Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Whether certain tangible property attached to a building is acquired solely for the purpose of supporting machinery and equipment and therefore included in paragraph (b) of Class 8 for CCA purposes.
Position: Question of fact.
Reasons: The property that is an integral part of the building does not meet the requirements in paragraph (b) of Class 8. Costs incurred solely for the purpose of supporting machinery and equipment may qualify for inclusion in Class 8.
June 19, 2002
Claude Englehart HEADQUARTERS
Director A. Seidel
Technical Applications & (613) 957-2058
Valuations Division
Compliance Programs Branch
Attention: Anne Wilson 2002-013935
Capital Cost Allowance
We are writing in response to your memorandum, dated May 7, 2002, concerning the appropriate classification of structures where a significant portion thereof is required to support equipment used in manufacturing and processing.
Background
XXXXXXXXXX (the "Company") was incorporated as a joint venture for the purposes of operating XXXXXXXXXX.
The taxpayer proposes to use a method of comparing the cost of the building actually constructed to the cost of a building of similar dimension, but built without the specifications required to house the equipment associated with the XXXXXXXXXX operations, and consider the difference, referred to as "excess building costs", to be the cost of property acquired solely for the purpose of supporting equipment and therefore includable in Class 8 for CCA purposes.
Description of the Properties
A major component of the equipment acquired to effect the XXXXXXXXXX operations is an elevated crane runway system used to carry an overhead crane of substantial weight and capacity. The crane runway system is located high above the ground. The principal source of strain on the system is that the crane runway and its support must be able to sustain the force of sudden stops while carrying up to 28 tons. To be able to support the crane runway, and meet safety requirements, the supporting structure for the crane runway and the floor underneath are constructed to rigorous standards. A number of steel columns are used to hold up the crane runway. Each of the columns has substantial dimensions necessitated by the loads they support. As operations to be performed in and around this equipment required protection from the weather, metal cladding was attached to these columns, either directly or by fastening them to transverse metal beams and secondary columns. This metal cladding is the roof and the walls of the plant. By virtue of the metal cladding, the columns are "attached" to the building which houses the manufacturing and processing activities. The concrete structure, required to withstand the weight of the overhead crane, is built on supporting walls that are 3 metres high and made of reinforced concrete. The steel columns, metal cladding and concrete structure are referred to as the "Supporting Structure" and it is these properties that are under consideration for inclusion in Class 8 or Class 1.
Tax Services Office's Position
The Supporting Structure is not included in Class 8 for the following reasons:
The Supporting Structure does not represent property attached to a building but is actually part of the building itself; and
The Supporting Structure was not acquired solely for the purpose of supporting machinery or equipment. It also supports the metal cladding that houses the equipment and is therefore an integral part of the building.
Taxpayer's Representative's Position
Class 8 provides for the inclusion of tangible property not themselves manufacturing or processing materials but acquired as a necessary component (provide support) to the operations. From a tax policy perspective, it stands to reason that these assets should receive the more favorable treatment of Class 8 capital cost allowance. The classification of the Supporting Structures as qualifying under Class 8 does not offend any of the published guidelines of the CCRA.
With respect to the issue of "attached", they state that the metal cladding, forming the walls and the roof of the plant, is "attached" to the Supporting Structure and not an integral part of the building.
With respect to the solely issue, they suggest that this is "more problematic" and requires for its resolution an interpretation of "...the words in their entire context in which they are found" approach. The metal cladding has not been acquired solely for the purpose of supporting manufacturing or processing equipment or machinery. However, the context does not justify a strict interpretation of the word "solely". It is only by incidence and by reason of being "attached" to the metal cladding that it can be said to support the walls and roof. It was certainly not "acquired", in any sense of the word, for that purpose. They also quote some non-tax US jurisprudence which took the view that "solely" should not be interpreted in a strict manner.
Analysis
The taxpayer's representative argues that the Supporting Structure is "acquired solely" for the purposes enumerated in paragraph (b) of Class 8.
