Canada Gazette

These amendments to the Income Tax Regulations (the "Regulations") primarily concern capital cost allowance (CCA) rates for depreciable property. A portion of the capital cost of a taxpayer's depreciable property is deductible as CCA each year in the computation of the taxpayer's income. The maximum CCA rate for each type of depreciable property is set out in the Regulations. Various factors affect the useful lives of capital assets, including technological obsolescence and changing market conditions.

1. The 2000 Budget announced certain measures to ensure that CCA rates were appropriate and did not impede the ability of Canadian firms to invest and compete. The following four proposals from the 2000 Budget were first released for consultations in draft form in Appendix C of the explanatory notes which accompanied proposed changes to the Income Tax Act (the "Act") tabled in the House of Commons on March 16, 2001, by the Minister of Finance (Finance news release 2001-029). These CCA changes apply to property acquired after February 27, 2000. In particular, these proposed changes provided for the following measures:

2. The following changes were also proposed in Finance news release 2001-029 of March 16, 2001.

3. Vessels. The changes related to vessels, the introduction of subsection 1101(2c) to the Regulations and a related amendment to Class 41 deny the additional CCA available to Canadian vessels and offshore drilling vessels in cases where the construction of the vessel or its attachments benefited from a federal loan financing facility. These changes are consequential to the creation of the Structured Financing Facility Program administered by Industry Canada. Under that program, participating taxpayers agree to forego the additional CCA that would otherwise be available. That policy was posted on Industry Canada's Web site on November 7, 2001. This consequential change was released in draft form on December 20, 2002 (for more detailed information, see Appendix C of the explanatory notes that accompanied proposed amendments to the Act published with Finance's news release 2002-107).

4. Class 43.1 property (30 percent CCA rate). This matter concerns two deficiencies in the current wording of Class 43.1.

These changes to Class 43.1 are made to better reflect the original proposals but generally apply to property acquired on or after the date of publication of the text of these changes in Part I of the Canada Gazette.

5. The other changes implemented by these amending Regulations are consequential to the above-noted matters or update the French version of some provisions.

These amendments are necessary to ensure that the Regulations remain relevant in a rapidly changing economic and technological environment, to address certain deficiencies in the CCA provisions, and to reflect a new government loan financing facility for vessels. No other alternatives were considered.

The 2000 Budget estimated that the cost of the adjustments to the CCA regime, in the manner proposed in that budget, would be $10 million, $45 million and $80 million in each of fiscal years 2000-2001, 2001-2002 and 2002-2003, respectively. The costs arising in subsequent fiscal years have not been estimated. These changes are intended to make the tax system more neutral by reflecting the actual lives of assets, thereby ensuring the accurate measurement of income for tax purposes by providing appropriate recognition of capital costs over time. Alignment of CCA rates with the useful life of assets can enhance productivity and standards of living through a more efficient allocation of investment across classes of assets.

Other amendments to the Regulations merely bring them in step with how they are presently administered, or reflect government policy such as the new government loan financing facility for vessels. Therefore, these amendments are expected to have minimal impact on government revenues.

The proposed changes related to railway cars and manufacturing and processing equipment were announced after consultation with industry stakeholders. The proposed changes concerning electrical generators were announced after extensive consultation with associations representing the industry and with officials of Natural Resources Canada and the Canada Customs and Revenue Agency. The proposed changes concerning vessels were announced in consultation with Industry Canada. Officials of the Canada Customs and Revenue Agency and of the Department of Finance identified most of the changes that concern deficiencies in the Regulations. However, the deficiency relating to the application of the Atlantic Canada Investment Tax Credit to Class 43.1 property was brought to the attention of the Department of Finance by a taxpayer from the Atlantic provinces.

The changes to CCA rates are part of a general policy of updating CCA rates to better reflect the useful lives of assets. These changes are intended to make the tax system more neutral by reflecting the actual lives of assets, thereby ensuring the accurate measurement of income for tax purposes by providing appropriate recognition of capital costs over time. These adjustments help ensure that investment decisions are motivated by underlying economic factors rather than by tax treatment.

Other changes clarify certain anomalies in the current wording of Class 43.1, including ensuring that a previously announced exclusion from the class of "reconditioned or remanufactured equipment" applies to all property in the Class as had been announced. This will ensure that the provision is targeted towards the most current energy efficient technology.

The implementation of these Regulations is not expected to have any significant environmental effects.

The Act provides the necessary compliance mechanisms. These mechanisms allow the Minister of National Revenue to assess and reassess taxes payable, conduct audits and seize relevant records and documents. The Class 43.1 Technical Guide and Technical Guide to Canadian Renewable and Conservation Expense, published by Natural Resources Canada, sets out engineering and scientific criteria applicable in determining inclusions in Class 43.1.

Kerry Harnish, Tax Legislation Division, Department of Finance, L'Esplanade Laurier, 140 O'Connor Street, Ottawa, Ontario K1A 0G5, (613) 992-4385.

Notice is hereby given that the Governor in Council, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), proposes to make the annexed Regulations Amending the Income Tax Regulations (Capital Cost Allowance).

Interested persons may make representations with respect to the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Kerry Harnish, Tax Legislation Division, Department of Finance, L'Esplanade Laurier, 17^th Floor, East Tower, 140 O'Connor Street, Ottawa, Canada, K1A 0G5.

1. (1) Subsection 1100(1) of the Income Tax Regulations (see footnote 1) is amended by adding the following after paragraph (z.1b):

(z.1c) where throughout the taxation year the taxpayer was a common carrier that owned and operated a railway, such additional amount as the taxpayer may claim in respect of property for which a separate class is prescribed by subsection 1101(5d.2), not exceeding six percent of the undepreciated capital cost to the taxpayer of property of that class as of the end of the year (before making any deduction under this subsection for the year);

(2) Subclause 1100(1)(zc)(i)(E)(II) of the French version of the Regulations is replaced by the following:

(II) de l'équipement de contrôle du trafic ferroviaire ou de signalisation, y compris l'équipement d'aiguillage, de signalisation de cantonnement, d'enclenchement, de protection des passages à niveau, de détection, de contrôle de la vitesse ou de retardement, mais non les biens qui sont principalement de l'équipement électronique ou du logiciel de systèmes pour de l'équipement électronique,

2. (1) Section 1101 of the Regulations is amended by adding the following after subsection (2b):

(2c) Subsections (2a) and (2b) do not apply to a vessel, nor to the furniture, fittings, radio communications equipment and other equipment attached to the vessel, if a structured financing facility relating to any such property has been agreed to by the Minister of Industry under the Department of Industry Act.

(5d.1) A separate class is hereby prescribed for all property included in Class 35 in Schedule II acquired at a time after December 6, 1991 and before February 28, 2000 by a taxpayer that was at that time a common carrier that owned and operated a railway.

(5d.2) A separate class is hereby prescribed for all property included in Class 35 in Schedule II acquired at a time after February 27, 2000 by a taxpayer that was at that time a common carrier that owned and operated a railway.

(5q) Each of subsections (5p) and (5s) apply to a property or properties of a taxpayer only if the taxpayer has (by letter attached to the taxpayer's return of income filed with the Minister in accordance with section 150 of the Act for the taxation year in which the property or properties were acquired) elected that the subsection apply to the property or properties, as the case may be.

(4) Section 1101 of the Regulations is amended by adding the following after subsection (5r):

(5s) Subject to subsection (5q), a separate class is prescribed for one or more properties of a taxpayer

(a) that were acquired in a taxation year and included in the year in Class 43 in Schedule II because of paragraph (a) of that Class; and

(5t) A separate class is prescribed for one or more properties of a taxpayer that are a combustion turbine (including associated burners and compressors) included in Class 17 in Schedule II because of subparagraph (a.1)(i) of that Class if the taxpayer has (by letter attached to the taxpayer's return of income filed with the Minister in accordance with section 150 of the Act for the taxation year in which the property or properties were acquired) elected that this subsection apply to the property or properties.

