Principal Issues: [TaxInterpretations translation] In four situations, is the equipment and machinery prescribed depreciable property ("PDP") by virtue of subsection 2900(11) of the Income Tax Regulations, or can it qualify as first term shared-use-equipment ("SUE") and possibly as second term SUE as they are defined in subsection 127(9) of the Income Tax Act?
Position: Questions of fact. The definitions of first term SUE and second term SUE exclude PDP. As a first step, if the intent tests in subsection 2900(11) of the Regulations are otherwise satisfied, the property may be PDP. When determining whether a property is PDP at the time of acquisition, the intended use of the property in the year in which the expenditure was made and throughout its expected useful life should be taken into account. Second, if the property is not a PDP and the criteria of used primarily for scientific research and experimental development, as well as all other conditions set out in the definitions of first term and second term SUE, are satisfied, the property could potentially qualify as both first term SUE and second term SUE. The period for determining the eligibility of the SUE for the investment tax credit begins when it is acquired and is ready to be put into service, and ends at the end of the taxation year in which the 12- or 24-month period ends following the acquisition of the SUE.
Reasons: Application of subsection 127(9) of the Act and subsection 2900(11) of the Regulations. Clear 2005-01Enforcement Policy.
2009-031656 XXXXXXXXXX Lucie Allaire, Advocate, CGA, D. Fisc. February 9, 2010
Dear Sir,
Subject: Capital property used for scientific research and experimental development (hereafter "SR&ED")
This is in response to your letter received on March 30, 2009, in which you requested our views on the application of the definitions of first term shared-use-equipment and second term shared-use-equipment (collectively, "SUE") in subsection 127(9) of the Income Tax Act (the "Act") and the definition of prescribed depreciable property ("PDP") in subsection 2900(11) of the Income Tax Regulations (the "Regulations") in particular situations. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
Particular Situations
Below, we will outline the four situations (the "Particular Situations") that you have presented to us, with the following common assumptions:
1. A corporation intends to build a new manufacturing plant in XXXXXXXXXX. To do so, it is constructing a building and acquiring four different types of manufacturing equipment and different types of tools to allow for the assembly, construction and commissioning of this new facility.
2. The four types of equipment and tools are depreciable property and are new, but do not qualify as capital expenditures for SR&ED.
3. The four types of equipment and tools are not furniture or office equipment of a general nature.
4. The service life of the equipment is 15 years and that of the tools is 10 years.
5. The cost of purchasing the equipment is estimated at $1,000,000. The cost of installing this equipment is estimated at $225,000, including $125,000 for labour and $100,000 for subcontracting.
6. The cost of purchasing tools (pliers, wrenches, welders, etc.) is estimated at $20,000.
7. The equipment was acquired on 15 September of Year 1 and put into service on 30 November of the same year.
8. The corporation’s fiscal year-end is December 31 of each year.
In relation to these common assumptions, you stated that SR&ED was not being effected with any such items of equipment. However, taken as a whole, you indicated that the integration of the four types of equipment in the context of a new process development project is assumed to be eligible for SR&ED.
First Particular Situation
When the four types of equipment were acquired on September 15 of Year 1, it was the corporation's intention to use all of the equipment throughout its useful life for commercial production, and at no time for SR&ED purposes at the time of commissioning. In addition, the tools were to be used only for the assembly, construction, commissioning and maintenance of the equipment.
However, on November 30 of Year 1, when the new facility was commissioned, the corporation engaged in SR&ED. The operating times of the four new types of equipment used to perform SR&ED were as follows: Year 1, 40%; Year 2, 60%; Year 3, 20%; and Year 4, 10%. Further, the tools’ operating times for SR&ED purposes were: Year 1, 20%; Year 2, 70%; and Year 3, 60%.
Second Particular Situation
When the four types of equipment were acquired on September 15 of Year 1, it was the corporation's intention to use them in part, i.e., for 60% of their useful life for commercial production, and for 40% of their useful life for SR&ED purposes. In addition, the corporation intended to use the tools for 30% of their useful life for commercial production, and 70% for SR&ED.
However, from November 30 of Year 1, when the new facility was commissioned, the corporation was engaging in SR&ED. The operating times of the four new types of equipment used to perform SR&ED were as follows: Year 1, 40%; Year 2, 70%; Year 3, 20%; and Year 4, 10%.
Further, the operating times for tools used for SR&ED purposes were as follows: Year 1, 45%; Year 2, 70%; and Year 3, 60%.
Third Particular Situation
When the four types of equipment were acquired on September 15 of Year 1, the corporation intended to use them partly for commercial production for 35% of their useful life and partly for SR&ED for 65% of their useful life. In addition, the corporation intended to use the tools for 80% of their useful life in commercial production, and 20% for SR&ED.
However, from November 30 of Year 1, when the new facility was commissioned, the corporation was performing SR&ED. The operating times of the four new types of equipment used to perform SR&ED were as follows: Year 1, 40%; Year 2, 60%; Year 3, 70%; and Year 4, 60%.
