowen (613) 957-2094
SUBJECT: Cape Breton Investment Tax Credit (CBITC)
We are writing in reply to your memorandum of November 21, 1988, wherein you request our comments on a number of questions raised by Enterprise Cape Breton ("ECB") concerning the loan insurance and contribution interest buy down offered by the Atlantic Canada Opportunities Agency ("ACOA") through the ACOA Action Program ("AAP").
Background
The loan insurance offered by ACOA insures 85% of the lender's loss on a term loan to the borrower. The insured loan is to be used by the borrower for the purpose of financing either the capital costs or the working capital requirements of the project. The contribution interest buy down offered by ACOA pays a contribution to the borrower towards the interest cost of a loan used to finance either the establishment, expansion or modernization of a facility. The term loan is to be used by the borrower to finance the eligible costs of the project.
Your Questions
1. Will the contribution interest buy down and the loan insurance (or loan guarantee) offered by ACOA be considered government assistance in respect of or for the acquisition of property, and as a result, require that the capital cost of the property be reduced under paragraph 127(11.1)(b) of the income Tax Act (the "Act")? Alternatively, will they be considered to be income under paragraph 12(1)(x) of the Act?
2. How is the amount of government assistance and non-government assistance valued for purposes of paragraph 127(11.1)(b) of the Act? It is ECB's opinion that the amount should be based on the present value of the assistance and has asked if Revenue Canada has any guidelines as to the discount rate to use in determining the present value.
3. If the loan insurance (or loan guarantee) is determined to be assistance for purposes of paragraph 12(1)(x) or 127(11.1)(b) of the Act, how should it be valued?
Our Comments
Our comments are indicated in the same order as the questions are posed.
1. (a) The amount received or receivable by the borrower on account of the interest buy down as a contribution towards the interest cost of the loan will not reduce the capital cost of the property acquired by the borrower under paragraph 127(11.1)(b) or subsection 13(7.1) of the Act, as it is not considered to be an amount in respect of or for the acquisition of property. Instead, it is our opinion that the amount is in respect of interest expense. Following generally accepted accounting principles, this amount would either be included in revenue or netted against the interest expense and consequently, affect the amount of profit or loss reported by the taxpayer under subsection 9(1) or 9(2) of the Act. It is our view that the wording in subparagraph 12(l)(x)(v) of the Act provides that paragraph 12(1)(x) will not apply wherever an amount is required to be included in income under some other provision, such as subsection 9(1) of the Act. Therefore, paragraph 12(1)(x) will generally not have application to the amount received by the taxpayer as the amount is already included in income under subsection 9(1) or 9(2) of the Act.
(b) The guaranteeing or insuring of a loan by the federal government, in and by itself, would not give rise to an income inclusion by virtue of paragraph 12(1)(x) or a reduction to the capital cost of the property under paragraph 127(11.1)(b), as no amount has been received by the taxpayer in respect of the guarantee or insurance. Should the federal government (guarantor) be called upon to make a payment pursuant to the terms of the guarantee, paragraph 12(1)(x) of the Act could apply to the borrower in the year of the payment by the guarantor.
2. For purposes of paragraph 127(11.1)(b) of the Act, the calculation of the amount of the assistance receivable by a taxpayer in the future is not based on the present value of the amount to be received at that future point in time. Instead, the amount of the reduction to the capital cost of the property for government assistance that the taxpayer is entitled to receive or can reasonably be expected to receive will be the face value or actual amount of the assistance. There is no provision in the Act which recognizes the time value of money.
3. As stated in the response to the first question, the federal government loan insurance or guarantee will normally not be considered assistance for purposes of paragraph 12(1)(x) or 127(1l.1)(b) of the Act.
We trust these comments will be of assistance to you.
Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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