23 February 2010 External T.I. 2009-0332581E5 - Capital cost allowance - Non-residential buildings

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. What documentation would the CRA require to support the taxpayer's assertion that the building was not used or acquired for use by any person or partnership prior to March 19, 2007? 2. Where an eligible non-residential building in respect of which an election has been filed by the transferor under subsection 1101(5b.1) is transferred by the transferor to a non-arm's length party, will that building automatically remain eligible in the hands of the transferee for the additional CCA rate in paragraph 1100(1)(a.1) or (a.2) due to the operation of subsection 1102(14)? 3. In the event the transferor did not file an election under subsection 1101(5b.1) in respect of a property that was first acquired on or after March 18, 2007, does the CRA accept that the non-arm's length transferee that acquired the property in circumstances in which subsection 1102(14) is applicable may file the election, making the property eligible for the additional CCA rate in paragraph 1100(1)(a.1) or (a.2)?

Position: 1. See response. 2. The transferee would not have to make the election, but would still have to meet the requirements in paragraph 1100(1)(a.1) or (a.2), as applicable, concerning the use test for at least 90% of the floor space at the end of the particular year. 3. The transferee may still file the election, but must also meet the requirements in paragraphs 1100(1)(a.1) or (a.2), as applicable, concerning the use test for at least 90% of the floor space.

Reasons: Legislation.

									2009-033258
XXXXXXXXXX 								André Gallant
									(613) 957-8961
February 23, 2010

Dear XXXXXXXXXX :

Re: Capital cost allowance (CCA) - non-residential buildings

This is in response to your fax of July 15, 2009 regarding non-residential buildings and the application of subsection 1102(14) of the Income Tax Regulations (Canada) (the "Regulations").

The issue involves whether a building would qualify as an "eligible non-residential building" before and/or after the non-arm's length transfer of the building from the transferor to the transferee (the taxpayer).

Subsection 1101(5b.1) of the Regulations prescribes a separate 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] 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)..."

Subsection 1102(14) of the Regulations, as it currently reads, deems property transferred between non-arm's length parties to be property of the same prescribed class, or separate prescribed class, as the case may be, to the transferee as it was to the transferor.

In relation to the above provisions, you have raised the following questions:

1. What documentation would the CRA require to support the taxpayer's assertion that the building was not used or acquired for use by any person or partnership prior to March 19, 2007?

2. Where an eligible non-residential building in respect of which an election has been filed by the transferor under subsection 1101(5b.1) is transferred by the transferor to a non-arm's length party, will that building automatically remain eligible in the hands of the transferee for the additional CCA rate in paragraph 1100(1)(a.1) or (a.2) due to the operation of subsection 1102(14)?

3. In the event the transferor did not file an election under subsection 1101(5b.1) in respect of a property that was first acquired on or after March 18, 2007, does the CRA accept that the non-arm's length transferee that acquired the property in circumstances in which subsection 1102(14) is applicable may file the election, making the property eligible for the additional CCA rate in paragraph 1100(1)(a.1) or (a.2)?

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 (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.

With respect to your first question, it is a question of facts whether a building was used or acquired for use by any person or partnership prior to March 19, 2007. When a new building is purchased by a taxpayer, the date of acquisition is generally the closing date; if this date is prior to March 19, 2007, the building would generally be considered to be acquired for use and would be ineligible for treatment as eligible non-residential building.

When a building is constructed by a taxpayer, we generally take the view that once a building was substantially completed by the taxpayer, this building is considered at that time to be used or acquired for use by the taxpayer. Therefore, credible evidence demonstrating the date when a building was substantially completed would be relevant in determining when the building was first used or acquired for use.

Pursuant to subsection 1102(25), if an eligible non-residential building is under construction on March 19, 2007, the portion of the capital cost incurred before March 19, 2007, is deemed to be incurred on March 19, 2007, unless the taxpayer elects that this subsection not apply to that cost.

The following comments apply to your second question.

Subsection 1102(14) of the Regulations does deem property transferred between non-arm's length parties to be property of the same prescribed class, or separate prescribed class, as the case may be, to the transferee as it was to the transferor. Therefore, if a non-arm's length transferor was to make a separate prescribed class election under subsection 1101(5b.1), the transferee would acquire the eligible non-residential building which would be deemed to be in a separate prescribed class as that of the transferor without having to elect subsequent to the transfer.

However, the application of subsection 1102(14) does not result in the transferee being automatically entitled to the additional CCA rate of 6% or 2% provided under paragraph 1100(1)(a.1) or (a.2), respectively. That is, the CCA rate that does flow through automatically to the transferee by reason of subsection 1102(14) for a class 1 building is the normal 4% rate of CCA. To qualify for one of the mentioned additional CCA rates for a particular taxation year, the transferee must meet the requirements in paragraph 1100(1)(a.1) or (a.2), as applicable, concerning the use test for at least 90% of the floor space at the end of the particular year.

As regards your third question, in the scenario where the transferor did not elect under subsection 1101(5b.1), based on the wording of the definition of eligible non-residential building in subsection 1104(2), the transferee may still elect under subsection 1101(5b.1) so that the building acquired for a non-residential use is included in a separate prescribed class, provided that the building was not used, or acquired for use, by any person or partnership before March 19, 2007.

For the transferee to qualify for one of the additional CCA rates in paragraph 1100(1)(a.1) or (a.2) in this scenario, the transferee must not only be able to and in fact elect under subsection 1101(5b.1), but must also meet the requirements in paragraphs 1100(1)(a.1) or (a.2), as applicable, concerning the use test for at least 90% of the floor space.

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