Further, the times for operating tools for SR&ED purposes were as follows: Year 1, 20%; Year 2, 70%; and Year 3, 60%.
Fourth Particular Situation
When two of the four types of equipment were acquired on September 15 of Year 1, it was the Corporation's intention to use them all for commercial production. Nevertheless, on November 30 of Year 1, when the new facility was commissioned, the corporation was performing SR&ED. The operating times of these two types of equipment used for SR&ED purposes were as follows: Year 1, 40%; Year 2, 60%; Year 3, 70%; and Year 4, 60%.
At the time of the acquisition of the two remaining types of equipment, the corporation intended to use part of the equipment, for 35% of its useful life, for commercial production and for 65% of its useful life for SR&ED purposes. However, when the new facility was commissioned on November 30 of Year 1, the operating times of the two remaining types of equipment used to perform SR&ED were as follows: Year 1, 60%; Year 2, 85%; Year 3, 85%; and Year 4, 60%.
With respect to the tools, the corporation's intention at the time of acquisition was to use them for 80% of their useful life for purposes of commercial production, and for 20% of their useful life for SR&ED purposes. However, from November 30 of Year 1, times for operating tools for SR&ED purposes were as follows: Year 1, 20%; Year 2, 70%; and Year 3, 60%.
Your Question
You asked to confirm, for each of the Particular Situations, whether the equipment and tools were either first term SUEs, second term SUEs, or PDPs.
Our Comments
It appears to us that the situation described in your letter and summarized below could 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.
First of all, we understand that the equipment and tools have in no way been used or acquired to be used or leased for any purpose whatsoever prior to their acquisition by the corporation.
In general, a partial investment tax credit ("ITC") may be obtained in respect of expenses incurred to acquire a SUE. The cost of the SUE is included in the appropriate capital cost allowance class ("CCA") in the year of acquisition and the usual CCA rules apply. Conversely, an expenditure incurred to acquire a PDP is not eligible for an ITC.
On the other hand, subsection 127(11.2) deems, for ITC purposes, a taxpayer not to have acquired a property or incurred an expenditure in respect of a property related to SR&ED until the property becomes available for use by the taxpayer.
By virtue of its definition in subsection 127(9), first term SUE is depreciable property of the taxpayer that is used by the taxpayer, during its operating time of the property and in the period beginning at the time the property was acquired by the taxpayer and ending at the end of the taxpayer's first taxation year ending at least 12 months after that time, primarily for the prosecution of SR&ED in Canada. General purpose office equipment or furniture and PDP are excluded from the definition of SUE.
In addition, by virtue of its definition in subsection 127(9), a second term SUE is a property of a taxpayer that was first term SUE of the taxpayer and that is used by the taxpayer, during its operating time of the property in the period beginning at the time the property was acquired by the taxpayer and ending at the end of the taxpayer's first taxation year ending at least 24 months after that time, primarily for the prosecution of SR&ED in Canada.
Thus, the period for determining the eligibility for the partial ITC of the first term SUE or the second term SUE begins when it is acquired and is available for use, and ends at the end of the taxation year in which the 12-month or 24-month period ends following the acquisition of the SUE. Consequently, in this case, the criteria for the actual use of a property primarily for SR&ED purposes, as set out in the definitions of first term SUE and second term SUE, are not applied by taxation year but rather are cumulative in nature. In this regard, we invite you to consult Example A contained in Application Policy SR&ED 2005-01 available at the following address: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/pblctns/p2005-01-eng.html.
On the other hand, a taxpayer acquires a PDP, as defined in subsection 2900(11) of the Regulations, if the following two conditions are satisfied:
- The taxpayer acquired a property, or portion of the property and, at the time it was acquired by the taxpayer, the taxpayer intended that it would be used in the prosecution of SR&ED during the assembly, construction or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes (other than SR&ED) and
- The taxpayer acquired a property, or part of a property, and at the time it was acquired by the taxpayer, the taxpayer intended that it would be used during its operating time in its expected useful life primarily for purposes other than SR&ED, or that its value would be consumed primarily in activities other than SR&ED.
In other words, assets used for SR&ED during the establishment phase of a commercial facility are PDP unless they are used primarily during their useful life, or their value is consumed primarily, for SR&ED purposes.
When determining at the time of acquisition whether a particular property is a PDP, the intended use of the property in the year in which the expenditure is made and throughout its expected useful life should be taken into account. The subsequent use of a property may provide an indication of the corporation's intention at the time the expenditure was made.
In the present case, the application of the intention tests provided for in the PDP definition and of the conditions for actual use in the first and second term SUE definitions are questions of fact that can only be resolved after an analysis of all the facts relating to each particular situation, and in that regard it would not be possible to confirm that they are actually satisfied. In all of the Particular Situations, you indicated the proportion of time the property is used for SR&ED for each taxation year. However, your percentages of use are not done on a cumulative basis and, as such, do not allow us to make a final determination as to whether the property qualifies as first and second term SUE or PDP.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.