Paragraph 18 of IT-79R3 states that "property that is attached to a building, however firmly, is included in Class 8 if it is acquired exclusively for those purposes stated in Class 8. For example, concrete footings, foundations and structural steel exclusively for the support of machinery are regarded as Class 8 assets.
Paragraph 4 of IT-472 states that "tangible property attached to a building is not included in the same class as the building but in Class 8 under paragraph (b), if it is acquired solely for the purposes outlined in paragraph (b) of Class 8. It provides that some common examples of such property includes "concrete footings, foundations and structural steel used exclusively for the support of machinery or equipment".
Black's Law Dictionary defines "sole" as "single; individual; separate; the opposite of aggregate; without another or others". The Concise Oxford Dictionary defines "sole" as "one and only, exclusive". In Classic's Little Books Inc. v. MNR, 72 DTC 1155, Tax Review Board, "solely" is defined to mean: alone, unique, singular, exclusive.
In Maclean Hunter Limited v. The Deputy MNR for Customs and Excise, 88 DTC 6096, FCA, when considering the expression "solely for educational or technical purposes" stated that "the statutory definition, as confined by solely, must be taken narrowly ...".
In Nigel E. Brown v. HMQ, 95 DTC 5126, FC-TD, when reviewing the provisions of section 5700 of the Regulations distinguished those provisions that only used the word "designed" from those that used the expressions "designed exclusively" and "designed solely". For those provisions which used the latter expressions, the provisions were to be given a narrow interpretation while the more general "designed" could be given a broader interpretation.
Deloitte & Touche Inc., Trustee of the Estate of Vancouver Trade Mart Inc., a Bankrupt v. Attorney General of Canada, representing the MNR, 97 DTC 5520, FC-TD, compared the expressions "dominant purpose" and "sole purpose" and concluded that the "dominant purpose" test was a less stringent test than the "sole purpose" test.
By the taxpayer's representative's own admission, if the expression "acquired solely" is interpreted in a restrictive manner, they cannot meet the test laid out in paragraph (b) of Class 8.
The only statement made by the taxpayer's representative concerning the issued of "attached' is "that both from a purely physical perspective and previous judicial announcement on the meaning of "attached", the Supporting Structure meets the test.
Black's Law Dictionary defines "attached" and "annexed" as follows:
"attached" - A term describing the physical union of two otherwise independent structures or objects, or the relation between two parts of a single structure, each having its own function. As applied to buildings, the term is often synonymous with "annexed".
"annexed" - to attach, and often, specifically, to subjoin.
To add to; to unite.
The word expresses the idea of joining a smaller or subordinate thing with another, larger, or of higher importance.
It implies physical connection or physically joined to, yet physical connection may be dispensed with, and things may be annexed without being in actual contact, when reasonably practicable.
Something appended to, as a supplementary structure or wing.
The Concise Oxford Dictionary defines them as follows:
"attached" - fasten thing to another; affix;
"annexed" - add as subordinate part; append; attach as an attribute, addition or consequence;
The Roy Legumex Inc. v. MNR case, 90 DTC 1858, TCC was cited by the Taxpayer's Representative as dealing with the issue of "attached". This case dealt with the issue of whether tanks were connected with, or attached to, a building. The definition for "attach" referred to by the Tax Court was "to tack on; to fasten or join (to) by tacking, tying, sticking, etc.". In this case, the Tax Court determined that various units were connected but not attached. In this case, the metal cladding, metal beams and secondary columns are not "attached" to a building within this definition. They actually form the walls and the roof of the building.
The Taxpayer's representative's reference to Midland Transport Limited v. HMQ, 94 DTC 1759, TCC is misleading. This case dealt with whether or not a "chip bin" was "machinery" or "equipment" used in manufacturing or processing or whether it was a bin used for storage. This case does not deal with the issue of "attached". Similarly, the reference to HMQ v. Lomex Inc., 98 DTC 6588, FC-TD is misleading in that it dealt with the issue of when manufacturing and processing began and not the issue of "attached".
Based on the above Canadian tax jurisprudence, it is our view that the metal cladding, metal beams and secondary columns, which form the walls and roof of the plant, were not "acquired solely" for the purpose of supporting manufacturing or processing equipment or machinery. Furthermore, it is our view that the metal beams, metal cladding and secondary columns go beyond the common meaning of "attached" and are an integral part of the building itself. Black's Law Dictionary defines a "building" as "a structure or edifice inclosing a space within its walls, and usually, but not necessarily, covered with a roof". Until the plant had walls, in this case made up of the metal cladding, it was not a building. The walls would therefore be considered to be an integral part of the building. Similarly, the roof, once added to the building, would be considered an integral part of the building.
Supporting Structures for Crane Runway
To be able to support the crane runway, and meet safety requirements, the supporting structure for the crane runway, and the floor underneath it, are constructed to rigorous standards. A number of steel columns are used to hold up the crane runway. Each of the columns has substantial dimensions necessitated by the loads they support. The concrete structure, required to withstand the weight of the overhead crane, is built on supporting walls that are 3 metres high and made of reinforced concrete. These columns and supporting walls are also used to attach the metal cladding and the metal beams.
Although a strict interpretation of the provision would conclude that the specific requirement in Class 8 that the columns and supporting walls have not been acquired "solely" for the purposes enumerated therein, the fact is, the columns and supporting walls would not have been built to their size and specifications had they not been required to support the crane runway. The Taxpayer's Representative's has put forth the argument that in this particular situation, "solely" should not be given a strict interpretation, such that, due to the specific facts, the costs incurred to build the columns and supporting walls to the specifications needed to support the crane runway are costs that are incurred "solely" to support eligible equipment.
In the case of British Columbia Forest Products Ltd. v. Minister of National Revenue, (71 DTC 5178, SCC) ("BCFP") it was concluded that the items under dispute, while they may have formed part of the manufacturing plant, were a part of the very fabric of the mill building. They were not chattels that were merely attached to the building, but were a part of the building itself. The courts relied on an examination of the plans and photographs filed as exhibits to conclude that the assets in question had no separate existence as tangible capital assets. The supporting piers, the reinforced concrete foundations and overhead crane structure were determined to be the walls and roof of the building and therefore included in Class 3. There were also other "structures" which were in dispute in this case.
Class 8 appears to have been amended after the BCFP case. The amendment to Class 8, amongst other things, added what is now paragraphs (a) and (b) of Class 8. The "structures" in dispute in the BCFP case would now appear to qualify for inclusion in paragraph (a) of Class 8. The supporting piers, reinforced concrete foundations and overhead crane structure in the BCFP case would still not fit into Class 8 as they were considered to be the "very fabric of the mill building" and not just "attached" to the building.
The description of the columns and supporting walls, needed to support the crane runway system in this particular case, would suggest that these assets could be considered to be "separate tangible assets". The crane runway and supporting walls, as described, could have existed on their own and would not be considered to be a building. The additional beams and columns added to construct the roof and the metal cladding added to the columns to construct the walls, however, became "the building".
The legislative amendments to Class 8, which appear to have been introduced after the BCFP case, broadened the inclusion of property eligible for accelerated capital cost allowance. Accordingly, where there is a reasonable argument that tangible property is constructed "solely" because of the specifications needed to support machinery or equipment, and considering that paragraph (b) of Class 8 is an "incentive" provision, the courts may be inclined to give a less strict interpretation to the meaning of "acquired solely" in those situations where there is also a secondary use of the tangible property. If one were to take into consideration that, to the extent that the "excess building costs" are tangible property attached to a building, and those excess costs are incurred solely for the purpose of supporting machinery or equipment, a portion of the cost of such property, in this case, the columns and supporting walls, could be included in paragraph (b) of Class 8.
XXXXXXXXXX
Conclusion
A strict interpretation of the expression "acquired solely" in paragraph (b) of Class 8 would result in none of the property qualifying for inclusion in Class 8. Nevertheless, there is a reasonable argument that the "excess building costs" attributable to the columns and supporting walls, to the extent that they are incurred "solely" to support machinery or equipment, could be included in Class 8.
We hope our comments are of assistance.
Marc Vanasse, CA
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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