14 June 1989 Ministerial Correspondence 57974 F - Capital Cost Allowance

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.

June 14, 1989

Dear Sirs:

Re:  Subsections 1100(11) and 1100(14) of the Regulations to the Income Tax Act (the "Act")

This is in reply to your letter of April 20, 1989, relating to the application of subsections 1100(11) and 1100(14) of the Regulations.

In your letter, you outlined the following hypothetical situation:

-      Three corporations (including Company X) enter into a "co- ownership" arrangement to construct an office building.

-      Company X acquires an undivided 30% interest in the office building.

-      The co-ownership arrangement is not a partnership but rather an unincorporated joint venture.

-      A management company is formed by the three corporations to handle the operation of the building.  The management company's responsibilities include renting and maintaining the building.  The office building is leased by the co-owners to the management company.

-      Company X occupies 21% of the building's total rentable space.  It pays the management company rent at a reasonable fair market value.  Company X has an option to occupy a further 8% of the rentable space which is required to handle future growth in personnel.

-      The two other co-owners are both in the principal business of leasing, rental, development, or sale of real property owned by them (i.e. they are principal business corporations as defined in the Act).

-      One of the other two co-owners occupies one-third of the building's space.  It too pays the management company rent at a reasonable fair market value.

You have requested our opinion as to whether Company X's interest in the office building is considered to be rental property as defined in subsection 1100(14) of the Regulations and as such, whether its claim for capital cost allowance will be computed pursuant to subsection 1100(11) of the Regulations.

The question of whether a taxpayer has acquired a rental property within the meaning of subsection 1100(14) of the Regulations is one of fact and can only be determined when all the facts relating to a particular taxpayer are known.

However, based on the above information it is our opinion that the office building would not be considered a rental property as defined in subsection 1100(14) of the Regulations for the purpose of determining Company X's taxable income.  The reasons for this opinion are as follows:

1)     Allocation of floor space is generally considered a reasonable basis for determining the principal use of a building.

2)     A total of 54% of the building is occupied by the owners of the building and thus it would not appear to be used principally for the purpose of gaining or producing gross revenue that is rent.

3)     Company X occupies 21% of the building.  This indicates that of the 30% interest it has in the building, it uses 70% for non-rental activities.  Thus Company X would not be said to have purchased its interest in the building principally for the purpose of gaining or producing gross revenue that is rent.

We trust this will be of assistance to you.

for DirectorSmall Business and General DivisionSpecialty Rulings Directorate Legislative and IntergovernmentalAffairs Branch