27 March 2008 Internal T.I. 2008-0267531I7 - Underground Parking Lots - Class 1(q) or 17(c)

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: 1. Whether parking lots in an underground parking garage should be included in class 1 or class 17. 2. Whether the parking lots qualify as "rental property" pursuant to Regulation 1100(14).

Position: 1. Class 1(q). 2. Yes.

Reasons: 1. The parking lots being in an underground parking garage are not a "surface constructions" under class 17(c), but a building or part of a building under class 1(q). 2. IT-304R2.

								March 27, 2008

	XXXXXXXXXX  Taxation Services Office	André M. Gallant
	Audit Division					(613) 957-8961

	Attention: XXXXXXXXXX
								2008- 026753

Underground Parking Lots - Class 1(q) or Class 17(c)

This is in response to your email of February 7, 2008, and is further to our telephone conversation, regarding the proper class in Schedule II of the Income Tax Regulations ("Regulations") in which parking lots in an underground parking garage should be included.

Our understanding of the facts is as follows:

1. In XXXXXXXXXX (the "Taxpayers"), XXXXXXXXXX , purchased parking lots (approximately XXXXXXXXXX ) (the "Parking Lots") in an underground parking garage situated directly under and directly connected to a residential condominium building ("condo #1").

2. You do not know whether the Taxpayers own the Parking Lots through a partnership or by simple co-ownership. There is no written partnership agreement, but the Taxpayers did open a GST account as partners.

3. When condo #1 was being constructed, the company that owned condo #1 also intended to subsequently construct a second condominium ("condo #2"). The underground parking garage for both condo #1 and the planned condo #2 was constructed at the same time as condo #1 was being constructed, and only under condo #1.

4. Condo # 2 was never constructed because the company went bankrupt. All or most of the parking lots that would have been available for condo # 2 were now totally vacant. The Taxpayers purchased all of the "vacant" parking lots (i.e., the Parking Lots) that are found throughout levels P1, P2, P3, etc. under condo #1.

5. The Taxpayers own the Parking Lots in fee simple. There is no lease between the owner(s) of condo #1 and the Taxpayers, nor does the arrangement between these the parties include an occupation permit.

6. The Parking Lots are rented out by the Taxpayers to persons who work around the area. They are not rented out to tenant/owners of the units of condo #1.

7. The Taxpayers are reporting losses from the rental of the Parking Lots.

8. The Taxpayers classified the Parking Lots as class 17(c) of Schedule II of the Regulations. Property described in class 17(c) includes "a road (other than a specified temporary access road of the taxpayer), sidewalk, airplane runway, parking area, storage area or similar surface construction."

Your first question is whether the Parking Lots should be included in class 1 or class 17.

Your second question is whether the Parking Lots qualify as "rental property" pursuant to the definition in Regulation 1100(14) for purposes of the capital cost allowance (CCA) restrictions.

Position of the XXXXXXXXXX TSO

The Parking Lots should be included in class 1(q). The Parking Lots are not in an open area. They are part of a building structure, underground parking garage. In addition, the Taxpayers are paying maintenance fees, just like paying for condominium units.

OUR COMMENTS

For the reasons explained below, we agree with your opinion that the Parking Lots should be included in class 1(q) and not in class 17(c).

Property described in class 17(c) includes "a road (other than a specified temporary access road of the taxpayer), sidewalk, airplane runway, parking area, storage area or similar surface construction." [Emphasis added]

When reading all the words in class 17(c) in context, a parking area that is not a surface construction would not fall into class 17(c). According to the Federal Court of Appeal, roads, sidewalks, airplane runways, parking areas and storage areas are only specific examples of "surface construction": The Queen v. Mont-Sutton Inc., 99 DTC 5733 at paragraph 28 (FCA). The FCA reviewed the characteristics of each of the five types of surface construction in class 17(c). The FCA noted that one common characteristic was that all five surface constructions required maintenance to counter wear and tear resulting from use and erosion and that all five had roughly the same life expectancy, especially when one compared each of them to a dirt road (shorter life expectancy) or a building (longer life expectancy).

Mont-Sutton supports the view that the Parking Lots should not be included in class 17(c) for two reasons. First, an "underground" parking area is not a "surface" area based on the common meaning of that term (the word "surface" is also used in the French version of class 17(c)). In fact, the Collins English Dictionary (1995) defines the word "surface" in part as "the uppermost level of the land or sea."

The Le Nouveau Petit Robert (1995) defines the word "surface" in part by giving the following examples: [rough translation] the surface of the Earth, the ground's surface, the water's surface and the surface of the Ocean. Had the drafters of the Regulations wanted to include an underground parking area in class 17(c), they could perhaps have used the words "surface or sub-surface construction" which are found in Regulation 238(1). Since the drafters only used "surface," and not "sub-surface" in class 17(c), one cannot read in "sub-surface." A general rule of interpretation is that in ascertaining the meaning of a provision in a statute one cannot read in particular words that are not there, especially when those particular words are explicitly found in another provision of the statute (as is the case here): see more generally Friesen v. Canada, [1995] 3 S.C.R. 103 at paragraph 27 (SCC).

Second, an underground parking garage in a building has a life expectancy that is closer to that of the building than that of an outdoor parking area, road, bridge or similar "surface" construction. Accordingly, it is reasonable to expect that the depreciation rate of an underground parking garage approximate the rate accorded to the building: see e.g. Thibodeau Express Limited v. MNR, 66 DTC 260 (TAB), confirmed with limited reasons 68 DTC 5220 (Ex.Ct.).

