Principal Issues: [TaxInterpretations translation] (1) Is the amount of the Quebec investment tax credit an inducement payment required to be included in the taxpayer's income by virtue of paragraph 12(1)(x)?
(2) If the answer to the first question is no, does the amount received as an investment tax credit instead represent government assistance received in respect of depreciable property to be applied against the cost of depreciable property pursuant to subsection 13(7.1)?
(3) Does the Quebec investment tax credit constitute government assistance that can reasonably be considered to relate to the property or its acquisition for the purposes of paragraph 127(11.1)(b) and, therefore, must reduce the capital cost of the property for the purposes of calculating the federal investment tax credit, to the extent that the property giving rise to the two credits is the same?
4) To the extent that the Quebec investment tax credit constitutes government assistance for purposes of the Act, at what time must it be included in the taxpayer's income by virtue of paragraph 12(1)(x) or applied against the cost of depreciable property by virtue of subsection 13(7.1)?
5) Does the answer to Question 4 differ depending on whether the credit is applied against the tax payable or whether it exceeds the tax payable and is refunded to the taxpayer?
Position: (1) and (2) The amount represents government assistance in respect of depreciable property that reduces the capital cost of the property under subsection 13(7.1).
(3) Yes.
(4) and (5) Under subsection 13(7.1), this tax credit is applied against the cost of a corporation's depreciable property at the end of the corporation's taxation year where the corporation has received or is entitled to receive, before the particular time, such assistance. The corporation is entitled to receive this credit for the purposes of paragraph 13(7.1)(f) where the conditions of the first paragraph of section 1029.8.36.166.43 of the IA are satisfied, that is, at the end of the taxation year in which it claims the credit. However, it is not entitled to receive the portion of the credit that is carried forward to a subsequent taxation year.
Reasons: Interpretation of the Act and previous positions
XXXXXXXXXX 2009-035024 Danielle Bouffard
June 28, 2010
Dear Madam,
Subject: Tax Treatment of the Quebec Investment Tax Credit
This is in response to your letter dated December 2, 2009, in which you requested our opinion regarding the tax treatment to be accorded to the Quebec investment tax credit for manufacturing and processing equipment (the "Quebec investment tax credit").
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
More specifically, you stated that under sections 1029.8.36.166.40 to 1029.8.36.166.60 of the Quebec Taxation Act (the "TA"), a corporation that incurs eligible expenses for the acquisition of a qualified property during a taxation year may claim a tax credit calculated at a rate ranging from 5% to 40% of the eligible expenses depending on inter alia the administrative region in which the property is principally used.
“Qualified property" means prescribed property, i.e., new property included in Class 43 or, where applicable, Class 29 (manufacturing and processing equipment), which, among other things, must be acquired during a certain period and be used only in Québec primarily in the course of carrying on a business.
For the purposes of this credit, eligible expenses are expenses incurred by a corporation in a taxation year for the acquisition of a qualified property that are included in the capital cost of the property at the end of that year and that are paid no later than 18 months after the end of the taxation year in which they were incurred. Those paid after that time may be eligible expenses in the taxation year in which they are paid.
The credit is applied first to income and capital taxes otherwise payable. Depending on the amount of consolidated paid-up capital for the year, the balance of the credit may also be refundable in whole or in part. The unused balance can be carried forward. The corporation must attach to its provincial return for the year the form prescribed by the TA containing the prescribed information.
Your Questions:
1. Does the amount of the Quebec investment tax credit represent an inducement payment that must be included in the taxpayer's income by virtue of paragraph 12(1)(x)?
2. If the answer to the first question is no, does the amount received as a Quebec investment tax credit instead represent government assistance received in respect of depreciable property to be applied against the cost of depreciable property pursuant to subsection 13(7.1)?
3. Does the Quebec investment tax credit constitute government assistance that can reasonably be considered to relate to the property or its acquisition for the purposes of paragraph 127(11.1)(b) and, therefore, must it reduce the capital cost of the property for the purposes of calculating the federal investment tax credit to the extent that the property giving rise to the two credits is the same?
4. To the extent that the Quebec investment tax credit constitutes government assistance for purposes of the Act, at what time must it be included in the taxpayer's income by virtue of paragraph 12(1)(x) or applied against the cost of depreciable property by virtue of subsection 13(7.1)?
5. Does the answer to question 4 differ depending on whether the credit is applied against the tax payable, or whether it exceeds the tax payable and is refunded to the taxpayer?
Our Comments
It appears to us that the situation described in your letter may constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
Questions 1 and 2
Paragraph 12(1)(x) generally provides that an amount received by the taxpayer in the year from inter alia a government, is required to be included in the taxpayer's income where the particular amount can reasonably be considered to have been received, among other things, as a reimbursement, contribution or allowance or as assistance, in the form of, for example, a deduction from tax, or any other form of assistance, in respect of an amount included in, or deducted as, the cost of property, or in respect of an outlay or expense incurred or made. However, subparagraphs 12(1)(x)(v) to (viii) provide exceptions. For example, subparagraph 12(1)(x)(vi) provides that paragraph 12(1)(x) does not apply if the amount received by the taxpayer reduced the cost or capital cost of the property or the amount of the outlay or expense.
Where a taxpayer receives or is entitled to receive, before the particular time, assistance from a government in the form of inter alia a deduction from tax or otherwise in respect of, or for the acquisition of, depreciable property before the taxpayer disposes of the property, subsection 13(7.1) applies to reduce the amount of the assistance by the capital cost of the property.
In our view, eligible expenses incurred in respect of property that is qualified under Quebec tax legislation is the raison d'être of the Quebec investment tax credit, which constitutes, for the purposes of the Act, government assistance for the acquisition of depreciable property. The capital cost of the depreciable property that generated this credit at a particular time must therefore be reduced by virtue of paragraph 13(7.1)(f) by the amount of the assistance that the taxpayer has received or is entitled, before the particular time, to receive.
Question 3
For the purposes of the definition "investment tax credit" ("ITC") in subsection 127(9), paragraph 127(11.1)(b) deems the capital cost to a taxpayer of a property to be:
… the capital cost to the taxpayer of the property, determined without reference to subsections 13(7.1) and 13(7.4), less the amount of any government assistance or non-government assistance that can reasonably be considered to be in respect of, or for the acquisition of, the property and that, at the time of the filing of the taxpayer’s return of income under this Part for the taxation year in which the property was acquired, the taxpayer has received, is entitled to receive or can reasonably be expected to receive;
Furthermore, the term "government assistance" is defined in subsection 127(9) for the purposes of section 127 as assistance received from a government in the form of, among other things, a deduction from tax or any other form of assistance other than a deduction under subsection 127(5) or 127(6).
Since the Quebec investment tax credit is government assistance, as defined above, relating to the acquisition of a property, we are of the view that it should reduce the capital cost of the property for ITC purposes where the rules set out in paragraph 127(11.1)(b) are satisfied.
Questions 4 and 5
As noted above, subsection 13(7.1) applies to reduce the capital cost of depreciable property at a particular time (for example, the last day of a taxpayer's taxation year) where a taxpayer has received or is entitled to receive, before the particular time, government assistance in the form of a deduction from tax or otherwise in respect of or for the acquisition of the property.
As specified in Income Tax Technical News No. 29, a tax credit or a reduction in computing the tax calculation is considered to be received at the earliest of:
- when the amount is applied as a reduction of instalment payments to be paid by the taxpayer, if it is credited to its instalment account by the fiscal authorities; or
- when all the conditions for its receipt are met, at the earliest of:
- when it reduces the tax payable for a taxation year, or
- when it is paid, if it allows for or increases a tax refund.
Furthermore, a taxpayer is entitled to receive government assistance in the form of a deduction from tax or in any other form of assistance where the taxpayer has a definite right to receive such assistance even though the amount of the assistance may not necessarily be payable.
The Quebec investment tax credit is granted, among other things, under section 1029.8.36.166.43 of the TA. Under the first paragraph of such section, a qualified corporation for a taxation year that encloses the prescribed form containing prescribed information with the fiscal is deemed, subject to the third paragraph, to have paid to the Minister of Revenue of Quebec on the corporation's balance-due day for the year, on account of its tax payable for the year, an amount equal, inter alia, to the product obtained by multiplying the amount of its eligible expenses for the year, in respect of a qualified property, by the specified rate (which varies between 5% and 40%) determined in respect of the property. The second paragraph of that section provides that the total amount that the corporation is deemed to have paid must not exceed the corporation's “maximum tax credit amount” for the year, an expression defined in the TA for the purposes of calculating such credit.
According to our understanding of these rules, the corporation is entitled to receive this credit for the purposes of paragraph 13(7.1)(f) when the conditions of the first paragraph of section 1029.8.36.166.43 of the TA are satisfied, that is, at the end of the taxation year in which it claims the credit. However, it is not entitled to receive the portion of the credit that is carried forward to a subsequent taxation year. Furthermore, the corporation is not considered to have received this credit until it has submitted the prescribed documents and information, it is shown that the corporation is entitled to the credit and it is applied as a payment of tax due by the corporation or at the time the credit is actually paid.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.