| 19(1) | File No. 5-8194 |
| G.R. White | |
| (613) 957-8585 |
June 28, 1989
Dear Sirs:
Re: Adjustments to earned depletion base
We are writing in reply to your letter dated June 5, 1989 in which you asked whether there would be a reduction in a taxpayer's earned depletion base (EDB) of an amount equal to 16 2/3% or 33 1/3% of any investment tax credit (ITC) claimed, for example, in year 1989 on assets acquired in 1987 in view of certain tax reform proposals.
With respect to your query our comments are as follows:
The EDB of a taxpayer at any particular time is 1/3 of any qualifying expenditures incurred by the taxpayer before that timeless any amount of the EDB deducted as an allowance in computing income for a previous year and certain other adjusting items. One of these qualifying expenditures included in EDB is the capital cost of certain depreciable property.
In determining capital cost of depreciable property, subsection 13(7.1) of the Income Tax Act requires a taxpayer to reduce the capital cost to the extent that he has deducted an ITC. An amendment to subsection 13(7.1) applicable for taxation years ending after 1987 requires a reduction of the capital cost of a depreciable property only for taxation years following that in which a related ITC is claimed.
Therefore in your example, ITC deducted will not reduce EDB at a stated percentage as a result of the enactment of any tax reform proposal. Instead ITC deducted will reduce the capital cost of the 1987 asset which is always to be included with the EDB at 331/3%. The capital cost of the 1987 asset is reduced by the ITC deduction in the year following the claim which is year 1990 - but the 1987 asset still goes into the EDB at 33 1/3% of its (reduced) capital cost in year 1990. With respect to year 1989 there is no effect on the EDB vis-a-vis ITC claimed in 1989 in respect of the 1987 asset included in the EDB.
We trust the above is the information you require.
ChiefResource Industries SectionBilingual Services and ResourceIndustries DivisionRulings Directorate