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: Whether certain buildings may be considered "non-residential" in respect of use such that additional CCA allowances may be available in respect of such properties as permitted by amendments made consequent to the 2007 Budget.
Position: The purpose for acquiring a property and its actual use are questions of fact. Where a property that is a building is used on a more or less permanent basis, as the place of residence or abode of its occupants, there is a presumption that the building is used residential.
Reasons: The law. Case law. Previous positions.
XXXXXXXXXX
2010-036108
James Atkinson CGA
(519) 457-4832
July 20, 2010
Dear XXXXXXXXXX :
Re: Class 1 Buildings
This is in response to your letter dated March 15, 2010 concerning capital cost allowance ("CCA") rates for Class 1 buildings that are acquired and used for a non-residential use. Your question concerns the meaning of the phrase "non-residential use" that is found in paragraph 1100(1)(a.2) and the definition of "eligible non-residential building" in subsection 1104(2) of the Income Tax Regulations ("Regulations").
In particular, you ask if the use of the following buildings acquired to be used and actually used for the purposes indicated can be regarded to be a non-residential use for purposes of the definition of eligible non-residential building in subsection 1104(2) and the additional 2% rate of CCA provided for in paragraph 1100(1)(a.2) of the Regulations:
1. A building designed as a cottage is constructed for use in the tourism accommodation business.
2. A building constructed for rental to commercial businesses such as retail store owners.
3. A warehouse constructed and rented to both residential and commercial customers.
4. A rental apartment building.
You believe that the buildings described in 1 and 2 above would qualify and that the building described in 4 above would not qualify for the additional 2% CCA rate under paragraph 1100(1)(a.2). You are uncertain whether the building referred to in 3 above would be eligible for the additional 2% CCA rate.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following general comments, which may be of assistance.
Paragraphs 1100(1)(a.1) and (a.2) of the Regulations provide for additional CCA rates in respect of certain buildings acquired after March 18, 2007 and included in Class 1 (4%) in Schedule II to the Regulations, depending on their actual use at the end of the taxation year.
Paragraph 1100(1)(a.1) provides an additional 6% CCA rate in respect of an eligible non-residential building that a taxpayer elects, pursuant to paragraph 1101(5b.1) of the Regulations, to include in a separate prescribed class if at least 90 per cent of the floor space of the building is used at the end of a taxation year for the purpose of manufacturing or processing ("M&P") in Canada of goods for sale or lease. As a result, eligible non-residential buildings used for M&P purposes are eligible for a 10% combined CCA rate (4% + 6%).
Paragraph 1100(1)(a.2) provides for an additional 2% CCA rate in respect of an eligible non-residential building that is included in a separate prescribed class under paragraph 1101(5b.1) and is not eligible for the additional CCA rate under paragraph 1100(a.1) if at least 90 per cent of the floor space of the building is used at the end of a taxation year for a "non-residential" use in Canada. As a result, this non-residential use building is eligible for a 6% combined CCA rate (4% + 2%).
Subsection 1104(2) defines the term "eligible non-residential building" as a taxpayer's building that:
- is located in Canada;
- is included in Class 1 in Schedule II of the Regulations;
- has not been used, or acquired for use, by any person or partnership before March 19, 2007; and
- has been acquired by the taxpayer on or after March 19, 2007 to be used by the taxpayer, or a lessee of the taxpayer, for a non-residential use.
It is the intended use of the building, not its actual use, which is relevant in determining whether a building is an eligible non-residential building. This test results from the wording "has been acquired by the taxpayer ... to be used by the taxpayer, or a lessee of the taxpayer, for a non-residential use" found in the definition in subsection 1104(2). This is, in our view, an objective test. Whether a particular building was to be used for a non-residential use is a question of fact which can only be decided after reviewing all relevant facts.
The additional CCA rates permitted under paragraphs 1100(1)(a.1) and (a.2) apply to a building only if the building is an eligible non-residential building and the taxpayer elects under subsection 1101(5b.1) to include the building in a separate prescribed class. The election may be made by attaching a letter to the return for the tax year in which the building was acquired. If an election is not filed to put the building in a separate class, the default rate of 4% will apply.
