Principal Issue: [TaxInterpretations translation]
What tax treatment should be given to a GST rebate relating to the capital cost of Class 10.1 property when the rebate is received by an employee after the property is disposed of?
Position:
The UCC of the class to which the property belonged is reduced.
Reasons:
The description of "J" in the definition of UCC in subsection 13(21) of the Act includes the amounts of assistance that the taxpayer received or was entitled to receive in respect of a depreciable property that would have been subject to paragraph 13(7.1)(f) but for the taxpayer's disposition of the property. That amount reduces the UCC of the class to which the property belonged.
October 4, 2002
Quebec Tax Services Office Headquarters
Client assistance N. Deslandes, CGA
(613) 957-8961
Attention: Mr. Bruno Faucher
2002-013980Request for Technical Interpretation: Paragraph 6(8)(b) of the Act
This is in response to your fax of May 8, 2002, in which you requested our opinion on the above subject. We apologize for the delay in responding to your request.
You describe the situation of an employee who, in Year I, claimed a goods and services tax ("GST") rebate for employees and partners on line 457 of the individual’s tax return. Part of this rebate related to the depreciation that the employee claims on a motor vehicle, which, for purposes of the Income Tax Act (the "Act"), was a passenger vehicle in Class 10.1 of Schedule II to the Income Tax Regulations ("Class 10.1").
The GST rebate took place in the year following the sale of the passenger vehicle, i.e., Year II. The taxpayer acquired a new vehicle, but it was included in a separate Class 10.1.
You wish to know the tax treatment of the portion of the GST rebate that relates to capital cost allowance for the Class 10.1 vehicle. You told us that, generally speaking, such a rebate, when connected to an asset, reduces the capital cost of the asset pursuant to subsection 13(7.1).
OUR COMMENTS
Paragraph 6(8)(b) of the Act provides two deeming rules regarding GST rebates relating to the capital cost of property described in subparagraph 8(1)(j)(ii) or (p)(ii). First, the GST refund is deemed to be an amount received during the year and, second, the amount received is treated as government assistance.
For an employee, the tax treatment of a GST rebate is therefore deemed to be similar to that of an amount of government assistance. Generally speaking, an amount of assistance received or receivable from a government in respect of depreciable property will be treated differently for tax purposes, depending on whether the taxpayer was entitled to receive or received the amount of assistance in question before or after disposing of the depreciable property.
Subsection 13(7.1) provides that the capital cost of a property will be reduced by any assistance received or receivable from a government on condition that the taxpayer does not dispose of the property in question before the taxpayer was entitled to receive such assistance.
Cases where a taxpayer has already disposed of the depreciable property in question before being entitled to receive, or receiving, the related assistance, are covered by the description of "J" in the definition of undepreciated capital cost ("UCC") in subsection 13(21). That provision includes the amount that a taxpayer is entitled to receive as government assistance in respect of a depreciable property that would otherwise have been subject to subsection 13(7.1) but for the taxpayer's disposition of the property. That amount reduces the UCC of the class to which the property belonged.
Under subsection 253(3) of the Excise Tax Act, an employee is entitled to a GST rebate where the employee files an application with the Minister along with a return of income filed under Part I of the Act. In the situation here, the employee had already disposed of the vehicle before being entitled to receive the related GST rebate. Consequently, the employee must reduce the Class 10.1 UCC under the description of "J" in the definition of UCC in subsection 13(21).
However, subsection 13(2) provides that there will be no recapture of depreciation where there is an excess under subsection 13(1) in respect of a Class 10.1 property. For more details on the particulars of Class 10.1, please refer to paragraphs 9 and 10 of Interpretation Bulletin IT-478R2, Capital Cost Allowance - Recapture and Terminal Loss.
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope you find these comments of assistance. Should you require any additional information regarding this document, please do not hesitate to contact us.
Best regards,
Manager
Individuals, Business
and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
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