2023-0960171E5 Immediate expensing rules

Principal Issues: 1) Whether any recapture or terminal loss is included when determining income for purposes of paragraph 1100(0.1)(c) of the Regulations. 2) Whether the immediate expensing CCA deduction is deducted prior to regular CCA and whether regular CCA can still be used to create or increase a loss from self-employed business income. 3) What income amount an individual partner of a partnership should be using for the purposes of paragraph 1100(0.1)(c). 4) Whether income used for the purpose of paragraph 1100(0.1)(c) should be adjusted for the 12(1)(x) income inclusion related to the Return of Fuel Charge Proceeds to Farmers Tax Credit.

Position: 1) Yes 2) Immediate expensing CCA is deducted first, regular CCA can then be used to create or increase a loss from self-employment income subject to existing CCA restriction rules. 3) Where a partnership is involved, the immediate expensing rules apply at the partnership level as though the partnership were a separate tax payer. Therefore, any immediate expensing deduction for partnership property is made at the partnership level. 4) Provided an EPOP’s Return of Fuel Charge Proceeds to Farmers Tax Credit and DIEP relate to the same business, the credit is included in income for purposes of paragraph 1100(0.1)(c).

Reasons: 1)Wording of the Act. 2) Wording of the Act 3) Subsection 96(1), subsection 1100(0.1) of the Regulations. 4) Wording of the Act.

Author: Springate, Sarah
Section: 20(1)(a); 96(1); 127.42; 1100(0.1)

XXXXXXXXXX                                                                 2023-096017
                                                                                         S. Springate

March 24, 2023

Dear XXXXXXXXXX

This is in reply to your correspondence dated January 11, 2023, wherein you requested our views on various scenarios and how the immediate expensing rules in subsection 1100(0.1) of the Income Tax Regulations (Regulations) would apply when determining an individual’s capital cost allowance (CCA) for the year on form T2125. In particular, you asked for confirmation on whether certain amounts should be included in income when determining the amount calculated under paragraph 1100(0.1)(c) of the Regulations, and confirmation on whether CCA determined under subsection 1100(1) of the Regulations may be deducted after the immediate expensing incentive to create a loss.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the 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 a particular transaction 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

In general terms, the immediate expensing incentive in subsection 1100(0.1) of the Regulations allows for the immediate expensing of designated immediate expensing property (DIEP), as defined in subsection 1104(3.1) of the Regulations, subject to a maximum amount, acquired by an eligible person or partnership (EPOP). Immediate expensing is only available in the year in which an eligible property becomes available for use. The half-year rule does not apply to property for which the incentive is applied.

An eligible person or partnership (EPOP) means a Canadian-controlled private corporation (CCPC), an individual (other than a trust) resident in Canada, or a Canadian partnership where all the members are CCPCs, Canadian-resident individuals (other than a trust), or a combination thereof.

Under subsection 1100(0.1) of the Regulations, the immediate expensing deduction allowed by an EPOP for each taxation year is equal to the lesser of:

a) the EPOP’s immediate expensing limit (i.e., generally $1.5 million, subject to the requirement to allocate the limit among members of an associated group);

b) the undepreciated capital cost (UCC) to the EPOP as of the end of the taxation year (before making any CCA deduction for the taxation year) of property that is DIEP for the taxation year, and

c) if the EPOP’s is not a CCPC, their income (computed without regard to paragraph 20(1)(a) of the Act (i.e., CCA)), if any, earned from the business or property in which the relevant DIEP is used for the taxation year.

As a consequence of paragraph 1100(0.1)(c), an individual or partnership cannot use the immediate expensing incentive to create or increase a loss.

1. You have asked us to confirm whether the amount determined under paragraph 1100(0.1)(c) of the Regulations, e.g., an EPOP’s amount of income earned from a business or property (computed without regard to paragraph 20(1)(a) of the Act) in which the relevant DIEP is used for the EPOP’s taxation year, would include any relevant recapture of CCA or terminal loss.

As noted above, paragraph 20(1)(a) of the Act allows for the deduction of CCA and the reference to paragraph 20(1)(a) in paragraph 1100(0.1)(c) of the Regulations therefore excludes from the calculation of an EPOP’s income in which a DIEP is used deductions for CCA.

As noted in paragraph 1.95 of Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance (the “Folio”), the UCC to a taxpayer of depreciable property of a prescribed class is determined as of any time under subsection 13(21) of the Act. Increases to the UCC of the class include the capital cost to the taxpayer of a depreciable property for the class acquired before the determination time. The decreases to the UCC of the class include CCA taken for the class, and proceeds of disposition for property of the class disposed of, before the determination time. If the total of all the decreases exceeds the total of all the increases to the UCC of a class at the end of a tax year, subsection 13(1) provides that this excess (the negative UCC balance), commonly referred to as recapture, shall be included in computing the taxpayer's income for the year.

Where, however, at the end of a particular tax year, the total of all the increases to the UCC of a prescribed class exceed the total of all the decreases, and the taxpayer no longer owns any property in that class, subsection 20(16) of the Act provides that the excess (the positive UCC balance), commonly referred to as a terminal loss, shall be deducted in computing the taxpayer's income for the year. Subsection 20(16) also provides that no CCA may be claimed under paragraph 20(1)(a) for that class for the year.