Providing that a taxpayer has elected under subsection 1101(5b.1) to include a building that meets the definition of eligible non-residential building in a separate prescribed class, it remains that the building must meet one of the two actual use requirements mentioned above (i.e., M&P and non-residential use) at the end of the taxpayer's taxation year in order to qualify for the additional CCA rates in paragraphs 1100(1)(a.1) or (a.2).
Consequently, in addition to the intended non-residential use at acquisition that is referred to in the definition of eligible non-residential building, the actual use of the building, at the end of the year, is also relevant. Whether a particular building meets one of the two use requirements mentioned in paragraphs 1100(1)(a.1) or (a.2) at the end of the taxpayer's taxation year is a question of fact which can only be decided after reviewing all relevant facts.
Paragraph 1100(1)(a.2) and the definition of eligible non-residential building in subsection 1104(2) each rely on the phrase "non-residential use" in describing the actual use and intended use of a building. The word "non-residential" is not defined in either the Income Tax Act or the Regulations. A review of various dictionaries for direct guidance as to the ordinary meaning of the expression is not of significant assistance. However, meanings of the root words "residence" and "residential" are helpful.
The Concise Oxford Dictionary of Current English, Ninth Edition, which does not define "non-residential", but does define the term "residential", states:
residential / adj. 1. suitable for or occupied by private houses (residential area). 2. used as a residence (residential hotel). 3. based on or connected with residence (the residential qualification for voters; a residential course of study).
The Canadian Law Dictionary, Third Ed., citing Re Fulford and Townshend, [1970] 3 O.R. 493 at 500 (Surr.Ct.), describes the root word "residence" as "an elastic term that takes colour from the context in which it is used and is capable of various constructions according to the statute in which it appears." Generally, residence "means a person's permanent place of abode and not his temporary place of abode. .... The mere physical presence of a person in a place does not constitute his residence there but in addition he must have the present intention of remaining there for some time but not necessarily for all time."
If a building is intended to be used by a taxpayer, or a lessee of the taxpayer, for a residential use, the corollary is that the intended use of the building is not "non-residential"; thus the building will not be an eligible non-residential building as defined in subsection 1104(2) and will not be eligible for the additional CCA rates under paragraphs 1100(a.1) and (a.2). It may therefore be reasoned, based upon the meaning of the word "residential", that the phrase "non-residential use" would exclude use of a building on a more or less permanent basis, as the place of residence or abode of its occupants.
Generally, residential use requires the existence of a place of residence in which a person as a general rule and in the routine of life sleeps and eats; such place would generally be a complete and separate living unit with a kitchen, bathroom, sleeping facilities, and its own private access. Conversely, non-residential use would not generally encompass a place of residence in which a person as a general rule and in the routine of life sleeps and eats and which would generally be a complete and separate living unit with a kitchen, bathroom, sleeping facilities, and its own private access. However, we would mention that use by an individual of a separate living unit with a kitchen, bathroom, sleeping facilities, and its own private access would not necessarily be considered residential use if the unit is not the place where the individual as a general rule and in the routine of life sleeps and eats.
The determination of whether a building's intended use at the time it is acquired and its actual use at the end of a particular year is non-residential is a question of fact which can only be decided after reviewing all relevant facts.
As regards the buildings you mentioned, we offer the general comments below.
A cottage acquired by a taxpayer in the tourism accommodation business for short term rental use by individuals would generally be considered to be for non-residential use.
A building that is used by tenants operating commercial businesses such as retail store owners would be considered to be used for non-residential use.
A (warehouse) building used by commercial tenants to store inventory items of their retail store businesses and by individuals to store personal-use property (e.g., television sets, bicycles, patio furniture) would be considered to be used for non-residential use. On the other hand, in a situation where a (warehouse) building is used partly by tenants for a residential use (i.e., where residential lofts are leased and used as residences) and partly by tenants operating commercial businesses, it is the relative percentage of the two uses that determines whether the building is used for non-residential purposes. In the context of your enquiry, eligibility for the additional CCA allowances in a mixed use scenario is ultimately dependent upon meeting the 90% use requirements mentioned in paragraphs 1100(1)(a.1) or (a.2) of the Regulations at the end of the taxpayer's taxation year.
An apartment building with complete and separate living units (i.e., with a kitchen, bathroom, sleeping facilities, and its own private access) that are rented to individuals and families who use the units as a general rule and in the routine of life to sleep and eat would not be considered to be used for non-residential use.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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