ARCHIVED - Capital Cost Allowance - Vessels

From: Canada Revenue Agency

NO.:

IT-267R2

DATE:

February 28, 1995

SUBJECT:

INCOME TAX ACT
Capital Cost Allowance -- Vessels

REFERENCE:  

Paragraph 20(1)(a) (also subsections 13(1), 13(4), 13(14), 13(16) and 13(17) and the definitions of "conversion," "conversion cost" and "vessel" in subsection 13(21)) of the Income Tax Act and subsections 1100(16), 1101(2a), 1101(2b), 1102(14), 1102(14.1) and 1102(20), paragraphs 1100(1)(v) and 1100(1)(va), and classes 7 and 41 of Schedule II of the Income Tax Regulations)


Notice -- Bulletins do not have the force of law

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Capital Cost Allowance -- Vessels

Application

This bulletin cancels and replaces Interpretation Bulletin IT-267R dated December 31, 1979, and the Special Release dated March 14, 1985.

Summary

This bulletin outlines the capital cost allowance provisions that apply to vessels and includes a discussion on the classification of various types of vessels and the corresponding rates of capital cost allowance, as well as the recapture of depreciation for vessels.

Discussion and Interpretation

General

¶ 1. "Vessel" is defined in subsection 13(21) to mean a vessel as defined in the Canada Shipping Act. The Canada Shipping Act states that a "vessel" includes any ship or boat or any other vessel used, or designed to be used, in navigation. For example, the following are considered vessels, if used or designed to be used in navigation:

(a) dredges, barges or lighters, even if they are rudderless or not self-propelled;

(b) dracones; and

(c) floating cranes.

¶ 2. Vessels, other than "Canadian vessels" (see ¶s 5 and 6 below) and most "offshore drilling vessels" (see ¶s 7 to 10 below), are included in class 7 in Schedule II of the Regulations. The furniture, fittings and equipment (other than radiocommunication equipment) attached to, and spare engines for, such vessels are also included in class 7. The maximum annual rate of capital cost allowance ("CCA") for class 7 property is 15% applied to the undepreciated capital cost of the class and the maximum CCA claim is subject to the "50% rule" for property acquired in a year. See the current version of Interpretation Bulletin IT-285, Capital Cost Allowance -- General Comments, for a discussion of the "50% rule." In addition, if a vessel (or a vessel under construction, see ¶ 3 below) is acquired and is not considered available for use, the CCA claim will be restricted until the time that it is available for use. The "available for use" rules are contained in subsections 13(26) to (31).

¶ 3. A vessel under construction is included in class 7 even though the vessel may qualify to be included in a separate class when construction is completed (see ¶s 5, 8 and 10 below). However, a vessel under construction that is described in class 41 (see ¶ 9 below) is included in class 41.

Accelerated Capital Cost Allowance

¶ 4. A "Canadian vessel" or an "offshore drilling vessel" may have all or part of its cost qualify as a separate prescribed class having a CCA rate designed to create an incentive for the acquisition, construction or conversion of the vessel. These vessels are outlined in ¶s 5 to 10 below.

Canadian Vessels

¶ 5. Under paragraph 1100(1)(v) of the Regulations, accelerated CCA on a straight-line basis at a maximum annual rate of 33 1/3% of the capital cost of the property (16 2/3% for the year of acquisition, see ¶ 6 below) is available for the following properties ("Canadian vessels"):

(a) a vessel described in subsection 1101(2a) of the Regulations (including the furniture, fittings, radiocommunication equipment and other attached equipment) that:

(i) was constructed in Canada;

(ii) is registered in Canada; and

(iii) had not been used for any purpose whatever before it was acquired by the taxpayer;

(b) a "conversion cost" (defined in subsection 13(21) as the cost of a conversion for a vessel; and "conversion," also defined in subsection 13(21), for a vessel, means a conversion or major alteration in Canada by a taxpayer); and

(c) a vessel, or a conversion cost for a vessel, established as a separate prescribed class under the Canadian Vessel Construction Assistance Act that was repealed on March 23, 1967.

Each vessel is established as a separate prescribed class under subsection 1101(2a) of the Regulations and each conversion cost for a vessel is established as a separate prescribed class under subsection 13(14) of the Act.

These properties will not be considered to have been acquired for purposes of calculating the accelerated CCA claim until they are available for use.

¶ 6. The maximum CCA rate is limited to 16 2/3% for the year of acquisition for properties described in ¶ 5 above, other than:

(a) specified leasing property of a corporation that was throughout the year a corporation described in subsection 1100(16) of the Regulations;

(b) property acquired by a taxpayer when a lease of the property terminates and the "50% rule" had already applied to the taxpayer for the property in a previous year because the taxpayer had made an election, under section 16.1, to be considered as having acquired the leased property; and

(c) property for which CCA claims were deferred under the available for use rules but which are considered to be available for use under the "rolling-start" rule in paragraph 13(27)(b) or (28)(c).

Offshore Drilling Vessels

¶ 7. The term "offshore drilling vessel" refers to:

(a) floating drillships, stabilized by dynamic positioning and, where possible, by anchoring; and

(b) semi-submergible rigs stabilized by submerging pontoons to a more stable depth and by anchoring.

An offshore drilling platform of the "jack-up" type that stands on the seabed is not considered to be a vessel. For a discussion of CCA for drilling rigs that are not vessels, see the current version of Interpretation Bulletin IT-476, Capital Cost Allowance -- Gas and Oil Exploration and Production Equipment.

¶ 8. Depending on the circumstances, an "offshore drilling vessel" could be included in any one of the following classes:

(a) class 7 (see ¶ 2 above), if it is not a vessel described in (b), (c) or (d);

(b) a separate class established for each qualifying vessel by subsection 1101(2a) of the Regulations, if the vessel meets the requirements of that Regulation (i.e., it is a "Canadian vessel" -- see ¶ 5 above);

(c) class 41, when the vessel so qualifies both as to principal design and acquisition dates (see ¶ 9 below), if it is not a vessel described in (b); or

(d) a separate class for vessels meeting the requirements of subsection 1101(2b) of the Regulations both as to principal design and acquisition dates (see ¶ 10 below), if it is not a vessel described in (b).

¶ 9. A vessel (including the furniture, fittings, radiocommunication equipment and other equipment attached thereto) acquired after 1987 will generally be included in class 41 if it is designed principally for the purpose of:

(a) determining the existence, location, extent or quality of accumulations of petroleum, natural gas or mineral resources; or

(b) drilling oil or gas wells.

The maximum annual rate of CCA for class 41 property is 25% applied to the undepreciated capital cost of the class, subject to the "50% rule" and the "available for use" rules, as noted in ¶ 2 above.

However, a vessel will not be included in class 41 if it was acquired before 1990 and:

(i) pursuant to a written obligation entered into by the taxpayer before June 18, 1987;

(ii) was under construction by or on behalf of the taxpayer on June 18, 1987; or

(iii) is machinery and equipment that is a fixed and integral part of property that was under construction by or on behalf of the taxpayer on June 18, 1987.

In addition, as discussed in ¶ 8 above, a vessel will not be included in class 41 if it is a "Canadian vessel."

¶ 10. For offshore drilling vessels that otherwise qualify for the maximum annual CCA rate of 15% under class 7, paragraph 1100(1)(va) of the Regulations permits the deduction of an additional maximum annual CCA of 15%. These vessels are in a separate prescribed class under subsection 1101(2b) of the Regulations. The combined maximum annual CCA rate is, in effect, 30% for this separate class of vessels, subject to the "50% rule" and the "available for use rules", as noted in ¶ 2 above. Under subsection 1101(2b) of the Regulations, a separate class is prescribed for all vessels described in class 7 in Schedule II, rather than a separate class for each vessel. Vessels, including the furniture, fittings, radiocommunication equipment and other equipment attached thereto, will so qualify for the separate prescribed class if they are acquired by a taxpayer:

(a) after May 25, 1976, and are designed principally for the purpose of:

(i) determining the existence, location, extent or quality of accumulations of petroleum or natural gas (other than mineral resources); or

(ii) drilling oil or gas wells; or

(b) after May 22, 1979, and designed principally for the purpose of determining the existence, location, extent or quality of mineral resources.

