14 March 2018 Internal T.I. 2017-0733971I7 - CCA class of “wellsite trailers”

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: Appropriate capital cost allowance (“CCA”) classification of “wellsite trailers” under Schedule II of the Income Tax Regulations (the “Regulations”) under two specific scenarios. 1. The wellsite trailers are moved around frequently from site to site, i.e. at least 30 times a year; 2. The wellsite trailers are installed and remain at a particular site for a long period of time.

Position: 1. Class 10(e); 2. Class 6 or Class 1(q).

Reasons: 1. The wellsite trailers in this scenario are portable and are moved frequently and are therefore not buildings or structures, but instead fall within Class 10(e).

2. In the second scenario, the wellsite trailers are installed and remain at a particular site for a long period of time and would otherwise have the characteristics of a building. If the wellsite trailers are made of corrugated metal and have no footings or other base supports below ground level, they would fall within Class 6. If this is not the case, such wellsite trailers would fall within Class 1(q).

							March 14, 2018

Mr. Minguy Choi					HEADQUARTERS
Senior Programs Officer,			Income Tax Rulings
Technical section		  			  Directorate
Business Audit Division				André Payette
SMED, DCPB

							2017-073397

Re: CCA class of “wellsite trailers

We are writing in reply to your query regarding our views on the appropriate capital cost allowance (“CCA”) classification of “wellsite trailers” under Schedule II of the Income Tax Regulations (the “Regulations”) under two specific scenarios.

Background

As you mentioned, wellsite trailers resemble large cargo containers (XXXXXXXXXX). These units are generally fitted with a washroom, full kitchen, washer and dryer, satellite bed and furniture (some are fitted as offices). They have bottom chassis with trailer skids that allow them to be dragged onto a flatbed truck for transportation. Their weight allows them to remain stationary when they are grounded (though they can be moved by a large construction grade tractor). They are hooked up to an external electric source and septic tank once grounded. XXXXXXXXXX, these trailers are capable of offering protection for temperatures between -70°C to 40°C.

You also state that these units do not have a trailer hitch, brake lights, emergency lights, or the type of axel, wheels and steel carriage meant for towing, nor are they permanently affixed to the ground. The wellsite trailers are made of corrugated metal and have no footings or other base supports below ground level.

Question

You would like to know our views as to the proper capital cost allowance classification of the wellsite trailers in two different scenarios:

1. The wellsite trailers are moved around frequently from site to site, i.e. at least 30 times a year;

2. The wellsite trailers are installed and remain at a particular site for a long period of time.

Our comments

Overview of Relevant CCA Classes

Schedule II of the Regulations sets out the various classes for depreciable capital property. The determination of the proper CCA classification of a particular depreciable capital property is a question of fact.

In the scenarios described above, the potentially relevant CCA classes would be Class 1(q), Class 6 and Class 10(e), depending on whether the wellsite trailers in question are considered to be trailers or buildings or structures.

Class 1(q) applies to property not included in any other class that is a building or other structure, or a part of it, including component parts, subject to certain exceptions that are not relevant to the scenarios described above.

Generally, Class 6 includes a property not included in any other class that is a building made of frame, log, stucco on frame, galvanized iron, or corrugated metal and in addition, one of the following conditions applies:

• the building was acquired before 1979;
• the building has no footings or other base supports below ground level; or
• the building is used to gain income from farming or fishing.

In the facts described above, the wellsite trailers are made of corrugated metal and they have no footings or other base supports below ground level. Therefore, they should fall within Class 6 if they are considered to be buildings. (footnote 1)

Class 10(e) applies to property not included in any other class that is a trailer, including a trailer designed to be hauled on both highways and railway tracks. If the wellsite trailers are trailers instead of buildings or structures, they should fall within Class 10(e).

Meaning of “Building” and “Structure”

"Building" is a term of wide range covering any structure with walls and a roof affording protection and shelter.

The word "structure" includes anything of substantial size that is built up from component parts and intended to remain permanently on a permanent foundation. Portable shelters such as housing, office and other service units are regarded as buildings if they are installed and intended to remain in a particular location. More information on the classification of buildings can be found in Interpretation Bulletin IT-79R3, Capital Cost Allowance – Building or Other Structures.

In Landsdowne Equity Ventures Ltd. v. The Queen, 2007 DTC 3 (TCC) (“Landsdowne”), the court concluded that mobile homes with steel carriages, axels, wheels, trailer hitches, brakes and emergency lights that were designed to be towed on a public road were trailers within the ordinary sense of the word and were not buildings or structures. As a result, the mobile homes fell within Class 10(e), rather than within Class 1(q) or 6.

Scenario #1

In Scenario #1, the wellsite trailers are moved frequently (at least 30 times per year). Given the frequency of this movement, it seems clear that the wellsite trailers in this scenario are portable and are not intended to remain at a particular location. For this reason, the wellsite trailers in this scenario would not be considered to be buildings or structures and therefore would not fall within Class 1(q) or 6.

It is true that the wellsite trailers do not have the exact same characteristics as the mobile homes in Landsdowne (axels, wheels, trailer hitches, brakes and emergency lights). Nevertheless, it appears that the court in Landsdowne focused on these features because they were indicative of the portability of the mobile homes in that case. In the above scenario, the reason why the wellsite trailers do not have such characteristics is because they are moved on flatbed trucks, rather than towed on public roads due to the rough terrain in the areas in which they are used. In fact, the wellsite trailers do have bottom skids to assist with such movement and the wellsite trailers are actually moved on a very frequent basis. As a result, the fact that the wellsite trailers do not have the exact same characteristics as the characteristics highlighted by the court in respect of the mobile homes at issue in Landsdowne should not, in our view, preclude the wellsite trailers from being considered to be trailers within Class 10(e).

Scenario #2

On the other hand, in Scenario #2 the wellsite trailers are installed and remain at a particular site for a long period of time. In those circumstances, the wellsite trailers, would, in our view, qualify as buildings. If the wellsite trailers are made of corrugated metal and have no footings or other base supports below ground level, they would fall within Class 6. If this is not the case, such wellsite trailers would fall within Class 1(q).

We trust that these comments will be of assistance.

Yours truly,

Kimberley Wharram
Acting Manager
Resource Section
Income Tax Rulings Directorate

FOOTNOTES

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

1 If the wellsite trailers fell within the descriptions in both Class 1(q) and Class 6, the taxpayer could choose the CCA class to apply to the wellsite trailers given that both of these classes apply to “property not included in any other class”. See paragraph 1.121 of Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance.