9 November 2010 External T.I. 2010-0379751E5 - Regulations 1100(1)(a.2) and 101(5b.1)

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: Can the election be made by a partnership? If so, how is it made?

Position: Yes and see response.

Reasons: The law.

XXXXXXXXXX
								2010-037975
								Michael Cooke, C.A.

November 9, 2010

Dear XXXXXXXXXX :

Re: Paragraph 1100(1)(a.2) and Subsection 1101(5b.1) of the Income Tax Regulations

We are writing in response to your letter dated August 27, 2010, wherein you asked whether a Canadian partnership could make an election under subsection 1101(5b.1) of the Income Tax Regulations (the "Regulations") and if so, how such an election should be made.

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.

The Income Tax Act (the "Act") does not define a "partnership", but outlines the income tax consequences if one exists. A partnership is not a person, nor is it deemed to be a person within the meaning of the Act, and is generally considered to be a "flow-through" entity. Notwithstanding that a partnership is not a person, once it is established that a partnership does exist, the rules in section 96 of the Act provide that income is computed at the partnership level as if the partnership is a separate person on each source. Each member of a partnership, in turn, must report and pay tax on its proportionate share of such income.

Therefore, where a partnership holds depreciable property, in computing the income of the partnership from each source as required by subsection 96(1) of the Act any deduction under paragraph 20(1)(a) of the Act in respect of such property (i.e., capital cost allowance or "CCA") would be computed at the partnership level and having regard to the applicable Regulations under Part XI, Part XVII and Schedule II to VI (please refer to paragraph 15 of Interpretation Bulletin, IT-285R2, Capital Cost Allowance - General Comments).

In connection with the forgoing, paragraph 1100(1)(a.2) of the Regulations provides for an additional 2% CCA rate in respect of an "eligible non-residential building" that is included in a separate prescribed class under subsection 1101(5b.1) of the Regulations (i.e., Class 1). This provision may apply where the building is not eligible for the additional CCA rate under paragraph 1100(1)(a.1) of the Regulations and at least 90 per cent of the floor space of the building is used at the end of the taxpayer's taxation year for a "non-residential" use in Canada. In order to qualify for the additional 2% CCA rate the taxpayer must elect under subsection 1101(5b.1) of the Regulations to include the building in a separate prescribed class. This election must be made by attaching a letter to the taxpayer's return of income required by section 150 of the Act for the taxation 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. In this regard, there is no provision to allow any taxpayer to late file such an election.

Subsection 1104(2) of the Regulations 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.

While it remains a question of fact as to whether a particular building otherwise meets the definition of "eligible non-residential building", it is our view that where a building owned by a Canadian partnership meets the conditions described in paragraph 1100(1)(a.2) of the Regulations at the end of the partnership's fiscal period that partnership would not be prevented from making an election under subsection 1101(5b.1) of the Regulations. While this election is not included in the list of elections described in subsection 96(3) of the Act, the CRA will generally accept an election under subsection 1101(5b.1) of the Regulations to be valid for a Canadian partnership where it follows the requirements set out in subsection 96(3) of the Act.

We trust that these comments will be of assistance.

Yours truly,

Sandy Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch