2014-0531601E5 OPSTC - "tangible property that is leased"

Principal Issues: For purposes of the Ontario Production Services Tax Credit, does a reference to the term “lease” refer to the commercial meaning of this term? Under common law, a lease normally confers exclusive possession while a license normally would not.

Position: Yes.

Reasons: In Will-Kare Paving & Contracting Limited vs. The Queen, the Supreme Court enunciated the principle that the plain meaning of terms cannot be used in place of well-defined commercial terms.

Author: Gibbons, Jim
Section: 92(5.6) of the OTA

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                                                                                                                                                     2014-053160
                                                                                                                                                     J. Gibbons

February 3, 2015

Dear XXXXXXXXXX:

Re:  Ontario Production Services Tax Credit (the “OPSTC”)

This is in reply to your email dated May 14, 2014, concerning our views of the meaning of “eligible tangible property expenditure” as set out in subsection 92(5.6) of the (Ontario) Taxation Act (the “OTA”).  This amount is a component of the OPSTC. 

Under subsection 92(3) of the OTA, a “qualifying corporation” that incurs “qualifying production expenditures” may claim an OPSTC equal to 25 per cent of these expenditures.  Amount “A” of the definition of “qualifying production expenditure” in subsection 92(5.1) of the OTA refers to a corporation’s “eligible tangible property expenditure” as defined in subsection 92(5.6) of the OTA.  Paragraph 2 of this latter definition provides that:

“If tangible property is leased by the corporation, the total of all amounts each of which is the proportion of the lease cost attributable to the use in Ontario of the property in the taxation year in the course of completing the eligible production.”

This definition of “eligible tangible property expenditure” refers to tangible property that is “leased” and to “lease cost”; however, it is your view that the term “lease” should include a “licence.”  You indicate that the OPSTC should not be denied solely because the owner of the property is not granting exclusive possession of the property and does not intend to create an interest in the property.  It is your view that the OPSTC should be allowed regardless of whether the property owner is granting a lease or a licence.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings.

In the common law provinces, it has generally been determined that a lease normally confers exclusive possession, while a licence normally would not.

In Will-Kare Paving & Contracting Limited v. The Queen, 2000 DTC 6467, the Supreme Court of Canada (the “SCC”) enunciated the principle that the plain meaning of terms cannot be used in place of well-defined commercial terms:

“[29] Notwithstanding this absence of direction, the concepts of a sale or a lease have settled legal definitions. As noted in Crown Tire and Hawboldt Hydraulics, Parliament was cognizant of these meanings and the implication of using such language.

Nevertheless, it remains that in drafting the manufacturing processing incentives to include reference to sale or lease, Parliament has chosen to use language that imports relatively fine private law distinctions. Indeed, the Act is replete with such distinctions. Absent express direction that an interpretation other than that ascribed by settled commercial law be applied, it would be inappropriate to do so.

[31] To apply a ‘plain meaning’ interpretation of the concept of a sale in the case at bar would assume that the Act operates in a vacuum, oblivious to the legal characterization of the broader commercial relationships it affects. It is not a commercial code in addition to a taxation statute. Previous jurisprudence of this Court has assumed that reference must be given to the broader commercial law to give meaning to words that, outside of the Act, are well-defined.”
[Our emphasis.]

Consistent with the comments above, it is our view that for purposes of the meaning of “lease cost” in paragraph 2 of the definition of “eligible tangible property expenditure” in subsection 92(5.6) of the OTA, the commercial meaning of “lease” must be applied. 

We trust these comments will be of assistance.

Yours truly,

G. Moore
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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