| Mr. Robert Fitzpatrick | |
| Project Officer | |
| Propulsion and Aircraft Systems Division | F.B. Fontaine |
| Aerospace, Defence and | 957-2095 |
| Industrial Benefits Branch | 902190 |
| Industry, Science and Technology Canada | EACC9648 |
September 19, 1990
Dear Mr. Fitzpatrick:
Re: Capital Cost Allowance
This is in reply your letter dated August 22, 1990 concerning the determination of capital cost for capital cost allowance purposes.
Following our telephone conversation of September 12, 1990 (Fontaine/Fitzpatrick) we outline our understanding of the situation as follows:
24(1)
On the basis of the above scenario you request whether the company would be entitled to claim a capital cost allowance ("CCA") on the full cost of depreciable property in the year of acquisition.
Our comments are as follows:
1. Paragraph 12(1)(x) of the Income Tax Act (the "Act") requires that certain amounts received by a taxpayer in the course of earning income from a business from a government be included in income. These amounts include any payment made as a "contribution" or "forgivable loan" in respect of the cost of property. However, any such amount or a part thereof that is applied to reduce the cost of the property is excluded in computing income of the taxpayer.
2. Also, subsection 13(7.1) of the Act requires a taxpayer or reduce the capital cost of a depreciable property by the amount of any financial assistance the taxpayer has received or is entitled to receive from a government. Such assistance, as in paragraph 12(1)(x), includes a forgivable loan. Similarly, paragraph 127(11.1)(b) of the Act requires such a reduction in calculating the investment tax credit in respect of the property under subsection 127(9) of the Act.
3. The Department considers that a government loan which is unconditionally repayable ordinarily would be excluded from paragraph 12(1)(x) and would not constitute government assistance for the purposes of either subsection 13(7.1) or paragraph 127(11.1)(b). However, repayment of the particular loans or contributions in question appears to be conditional upon achieving a projected sales level. As such, they would not be considered as being unconditionally repayable under the terms of the loan agreements.
4. Where any possibility of forgiveness is inherent in the terms and conditions of a loan agreement, paragraph 12(1)(x) applies to the principal amount of the forgivable loan, to the extent that it does not reduce the cost of depreciable property, pursuant to subsection 13(7.1). In this latter instance, CCA claimed on a relevant depreciable property will be calculated on the cost of the property, less any portion of the forgivable loan which relates to the cost of such property. However, any part of the loan that is subsequently repaid will be added at that time to the reduced cost base of the property on which CCA is then calculated.
5. It is a question of fact, in any given set of circumstances, whether or not a loan can be considered to be unconditionally repayable. In a particular case, the provision under a loan agreement to make repayments on condition that a specified level of sales is achieved or to make only a limited number of repayments after which any unpaid balance will be forgiven, in our opinion,would indicate that the loan is not unconditionally repayable.
We trust our comments will be of assistance to you. They are an expression of our opinion only based on limited information provided and should not be construed to be an advance income tax ruling binding on the Department.
Yours truly,
for Director Business and General Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch