Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Would, (1) recaptured depreciation under subsection 13(1) of the Act; (2) investments tax credits included in income under paragraphs 12(1)(t) and (v) of the Act; and, (3) charitable donations and political contributions, be included/deducted in determining the income from production and/or processing under subsection 1204 of the Regulations.
Position: (1) and (2): Yes. (3): No
Reasons: A taxpayer's income from the year from a business is the taxpayer's profit determined by Division B of the Act, which includes amounts determined under subsection 13(1) of the Act, and paragraphs 12(1)(v) and (t) of the Act. The recapture provisions of the Act and Regulations are fundamentally adjustments to income of previous years and do not create, in the year of disposal of the asset, some new form or source of income. A recapture of depreciation, to the extent the recapture is in respect of capital cost allowance claimed in computing gross resource profits in prior years, would be included in gross resource profits. Using the same reasoning, an amount under 12(1)(v) that arose due to investments tax credits included under paragraph 37(1)(e), would be included in computing gross resource profits. Amounts determined under paragraphs 12(1)(t) would be included in the taxpayer's income for the year from production and/or processing in computing gross resource profits, to the extent that the amounts are in respect of SR and ED amounts that were deducted under subsection 37(1) of the Act in computing gross resource profits in prior years.
Deductions for charitable donations and political contributions are not deductions in computing income from a business, but, rather, are deductions made in computing taxable income or are deductions from taxes otherwise payable. Since they are not deductions in computing income from a business, they cannot be deducted in calculating gross resource profits or resource profits for resource allowance purposes.
January 30, 2001
Industry Specialist Services HEADQUARTERS Harry Hayes Building Reorganizations and Calgary TSO Resources Division David Shugar 957-2134 Attention: Zul Ladak, Oil and Gas Specialist 2000-003654
Recapture and Donations for Resource Allowance Purposes
This is in reply to your correspondence of June 29, 2000 wherein you provided your positions, and requested our opinion thereon, in respect of whether the following amounts are required to be included in the calculation of the resource allowance under subsection 1210(1) of the Income Tax Regulations (ITR):
1. Recaptured depreciation determined under subsection 13(1) of the Income Tax Act (the "Act");
2. Amounts determined under paragraph 12(1)(v) of the Act with respect to a negative Scientific Research and Experimental Development (SR & ED) pool balance.
3. Amounts determined under paragraph 12(1)(t) of the Act to the extent the amounts are not included in an amount determined under paragraph 37(1)(e) of the Act.
4. Charitable donations and political contributions.
Our Comments
The resource allowance is determined in accordance with the ITR, and in very general (and simplified) terms, a taxpayer must first compute its gross resource profits, which is defined in subsection 1204(1) of the ITR. This amount is then modified in accordance with subsection 1204(1.1) of the ITR, and the resulting amount is a taxpayer's resource profits, which is itself adjusted by subsection 1210(2) of the ITR to become adjusted resource profits. Subsequently, the formula in subsection 1210(1) of the ITR determines the resource allowance that the taxpayer will be able to deduct in computing its income.
The expression "the taxpayer's income for the year" is used throughout the Act and ITR to refer to the taxpayer's income for the year from all sources, including sources from each office, employment, business and property, unless it is restricted to certain sources. Under subsection 9(1) of the Act, a taxpayer's income for the year from a business is the taxpayer's profit from that business, as determined by Division B of the Act, which includes amounts determined under subsection 13(1) of the Act, and paragraphs 12(1)(v) and (t) of the Act. In calculating gross resource profits, a taxpayer's source of income for the year is restricted to incomes from production and/or processing of certain natural resources.
In Powell Rouyn Gold Mines Limited v. MNR (59 DTC 401), recapture of CCA was held to be applicable to the same source of income from which the relevant CCA was deducted in prior years. In M.N.R. v Bessemer Trust Company et al, 73 DTC 5045 (F.C.A.) and 72 DTC 6404 (F.C.T.D.), both courts shared the view that generally, the recapture provisions of the Act and ITR are fundamentally adjustments to income of previous years and do not create, in the year of disposal of the asset, some new form or source of income.
In our view, based on the above-noted jurisprudence that recapture of expenses or deductions in computing income should be characterized as the same source of income from which the expenses or deductions were claimed, recaptured depreciation under subsection 13(1) of the Act would be included in income from the production and/or processing of certain natural resources. To the extent the recapture is in respect of capital cost allowance claimed in computing gross resource profits in prior years, we agree with your position that recaptured depreciation should be included in income for the year from production and/or processing in computing gross resource profits, and consequently, in the calculation of the resource allowance under subsection 1210(1) of the ITR.
In our view, the reasoning given in Powell also applies with respect to amounts included in income under paragraphs 12(1)(t) or (v) of the Act. In our view, amounts determined under paragraphs 12(1)(t) or (v) of the Act would be included in the taxpayer's income for the year from production and/or processing in computing gross resource profits. To the extent that the amounts are in respect of SR & ED amounts that were deducted under subsection 37(1) of the Act in computing gross resource profits in prior years, we agree with your position that amounts included in income under paragraphs 12(1)(t) or (v) of the Act should be included in income for the year from production and/or processing in computing gross resource profits, and consequently, in the calculation of the resource allowance under subsection 1210(1) of the ITR.
Paragraph 18(1)(a) denies a deduction for charitable donations in calculating a taxpayer's income for the year from a business. Subsection 2(2) of the Act allows corporations a deduction for donations in computing taxable income, under section 110.1 of Division C of the Act. Individuals may claim charitable donations as a tax credit against tax otherwise payable under section 118.1 of Division E of the Act. Paragraph 18(1)(n) of the Act denies a deduction for political contributions in computing income for the year from a business. Subsection 127(3) of the Act allows a deduction for political contributions from tax otherwise payable. Since the Act does not allow a deduction for charitable donations or political contributions in calculating income, the amounts cannot be deducted in calculating income for the year from production and/or processing in computing either gross resource profits under subsection 1204(1) of the ITR, or resource profits under subsection 1204(1.1) of the ITR. Therefore we agree with your position that charitable donations and political contributions cannot be deducted in calculating resource profits, and are not allowed as deductions for resource allowance purposes.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch