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 a building that will be used in a sawmill operation is available for use.
Position: No.
Reasons: The earlier of one of the times enumerated in paragraphs (a) to (e) of subsection 13(28) of the Act has not yet occurred.
December 19, 2003
XXXXXXXXXX HEADQUARTERS
Large Case File Auditor Randy Hewlett, B.Comm.
Verification & Enforcement Division 613-957-8973
XXXXXXXXXX Tax Services Office
2003-003534
Application Of The "Available For Use Rules" To A Building
We are writing in response to your letter of August 11, 2003, wherein you requested our view on the application of the "available for use rules" under the Income Tax Act (the "Act"), as it pertains to a building being constructed by XXXXXXXXXX (the "Taxpayer"). The Large Case File audit section of your TSO is making this request jointly with the Taxpayer pursuant to an "Audit Protocol Agreement" entered into between the CCRA and the Taxpayer.
We apologize for the delay in providing our response. We outline below our understanding of the relevant facts and your inquires, followed by our comments.
Facts
1. The Taxpayer is constructing a building that will be used in a sawmill operation.
2. The building will contain various pieces of equipment that will be used to process logs into lumber.
3. At this point in time, construction of the building is substantially complete and all processing equipment is inside the building at various stages of installation (i.e., complete, ongoing, or in crates on the building floor).
4. The processing equipment is not available for use pursuant to subsection 13(27) of the Act, since one of the times enumerated in paragraphs 13(27)(a) to (k) has yet to occur.
5. In terms of the application of the available for use rules to the building, one of the times enumerated in paragraphs 13(28)(b) to (e) of the Act has yet to occur.
Your Inquires
6. Has the time enumerated in paragraph 13(28)(a) of the Act occurred, that is, is the building considered all or substantially all first used by the Taxpayer for the purpose for which it was acquired?
7. Must the processing equipment be available for use under subsection 13(27) of the Act, or actually be put in use by the Taxpayer, for the building to meet the test in paragraph 13(28)(a) of the Act?
8. If the processing equipment is in various stages of installation, covering substantially all of the floor space of the building, will the building meet the test in paragraph 13(28)(a) of the Act?
Subsections 13(26) to (32) of the Act, generally referred to as the "available for use rules", postpone a taxpayer's claim for capital cost allowance ("CCA") on equipment and buildings until the time at which the property is available for use by the taxpayer for the purpose of earning income from a business or property. Subsection 13(26) of the Act provides that, for the purpose of calculating the CCA claim to which a taxpayer may be entitled, no amount in respect of a property is to be included in computing the undepreciated capital cost of depreciable property of a prescribed class until the property has become available for use by the taxpayer. Pursuant to subsection 13(27) of the Act, property (other than a building) is available for use at the occurrence of the earlier of one of eleven times enumerated in paragraphs 13(27)(a) to (k). Pursuant to subsection 13(28) of the Act, a building is available for use at the occurrence of the earlier of one of five times enumerated in paragraphs 13(28)(a) to (e).
Your inquiries are related to the time enumerated in paragraph 13(28)(a) of the Act, that is, "the time all or substantially all of the building is first used by the taxpayer for the purpose for which it was acquired". We are of the view that this rule refers to the time at which a taxpayer begins to use all or substantially all of a building for its intended purpose. Therefore, in our view, the time referred to in paragraph 13(28)(a) of the Act is not the time that the construction phase of a building is "all or substantially all" complete. Such an interpretation would render paragraph 13(28)(b) of the Act meaningless, which refers to the "the time the construction of the building is complete".
The Taxpayer's building is being constructed to house equipment that will process logs into lumber. Therefore, the building is an integral part of the Taxpayer's sawmill operation that has yet to commence production, as evidenced by the fact that the equipment has not yet been used to process logs into lumber. In our view, the time "all or substantially all" of the building is first used in the sawmill operation, will occur when 90% or more of the building's square footage is occupied by processing equipment that is also being used to process logs into lumber. Because certain areas of the building may not contain processing equipment (e.g. offices, washrooms, and cafeteria), it may be appropriate to consider them used in the sawmill operation if they are functional at the time.
We trust our comments are of assistance. For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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