2019-0821651I7 Filing of Long Term Project Election

Principal Issues: Is the long-term project election in subsection 13(29) required to be filed annually or only once?

Position: The long-term project election in subsection 13(29) is required to be filed by a taxpayer only once, with its return for the taxation year that is referred to as the "particular year" in subsection 13(29).

Reasons: Wording of subsection 13(29).

Author: Wharram, Kimberley
Section: Subsection 13(29)

                                                                                                                     October 1, 2020

Cameron Morash                                                                                         Income Tax Rulings Directorate
Oil and Gas Industry Specialist                                                                    2019-082165
Large Business Audit Division
International and Large Business Directorate

Dear Mr. Morash:

We are writing in response to your question regarding the long-term project election (“Long-Term Project Election”) under subsection 13(29) of the Income Tax Act (Canada) (the “Act”). In particular, you have asked whether the Long-Term Project Election is required to be filed only once or whether it must be filed annually.

Unless otherwise noted, all statutory references in this letter are to the provisions of the Act.

BACKGROUND

Pursuant to subsection 13(26), a taxpayer may not include an amount in computing its undepreciated capital cost (“UCC”) in respect of a depreciable capital property until that depreciable capital property has become available for use. Subsection 13(27) sets out the general rules for determining when a depreciable capital property will become available for use (the “general available-for-use rules”). (footnote 1)

Subsection 13(29) provides for an election that may be made where depreciable capital property is acquired as part of a long-term project. Where the election is made, the general available-for-use rules are modified to allow the taxpayer to claim a greater amount of capital cost allowance (“CCA”) than it could otherwise claim, generally beginning in the third taxation year of the project. The Explanatory Rules explain the general mechanics of subsection 13(29) as follows:

Where such an election is made by the taxpayer, the general available-for-use rules will be applied to all project-related expenditures made in the year in which project property was first acquired after 1989 and in the following year. However, in the third and subsequent years, application of the available-for-use rules to expenditures made as part of the project will be limited so that only those expenditures in any such year in excess of certain threshold amounts will be subject to the rules. These threshold amounts are determined with reference to expenditures incurred, on property that is part of the project, after 1989 and during years ending after the project commenced and at least 358 days before the beginning of the year under consideration. For example, in the case of a long-term project commencing after 1989, the amount of expenditures excepted from the available for use rules in the third year of the project under this special provision would be limited by the amount of project expenditures incurred in the first year of the project. The amount of expenditures excepted from the rules in the fourth year of the project would be limited, in general terms, by the amount of such expenditures on property in the second year of the project plus the amount of such expenditures from the first year that were not used in the third year to exclude expenditures.

The Explanatory Notes also provide examples illustrating these mechanics. These examples also illustrate that the Long-Term Project Election will generally be relevant to multiple taxation years.

ISSUE

You have asked whether the Long-Term Project Election is required to be filed by a taxpayer only once or whether it must be filed on a yearly basis, in each taxation year in which the taxpayer is making a claim for CCA that is based on the application of subsection 13(29).

CONCLUSION

The Long-Term Project Election is required to be filed by a taxpayer only once, with its return for the taxation year that is referred to as the “particular year” in subsection 13(29), which would generally be the third taxation year of the project (assuming the taxpayer first acquired property that is part of the project in its first taxation year of the project).

DISCUSSION

Text of subsection 13(29)

The language of subsection 13(29) is as follows:

“(29) Interpretation – Available for use —

For the purposes of subsection (26), where a taxpayer acquires property (other than a building that is used or is to be used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent) in the taxpayer's first taxation year (in this subsection referred to as the "particular year") that begins more than 357 days after the end of the taxpayer's taxation year in which the taxpayer first acquired property after 1989, that is part of a project of the taxpayer, or in a taxation year subsequent to the particular year, and at the end of any taxation year (in this subsection referred to as the "inclusion year") of the taxpayer

(a) the property can reasonably be considered to be part of the project, and

(b) the property has not otherwise become available for use,

if the taxpayer so elects in prescribed form filed with the taxpayer's return of income under this Part for the particular year, that particular portion of the property the capital cost of which does not exceed the amount, if any, by which

(c) the total of all amounts each of which is the capital cost to the taxpayer of a depreciable property (other than a building that is used or is to be used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent) that is part of the project, that was acquired by the taxpayer after 1989 and before the end of the taxpayer's last taxation year that ends more than 357 days before the beginning of the inclusion year and that has not become available for use at or before the end of the inclusion year (except where the property has first become available for use before the end of the inclusion year because of this subsection or paragraph (27)(b) or (28)(c))

exceeds

(d) the total of all amounts each of which is the capital cost to the taxpayer of a depreciable property, other than the particular portion of the property, that is part of the project to the extent that the property is considered, because of this subsection, to have become available for use before the end of the inclusion year

shall be considered to have become available for use immediately before the end of the inclusion year.”
                                                                    [Emphasis added.]

Relevant Taxation Years

Subsection 13(29) defines and references two different taxation years: (i) the particular year, and (ii) the inclusion year.

The “particular year” is “the taxpayer’s first taxation year … that begins more than 357 days after the end of the taxpayer’s taxation year in which the taxpayer first acquired property after 1989” which is part of the given project. Generally, the “particular year” will be the third taxation year of the project. (footnote 2)  The mid-amble of subsection 13(29) that is highlighted above clearly indicates that the taxpayer must file a single election with its return for the “particular year” in order for the taxpayer to benefit from the Long-Term Project Election.

Once the Long-Term Project election has been filed with its return for the particular year, subsection 13(29) will apply in respect of the taxpayer’s “inclusion year”. The “inclusion year” is any taxation year where, at the end of that taxation year:

*    the property that the taxpayer acquired in either in the particular year or in any taxation year subsequent to the particular year can reasonably be considered to be part of the project (the “acquired property”); and

*    the acquired property has not otherwise become available for use.

Generally, the “inclusion year” will be the third and subsequent taxation years of the project where the taxpayer owns project property in that taxation year that has not yet otherwise become available for use.

Impact of Filing the Long-Term Project Election

The effect of the filing of the Long-Term Project Election is that “that particular portion of property … [up to a threshold amount] shall be considered to have become available for use immediately before the end of the inclusion year”.  In other words, once the Long-Term Project Election has been filed with the return of the taxpayer for the particular taxation year, the cost of project property acquired in the particular year and subsequent inclusion years (up to a threshold amount) is deemed to be “available for use” and is therefore automatically added to the UCC of the relevant prescribed class.

Form T1031

Form T1031 is the prescribed form for the Long-Term Project Election in subsection 13(29). The information that is required in the current version of Form T1031 suggests that the form must be filed annually. We understand that Form T1031 is currently under review.

We trust that these comments will be of assistance to you.

Yours truly,

Kimberley J. Wharram
Manager, Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1     Subsections 13(28) to (31) are additional provisions that contain rules that apply to determine when properties become available for use in the situations described in those provisions.
2     This assumes that the taxpayer first acquired property that is part of the project in its first taxation year of the project and that the third taxation year of the project begins more than 357 days after the end of that first taxation year.

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