17 April 1996 External T.I. 9604715 - CCA - REMAINDER INTEREST IN PROPERTY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether, capital cost allowance can be claimed by a taxpayer who has a remainder interest in property.

Position:

CCA cannot be claimed in respect of the remainder interest. However, the taxpayer may be able to claim capital cost allowance if he has a leasehold interest in the property.

Reasons:

CCA can only be claimed by the owner of the property, that is, the person who has a freehold or a leasehold interest in the property. A remainderperson has neither.

It is not clear whether the taxpayer has a leasehold interest in the property and if he does, whether he has a capital cost in respect of such interest.

		5-960471
XXXXXXXXXX	C. Chouinard

April 17, 1996

Dear Sir:

Re: Remainder Interest in Farm Property

We are writing in reply to your letter of February 5, 1996, wherein you inquired whether you could claim capital cost allowance in respect of certain farm property.

You indicate that, upon your father's death, you inherited farm property consisting of machinery, a residence and farm buildings, subject to a life interest in favour of your father's spouse (your stepmother and the executrix of the estate). You also indicate that you have entered into an agreement with your stepmother, whereby you have the sole right to use the machinery, the land and the buildings in carrying on a farming business. Pursuant to this agreement, you are responsible for the maintenance and repairs of the property, the municipal taxes and insurance. You inquire whether you are entitled to claim capital cost allowance in respect of the machinery and the buildings.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following comments.

A life estate in property is a freehold estate that is limited to exist for a period of time measured by one or more lives. A life estate carries with it the right to possession and the right to manage the property. At common law, a life tenant can alienate their interest and deal with the estate by way of lease or mortgage, however, any interests granted do not bind the estate of the remainderperson but terminate upon the death of the life tenant. A remainder interest in property is a separate property from the life estate and a future interest in property, that is, an interest in which the right to possession or enjoyment of the property is postponed to a future time.

As indicated in paragraph 2 of Interpretation Bulletin IT-128R and paragraph 15 of Interpretation Bulletin IT-285R2, copies of which are enclosed, capital cost allowance may only be claimed in respect of property owned by the taxpayer or in which the taxpayer has a leasehold interest. In addition, paragraph 21 of IT-285R2 states that, where a taxpayer has neither a freehold nor a leasehold interest in property, capital cost allowance may not be claimed for the property. Since a remainder interest is neither a freehold nor a leasehold interest in property, in our view, only the individual who has the life interest in property can claim capital cost allowance in respect of that property.

Although you would not be considered to have a freehold interest in the property, given that you appear to be using the farm buildings and machinery pursuant to an agreement akin to a lease, you might be considered to have a leasehold interest in the property. We consider a leasehold interest to be the interest of a tenant in any leased tangible property. A tenant who leases property acquires a leasehold interest in that property regardless of whether or not any capital cost is incurred in respect of that interest. However, a depreciable property is not considered to have been acquired until a capital cost has been incurred in respect of that property. Consequently, a tenant's eligibility to claim capital cost allowance will be dependent on the tenant incurring a capital cost in respect of the leasehold interest. Subsection 1102(4) of the Income Tax Regulations (the "Regulations") provides that the "capital cost" of a leasehold interest includes any amount expended for an improvement or alteration to a leased property. This subject is discussed in Interpretation Bulletin IT-464R, a copy of which is enclosed for your information.

Leasehold interests which are in the nature of a building or structure (i.e., construction or reconstruction of a building or structure on leased land) would, by virtue of subsection 1102(5) of the Regulations, be required to be included in the appropriate class in Schedule II, usually Classes 1, 3 or 6. All other capital costs in respect of leasehold interests would be included in Class 13. In order for a tenant to claim capital cost allowance under Classes 1, 3 or 6, according to subsection 1102(5) of the Regulations, the tenant must have (i) erected a building on leased land, (ii) made an addition to a leased building or structure, or (iii) made alterations to a leased building or structure that substantially changed the nature of the property. Where a tenant merely makes alterations that do not substantially change the nature of the property, the tenant may only claim capital cost allowance in respect of those alterations under class 13.

Since it is not clear from your letter whether you have made improvements to or altered the buildings and machinery used by you pursuant to the above-mentioned agreement, we cannot determine whether you have a capital cost in respect of your leasehold interest in such property. You should note, however, that if the expenses incurred in respect of the machinery and the buildings are normal repair and maintenance expenses, do not result in the acquisition of assets or fixtures of enduring value and do not materially improve the machinery or buildings beyond their original conditions, the expenses should be deducted as current repairs and not capitalized as leasehold improvements. In this respect, we refer you to IT-128R mentioned above, which discusses the factors to consider in determining whether a particular expenditure is capital in nature, and therefore depreciable, or current and thus deductible.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.