7 January 2014 External T.I. 2013-0515361E5 - CCA and Manufacturing or Processing of Malt

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: Would machinery and equipment that is used in the manufacturing or processing of malt be eligible for inclusion in class 29 or 43 and would buildings used in manufacturing or processing activities be eligible for additional CCA under 1100(1)(a.1) or (a.2)?

Position: General comments - Question of fact.

Reasons: See response

XXXXXXXXXX
2013-051536
S. D'Angelo

January 7, 2014

Dear XXXXXXXXXX:

Re: Capital Cost Allowance – Machinery and Equipment and Non-residential Buildings

This is in response to your correspondence of December 13, 2013 and our telephone conversations [XXXXXXXXXX/D'Angelo] of December 30, 2013 and January 2, 2014. You were seeking our views on whether certain machinery and equipment ("M&E") would be included in class 29 or class 43 of Schedule II of the Income Tax Regulations ("Regulations") and whether certain buildings would be eligible for additional capital cost allowance ("CCA") under paragraph 1100(1)(a.1) or (a.2) of the Regulations.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Class 29 property in Schedule II of the Regulations includes, among other things, property that is M&E, manufactured or acquired by the taxpayer after March 18, 2007 and before 2016, which, but for class 29, would be included, with certain exceptions, in class 8. Such property must also be used directly or indirectly by the taxpayer in Canada primarily (more than 50%) in the manufacturing or processing of goods for sale or lease or leased by certain corporations to a lessee who can reasonably be expected to use, directly or indirectly, the property in Canada primarily in the manufacturing or processing of goods for sale or lease.

As mentioned above, class 29 includes, among other things, property that is M&E that is to be used directly or indirectly by the taxpayer in Canada primarily in the manufacturing or processing of goods for sale or lease. The expression "to be used directly or indirectly" refers to property acquired by the taxpayer for the purpose of being an integral and essential part of the taxpayer's manufacturing or processing activities, as well as any ancillary equipment such as furniture and fixtures, repair and maintenance equipment and fire extinguishing equipment, which is acquired for use in those activities. However, M&E acquired by a taxpayer after February 25, 1992 and before March 19, 2007 would normally be included in class 43 of Schedule II of the Regulations. Interpretation Bulletin, IT-147R3, "Capital Cost Allowance-Accelerated Write-Off of Manufacturing and Processing Machinery and Equipment", provides further information in this regard.

Paragraphs 1100(1)(a.1) and (a.2) of the Regulations provide for additional CCA rates in respect of certain buildings acquired after March 18, 2007 and included in Class 1 (4%) in Schedule II of the Regulations, depending on their actual use at the end of the taxation year. (footnote 1)

Paragraph 1100(1)(a.1) provides an additional 6% CCA rate in respect of an "eligible non-residential building" that a taxpayer elects, pursuant to paragraph 1101(5b.1) of the Regulations, to include in a separate prescribed class if at least 90 per cent of the floor space of the building is used at the end of a taxation year for the purpose of manufacturing or processing in Canada of goods for sale or lease. As a result, eligible non-residential buildings used for M&P purposes in Canada are eligible for a 10% combined CCA rate (4% + 6%).

Paragraph 1100(1)(a.2) provides for an additional 2% CCA rate in respect of an "eligible non-residential building" that is included in a separate prescribed class under paragraph 1101(5b.1) and is not eligible for the additional CCA rate under paragraph 1100(a.1) if at least 90 per cent of the floor space of the building is used at the end of a taxation year for a "non-residential use" in Canada. As a result, such non-residential use buildings are eligible for a 6% combined CCA rate (4% + 2%).

Subsection 1104(2) defines the term "eligible non-residential building" as a taxpayer's building that:

• is located in Canada;
• is included in Class 1 in Schedule II of the Regulations;
• has not been used, or acquired for use, by any person or partnership before March 19, 2007; and
• has been acquired by the taxpayer on or after March 19, 2007 to be used by the taxpayer, or a lessee of the taxpayer, for a non-residential use.

It is the intended use of the building, not its actual use, which is relevant in determining whether a building is an eligible non-residential building. This test results from the wording "has been acquired by the taxpayer ... to be used by the taxpayer, or a lessee of the taxpayer, for a non-residential use" found in the definition in subsection 1104(2) of the Regulations. This is, in our view, an objective test. Whether a particular building was to be used for a non-residential use is a question of fact which can only be decided after reviewing all relevant facts.

The additional CCA rates permitted under paragraphs 1100(1)(a.1) and (a.2) apply to a building only if the building is an eligible non-residential building and the taxpayer elects under subsection 1101(5b.1) to include the building in a separate prescribed class. The election may be made by attaching a letter to the return for the tax year in which the building was acquired. If an election is not filed to put the building in a separate class, the default rate of 4% will apply.

Providing that a taxpayer has elected under subsection 1101(5b.1) to include a building that meets the definition of eligible non-residential building in a separate prescribed class, it remains that the building must meet one of the two actual use requirements mentioned above (i.e., M&P and non-residential use) at the end of the taxpayer's taxation year in order to qualify for the additional CCA rates in paragraphs 1100(1)(a.1) or (a.2). Whether a particular building meets one of the two use requirements mentioned in paragraphs 1100(1)(a.1) or (a.2) at the end of the taxpayer's taxation year is a question of fact which can only be decided after reviewing all relevant facts.

We trust our comments will be of assistance.

Yours truly

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See also subsections 1102(23) to (25) of the Regulations.