18 December 1989 Income Tax Severed Letter AC58362 - Capital Cost Allowance Classes

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.

Transport Canada                             5168-17(AKCD-PK)
Airports Authority Group
Transport Canada Building                    5-8362
Place de Ville                               W.P. Guglich
330 Sparks Street                            (613) 957-2102
Ottawa, Ontario
K1A 0N5

Attention: D.J. MacLean

Dear Sirs:

This is in reply to your letter of July 10, 1989 concerning the applicable capital cost allowance classes respecting improvements on leased lands at Canadian airports.

You described the following hypothetical situations:

a) An airline requests a land lease upon which they wish to construct a metal clad hangar to maintain and store aircraft, a brick and mortar building for its office operations and an apron and taxiway so that their aircraft can get to their leased land from the main runway.

In our view the applicable cost allowance classes and applicable rates would be:

     Metal Clad Hangar            Class 6  - 10%
     Brick and Mortar Building*   Class 3  -  5%
                                          or
                                  Class 1  -  4% 
     Apron                        Class 13 -  As per Schedule III
     Taxiway                      Class 13 -  As per Schedule III

b) A developer leases land to construct a concrete, brick and steel hotel and a 100 space parking lot.

In our view the applicable capital cost allowance classes and applicable rates would be:

     Concrete, Brick and Steel Hotel* Class 3  - 5%
                                          or
                                  Class 1  - 4%
     Parking Lot                  Class 13 - As per Schedule III

Subsection 1102(5) of the Income Tax Regulations requires that leasehold improvements in the nature of a building or other structure are to be included in the respective class of Schedule II usually 1, 3 or 6. All other leasehold improvements that are capital in nature are to be included in Class 13.

c) A tenant builds a brick building on leased land and then decides to sell everything. The new owner starts claiming CCA on the building and his cost to obtain the lease.

In our view the applicable capital cost allowance classes and applicable rates for the new owner would be:

     Building*                    Class 3  - 5%
                                          or 
                                  Class 1  - 4%
     Cost to obtain lease         Class 13 - As per Schedule III

As a result of the requirements in subsection 1102(5) of the Income Tax Regulations the new owner will be required to allocate the purchase price between the building and the cost of acquiring the lease. The allocation should be done on a reasonable basis.

* Draft amendments to the Income Tax Regulations issued December 16, 1987 by the Department of Finance propose that buildings and other structures are to be included in Class 1. An exception is proposed to permit the inclusion in Class 3 of buildings and other structures acquired by the taxpayer.

(i) before 1988, or (ii) before 1990

          (A)  pursuant to an obligation in writhing entered into
               by the taxpayer before June 18, 1987,

          (B)  that was under construction by or on behalf of the
               taxpayer on June 18, 1987, or

          (C)  that is a component part of a building that was
               under construction by or on behalf of the taxpayer
               on June 18, 1987;"

When a lease expires and is not renewed and the tenant does not continue to occupy the premises on a periodic tenancy or other basis any undepreciated capital cost in a particular class may be deducted as a terminal loss under subsection 20(16) of the Income Tax Act (the "Act") provided:

(1) the tenant disposes of all properties in that particular class by the end of that year, and

(2) the tenant does not acquire new property of that particular class in the year.

As to the deduction by the lessee of his mortgage or building loans expenses there are two options available namely:

(1) the lessee may deduct under paragraphs 20(1)(c) and (d) of the Act interest expenses paid in the year and under paragraph 20(1)(e) of the Act in equal portions over five years those amounts incurred in the course of borrowing money to acquire depreciable property that are not otherwise deductible.

(2) alternatively the lessee may elect, under subsection 21(1) of the Act, to capitalize all or part of the costs of borrowing money, to acquire depreciable property that he is entitled to deduct but does not deduct under paragraphs 20(1)(c), (d) and (e) of the Act.

The amount of the expenses capitalized under subsection 21(1) of the Act is added to the capital cost of the particular depreciable property acquired and capital cost allowance may be claimed annually.

We would also like to draw to your attention to the 50% rule in subsection 1100(2) and paragraph 1100(1)(b) of the Income Tax Regulations which limits capital cost allowance claims in the taxation year of acquisition of most depreciable property to the amount otherwise available less one half of the capital cost allowance attributable to net acquisitions in the year determined on a class by class basis.

We are enclosing the following Interpretation Bulletins which may be of assistance to you:

- IT-121R3 - Election to Capitalize Cost of Borrowed Money - IT-285R - Capital Cost Allowance - General Comments - IT-464R - Leasehold Interest.

We would be please to provide you any further assistance you may require.

Yours truly,

for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch