Income tax questions for Revenue Canada: December 10, 1996

Tax Executive, The, Jan-Feb, 1997

2. Same situation as in 1 except that additional contamination occurs as a result of the taxpayer's ordinary business operations and, hence, additional clean-up costs are incurred during the 15 years following acquisition of the land. The additional costs are treated as expenses and charged against current operations in the income statement.

3. Same as 2 except that the additional clean-up costs are added to the cost of the land for book purposes.

Replacement Property

Proposed amendments to paragraph 13(4. l)(a) of the Act in the June 20, 1996, Notice of Ways and Means Motion will add the condition that in order for a particular depreciable property to qualify as a replacement property it must be "reasonable to conclude that the property was acquired by the taxpayer to replace the former property." Will the Department consider a particular depreciable property qualified replacement property where the original intention for the acquisition was that the property be for expansion purposes but that, as a result of unforeseen circumstances, it is used a replacement property?

Consider the following example. A corporate taxpayer receives approval from its board of directors to expand its packaging operations, which currently consists of one packaging machine, by acquiring a second packaging machine. The new machine is under construction at the taxpayer's business by the equipment supplier when the existing packaging machine is partially destroyed by fire. Title and ownership of the second machine passes to the taxpayer shortly after insurance proceeds for the destroyed first machine are received but subsequent to the end of the taxpayer's taxation year in which the recaptured capital cost allowance on the disposition of the first machine was reported in income. Will the Department confirm that, when the second machine is acquired, it qualifies as a "replacement property" with respect to the first machine even though the second machine was originally ordered and intended for expansion of the business?

Subsection91 (4)

Please confirm that under subsection 91(4) of the Act, where an amount has been included in income in year 1 under subsection 91(1), a deduction may be taken in year 1 in respect of accrued foreign tax related to year 1 that is paid subsequently in year 2.

Large Corporation Tax -- Hedged Debt

Section 3860 of the Canadian Institute of Chartered Accountants (CICA) Handbook summarizes the financial statement presentation and disclosure for financial instruments, including corporate debt denominated in a foreign currency that is hedged or otherwise combined with a foreign currency swap or forward contract. The net result of the guidance in the Handbook (subsection 3860.34, paragraph 3860.41(a), subsection 3860.09, and paragraphs 3860.05(a), (b), and (c)) is that, where there is no legal right of offset, foreign denominated debt must, for fiscal years beginning on or after January 1, 1996, be translated at the foreign exchange rate in effect as at the date of the balance sheet. In addition, the "net principal value" of the currency swap or forward contract must be reflected as an asset or liability (referred to below as a "hedge asset" or "hedge liability") at the presentation date. Prior to 1996, the net principal value of the foreign currency swap or forward contract was netted against (or combined with) the debt.