Most offshore drilling vessels acquired after 1987 will be included in class 41 and not a separate prescribed class under subsection 1101(2b) of the Regulations. In addition, as discussed in ¶ 8 above, a vessel will not be included in a separate prescribed class under subsection 1101(2b) of the Regulations if it is a "Canadian vessel."

Property Acquired by Transfer, Amalgamation or Winding-up

¶ 11. When a taxpayer acquires a property, subsection 1102(14) of the Regulations generally requires the taxpayer to place the property in the same prescribed class or separate prescribed class as that of the vendor of the property provided:

(a) the property is acquired by the taxpayer after June 17, 1987 in the course of a qualifying butterfly reorganization, as described in paragraph 55(3)(b); or

(b) the taxpayer and the vendor were not dealing at arm's length (otherwise than by a paragraph 251(5)(b) right for acquisitions after December 15, 1987) at the time the property was acquired.

In determining whether the parties are not dealing at arm's length for this purpose, the anti-avoidance rule in subsection 1102(20) of the Regulations should be consulted for property acquired after December 15, 1987.

Subsection 1102(14.1) of the Regulations provides that when a taxpayer has acquired property of a class that had been previously owned before May 26, 1976, by either the taxpayer or a person with whom the taxpayer did not deal at arm's length at the time of the acquisition, and at the time that the property was previously owned it was property of a different class, the property is deemed to be property of the original class. This rule is subject to the exception, generally applicable to acquisitions after December 15, 1987, that the non-arm's length relationship was not solely as a result of a right referred to in paragraph 251(5)(b). Unlike subsection 1102(14) of the Regulations, subsection 1102(14.1) only applies to property previously owned before May 26, 1976.

Recaptured Depreciation

¶ 12. The disposition of a vessel may give rise to the recapture of CCA in the usual manner under subsection 13(1) (see the current version of Interpretation Bulletin IT-478, Capital Cost Allowance -- Recapture and Terminal Loss). Relief may be available by deferring the recapture of CCA under the replacement property rules described in subsection 13(4) (see the current version of Interpretation Bulletin IT-259, Exchanges of Property) or under subsection 13(16) (see ¶ 13 below).

¶ 13. A taxpayer may, under subsection 13(16), elect to defer the recognition of the recapture of CCA on the disposition of a vessel. Under the election, the proceeds of disposition from a vessel that would have been included in the taxpayer's income for that year are treated as proceeds of disposition of property of another prescribed class that includes a vessel owned by the taxpayer. The election must be made before the time prescribed for the filing of the taxpayer's income tax return for the year in which the vessel was disposed.

¶ 14. When a vessel is acquired in or as a result of a transaction to which subsection 1102(14) or 1102(14.1) of the Regulations applies (see ¶ 11 above), the fact that the former owner had a choice as to the income tax treatment of the proceeds of disposition, under subsection 13(16), will not disqualify the vessel from continuing to be property of that same prescribed class or separate prescribed class to the purchaser. Consequently, the purchaser will be eligible to claim CCA for that vessel at the same rate that the former owner was entitled to.

¶ 15. When a separate prescribed class has been constituted by virtue of the conversion of a vessel (see ¶ 5(b) and (c) above), and the vessel is disposed of by the owner, subsection 13(17) deems that class to have been transferred to the class in which the vessel was included immediately before its disposition. In dealing with the proceeds of disposition, a taxpayer to whom subsection 13(17) applies may also elect under subsection 13(16) (see ¶ 13 above). When a converted vessel is acquired in or as a result of a transaction to which subsection 1102(14) or 1102(14.1) of the Regulations applies (see ¶ 11 above), it is considered that, although the provisions of subsections 13(16) and 13(17) apply and continue to apply to the taxpayer who disposed of the vessel, the taxpayer acquiring the converted vessel is allowed to include the conversion cost in the separate prescribed class in which the cost had been included by the transferor before the transfer. Consequently, the taxpayer acquiring the converted vessel will be entitled to claim accelerated CCA for the conversion cost at the rate permitted by paragraph 1100(1)(v) of the Regulations (as described in ¶ 5 above).


Explanation of Changes

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.

Overview

This bulletin updates Interpretation Bulletin IT-267R, and its March 14, 1985 Special Release, which explain the capital cost allowance provisions for vessels. We revised the bulletin to delete the references to the requirement for certificates to be obtained from the Minister of Regional Industrial Expansion (or its successors) regarding the certification of vessels for accelerated capital cost allowance purposes. Such certificates are not required for property acquired after July 13, 1990. The amendments to the Act and Regulations have been enacted by S.C. 1991, c. 49 (former Bill C-18) and P.C. 1994-139, SOR/91-196, January 25, 1994, respectively. The revised bulletin also deals with vessels that may be class 41 property.

The contents of this bulletin are not affected by any draft legislation released prior to January 1, 1995.

Legislative and Other Changes

¶ 1 (portions of former ¶s 4 and 16) contains the definition of "vessel." We have deleted a portion of former ¶ 4 because it referred to the Maritime Code Act that has not yet been proclaimed into force. We have also deleted a portion of former ¶ 16 because it dealt with the now repealed requirement for the certification of vessels.

¶ 2 (former ¶ 1) outlines the general operation of the capital cost allowance ("CCA") system for vessels. ¶ 2 now also refers to the possible application of the "50% rule" for property acquisitions in a year and the "available for use" rules (which were introduced in Bill C-18).

We have added new ¶ 3 to state that vessels under construction (except for class 41 vessels) are property that is included in class 7.

We have revised ¶ 5 (former ¶ 6) to remove the requirement for vessels (and conversion plans for vessels) to be certified, and to refer to the impact of the "available for use" rules on the acquisition date of vessels for purposes of the accelerated CCA provisions under paragraph 1100(1)(v) of the Regulations.

We have added new ¶ 6 to indicate the types of properties to which the "50% rule" for property acquired in a year does not apply for purposes of paragraph 1100(1)(v) of the Regulations.

We have amended ¶ 8 to provide for the classification of vessels in class 41 and to delete references to the certification requirement.

New ¶ 9 outlines the vessels to be included in class 41, and the CCA rate that applies to that class.

We have revised ¶ 11 (former ¶ 13) because of amendments to subsection 1102(14) of the Regulations, and the addition of subsections 1102(14.1) and 1102(20) to the Regulations. In addition, we have deleted the references to the certification requirement.

We have revised ¶ 12 (former ¶ 10) to delete information relating to special depreciation taken before 1949, and to subsection 13(15), because such information is dated and is only relevant for a small number of taxpayers.

We have deleted former ¶s 2 and 5 because they dealt with dated information that applies to few taxpayers. Former ¶ 2 described acquisitions of property before 1972, and former ¶ 5 outlined the CCA provisions that applies to certain vessels constructed or converted in the 1940s.

We have deleted former ¶s 14, 15 and 18 of IT-267R because they outlined the now obsolete certification requirements and procedures.

We have deleted former ¶ 17 because it refers to government assistance, a topic which is more fully covered in the current version of Interpretation Bulletin IT-273, Government Assistance -- General Comments.

We have made a number of other changes to improve the overall clarity and readability of the bulletin.


Notice -- Bulletins do not have the force of law

Interpretation bulletins (ITs) provide Revenue Canada's technical interpretations of income tax law. Due to their technical nature, ITs are used primarily by departmental staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, the Department offers other publications, such as tax guides and pamphlets.

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