2023-0984301E5 Code 5 - Reducing inclusion under para 12(1)(x)

Principal Issues: Whether the income inclusion for government assistance under subparagraph 12(1)(x)(iv) could be can be reduced under the Act.

Position: Yes, depending on what the government assistance was received for.

Reasons: See analysis.

Author: Flisfeder, Anna
Section: 12(1)(x), 12(2.2), 13(7.1), 13(7.4), 53(2)(k), 53(2.1)

XXXXXXXXXX                                                                       2023-098430
                                                                                               Anna Flisfeder

February 16, 2024

Dear XXXXXXXXXX:

Re:   Reductions to paragraph 12(1)(x) inclusion for government assistance

This is in reply to your letter dated July 14, 2023, on behalf of future private sector recipients of funding from your organization to construct and/or repair affordable housing units. In particular, you requested our views on whether the income inclusion for certain government assistance described under subparagraph 12(1)(x)(iv) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”) could be reduced under the Act.

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

Unless otherwise stated, all references to a statute are to the Act, and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. The singular should be read as plural and vice versa, where the circumstances so require.

Facts

Aco is a taxable corporation and a resident of Canada. Aco carries on a construction business and owns a portfolio of real estate assets in Canada as capital property.

Aco will receive an amount from a Crown corporation that is described under subparagraph 12(1)(x)(iv), for the purpose of creating or repairing affordable housing (the “Government Assistance”). The Crown corporation will not acquire any interest in Aco or the property of Aco under the terms of the Government Assistance. Pursuant to the agreement setting out the terms of the Government Assistance between Aco and the Crown corporation, Aco may use the proceeds of the Government Assistance only for the purposes of:

* the purchase of existing non-affordable housing;

* construction costs to convert existing structures into affordable housing units;

* the repair and renewal of existing affordable housing units properties;

* the purchase of land on which affordable housing units will be built; and

* the construction of new affordable housing buildings.

Questions

1. Will the Government Assistance be included in taxable income in the year of receipt under paragraph 12(1)(x)?

2. Are there any provisions under the Act that may reduce the income inclusion?

Our Comments

1. Will the Government Assistance be included in taxable income in the year of receipt?

We have assumed that the Government Assistance is described under subparagraph 12(1)(x)(iv); namely, that it is assistance in respect of an amount included or deducted as the cost of property, or the cost of an outlay or expense.

Generally, the amount of the income inclusion under paragraph 12(1)(x) in respect of the Government Assistance may be reduced by amounts described in subparagraphs 12(1)(x)(v) through 12(1)(x)(viii). Should none of those provisions apply, the full amount of the Government Assistance will be included in taxable income in the year it is received.

2. Are there any provisions under the Act that may reduce the income inclusion?

There are provisions in the Act that, if applicable, will reduce the amount of the income inclusion under paragraph 12(1)(x), depending on what the Government Assistance was received for.

There are three provisions – subsection 13(7.1), paragraph 53(2)(k) and subsection 12(2.2) – that may apply to the fact scenario, as discussed in detail below. Please note that the elective provisions under subsections 13(7.4) and 53(2.1) do not apply to the fact scenario, because of the automatic application of subsection 13(7.1) and paragraph 53(2)(k).

Subsection 13(7.1) – acquisition of depreciable property – building and construction costs

In general terms, subsection 13(7.1) automatically reduces the cost of depreciable property by any government assistance received by the taxpayer in respect of, or for the acquisition of, depreciable property. This provision applies automatically and ahead of the election available under subsection 13(7.4).

Therefore, to the extent that the Government Assistance received by Aco was in respect of or for the acquisition of depreciable property, subsection 13(7.1) will deem that amount of assistance to reduce the capital cost of the depreciable property. To the extent that subsection 13(7.1) applies, the inclusion under paragraph 12(1)(x) will be reduced pursuant to subparagraph 12(1)(x)(vi). There is no need to file any election in respect of such amounts.

Based on the fact scenario, the part of the proceeds of the Government Assistance received by Aco to acquire a building would reduce the cost of that building under subsection 13(7.1). As well, the expenditure of construction costs may be considered the acquisition of depreciable property that is a “building or structure”. Therefore, any part of the proceeds of the Government Assistance used by Aco to make capital expenditures (as opposed to current expenses) related to the construction of new affordable housing, or to convert existing buildings into affordable housing, may also reduce the cost of that property under subsection 13(7.1). Note that, to the extent that certain capital expenditures are otherwise deductible under a specific provision of the Act, such expenditures will not form the cost of depreciable property pursuant to subsection 1102(1)(a) of the Income Tax Regulations. Therefore, subsection 13(7.1) would not apply to such expenses (see discussion related to the subsection 12(2.2) election, below).

We refer you to Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance, which among other things, discusses the capital cost allowance system in general terms and addresses some of the more common issues encountered by taxpayers, including determining whether an expenditure is capital in nature and establishing the time at which depreciable property is considered to have been acquired.

If Aco later repays the Government Assistance pursuant to an obligation to repay all or any part of the receipt in respect of depreciable property and before the disposition of that property, subsection 13(7.1) will automatically increase the cost of that property at the time that the Government Assistance is repaid.

Paragraph 53(2)(k) – Cost of non-depreciable capital property - land

Section 53 of the Act sets out rules for determining the adjusted cost base of capital property (that is not depreciable property) for the purposes of calculating any gain or loss on its disposition. Subsection 53(2) sets out reductions to the adjusted cost base of capital properties. Generally, paragraph 53(2)(k) provides that the adjusted cost base of a property is reduced by the amount of government assistance received or receivable in respect of the acquisition of the property.

Accordingly, to the extent that the Government Assistance is received by Aco for the acquisition of non-depreciable capital property, such as land, paragraph 53(2)(k) will apply to reduce the adjusted cost basis of such property by that amount.

Where paragraph 53(2)(k) applies, the inclusion under paragraph 12(1)(x) will be reduced pursuant to subparagraph 12(1)(x)(vi). There is no need to file any election in respect of such amounts.

If Aco later repays the Government Assistance pursuant to an obligation to repay all or any part of the receipt in respect of non-depreciable capital property, subsection paragraph 53(2)(k) will increase the cost of that property at the time that the Government Assistance is repaid.

Subsection 12(2.2) election – deductible expenses

In general terms, subsection 12(2.2) enables a taxpayer to elect to reduce an outlay or expense (other than an outlay or expense in respect of the cost of property) where reimbursements, contributions, allowances or assistance which would otherwise be included in income under paragraph 12(1)(x) are received in respect of the outlay and expense.

To the extent that the proceeds of the Government Assistance are used to fund an outlay or expense that is otherwise fully deductible in the year under a provision of the Act (e.g. landscaping under paragraph 20(1)(aa), investigation costs under paragraph 20(1)(dd), disability related modifications to buildings in accordance with paragraph 20(1)(qq), salary and certain repairs and maintenance under subsection 9(1)), Aco may elect under subsection 12(2.2) to reduce the outlay or expense by the amount of the related assistance. Note that whether an expense is currently deductible or a capital outlay is a question of fact that must be determined based on all of the surrounding facts and circumstances. Please refer to Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance for a discussion on this topic.

To the extent that an election is made under subsection 12(2.2), the inclusion under paragraph 12(1)(x) will be reduced pursuant to subparagraph 12(1)(x)(vii). As an alternative, Aco may choose to take the deduction in respect of the outlay or expense in the normal course, and have an inclusion under paragraph 12(1)(x); the net result will be the same.

To the extent that an amount was previously included in Aco’s income under paragraph 12(1)(x), or not included by reason of subsection 12(2.2), any repayments of the Government Assistance may be deducted in the year of repayment by Aco under paragraph 20(1)(hh) as long as Aco meets the criteria in that provision.

New paragraph 12(1)(x)(ix) – excluded loans

We also draw your attention to legislative changes to paragraph 12(1)(x) released by the Department of Finance on December 20, 2023. In general terms, the amendments provide that, effective November 21, 2023, bona fide non-forgivable loans with reasonable repayment terms from public authorities will not be included in a taxpayer’s income.

Specifically, new subparagraph 12(1)(x)(ix) provides that the income inclusion under paragraph 12(1)(x) does not apply to the extent that the amount is an “excluded loan”.

The new definition of “excluded loan” under subsection 12(11) provides:

“excluded loan” means a loan evidenced in writing, other than a forgivable loan,

(a) that is from a payer that is

(i) a government, municipality or other public authority in Canada, or

(ii) a person resident in Canada or Canadian partnership, if it is reasonable to conclude that the payer would not have made the loan but for the direct or indirect receipt by the payer of amounts from a government, municipality or other public authority in Canada;

(b) for which, at the time the loan was made, bona fide arrangements were made for repayment of the loan within a reasonable time; and

(c) the funds from which were used for the purpose of earning income from a business or property.

Thus, to the extent that the amount of any advances from the Crown corporation to Aco are described in the new definition of “excluded loan” under subsection 12(11), the amount of the income inclusion under paragraph 12(1)(x) may be reduced under new subparagraph 12(1)(x)(ix) by that amount.

Should future recipients of the Government Assistance require confirmation of the tax consequences to their specific circumstances, we encourage them to submit an advance income tax ruling request in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

We trust these comments will be of assistance.

Yours truly,

Tobias Witteveen
Manager
Partnerships and Corporate Financing Section
Reorganization Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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