In our view, as stated above, the Parking Lots fall under class (1)(q).

Property included in class 1(q) is described as "a building or other structure, or part thereof, including component parts such as electric wiring, plumbing, sprinkler systems..."

Barat v. MNR, 91 DTC 1097 (TCC) involved an aboveground garage that was located on the opposite side of a street but was connected to a hotel by an aerial pedestrian bridge. At issue was whether the aboveground garage and the hotel constituted one building. In concluding that the parking garage and the hotel were two separate buildings, the TCC relied on the following factors:

• No physical connection between the two buildings;
• Both businesses have their own economic life and sources of income;
• The parking garage could stand on itself; and
• The parking garage did not form an integral part of the hotel.

The listed factors suggest that the TCC relied mainly on the degree of physical connection or integration of the two assets in concluding that the garage and the hotel were separate buildings. In the case at hand, there is a physical connection and integration between condo #1 and the Parking Lots, which we find as being determinative in concluding that they form one building. In any case, based on the wording used in class 1(q), the Parking Lots would be included in that class because they are "part of" a building.

There are also non-tax cases that support our conclusion that the Parking Lots and condo#1 can be regarded as one building. These cases, which are mentioned below, deal with whether a building includes its underground foundation.

All the judges in MJ O'Brien Ltd v. Freedman agreed that the foundation of a building is part of that building: [1923] O.J. No. 60 (Orde J. at trial; on appeal, Mulock C.J.O. agreeing with Ferguson J.A., and MaGee J.A., agreeing with Hodgins J.A.). The most convincing reasons for judgment on the issue came from Orde J., at paragraphs 14 and 15, which read as follows:

"14. ... If the defendant were here setting up his right to remove the foundations as forming part of the buildings he had purchased, ... City of St.John v. Gordon (1912), 46 Can. S.C.R. 101 [SCC], is clearly applicable. There it was held that, under the terms of a lease which required the lessors upon the expiration of the term to pay the lessees the value of any buildings and erections, the lessees were entitled to be paid for piling and other material used in substructure. And at p. 110 Davies J., says that the substructure was as much part of the erections and buildings as the superstructure...

15. ... A building is something erected upon land; and, while the word 'land' in its technical sense includes both the soil and the structures erected upon it, the expression 'land and buildings' draws a clear distinction between the soil and the structure, and the word 'buildings' would there clearly cover everything which formed no part of the original soil, and would therefore include the foundations..."

Ferguson J.A. added, at paragraph 37, that excluding the foundation from being part of the building to which it was connected would be "imparting to the word 'building' a colour which does not primarily belong to it and that such a course is inadmissible." Hodgin J.A., at paragraph 51 observed that even though the parties to the contract may have thought that the foundations of the building were not part of the building, the word "building" still had to be "construed as including them in the ordinary and usual acceptation of that term." 1

Another case is McKenzie v. Ferguson, [1923] 4 D.L.R. 931 (Man. C.A.), where it was found that the foundation of a building is part of that building for similar reasoning as in MJ O'Brien Ltd, supra.

In conclusion, in our view, the cost of the Parking Lots (excluding any portion allocated to land) would be included in class 1(q).

Your second question concern whether the Parking Lots constitute "rental property" pursuant to the definition in Regulation 1100(14) such that the related CCA restriction rules apply to prevent the creation or the increase of a rental loss.

Pursuant to Regulation 1100(14), a rental property includes:

(a) a "building" owned by the taxpayer or partnership , or

(b) a "leasehold interest" in real property owned by the taxpayer or partnership.

In the situation described, a leasehold interest is not an issue because the Taxpayers own the Parking Lots in fee simple, based on the information you provided.

Whether the Taxpayers carry on business in partnership and as such own the Parking Lots or the Taxpayers are simply co-owners of the Parking Lots is a question of fact. The Income Tax Act does not define what constitutes a "partnership" and it is a question of fact whether or not a partnership exists at law, as more fully discussed in Interpretation Bulletin IT-90, What is a Partnership? The information you provided is not such that we are able to offer any valuable comments regarding the existence of a partnership.

Paragraph 7 of Interpretation Bulletin IT-304R2 - Condominiums, provides the following comments regarding the CCA restriction and the separate class rule:

"Subsection 1100(11) of the Regulations restricts the amount of CCA that may be claimed on rental properties. A condominium unit which meets the definition of "rental property" in subsection 1100(14) is subject to this restriction with the result that a unit owner cannot create or increase a net loss from the rental of property. In addition, subsection 1101(1ac) of the Regulations requires the establishment of a separate class for each rental property with a capital cost of at least $50,000. However, if the taxpayer owns two or more units or lots in the same building with an aggregate capital cost of at least $50,000, all such units or lots in the same building are considered to be a single rental property in a separate prescribed class."

In answer to your second question, in our view, just as the condominium units qualify as rental property so would the Parking Lots in the situation described.

For more information regarding the specific application of the CCA restriction to rental property, you may wish to refer to Interpretation Bulletin IT-195R4 - Rental Property: Capital Cost Allowance Restrictions.

We trust that our comments will be 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 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. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Sandy Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

1 The O'Brien decision was mentioned in three other cases, without adding much: Bowen Island Properties Ltd. v. Rogers, 2003 BCSC 1595; I.C.R.V. Holdings Ltd. v. Tri-Par Holdings Ltd., [1996] B.C.J. No. 1721 (BCSC); and Lambert v. Royal Bank of Canada, [1994] S.J. No. 488 (SKQB).