Audit DirectorateRulings Directorate Audit Programs Division Manufacturing Industries, Specialized Audit Programs Partnerships and Trusts Section
Attention: Mrs. Mara Praulins
ICABC Roundtable
This is in reply to your facsimile transmission dated May 25, 1993, wherein you requested our comments in respect of a debtor's gain on settlement of debts under section 80 of the Income Tax Act (the Act) on a section 37 undeducted pool of Scientific Research and Development Experimental (SR&ED) expenditures for undeducted current and capital expenditures.
In our analysis, we assumed that the debtor's gain under section 80 is not part of the exclusions listed in paragraphs 80(1)(c) to (h) inclusively and that paragraph 80(1)(a) of the Act is not applicable.
Both current and capital expenditures on SR&ED carried on in Canada may be included in the pool of SR&ED expenditures under paragraphs 37(1)(a) and (b) of the Act. These expenditures may be deducted in computing income in the year, or in any subsequent year, subject to the overall limitations of subsection 37(1).
Paragraph 1102(1)(d) of the Regulations excludes from the classes of property described in Part XI and Schedule II of the Income Tax Regulations, on which capital cost allowance may be claimed, property that has been acquired by an expenditure for which the taxpayer is allowed a deduction under section 37. Subsection 37(6) provides that an amount claimed under subsection 37(1), that may reasonably be considered to be in respect of property described in paragraph 37(1)(b), will be deemed to be an amount that has been allowed to the taxpayer as capital cost allowance under paragraph 20(1)(a). As a result, in computing the amount that would otherwise be the undepreciated capital cost of the property, the capital cost of the property will be reduced by the amounts that were deducted by the taxpayer under subsection 37(1) and that may reasonably be considered to be in respect of the property (subparagraph 13(21)(f)(iii) adjustment).
Although subsection 37(6) of the Act deems, for purposes of section 13 of the Act only, the property to be of a separate prescribed class, it is our opinion that the debtor's gain on settlement of debts under subsection 80(1) should reduce the capital cost of any capital property of the taxpayer, in the order mentioned in subsection 5400(1) of the Regulations. It would not reduce the undeducted capital expenditures included in the pool of SR&ED under paragraph 37(1)(b).
The only other possible impact would be on the losses of a taxpayer, listed in paragraph 80(1)(a) of the Act, if any.
We trust that the above comments will be satisfactorily.
Acting Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch