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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1) Can a taxpayer maintain his principal residence exemption if he builds a large detached garage behind his home to be used for a manufacturing business ?
2) Specific additions to building or equipment, or expense
POSITION TAKEN:
1) No, paragraph 45(1)(c) applies and that portion of the land to be used in the business (land beneath the garage, area for parking and storage) is disposed of at fair market value and the new building is depreciable property.
2) Various items requiring to be capitalised along with the building. Interpretation Bulletins provided on component parts and equipment and service connection.
Reasons FOR POSITION TAKEN:
1) Land and Building used in Manufacturing is business property and 45(1)(c)
2) CCA schedules class 1 (component parts), class 8, and paragraph 20(1)(ee)
XXXXXXXXXX 2000-003327
C. Tremblay
September 14, 2000
Dear XXXXXXXXXX:
This is in reply to your letter of June 12, 2000, wherein you seek our opinion as to whether a taxpayer who is considering building a very large garage behind his home for a manufacturing business can retain his personal residence exemption. You state that he is considering purchasing a very large piece of machinery and will require modifications to accommodate this machinery.
As explained in Information Circular 70-6R3 (copy attached), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling submitted in the manner set out in that Circular. However, we are prepared to offer the following general comments which may be of assistance.
The construction of a detached garage for business purposes will result in the detached garage (the new building) being a separate "depreciable property" ("the business property") as defined in subsection 13(21) of the Income Tax Act (the "Act"). In our view, a detached garage to be used for a manufacturing business will be considered a business property and will not qualify for the principal residence exemption whether the taxpayer chooses to claim capital cost allowance or not. Further, the portion of the land allocated to the business which was formerly part of the principal residence and is now required for the business use will also not qualify for the principal residence exemption.
In our view, where a taxpayer allocates part of the land of his principal residence, that is, the land beneath the new building and the land improved and set apart for parking or storage or other business use and used solely with respect to the business for the purpose of producing income, that portion is deemed to have been disposed of for fair market value and reacquired at that same value. Paragraph 30 of Interpretation Bulletin IT-120R5 (copy enclosed) states that if a taxpayer has partially converted a principal residence to an income-producing use, paragraph 45(1)(c) of the Act provides for a deemed disposition of the portion of the property so converted (such portion is usually calculated on the basis of the area involved) for proceeds equal to its proportionate share of the property's fair market value. Paragraph 45 (1)(c) of the Act also provides for a deemed reacquisition immediately thereafter of the same portion of the property at a cost equal to the very same amount. Any gain otherwise determined on the deemed disposition is usually eliminated or reduced by the principal residence exemption.
In the future, should the whole property be sold, only a portion of the property will qualify for the principal residence exemption; any capital gain relating to the income-producing portion of the property will be realized and taxable in accordance with the usual rules respecting the disposition of capital property.
In our view, generally, the several modifications that would be necessary to accommodate the machinery, which includes the three phase power tower, the insulated walls and ceilings to assist in soundproofing, should be capitalized along with the new building and classified under Schedule II of the Income Tax Regulations (the "Regulations") as a class 1 asset. In our view, the modifications required appear to be part of the construction of the detached garage and would be considered part of the building and not separate assets. Interpretation Bulletin IT-79R3 (copy enclosed) provides details on capital cost allowances for buildings and other structures. We refer you to paragraph 15 which deals with component parts. We also direct you to Interpretation Bulletin IT-472 (copy enclosed) which describes certain items to be included under class 8 of Schedule II of the Regulations and that are subject to capital cost allowances at 20%. Paragraph 20(1)(ee) of the Act provides for a deduction from income from a business for a service connection, however, certain conditions must be met and those are stated in Interpretation Bulletin IT-452. See paragraphs 1 and 5 of the bulletin (copy enclosed) for details.
The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. They do not form an advance income tax ruling and they are not binding on the Canada Customs and Revenue Agency.
We trust our comments are of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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