CRA finds that property added to a building shell for it to function for housing an M&P operation did not qualify as Class 29 property
The taxpayer, which subleased premises containing “Shells” consisting essentially of foundations, walls and roofs, installed wall and floor coverings and performed electrical, ventilation and plumbing work to make the premises suitable for use in its manufacturing and processing operations. It took the position that the costs of the property added to the Shells for this work should be included in Class 29 rather than Class 13.
In order to so qualify, such property (before it could be assimilated to Class 29 property) needed to come within the description of a Class 8(b) property (i.e., "tangible property attached to a building and acquired solely for the purpose of (i) servicing, supporting, or providing access to or egress from, machinery or equipment [or] (ii) manufacturing or processing") and not a Class 1(q) property (a building or other structure including component parts). Although the Directorate agreed with the taxpayer that a property which otherwise was a Class 13 (leasehold) property (because at common law the improvements became part of the property of the landlord) could qualify as a Class 8 property, it went on to indicate that the above alterations to the Shells, assuming that they constituted leasehold improvements rather than acquisitions of property that had been agreed to stay separate from the lessor's property, would be sufficient to deem the taxpayer’s such leasehold improvements to be a building or other structure under Reg. 1102(5)(a)(iii), which applies to "alterations to a leased building or structure that substantially changed the nature of the property." It stated:
[A]lterations to a property materially change its nature where the property has no particular purpose before the work is carried out but does have a particular purpose after the work is carried out.
Conversely, it considered that the above alterations to the Shells could not qualify under Class 8(b), stating:
Generally, property is not acquired solely for supporting machinery or equipment and/or to manufacturing or processing for the purposes of paragraph (b) of Class 8 if it is necessary for the proper functioning of the building, such as the walls, roof and electricity of or for a building. …