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.
Principal Issues: Purchase of leasehold interest
Position: Allocate between Class 1 and Class 13
Reasons: 1102(5)
2005-011468
XXXXXXXXXX
March 8, 2005
Dear XXXXXXXXXX:
This is in reply to your fax of February 4, 2005 concerning the allocation of the purchase price of a restaurant located on leased land. The former lessee had recently done extensive renovations to the building. The purchaser will assume the land lease.
Paragraphs 20-22 of Interpretation Bulletin IT-464R deal with the situation you describe. The cost of the building will be capitalized to either or both of Class 1 and Class 13. To determine which, you should look to subsection 1102(5) of the Income Tax Regulations. If the former lessee should have capitalized costs of the building, or the renovations, to Class 1 pursuant to the rules in that subsection, those costs will also constitute Class 1 assets to your client. Otherwise, they will be Class 13 assets. It is the class to which the former lessee should have included the costs that matters, not the class in which they were included, if that differs.
The rules in that subsection depend on whether the building was constructed or enlarged by a former lessee on leased land, and if not, on whether the renovations "substantially changed the nature of the property". Your client is in the best position to make this determination. Regarding the words in quotations, we are generally of the view that if the building was a restaurant of similar size before and after the renovations, no substantial change was made.
Yours truly,
Phil Jolie
Director
Business and Partnerships Division
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