Since a taxpayer’s recapture and terminal loss are included or deducted from income, respectively, under subsections 13(1) and 20(16) of the Act, and are not included in income under paragraph 20(1)(a), it is our opinion that these amounts would be reflected in an EPOP’s income amount for purposes of paragraph 1100(0.1)(c) of the Regulations where they relate to the same source of income that is a business or property in which the relevant DIEP is used for the EPOP’s taxation year.

We further note that where a taxpayer has either a recapture of CCA or a terminal loss in respect of a particular class in a taxation year, generally no CCA would be deducted in respect of that class in the year. A claim for CCA for a particular class is specifically denied under paragraph 20(16)(d) of the Act where the taxpayer has a terminal loss in respect of that class. While subsection 13(1) does not have a similar provision, where a taxpayer has recapture in respect of a particular class (i.e., where a taxpayer has a negative UCC balance for a class), CCA calculated on the negative balance would result in an income inclusion which is not provided for under paragraph 20(1)(a).

2. You have asked us to confirm whether immediate expensing CCA is deducted prior to regular CCA, and whether regular CCA can subsequently be used to create a loss from self-employed business income following the immediate expensing CCA claim.

We confirm that the immediate expensing incentive is both determined and deducted from income and the UCC balance of the relevant CCA class prior to regular CCA.

As previously noted, paragraph 1100(0.1)(c) of the Regulations imposes a limit on the immediate expensing deduction for EPOPs who are individuals or partnerships, of the amount of income, if any, earned from the source of income that is a business or property (computed without regard to paragraph 20(1)(a) of the Act) in which the relevant designated immediate expensing property is used for the EPOP’s taxation year. Therefore, this paragraph prevents an EPOP that is an individual or partnership from using the immediate expensing incentive to create or increase a loss. However, following their immediate expensing claim and subject to various rules which may apply to limit a taxpayer’s CCA claim for a taxation year, such as those in subsection 1100(11) of the Regulations relating to rental properties, or in subsection 1100(15) of the Regulations relating to leasing properties, an individual or partner may use regular CCA on any remaining UCC balances to create or increase a loss.

3. Where an individual earns business or property income as a member of a partnership, you have asked whether the income amount used for purposes of paragraph 1100(0.1)(c) of the Regulations should be the individual’s allocation of income from the partnership (i.e., as computed under sections 96 to 103 of the Act) or whether the income to be used would be the individual’s allocation of income from the partnership less any expenses that the individual partner may have incurred personally to earn the partnership income (e.g., personal vehicle expenses or business-use-of-home expenses).

A partnership is generally not considered to be a taxpayer and does not generally have a liability under Part I of the Act. However, subsection 96(1) of the Act deems a partnership to be a separate person resident in Canada for limited purposes, including for the computation of income, and states that income shall be computed as though each partnership activity (including the ownership of property) were carried on by the partnership as a separate person.

Therefore, when reference is made to “computing a taxpayer’s income… such part of the capital cost to the taxpayer of property… if any, as is allowed by regulation” in paragraph 20(1)(a) of the Act, we are of the view that the “taxpayer” that is referred to is the EPOP mentioned in subsections 1100(0.1) and 1104(3.1) of the Regulations. Consequently, CCA is computed at the partnership level for partnership property. In addition, we note that the immediate expensing rules, with respect to a partnership, appears to have been structured with the intent that the immediate expensing mechanism is determined at the partnership level for all purposes. As a result, where a partnership is involved, the immediate expensing income limit under paragraph 1100(0.1)(c) of the Regulations is determined at the partnership level as though the partnership were a separate taxpayer. In other words, it is our view that it is the partnership’s income (before CCA) that is relevant for determining this limit. Additionally, any immediate expensing incentive deduction is also made at the partnership level for purposes of determining the partnership’s income as though it were a separate taxpayer.

4. Lastly, you have asked us whether the immediate expensing limit determined under paragraph 1100(0.1)(c) of the Regulations should be adjusted for the income inclusion related to the Return of Fuel Charge Proceeds to Farmers Tax Credit (Farmers Fuel Charge Tax Credit) found in section 127.42 of the Act.

This credit amount is in respect of a farm business for an applicable fuel charge year and is equal to the “eligible farming expenses” as defined in subsection 127.42(1) of the Act, attributable to the applicable provinces in the calendar year when the fuel charge year starts, multiplied by a payment rate. Generally, eligible farming expenses consist of the total of all amounts deducted in the year by the taxpayer in computing income under Part I of the Act from farming activities, with certain exclusions.

A taxpayer’s Farmers Fuel Charge Tax Credit is included in their business income under paragraph 12(1)(x) of the Act in the year of the related farming activity. Therefore, provided an EPOP’s Farmers Fuel Charge Tax Credit and DIEP relate to the same business, it is our view that the Farmers Fuel Charge Tax Credit included in an EPOP’s business income would be included in the amount of income used for purposes of determining the immediate expensing limit under paragraph 1100(0.1)(c) of the Regulations.

We trust these comments will be of assistance.

Yours truly,

Pamela Burnley CPA, CA
Manager
Business and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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