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Principal Issues: [TaxInterpretations translation] 1. What are the tax consequences, in a situation where a corporation builds a garage on land owned by its sole shareholder, which land forms part of the shareholder’s principal residence, where the corporation holds or does not hold the right of superficies to the garage, respecting (a) the right to the capital cost allowance on the garage, (b) a benefit to the shareholder and (c) the right to the principal residence exemption?
Position: 1. If the corporation holds a right of superficies by virtue of the Civil Code of Québec in respect of the garage erected on the shareholder's property, the corporation holds a property right to the garage. (a) The corporation may be entitled to the capital cost allowance on the garage if it qualifies as depreciable property. The garage could possibly be classified as Class 1(q) of Schedule II. (b) Question of fact. Dependent on the wording of the Deed of Superficies for the right of superficies; we do not have enough information to determine definitively. However, if the facts do not demonstrate that the corporation holds the right of superficies to the garage by virtue of the Civil Code of Quebec, the Quebec civil-law rule applies and the shareholder would then own the garage. In this case, (a) the shareholder would not be entitled to the capital cost allowance in respect of the garage, (b) a benefit to the shareholder would be generated, and (c) it does not matter whether or not there is a right of superficies for the corporation in respect of the garage; it is not reasonable to consider the subjacent land as contributing to the use of the home as the taxpayer's principal residence. In addition, there may be a partial change of use of the land subjacent to the garage if it is used to earn income. Thus, the garage (regardless of whether depreciation is claimed or not) and the land subjacent to the garage could not qualify for the principal residence exemption.
Reasons: 1.a) Definition of depreciable property in subsection 13(21) of the Income Tax Act. Classification in a tax class is a question of fact, but possibly Class 1(q) of Schedule II of the Income Tax Regulations and paragraph 1102(1)(c) of the Income Tax Regulations.
1. b) Application of subsections 15(1) or 15(2) of the Income Tax Act, as well as paragraph 10 of Interpretation Bulletin IT-432R2.
1. c) Partial change of use rule under paragraph 45(1)(c) of the Income Tax Act. Application of the definition of principal residence in section 54 and paragraph 40(2)(b) of the Income Tax Act.
Lucie Allaire, LL.B, CGA
January 23, 2012
Subject: Right of Superficies
This is in response to your letter of June 1, 2011 in which you requested our comments regarding the situation where a corporation ("Corporation A") constructed a building on the land on which the principal residence of its sole shareholder is located (the "Taxpayer"). You provided additional information during telephone exchanges (XXXXXXXXXX/Allaire).
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
First, you referred to Corporation A, which carries on a transport business and erected at its expense a garage on the land on which the Taxpayer's principal residence is located. The garage is not attached to the Taxpayer's principal residence and that is used exclusively for the carrying on of the business of Corporation A.
You added that Corporation A incurred all the costs of building the garage and that the Taxpayer did not reimburse Corporation A for them. You also specified that the municipal tax account, which includes the residence and the entire land, is in the name of the Taxpayer.
Finally, you referred to a lease agreement between the parties concerning only a lease by Corporation A of the land subjacent to the garage.
You wish to know if Corporation A is entitled to capital cost allowance ("CCA") and, if so, in which Class of depreciable property the garage could be classified. You asked if a taxable benefit to the shareholder could be conferred. Finally, you wish to know if the taxpayer retains the right to the principal residence exemption and whether claiming CCA for the garage has an impact in that regard.
We will answer your questions depending on whether or not Corporation A holds the right of superficies to the garage.
Under the principle of accession, which is found in Articles 948 and 954 to 964 of the Civil Code of Quebec ("CCQ") and which generally provides that construction on land belongs to the owner of the land, the taxpayer would be, at first glance, the owner of the garage.
To reverse this legal presumption, Corporation A must be able to prove that it is the owner of the garage, through the existence, among other things, of the right of superficies under the CCQ. In that respect, we would be of the view that the parties should establish in writing a deed of superficies
Article 1011 of the CCQ provides that superficies is ownership of the constructions, works or plantations situated on an immovable belonging to another person, the owner of the subsoil, and that it results from the division of the object of the right of ownership over an immovable, from the assignment of the right of accession or renunciation of the benefit of accession.
In addition, under article 1112 of the CCQ, the superficiary and the owner of the subsoil each bear the charges encumbering what constitutes the object of their respective rights of ownership.
Furthermore, under Article 1116 of the CCQ, at the termination of superficies, the subsoil owner acquires by accession ownership of the constructions, works or plantations by paying their value to the superficiary. If, however, the constructions, works or plantations are equal in value to the subsoil or of greater value, the superficiary has a right to acquire ownership of the subsoil by paying its value to the subsoil owner, unless he prefers to remove, at his own expense, the constructions, works and plantations he has made and return the subsoil to its former condition.
Finally, article 1117 of the CCQ provides that where the superficiary fails to exercise his right to acquire ownership of the subsoil within 90 days from the end of the superficies, the owner of the subsoil retains ownership of the constructions, works and plantations.
On the one hand, assuming that Corporation A is owner by way of superficies of the garage pursuant to the relevant provisions of the CCQ, then the garage, which is used by Corporation A to earn business income, would be depreciable property if the conditions set out in the definition of "depreciable property" within the meaning of subsections 13(21) and 248(1) are satisfied.
The classification of depreciable property in a Schedule II Class for purposes of the CCA is determined on the facts applicable to a specific situation. Buildings and other structures acquired after 1987 (except to the extent that they are included in Class 3 or 6 of Schedule II of the Income Tax Regulations (the "Regulations")) are usually included in Class 1. Thus, the garage could potentially fall into Class 1(q) of Schedule II of the Regulations.
Furthermore, given the limited facts in this case, we are unable to determine whether a taxable benefit could be conferred at a particular time on the Taxpayer by virtue of section 15, in the event that Corporation A holds the right of superficies of the garage.
On the other hand, if the taxpayer owns the garage, the taxpayer would not be entitled to CCA because the facts do not allow us to conclude that the taxpayer uses it for the purpose of earning income. Indeed, under paragraph 1102(1)(c) of the Regulations, depreciation is deductible only if the property was acquired for the purpose of gaining or producing income.
In addition, in the event that the Taxpayer owns the garage, the garage construction costs are incurred by Corporation A and the application of subsection 15(2) cannot be clearly demonstrated by the parties, we are of the view that a taxable benefit could be conferred on the Taxpayer by Corporation A by virtue of subsection 15(1).
With respect to your last question, paragraph (e) of the definition of "principal residence" in section 54 states, among other things, that the principal residence of a taxpayer for a taxation year is deemed to include the land subjacent to the housing unit and such portion of the contiguous land as can reasonably be regarded as contributing to the use of the housing unit as a residence.
In that regard, we are of the view that it would be unreasonable to consider the land subjacent to the garage as contributing to the use of the housing unit as the principal residence of the Taxpayer, from the time the garage is used exclusively for the purposes of the business of Corporation A.
In addition, if the taxpayer uses a portion of the land contiguous to the taxpayer’s principal residence to generate income, that portion of the land would be deemed to have been disposed of and reacquired at fair market value ("FMV")
In particular, paragraph 45(1)(c) provides that a taxpayer who partially converts a principal residence into income producing property is deemed to have disposed of the portion of the property so converted (which portion is usually calculated on the basis of the area in question) for proceeds equal to the proportion of the fair market value it represents of the property. Paragraph 45(1)(c) also provides that the same portion of the property is deemed to have been immediately thereafter reacquired at a cost equal to the same amount. However, any gain determined from the deemed disposition would ordinarily be eliminated or reduced by the principal residence exemption under paragraph 40(2)(b).
Consequently, regardless of whether or not any CCA is claimed for the garage, the land subjacent to the garage, if it was previously part of the taxpayer's principal residence, would not, in a potential disposition, be eligible for the principal residence exemption, from the beginning of the exclusive use of the garage for carrying on the business of Corporation A.
We hope that these comments will be of assistance.
François Bordeleau, Advocate
Business and Trusts Section
Income Tax Rulings Directorate
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