3. (1) The heading before subsection 1103(2g) of the Regulations is replaced by the following:

(2) Section 1103 of the Regulations is amended by adding the following after subsection (2h):

(2i) In respect of any property otherwise included in Class 7 in Schedule II because of paragraph (h) of that Class and to which paragraph 1100(1)(z.1a) and subsection 1101(5d), or paragraph 1100(1)(z.1c) and subsection 1101(5d.2), would apply if Class 35 of that Schedule applied to the property, the taxpayer may (by letter attached to the taxpayer's return of income filed with the Minister in accordance with section 150 of the Act for the taxation year in which the property was acquired) elect to include the property in Class 35 rather than in Class 7.

4. Section 1104 of the Regulations is amended by adding the following after subsection (14):

(15) For the purpose of subsection (14), a taxpayer's system referred to in that subsection that has at any particular time operated in the manner required by paragraph (c) of Class 43.1 in Schedule II includes at any time after the particular time a property of another person or partnership if

(a) the property would reasonably be considered to be part of the taxpayer's system were the property owned by the taxpayer;

(b) the property utilizes steam obtained from the taxpayer's system primarily in an industrial process (other than the generation of electrical energy);

(c) the operation of the property is necessary for the taxpayer's system to operate in the manner required by paragraph (c) of Class 43.1; and

(d) at the time that the taxpayer's system first became operational, the deficiency, failing or shutdown in the operation of the property could not reasonably have been anticipated by the taxpayer to occur within five years after that time.

5. Subsection 4600(2) of the Regulations is amended by striking out the word "or" at the end of paragraph (k), by adding the word "or" at the end of paragraph (l) and by adding the following after paragraph (l):

(m) a property included in Class 43.1 in Schedule II because of paragraph (c) of that Class.

6. Clause 4601(a)(iv)(B) of the French version of the Regulations is replaced by the following:

(B) de l'équipement de contrôle du trafic ferroviaire ou de signalisation, y compris l'équipement d'aiguillage, de signalisation de cantonnement, d'enclenchement, de protection des passages à niveau, de détection, de contrôle de la vitesse ou de retardement, mais non les biens qui sont principalement de l'équipement électronique ou du logiciel de systèmes pour de l'équipement électronique,

7. Paragraph (q) of Class 1 in Schedule II to the Regulations is replaced by the following:

(q) a building or other structure, or a part of it, including any component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures, elevators and escalators (except property described in any of paragraphs (k) and (m) to (p) of this Class or in any of paragraphs (a) to (e) of Class 8).

8. Class 7 in Schedule II to the Regulations is amended by striking out the word "or" at the end of paragraph (f) and by adding the following after paragraph (g):

(h) subject to an election made under subsection 1103(2i), property acquired after February 27, 2000 that is

(i) a rail suspension device designed to carry trailers that are designed to be hauled on both highways and railway tracks, or

(ii) a railway car; or

(i) property acquired after February 27, 2000 that is a railway locomotive, but not including an automotive railway car.

9. The portion of Class 8 in Schedule II to the Regulations before paragraph (a) is replaced by the following:

10. (1) Class 17 in Schedule II to the Regulations is amended by adding the word "or" at the end of paragraph (a) and by adding the following after paragraph (a):

(a.1) property (other than a building or other structure) acquired after February 27, 2000 that has not been used for any purpose before February 28, 2000 and is

(i) electrical generating equipment (other than electrical generating equipment described in any of paragraphs (f) to (h) of Class 8), or

(ii) production and distribution equipment of a distributor of water or steam used for heating or cooling (including, for this purpose, pipe used to collect or distribute an energy transfer medium but not including equipment or pipe used to distribute water that is for consumption, disposal or treatment),

(2) The portion of Class 17 of Schedule II to the French version of the Regulations that is after paragraph (a.1) and before paragraph (c) is replaced by the following:

ainsi que les biens ci-après qui ont été acquis après le 25 mai 1976 et ne sont compris dans aucune autre catégorie de la présente annexe :

b) un équipement téléphonique, télégraphique ou de commutation de transmission des données, sauf :

(i) l'équipement installé dans les locaux du client,

(ii) le bien constitué principalement par un équipement électronique ou un logiciel de systèmes pour un tel équipement;

11. The portion of paragraph (b) of Class 41 in Schedule II to the Regulations before subparagraph (i) is replaced by the following:

12. (1) The portion of Class 43.1 in Schedule II to the Regulations before paragraph (a) is replaced by the following:

Property, other than reconditioned or remanufactured equipment, that would otherwise be included in Class 1, 2 or 8 or in Class 17 because of subparagraph (a.1)(i) of that Class,

(2) The portion of Class 43.1 in Schedule II to the Regulations after paragraph (c) and before paragraph (d) is replaced by the following:

and property, other than reconditioned or remanufactured equipment, that would otherwise be included in another Class in this Schedule

(3) The portion of subparagraph (d)(ii) of Class 43.1 in Schedule II to the French version of the Regulations before clause (A) is replaced by the following:

(ii) une installation hydro-électrique d'un producteur d'énergie hydro-électrique (sauf le matériel de distribution, les biens compris autrement dans la catégorie 10 et les biens qui seraient compris dans la catégorie 17 en l'absence de son sous-alinéa a.1)(i)) qui répond aux conditions suivantes :

(4) The portion of subparagraph (d)(ii) of Class 43.1 in Schedule II to the English version of the Regulations after clause (B) is replaced by the following:

other than distribution equipment, property otherwise included in Class 10 and property that would be included in Class 17 if that Class were read without reference to its subparagraph (a.1)(i),

(5) The portion of subparagraph (d)(v) of Class 43.1 in Schedule II to the Regulations after clause (B) is replaced by the following:

other than distribution equipment, auxiliary electrical generating equipment, property otherwise included in Class 10 and property that would be included in Class 17 if that Class were read without reference to its subparagraph (a.1)(i),

(6) The portion of subparagraph (d)(vi) of Class 43.1 in Schedule II to the Regulations after clause (C) is replaced by the following:

other than buildings, distribution equipment, auxiliary electrical generating equipment, property otherwise included in Class 10 and property that would be included in Class 17 if that Class were read without reference to its subparagraph (a.1)(i),

(7) Subparagraph (d)(vii) of Class 43.1 in Schedule II to the Regulations is replaced by the following:

(vii) above-ground equipment used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy solely from geothermal energy, including such equipment that consists of pumps, heat exchangers, steam separators, electrical generating equipment and ancillary equipment used to collect the geothermal heat, but not including buildings, transmission equipment, distribution equipment, equipment designed to store electrical energy, property otherwise included in Class 10 and property that would be included in Class 17 if that Class were read without reference to its subparagraph (a.1)(i),

13. (1) Subsections 1(1), 2(2) to (4), sections 3, 8 and 9, subsections 10(1) and 12(1) and (3) to (7) apply to property acquired after February 27, 2000, except that subsections 1101(5s) and (5t) of the Income Tax Regulations, as enacted by subsection 2(4), apply in respect of property

(a) acquired by a taxpayer after February 27, 2000 and in a taxation year ending on or before the day of the publication of this subsection in Part II of the Canada Gazette; and

(b) in respect of which the taxpayer has elected, in a letter filed with the Minister of National Revenue, before the end of the sixth calendar month beginning after the month in which this subsection is published in Part II of the Canada Gazette.

(2) Subsection 2(1) and section 11 are deemed to have come into force on November 7, 2001.

(4) Paragraph 4600(2)(m) of the Income Tax Regulations, as enacted by section 5, applies to property acquired after February 21, 1994.

(6) Subsection 12(2) applies to property acquired by a taxpayer on or after the day of the prepublication of the text of that subsection in Part I of the Canada Gazette, other than property acquired by a taxpayer on or after that day pursuant to a written agreement made before that day by the taxpayer and a person with whom the taxpayer deals at arm's length.

TRANSITION — SUBSECTION 13(1) ELECTIONS AND
SUBSECTION 1103(2G) OF THE INCOME
TAX REGULATIONS

14. For the purpose of subsection 1103(2g) of the Income Tax Regulations, an election that is in respect of property described in subsection 1101(5s) of the Income Tax Regulations and that is made under subsection 13(1) of the present regulations is deemed to have been made in accordance with subsection 1101(5q) of the Income Tax Regulations.