18 February 2011 External T.I. 2010-0381311E5 - Non-residential buildings - late election

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: 1. Whether the CRA would allow the election under subsection 1101(5b.1) of the Income Tax Regulations to be late filed. 2. Whether a taxpayer could be considered to have elected under subsection 1101(5b.1) without a letter attached to the return of income, but by simply indicating a separate class 1 in schedule 8 of the T2 return of income along with a 6% or 10% CCA rate.

Position: 1. No. 2. No.

Reasons: Legislation and case law.

XXXXXXXXXX 					2010-038131
						André Gallant
						(613) 957-8961
February 18, 2011

Dear XXXXXXXXXX :

Re: Capital Cost Allowance (CCA) - Eligible Non-Residential Buildings

This is in response to your email dated September 22, 2010 regarding the filing and late filing of an election with respect to eligible non-residential buildings.

Subsection 1101(5b.1) of the Income Tax Regulations (the "Regulations") prescribes a separate CCA class for each eligible non-residential building in respect of which the taxpayer has elected that the provision apply. The election is made "by letter attached to the return of income of the taxpayer filed with the Minister in accordance with section 150 of the [Income Tax Act or the Act] for the taxation year in which the building is acquired".

Subsection 1104(1) of the Regulations offers the following definition of eligible non-residential building:

""eligible non-residential building" means a taxpayer's building (other than a building that was used, or acquired for use, by any person or partnership before March 19, 2007) that is located in Canada, that is included in Class 1 in Schedule II and that is 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;"

The CCA rate for a class 1 building is normally 4%. When a building qualifies as an eligible non-residential building, paragraph 1100(1)(a.1) of the Regulations provides an additional 6% CCA to the extent the floor space of this building is at least 90% used at the end of a taxation year for the manufacturing or processing in Canada of goods for sale or lease. More specifically, this additional CCA is a maximum of 6% of the undepreciated capital cost ("UCC") to the taxpayer of that class "as of the end of the taxation year..."

If the eligible non-residential building does not qualify for the additional 6% CCA under paragraph 1100(1)(a.1), it may still qualify for an additional 2% CCA under paragraph 1100(1)(a.2) to the extent the floor space of this building is at least 90% used at the end of a taxation year for non-residential use in Canada. This additional 2% is also calculated based on the taxpayer's UCC at the end of the taxpayer's taxation year.

Paragraphs 1100(1)(a.1) and (a.2) only apply "where a separate class is prescribed by subsection 1101(5b.1)...", which, as stated above, requires an election to be filed in the taxation year the building was acquired.

Your first question concerns whether the Canada Revenue Agency ("CRA") would allow a subsection 1101(5b.1) election to be late filed.

Your second question is whether a taxpayer could be considered to have elected under subsection 1101(5b.1) in respect of a building without doing so by a letter attached to the return of income, but simply by the manner in which the building is reported on the CCA schedule filed with the taxpayer's income tax return. For instance, in the case of a corporate taxpayer, the building subject to the election would be reported on the T2 Schedule 8 as a separate class 1 property along with a 6% or 10% CCA rate, depending on whether subsection 1100(1)(a.1) or (a.2) is applicable.

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.

As stated above, subsection 1101(5b.1) of the Regulations requires that the election be made by attaching a letter to the taxpayer's tax return filed in accordance with section 150 of the Act for the taxation year in which the taxpayer acquired the building. There is no specific late filing provision for the election for eligible non-residential buildings such as the one that is found, for example, in subsections 85(7) to (9) of the Act in respect of late elections for section 85 rollovers.

While the CRA has the discretion under paragraph 220(3.2)(a) of the Act to allow some late filed elections, the CRA is only allowed to exercise its discretion in respect of those elections listed in section 600 of the Regulations. Since subsection 1101(5b.1) is not listed in section 600, a subsection 1101(5b.1) election cannot be late filed. This conclusion is not only supported by the principle of statutory interpretation that one cannot generally read in something into a provision that is not there (footnote 1) , but it is also supported by the jurisprudence on late filing elections: see e.g. Miller v. MNR, 93 DTC 5035 (FCA); Nassau Walnut Investments Inc. v. The Queen, 97 DTC 5051 (FCA); Advanced Agriculture Testing v. The Queen, 2009 TCC 190; Terminal Norco Inc. v. The Queen, 2006 TCC 139; Stuart Estate v. The Queen, 2003 TCC 171; and Financial Collection Agencies (Quebec) Ltd. v. MNR, [1990] 1 C.T.C. 2178 (TCC).

Your second question deals with whether the CRA accepts that an election under subsection 1101(5b.1) of the Regulations is considered to have been made by a taxpayer by the manner in which a building is reported in the CCA schedule filed with the taxpayer's income tax return or requires that the election be made by letter attached to such income tax return, as specifically provided for in subsection 1101(5b.1) of the Regulations.

As regards the need to follow the procedure set out in a tax provision for filing a particular election, it is worth referring to the comments by the TCC in Financial Collection, supra:

"There are other provisions in the Act [in addition to subsection 39(4) of the Act] which provide for the filing of forms of elections notwithstanding it is clearly apparent from the return of income itself how the taxpayer wishes to treat an item of income. Vide, for example, sections 21, 82(3) and 85. Just because it may be obvious from the return of income how a taxpayer wishes to report a particular transaction or item of income does not in itself free the taxpayer of the necessity of filing a form of election as required." [Emphasis added]

The election under subsection 1101(5b.1) of the Regulations and its consequences involve matters of tax compliance and audit. Our Compliance Programs Branch, that is generally responsible for such matters, has advised that an election under subsection 1101(5b.1) would need to be made by letter attached to the return of income and that simply identifying a building in the CCA schedule in the manner mentioned above is not sufficient.

Where the taxpayer is filling a return electronically, the taxpayer has different options for filing an election, depending on whether the election has a prescribed form or not, as indicated in the T2 Corporation - Income Tax Guide 2010 (T4012(E) Rev. 11). In this regard, the T4012 guide, at page 9 (PDF version), under the heading entitled "Corporation Internet Filing" provides the following instructions:

"If you have to file a certificate or an election form with your return and you are filing your T2 return electronically, send the document(s) to your tax centre (see Where to file your paper return). Clearly identify your corporation's name, business number, and the applicable tax year end on the documents. If you are filing an election that does not have a prescribed form, include it with the notes to your financial statements on the General Index of Financial Information (GIFI) to transmit the election electronically with your return, unless otherwise specified on a T2 related form." [Underlining in original]

With respect to notes to the financial statements in a GIFI, when filing electronically, reference can be made to RC4088(E), Rev. 09, General Index of Financial Information (GIFI) for Corporation, at pages 4, 7-8 (PDF version).

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See e.g. Friesen v. The Queen, 95 DTC 5551 (SCC).