29 September 1997 External T.I. 9629865 - MEANING OF "REAL PROPERTY" (MACHINERY AFFIXED)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether certain machinery affixed to the floor of a building constitutes "real property" for purposes of the Canada-U.S. Income Tax Convention.

Position:

No definitive answer given.

Reasons:

Insufficient facts.

962986
XXXXXXXXXX Jim Wilson

Attention: XXXXXXXXXX

September 29, 1997

Dear Sirs:

Re: Meaning of "Real Property"

This is in reply to your letter dated September 9, 1996 wherein you requested our opinion as to whether certain property would constitute "real property situated in Canada" as that term is used in clause 3(b)(ii) of Article XIII of the Canada-U.S. Income Tax Convention (the "Convention"). In brief, you have described a situation where a Canadian public corporation ("Canco") carries on a manufacturing and processing business in Canada and its assets include cash and marketable securities, land and building and Class 43 depreciable property. The Class 43 depreciable property consists of processing equipment that is bolted to the concrete floors of the buildings. The issue you have raised is whether the shares of Canco derive their value from real property situated in Canada. You have asked us to assume that such shares would derive their value from real property situated in Canada if we were to consider the Class 43 depreciable property as "real property" for the purposes of the Convention.

Our Comments

Since the facts that you have described are specific in nature and seem to relate to a completed transaction undertaken by specific taxpayers, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Taxation. Confirmation with respect to completed transactions involving specific taxpayers will only be provided by a tax services office. However, we can provide the following general comments.

Paragraph 3 of Article XIII of the Convention reads, in part, that "For the purposes of this Article the term "real property situated in the other Contracting State ....... (b) In the case of real property situated in Canada means: (i) Real property referred to in Article VI (Income from Real Property) situated in Canada ....". Paragraph 2 of Article VI of the Convention provides that "the term "real property" shall have the meaning which it has under the taxation laws of the Contracting State in which the property in question is situated". We disagree with your conclusion that "Although the common law of the nine provinces received from English common law and the Civil Code of Quebec relating to real or immovable property and personal property in the provinces distinguish between realty and personalty in part on the basis of the degree, permanence, and intention of affixation of the property to the land, these criteria are not part of the taxation laws of Canada" and thus are not relevant to how the term should be interpreted in the Convention.

Section 3 of the Income Tax Conventions Interpretation Act ("ITCIA") reads, in part, as follows:

"Notwithstanding the provisions of a convention or the Act giving the convention the force of law in Canada, it is hereby declared that the law of Canada is that, to the extent that a term in the convention is

(a) not defined in the convention,

(b) not fully defined in the convention, or

(c) to be defined by reference to the laws of Canada,

that term has, except to the extent that the context otherwise requires, the meaning it has for the purposes of the Income Tax Act, ......" (Underlining for emphasis)

Where a term is not defined in the Income Tax Act (the "Act"), the Department would then look to the ordinary meaning of that term with respect to establishing its meaning for the purposes of the Act. In this regard provincial real property law would seem completely relevant when determining the ordinary meaning of that term. Furthermore, we fail to see any discrepancy between various legal and non-legal definitions of the term "real property" and those principles established under provincial real property law as described in your incoming letter. For example:

Black's Law Dictionary (6th edition) at page 1218 defines real property as follows:

"Real property. Land, and generally whatever is erected or growing upon or affixed to land. Also rights issuing out of, annexed to, and exercisable within or about land. A general term for lands, tenements, and hereditaments; property which, on the death of the owner intestate, passes to his heir.

Real or immovable property consist of: Land; that which is affixed to land; that which is incidental or appurtenant to land; that which is immovable by law; except that for the purposes of sale, emblements, industrial growing crops and things attached to or forming part of the land, which are agreed to be severed before sale or under the contract of sale, shall be treated as goods and be governed by the regulating the sales of goods. Calif. Civil Code, SS 658"

Megarry's Manual of the Law of Real Property (6th edition) on pages 19-21 states that the general rule in law is "quicquid plantatur solo, solo cedit"("whatever is attached to the soil becomes part of it) and that the term "fixtures" is applied to property which has become so attached to land or to a building thereon as to become in law part of the land. The determination of whether or not an object has become a fixture requires consideration of the degree of annexation and the purpose of annexation. Megarry's goes on to discuss these elements as follows:

"1.Degree of annexation. In general, for an article to be considered a fixture, some substantial connection with the land or a building on it must be shown. An article which merely rests on the ground by its own weight, such as a cistern or a "Dutch barn" which rests upon timber laid on the ground, is prima facie not a fixture. (See Wiltshire v. Cottrell (1853) I.E.&B. 674)

On the other hand, a chattel attached to the land or a building on it will prima facie be a fixture even if it would not be very difficult to remove it. (See Buckland v. Butterfield (1820) 2 Brod. & B. 54 and Jordan v. May (1947) K.B. 427).

2.Purpose of annexation. The degree of annexation is useful as showing upon whom the onus of proof lies (See Holland v. Hodgson (1820) L.R. 7 C.P. 328 at p. 335); thus if the article is securely fixed, the burden of proof lies on the party contending that it is not a fixture. The purpose of the annexation, however, is the main factor: the modern tendency is to regard the degree of annexation as being chiefly of importance as evidence of the purpose of annexation. (See Leigh v. Taylor (1902) A.C. 157 at p. 162) The more securely an object is affixed and the more damage that would be caused by its removal, the more likely it is that the object was intended to form a permanent part of the land. (See Spyer v. Phillipson (1931) 2 Ch. 183 at pp. 209; 210.)

In determining the purpose of annexation, the question to be asked is: `Was the intention to effect a permanent improvement of the land or building as such; or was it merely to effect a temporary improvement or to enjoy the chattel?' (See Hellawell v. Eastwood (1851) 6 Exch. 295 at p. 312.)

In the first case, the chattel is a fixture, in the second it is not."

We are also of the opinion that paragraph 3(c) of the ITCIA would include those terms defined in a convention by "reference to the taxation laws of Canada" (e.g. see the wording used in paragraph 2 of Article VI of the Convention) because the phrase "laws of Canada" is clearly broader than the phrase "taxation laws of Canada".

In summary, for purposes of both the Income Tax Act and the Convention, as suggested above, the determination of whether or not an object has become a fixture to the land or building requires consideration of the degree of annexation and the purpose of annexation. In order for an object to be considered a fixture, and thus "real property", some substantial connection with the land or a building on it must be shown. A definitive opinion on these issues can only be given on a case by case basis after a detailed review of the i) nature of the asset; ii) the particular method of affixation; and iii) the reason or purpose for affixing the asset to the building or land. In some circumstances an inspection of the asset would be necessary.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.

We apologize for the delay in replying.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch