2015-0599901E5 Qualified Property - Fishing Vessel

Principal Issues: Could a fishing vessel that is built from new and used parts meet the definition of QP in subsection 127(9) of the Act?

Position: Question of fact but in this case no.

Reasons: The law.

Author: Couvrette, Amanda
Section: 127(5); 127(9); 4600(2)

XXXXXXXXXX                                               2015-059990
                                                                       Amanda Couvrette

November 24, 2015

Dear XXXXXXXXXX

RE: “Qualified Property”

We are writing in response to your email of July 21st, 2015 wherein you requested our views on whether a certain fishing vessel would be considered “qualified property” within the meaning of that phrase, as defined in subsection 127(9) of the Income Tax Act (the “Act”), for the purposes of the Federal investment tax credit.

Briefly, as we understand your situation, the taxpayer is a corporation that is in the business of commercial fishing that operates out of XXXXXXXXXX.  The taxpayer is considering several different options to acquire a fishing vessel.  One option is to purchase a fishing vessel from a supplier that is built using a combination of both new and used component parts including a used hull.  You would like to know if such a fishing vessel would be considered as a “qualified property” on the basis that such property, assuming all the other requirements are met, has not been used for any purpose whatever before it was acquired by the taxpayer.

Our comments

Written confirmation of the income tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R6 dated August 29, 2014, issued by the Canada Revenue Agency (CRA).  A fee is charged for this service.  Although we are unable to provide any comments with respect to the specific situation that you have described, otherwise than in the form of an advance income tax ruling, we will provide the following general comments.

Qualified property of a taxpayer, as defined in subsection 127(9) includes, inter alia, prescribed machinery and equipment acquired by the taxpayer after June 23, 1975 that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is, inter alia, to be used by the taxpayer in Canada primarily for the purpose of, inter alia, farming or fishing.  A vessel is prescribed machinery or equipment as outlined in subsection 4600(2) of the Regulations.

In paragraph 24 of cancelled IT-331R, "Investment Tax Credit", the CRA administratively allowed some used equipment to essentially be treated as being new and unused for Federal investment tax credit purposes where "major renovations" were made to such property that otherwise would meet the definition of qualified property.  The validity of this administrative position was recently commented on by the Tax Court of Canada in Pêcheries Yvon Savage Inc. v. The Queen, 2011 TCC 477.  In particular, the court noted in Pêcheries that it was not bound by the CRA’s administrative position and found in the fact situation before it that the vessel was not qualified property as it was not new and unused.  Given the inherent difficulties in consistently applying this administrative position, the CRA no longer considers the administrative position in paragraph 24 of cancelled IT-331R to be valid.

However, in a situation where an entirely new vessel (e.g., one constructed using a new hull that has never been registered in any jurisdiction or otherwise used before) has come into existence at the end of a construction process by which new and used components were combined to form that vessel, then it could be said that such a vessel has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer.  In the case at hand, since a major component of the vessel (i.e., the hull) has been used, it would not be considered unused for purposes of the definition of qualified property in subsection 127(9).

Careful consideration based on the particular facts and circumstances of each case would be required in order to determine whether or not a particular property would be considered a qualified property for the purposes of the Federal investment tax credit.

We trust these comments will be of assistance.

Yours truly,

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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