Principal Issues: Whether a logging truck purchased by a taxpayer to be used for the purpose of transporting logs is a qualified property for investment tax credit?
Position: Yes
Reasons: Previous positions & facts.
November 29, 2005
XXXXXXXXXX TSO Income Tax Rulings Directorate
Audit Division Corporate Reorganizations and
Resource Industries Division
Attention: XXXXXXXXXX Robert Gagnon
XXXXXXXXXX (613) 957-21082005-013010
Investment tax credit for qualified property
This is in response to your memorandum of May 10, 2005, in which you asked us questions regarding the eligibility of a logging truck as a property qualified for the investment tax credit ("ITC") provided for in subsection 127(9), having regard to the situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Facts
1. On XXXXXXXXXX, a corporation ("Opco") acquired a XXXXXXXXXX transport truck. That is the only truck owned by Opco.
2. On XXXXXXXXXX, Opco acquired a new log loader and XXXXXXXXX grapple to replace its old loader and grapple.
3. The truck, equipped with a loader and a grapple, was used exclusively for the transportation of logs from undamaged timber ("logs") in a qualifying area referred to in subparagraph (a)(iii) of the definition of "specified percentage" in subsection 127(9) for purposes of the investment tax credit ("ITC").
4. During Opco's XXXXXXXXXX taxation year, Opco's use of the truck may be categorized into the following three activities:
(a) Transportation of pulpwood logs for XXXXXXXXXX in an area assigned to Opco. This activity was performed pursuant to a transportation agreement (the "Agreement") between XXXXXXXXXX and Opco. The Agreement provided that Opco was to receive revenue for its transportation services based on prices per metric ton or per cubic meter of wood transported. The logs were collected from woodlots owned by wood producers who had their lots under management by XXXXXXXXXX, with the logs then transported to a pulpwood processing plant.
The gross wood transportation revenue from this activity during Opco's taxation year ending XXXXXXXXXX, was approximately $XXXXXXXXXX. That amount represented approximately XXXXXXXXXX% of Opco's gross revenues.
(b) Opco transported sawlogs that it purchased from lumber producers and resold to sawmill operators. The logs were picked up by Opco directly from lots owned by lumber producers and transported to sawmill sites. Opco's gross revenue from the sale of logs to sawmills was determined by the volume and species of wood sold.
The total cost of logs acquired by Opco from wood producers was approximately $XXXXXXXXXX for its taxation year ending XXXXXXXXXX.
(c) Opco also transported sawlogs from woodlots belonging to it. The Opco-owned logs were then sold to sawmill operators. The logs were picked up by Opco directly from its lots and transported to the sawmill sites. Opco's revenue from the sale of its logs to sawmills was determined by the volume and species of wood sold.
Opco's gross revenue from the sale of logs (including logs acquired from other wood producers) during its taxation year ending XXXXXXXXXX, was approximately $XXXXXXXXXX. You were unable to separate the revenue specifically from the sale of wood derived from the production of wood by Opco. The total amount of tree cutting and silviculture expenses was approximately $XXXXXXXXXX. Thus, in your opinion, the taxpayer's primary source of net income was from the sale of wood.
5. XXXXXXXXXX.
Your Questions
1. In the situation described above, was the Opco truck used in an activity of logging as required by paragraph 4600(2)(f) of the Income Tax Regulations ("Regulations")?
2. Was the purchase and resale of logs an activity of logging for the purposes of paragraph 4600(2)(f) of the Regulations and the definition of "qualified property" in subsection 127(9)?
3. Could a truck be considered to be used in the course of an activity of logging where it is used by a subcontractor to provide log hauling services for a number of wood producers who are either farmers or simply other persons who own woodlots to whom revenue from the sale of wood is not the primary source of revenue (on either an income or capital account)?
Our Comments
In our view, the intended use of the logging truck by Opco at the time of its acquisition by the taxpayer must be examined for the purpose of determining whether the truck constitutes "qualified property" within the meaning of the definition in subsection 127(9). That reasoning is based, in part, on the wording of paragraph (c) of the definition of "qualified property" which uses the following words: "(c) to be used by the taxpayer in Canada primarily for the purpose of … .”
It appears to us that there is a difference between the English and French versions of paragraph 4600(2)(f) of the Regulations that could cause confusion. The English version of paragraph 4600(2)(f) of the Regulations states
(f) notwithstanding paragraph (e), a logging truck acquired after March 31, 1977 to be used in the activity of logging and having a weight, including the weight of property the capital cost of which is included in the capital cost of the truck at the time of its acquisition (but for greater certainty not including the weight of fuel), in excess of 16,000 pounds;
The French version of paragraph 4600(2)(f) states:
f) nonobstant l'alinéa e), un camion de débardage acquis après le 31 mars 1977, qui est utilisé dans le cadre d'une activité d'exploitation forestière et dont le poids, y compris le poids des biens dont le coût en capital est compris dans le coût en capital du camion à la date de l'acquisition (mais pour plus de certitude, ne comprend pas le poids du carburant), dépasse 16 000 livres;
It seems to us that the wording of the English version of paragraph 4600(2)(f) should be preferred, as it is symmetrical to the wording of the English and French versions of paragraph (c) of the definition of "qualified property" in subsection 127(9). The wording of the French version of paragraph 4600(2)(f) does not appear to us to be consistent with the approach taken by Parliament in paragraph (c) of the definition of "qualified property" in subsection 127(9).
We are of the view that in the situation described above, the truck and property described in paragraph 2 above would be "qualified property" within the meaning of the definition in subsection 127(9), if acquired by Opco with the intention of using it primarily for the transportation of logs in the course of the activities described in paragraph 4 above.
It should be noted that it is the CRA's position that log hauling services performed by a subcontractor from the point of harvest to the point of delivery of the logs to a processing plant (sawmill, pulp mill, plywood mill or other similar log processing location), can constitute an activity of logging for purposes of the definition of qualified property in subsection 127(9) and paragraph 4600(2)(f) of the Regulations (see for example, document 9327027). That position is based, inter alia, on Lor-Wes Contracting Ltd. 85 DTC 5310 (FCA).
It appears to us that the purchase and resale of logs by Opco constituted an activity of logging for the purposes of paragraph 4600(2)(f) of the Regulations and the definition of "qualified property" in subsection 127(9).
Finally, a logging truck as described in paragraph 4600(2)(f) of the Regulations could be considered to have been acquired for use in logging for purposes of paragraph 4600(2)(f) of the Regulations and the definition of "qualified property" in subsection 127(9) if it were acquired by a subcontractor with the intention of using it for log hauling services to sawmills, pulp mills or other processing sites on behalf of a number of wood producers who are either farmers who own woodlots or simply other persons who own woodlots for whom income from the sale of wood is not the primary source of income.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Industrial Resources
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch