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Archived - Explanatory Notes – Proposed Regulations Amending the Income Tax Regulations (Phase-out of Accelerated Capital Cost Allowance for Oil Sands Projects-Budget 2007)

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The following explanatory notes accompany proposed changes to the Income Tax Regulations announced by the Government of Canada in Budget 2007 concerning the phase-out of the accelerated capital cost allowance for oil sands projects.  Details of the proposal are provided on pages 408 to 411 of Annex 5 to The Budget Plan 2007.

Section 1

CCA Rates

ITR
1100(1)(a)(xxvii.1)

Subsection 1100(1) of the Income Tax Regulations sets out the capital cost allowance (CCA) rates that taxpayers may claim with respect to prescribed classes of depreciable property.

Subsection 1100(1) is amended by adding new subparagraph (a) (xxvii.1) to provide a 25-per-cent CCA rate for the new Class 41.1. The new class generally applies to oil sands property acquired after March 18, 2007.

This amendment applies to taxation years that end after March 18, 2007.

Additional Allowances – Class 28 – Single Mine Properties

ITR
1100(1)(w)(i)

Subparagraph 1100(1)(w)(i) of the Regulations is amended to add references to new paragraphs 1100(1)(y.1) and (ya.1) of the Regulations.

This amendment applies to taxation years that end after March 18, 2007.

Additional Allowances – Class 28 – Multiple Mine Properties

ITR
1100(1)(x)(i)

Subparagraph 1100(1)(x)(i) of the Regulations is amended to add a reference to new paragraph 1100(1)(ya.1).

This amendment applies to taxation years that end after March 18, 2007.

Additional Allowances – Class 41 – Single Mine Properties

ITR
1100(1)(y)(i)

Subparagraph 1100(1)(y)(i) of the Regulations is amended to add a reference to new paragraph 1100(1)(ya.1).

This amendment applies to taxation years that end after March 18, 2007.

Additional Allowances – Class 41.1 – Single Mine Properties

ITR
1100(1)(y.1)

New paragraph 1100(1)(y.1) is added to the Regulations consequential to the introduction of new Class 41.1.  This paragraph provides for the gradual phase-out of the accelerated capital cost allowance (CCA), during the period 2011 to 2015, applicable to oil sands property that is single mine property and for which a separate class is prescribed by new subsection 1101(4e).

Under current rules, accelerated CCA is available in the form of an additional allowance which supplements the regular 25-per-cent CCA rate.  It allows a taxpayer to deduct, in computing income for a taxation year, up to 100-per-cent of the undepreciated capital cost of the properties included in the separate Class 41, not exceeding the taxpayer’s income for the year from the mine (calculated after deducting the regular CCA).

Oil sands property acquired after March 18, 2007 is generally included in new CCA Class 41.1.  New subsection 1101(4e) prescribes a separate class for single mine properties that are included in paragraph (a) of Class 41.1.  Properties included in paragraph (a) of new Class 41.1 remain eligible for the accelerated CCA until 2010.   Beginning in 2011, the accelerated CCA is phased out and the amount of the additional allowance will be reduced each year, regardless of whether the constraint is the income from the mine or the amount of the undepreciated capital cost.  The percentage allowed, as accelerated CCA, in each calendar year will be 90% in 2011, 80% in 2012, 60% in 2013 and 30% in 2014 of the amount otherwise allowable as accelerated CCA.  No accelerated CCA will be allowed after 2014 and only the regular 25-per-cent CCA rate will apply after 2014.

This amendment applies to taxation years that end after March 18, 2007.

Additional Allowances – Class 41.1– Multiple Mine Properties

ITR
1100(1)(ya.1)

New paragraph 1100(1)(ya.1) is added to the Regulations consequential to the introduction of new Class 41.1.  This paragraph provides for the gradual phase-out of the accelerated capital cost allowance (CCA), during the period 2011 to 2015, applicable to oil sands property that is a multiple mine property and for which a separate class is prescribed by new subsection 1101(4f).

Under current rules, accelerated CCA is available in the form of an additional allowance which supplements the regular 25-per-cent CCA rate. It allows a taxpayer to deduct, in computing income for a taxation year, up to 100-per-cent of the undepreciated capital cost of the properties included in the separate Class 41, not exceeding the taxpayer’s income for the year from the mine (calculated after deducting the regular CCA).

Oil sands property acquired after March 18, 2007 is generally included in new CCA Class 41.1.  New subsection 1101(4f) prescribes a separate class for multiple mine properties that are included in paragraph (a) of Class 41.1.  Properties included in paragraph (a) of new Class 41.1 remain eligible for the accelerated CCA until 2010.  Beginning in 2011, the accelerated CCA is phased out and the amount of the additional allowance will be reduced each year, regardless of whether the constraint is the income from the multiple mines or the amount of the undepreciated capital cost.  The percentage allowed, as accelerated CCA, in each calendar year will be 90% in 2011, 80% in 2012, 60% in 2013 and 30% in 2014 of the amount otherwise allowable as accelerated CCA.  No accelerated CCA will be allowed after 2014 and only the regular 25-per-cent CCA rate will apply after 2014.

This amendment applies to taxation years that end after March 18, 2007.

Section 2

Separate Classes – Businesses and Properties

ITR
1101

Section 1101 of the Regulations provides separate classes in respect of certain properties described in Schedule II to the Regulations and used to earn income.  Section 1101 is amended in two respects.  First, new subsections (4e) and (4f) are introduced.  Second, subsections (4a) to (4d) are reworded to be consistent with the wording of the new subsections.

Single Mine Property – Class 28

ITR
1101(4a)

Subsection 1101(4a) of the Regulations prescribes a separate class for single mine properties that are included in Class 28.  Subsection 1101(4a) is reworded to be consistent with the wording of new subsection 1101(4e).

This amendment applies to taxation years that end after March 18, 2007.

Multiple Mine Property – Class 28

ITR
1101(4b)

Subsection 1101(4b) of the Regulations prescribes a separate class for multiple mine properties that are included in Class 28.  Subsection 1101(4b) is reworded to be consistent with the wording of new subsection 1101(4f).

This amendment applies to taxation years that end after March 18, 2007.

Single Mine Property – Class 41

ITR
1101(4c)

Subsection 1101(4c) of the Regulations prescribes a separate class for single mine properties that are included in Class 41.  Subsection 1101(4c) is reworded to be consistent with the wording of new subsection 1101(4e).

This amendment applies to taxation years that end after March 18, 2007.

Multiple Mine Property – Class 41

ITR
1101(4d)

Subsection 1101(4d) of the Regulations prescribes a separate class for multiple mine properties that are included in Class 41.  Subsection 1101(4d) is reworded to be consistent with the wording of new subsection 1101(4f).

This amendment applies to taxation years that end after March 18, 2007.

Single Mine Property – Class 41.1

ITR
1101(4e)

New subsection 1101(4e) of the Regulations provides for a separate class for single mine properties that are included in paragraph (a) of new Class 41.1.

This amendment applies to taxation years that end after March 18, 2007.

Multiple Mine Property – Class 41.1

ITR
1101(4f)

New subsection 1101(4f) of the Regulations provides for a separate class for multiple mine properties that are included in paragraph (a) of new Class 41.1.

This amendment applies to taxation years that end after March 18, 2007.

Section 3

Special Property Rules

Electrical Plant Used for Mining

ITR
1102(8) and (9)

Paragraphs 1102(8)(d) and 1102(9)(d) of the Regulations allow certain taxpayers to elect to have property that would otherwise be included in Class 41 to instead be included in Class 43.1 or 43.2, as the case may be.  These paragraphs are amended to add a reference to new Class 41.1.  These amendments apply to property acquired after March 18, 2007. The coming-into-force provisions for these amendments­ provide that the reference to “for the taxation year in which the property was acquired” in paragraphs 1102(8)(d) and (9)(d) is to be read as “for the taxation year that includes ANNOUNCEMENT DATE.”  This ensures that, where a taxpayer has acquired property after March 18, 2007 and before the ANNOUNCEMENT DATE, the taxpayer has until the filing-due-date for the taxation year that includes the ANNOUNCEMENT DATE to make the election referred to in these paragraphs.

Property acquired in a non-arm’s length transfer

ITR
1102(14)

Subsection 1102(14) of the Regulations ensures that properties acquired by a taxpayer under certain circumstances remain properties of the same class as that of the person from whom the taxpayer acquired the property.

Subsection 1102(14) is amended to add a reference to new subsection (14.11) to ensure that, if applicable, the new rule in subsection 1102(14.11) supersedes the rule in subsection 1102(14).  This amendment applies to property acquired after March 18, 2007.

ITR
1102(14.1)

Subsection 1102(14.1) of the Regulations provides a special rule for the purpose of claiming capital cost allowance in respect of certain depreciable property.  This rule applies to a taxpayer that acquires a property of any class in Schedule II after May 25, 1976, if the acquired property had been owned before May 26, 1976 by the taxpayer or by a person with whom the taxpayer was not dealing at arm's length.  The effect of this rule is that the purchaser of such a property cannot include the property in a new class and the property stays in the old class.

Subsection 1102(14.1) is amended to exclude property of Class 28 and 41 and to ensure that it does not apply to acquired property that is to be included in new Class 41.1.  This amendment ensures that Class 41.1 applies to the property if the taxpayer has acquired a property to which Class 41.1 would otherwise apply and which was owned before May 26, 1976 by the taxpayer or by a person with whom the taxpayer was not dealing at arm's length.  Therefore, the acquired property is to be included in the new class 41.1 and is not to be included in the same class as the property was included in the class by the taxpayer, or by a person with whom the taxpayer was not dealing at arm's length, when the property was owned by the taxpayer or by a person with whom the taxpayer was not dealing at arm's length before March 26, 1976.

This amendment applies to property acquired after March 18, 2007.

ITR
1102(14.11)

New subsection 1102(14.11) of the Regulations is introduced to ensure that the undepreciated capital cost (UCC) pool of an oil sands property included in Class 41 is preserved, for the purpose of deducting an additional capital cost allowance (CCA) under the Regulations, in circumstances where subsection 1102(14) applies.

Generally, an oil sands property acquired after March 18, 2007 is to be included in new Class 41.1.  New subsection 1102(14.11), however, ensures that where a Class 41 property is acquired in circumstances to which subsection (14) applies, the additional accelerated CCA will continue to be available to the extent of the UCC pool of the vendor.

Paragraph (a) of new subsection 1102(14.11) provides for a rollover of the reduction in the UCC of Class 41 of the vendor to the UCC of Class 41 of the purchaser. Paragraph (b) of new subsection 1102(14.11) provides for any excess of the reduction in the UCC of Class 41 of the vendor over the opening UCC balance of the vendor to be included in Class 41.1 of the purchaser.

The accelerated CCA in the form of an additional allowance supplements the regular CCA rate for Class 41 property.  The additional allowance allows a taxpayer to deduct in computing income for a taxation year up to 100-per-cent of the UCC of the properties included in the separate Class 41, not exceeding the taxpayer’s income for the year from the mine (calculated after deducting the regular CCA).

The accelerated CCA is available in full only until 2010 for property included in paragraph (a) of the new Class 41.1.  After 2010, the accelerated CCA is gradually phased out during the 2011-2014 period.  The percentage allowed in each of those calendar years will be 90% in 2011, 80% in 2012, 60% in 2013 and 30% in 2014 of the amount otherwise allowable as accelerated CCA.  No accelerated CCA will be allowed after 2014 and only the regular 25-per-cent CCA rate will apply after 2014.

This amendment applies to property acquired after March 18, 2007.

Section 4

Definitions

ITR
1104(2)

Subsection 1104(2) of the Regulations sets out definitions that apply for the purposes of Part XI of the Regulations and Schedule II to the Regulations.

Subsection 1104(2) is amended in two respects.  First, the definition “specified temporary access road” is amended.  Second, various definitions are added in connection with the phase-out of accelerated CCA for property used in oil sands projects and the consequential  introduction of Class 41.1 applicable to oil sands property acquired after March 18, 2007.

Accelerated CCA continues to be provided without any phase-out in respect of “specified oil sands property” acquired before 2012 and included in paragraph (a), (a.1) or (a.2) of Class 41 that is required to complete a “specified development phase” of a taxpayer’s “oil sands project.”  “Specified development phase” is defined with reference to a threshold level of activity involving a “designated asset” that must have been acquired or under construction before March 19, 2007.  In determining whether an oil sands property is required for a “specified development phase” to reach completion, reference is made to the planned level of average daily output from the phase of the “oil sands project” of the taxpayer. Oil sands property acquired after March 18, 2007 that would otherwise be included in paragraph (a), (a.1) or (a.2) of Class 41 is included in paragraph (a) of new Class 41.1, for which the additional accelerated allowance is gradually phased out over the period 2011 to 2015.

“specified temporary access road

The definition “specified temporary access road” in subsection 1104(2) of the Regulations, is amended by adding a reference to paragraph (k.1) of the definition of “Canadian exploration expense” in subsection 66.1(6) of the Income Tax Act, in its paragraph (b). This amendment ensures that a specified temporary access road will not be considered property of a prescribed class merely because a taxpayer has an expense that is the cost of the road.

This amendment to the definition “specified temporary access road” applies after March 5, 1996.

“bitumen development phase

A “bitumen development phase” of a taxpayer’s “oil sands project” means a “development phase” that expands the oil sands project’s capacity to extract and initially process “tar sands” to produce bitumen or a similar product.

This new definition applies after March 18, 2007.

“completion

The definition “completion” is important for determining when a “specified development phase” of an “oil sands project” is complete.  

A specified development phase of a taxpayer’s oil sands project would be considered to have reached completion when the level of average output from the specified development phase, (measured over a 60–day period) equal to at least 60% of the planned level of average daily output (as that term is described in paragraph (b) of the definition “specified development phase”) is achieved.

This new definition applies after March 18, 2007.

“designated asset

The definition  “designated asset” is important in determining whether a “development phase” of an “oil sands project” of a taxpayer is a “specified development phase.”

Paragraph (a) of the definition lists the designated assets in the case of a “bitumen development phase” of a taxpayer’s oil sands project.   In such a case, designated asset means a property that is a building, a structure, machinery or equipment and is, or is an integral and substantial part of,

(i) a crusher,

(ii) a froth treatment plant,

(iii) a primary separation unit,

(iv) a steam generation plant,

(v) a cogeneration plant, or

(vi) a water treatment plant.

Similarly, paragraph (b) of the definition lists the designated assets in the case of an “upgrading development phase” of a taxpayer’s oil sands project.  In such a case designated asset means a property that is a building, a structure, machinery or equipment and is, or is an integral and substantial part of,

(i) a gasifier unit,

(ii) a vacuum distillation unit,

(iii) a hydrocracker unit,

(iv) a hydrotreater unit,

(v) a hydroprocessor unit, or

(vi) a coker.

This new definition applies after March 18, 2007.

development phase

The “development phase” of a taxpayer’s “oil sands project” means the acquisition, construction, fabrication or installation of a group of assets, by or on behalf of the taxpayer that may reasonably be considered to constitute a discrete expansion, upon “completion”, in the capacity of the oil sands project (including, for greater certainty, the initiation of a new oil sands project).

This new definition applies after March 18, 2007.

“oil sands project

An “oil sands project” of a taxpayer means an undertaking by the taxpayer for the extraction of “tar sands” from a mineral resource owned by the taxpayer, which undertaking may include the processing of the tar sands to a stage that is not beyond the crude oil stage or its equivalent.

This new definition applies after March 18, 2007.

“oil sands property

An “oil sands property” of a taxpayer means property acquired by the taxpayer for the purpose of earning income from an “oil sands project” of the taxpayer.

This new definition applies after March 18, 2007.

“preliminary work activity

The definition “preliminary work activity” is important in determining whether a “development phase” of an “oil sands project” of a taxpayer is a “specified development phase.”  The undertaking prior to March 19, 2007 of preliminary work activities in respect of a designated asset in a development phase would not qualify the development phase as a specified development phase. 

A preliminary work activity means activity that is preliminary to the acquisition, construction, fabrication or installation by or on behalf of a taxpayer of “designated assets” in respect of the taxpayer's oil sands project including, without limiting the generality of the foregoing, the following activities:

(a) obtaining permits or regulatory approvals,

(b) performing design or engineering work,

(c) conducting feasibility studies,

(d) conducting environmental assessments,

(e) clearing or excavating land,

(f) building roads, and

(g) entering into contracts.

This new definition applies after March 18, 2007.

“specified development phase

A specified development phase of a taxpayer’s oil sands project means a bitumen development phase or an upgrading development phase of the oil sands project which can reasonably be expected to result in a planned level of average daily output, and in respect of which (not including any preliminary work activity) one or more designated assets before March 19, 2007, were acquired by the taxpayer, or were being constructed, fabricated or installed, by or on behalf of the taxpayer.

The planned level of average daily output in respect of a specified development phase is the lesser of:

(a) the level that it was the demonstrated intention of the taxpayer as of March 19, 2007 to produce from the specified development phase; and

(b) the maximum level of output associated with the design capacity, as of March 19, 2007, of the designated asset or assets that were acquired or being constructed, fabricated or installed before March 19, 2007.

This new definition applies after March 18, 2007.

“specified oil sands property

The definition “specified oil sands property” is important in determining whether an “oil sands property” continues to qualify for inclusion in Class 41.  Oil sands property acquired on or after March 19, 2007 that would otherwise be eligible for accelerated CCA must be included in new Class 41.1, unless it is a specified oil sands property.

A specified oil sands property of a taxpayer means oil sands property, acquired by the taxpayer before 2012, the taxpayer’s use of which is reasonably required

(a) in order for a “specified development phase” of an “oil sands project” of the taxpayer to reach “completion,” or

(b) as part of a “bitumen development phase” of an oil sands project of the taxpayer,

(i) to the extent that the output from the bitumen development phase is required for an “upgrading development phase” that is a specified development phase of the oil sands project to reach completion, and it is reasonable to conclude that all or substantially all of the output from the bitumen development phase will be so used, and

(ii) where it was the demonstrated intention of the taxpayer as of March 19, 2007 to produce, from a mineral resource owned by the taxpayer, the bitumen feedstock required for the upgrading development phase to reach completion.

This new definition applies after March 18, 2007.

“upgrading development phase

An “upgrading development phase” of a taxpayer’s “oil sands project” means a “development phase” that expands the oil sands project’s capacity to process bitumen or a similar feedstock (all or substantially all of which is from a mineral resource owned by the taxpayer) to the crude oil stage or its equivalent.

This new definition applies after March 18, 2007.

Mining

ITR
1104(5)

Subsection 1104(5) of the Regulations describes the expression “income from a mine” or any expression referring to a taxpayer’s income from a mine.

Subsection 1104(5) is amended to add references to new paragraphs 1100(1) (y.1) and (ya.1), to new subsections 1101(4e) and (4f), and to the new Class 41.1.  This ensures that the description of the expression “income from a mine” or any expression referring to a taxpayer’s income from a mine in subsection 1104(5) also apply for the purposes of these new provisions.

This amendment applies after March 18, 2007.

Mining

ITR
1104(5.1)

Subsection 1104(5.1) of the Regulations describes the expression “gross income from a mine” for the purpose of Class 41 of Schedule II to the Regulations.

Subsection 1104(5.1) is amended to add a reference to new Class 41.1.  This ensures that the description of the expression “gross income from a mine” in subsection 1104(5.1) also applies for the purpose of the new Class 41.1.

This amendment applies after March 18, 2007.

Mine

ITR
1104(7)

Subsection 1104(7) of the Regulations describes a mine for certain provisions of the Regulations.

Subsection 1104(7) is amended to add references to new paragraphs 1100(1)(y.1) and (ya.1), to new subsections 1101(4e) and (4f), and to new Class 41.1.  This ensures that the description of a mine also applies for the purposes of these new provisions in the Regulations.

This amendment applies after March 18, 2007.

Production

ITR
1104(8.1)

Subsection 1104(8.1) of the Regulations clarifies that any references to the word “production” means - for the purposes of paragraphs (c) and (e) of Class 28 and paragraph (a) of Class 41 in Schedule II - production in reasonable commercial quantities.

Subsection 1104(8.1) is amended to add a reference to paragraph (a) of new Class 41.1.  This ensures that for the purposes of paragraph (a) of new Class 41.1 production also means production in reasonable commercial quantities.

This amendment applies after March 18, 2007.

Section 5

Investment Tax Credits

ITR
Part XLVI

Part XLVI of the Regulations provides for rules that are generally applicable for the purposes of various definitions in subsection 127(9) of the Act.  The definitions in subsection 127(9) of the Act are relevant for the purposes of the investment tax credit regime.  Section 4600 of the Regulations is amended to add references to new Class 41.1.

Qualified Property

ITR
4600(1)(b)

Subsection 4600(1) of the Regulations prescribes a building for the purposes of the definition “qualified property” in subsection 127(9) of the Act. The cost of a qualified property is included in the definition “investment tax credit” in subsection 127(9) of the Act.  A deduction may be claimed, under subsection 127(5) of the Act, in respect of an investment tax credit against tax otherwise payable by a taxpayer.

Paragraph 4600(1)(b) is amended to add a reference to new Class 41.1.  This amendment applies after March 18, 2007.

ITR
4600(2)(j)

Subsection 4600(2) of the Regulations prescribes machinery and equipment for the purposes of the definition “qualified property” in subsection 127(9) of the Act. The cost of a qualified property is included in the definition “investment tax credit” in subsection 127(9) of the Act.  A deduction may be claimed, under subsection 127(5) of the Act, in respect of an investment tax credit against tax otherwise payable by a taxpayer.

Paragraph 4600(2)(j) is amended to add a reference to new Class 41.1.  This amendment applies after March 18, 2007.

Section 6

Capital Cost Allowance – Prescribed Classes

ITR
Schedule II

Schedule II to the Regulations lists the properties that can be included in each capital cost allowance (CCA) class.  A portion of the capital cost of depreciable property is deductible as CCA each year.  CCA rates for each type of property, identified by their CCA classes, are set out in section 1100 of the Regulations.

Class 10 (30% rate)

The mid-amble in Class 10 (30-per-cent CCA rate) in Schedule II to the Regulations that is after paragraph (f.2) and before paragraph (g) is amended to add a reference to new Class 41.1.

This amendment applies to property acquired after March 18, 2007.

Class 41 (25% rate)

The pre-amble to Class 41 (25-per-cent CCA rate) in Schedule II to the Regulations is amended to add a reference to new Class 41.1.  This amendment ensures that Class 41 does not apply to oil sands property included in Class 41.1. This amendment generally applies to property acquired after March 18, 2007.  Specified oil sands property acquired after March 18, 2007 and before 2012 can be included in Class 41.  Oil sands property acquired before 2016 that is generally not eligible for accelerated CCA (i.e. property described in paragraphs (a.3) to (d)) of Class 41 will continue to be included in this class.

Class 41.1 (25% rate)

New Class 41.1 (25-per-cent CCA rate) includes certain oil sands property (other than specified oil sands property) acquired after March 18, 2007.

Paragraph (a) of new Class 41.1 includes oil sands property acquired after March 18, 2007  and before 2016 that, if the property had been acquired before March 19, 2007, would have been included in paragraphs (a), (a.1) or (a.2) of Class 41.

Paragraph (b) of new Class 41.1 includes oil sands property acquired after 2015 that, if the property had been acquired before March 19, 2007, would have been included in Class 41.

Under current rules, accelerated CCA is available in the form of an additional allowance which supplements the regular 25-per-cent CCA rate.  It allows a taxpayer to deduct, in computing income for a taxation year, up to 100 per cent of the undepreciated capital cost of the properties included in the separate Class 41, not exceeding the taxpayer’s income for the year from the mine (calculated after deducting the regular CCA).

As discussed in the notes accompanying new subsections 1101(4e) and (4f), these subsections prescribe separate classes for certain properties that are included in paragraph (a) of new Class 41.1.  These separate classes of properties remain eligible for the full accelerated CCA until 2010.  Beginning in 2011, the accelerated CCA is phased out and the amount of the additional allowance will be reduced each year, regardless of whether the constraint is the level of project income or the amount of the undepreciated capital cost.  The percentage allowed, as accelerated CCA, in each calendar year will be 90% in 2011, 80% in 2012, 60% in 2013 and 30% in 2014 of the amount otherwise allowable as accelerated CCA.  No accelerated CCA will be allowed and only the regular 25-per-cent CCA rate will apply for assets in this Class after 2014.

This amendment generally applies to property acquired after March 18, 2007.  Specified oil sands property acquired after March 18, 2007 and before 2012 can be included in Class 41.