17 July 1991 Administrative Letter 911276 F - Leasehold Interest

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.

July 10, 1991

Dear Sirs:

Re: Leasehold Interest

This is in reply to your letter of May 3, 1991 requesting a technical interpretation on the classification of certain assets for capital cost allowance (CCA) purposes.

In your example the gas station operator leases the land and the building where a gas station is located. The operator puts in a new underground gas storage tank and repaves the parking lot at his own cost prior to opening for business. You ask, among other things, what the proper classification of these assets are for CCA purposes.

Our reply follows the point order of your questions.

a)     Since the capital cost of a leasehold interest is a depreciable property a tenant may deduct capital cost allowance in respect of the capital cost of his leasehold interests. 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, the tenants eligibility to claim capital cost allowance will be dependent on him incurring a capital cost in respect of the leasehold interest. The contractual arrangements, although relevant in determining that a tenant has acquired a leasehold interest, are not necessarily in and by themselves decisive regarding the tenants eligibility to claim capital cost allowance. This subject is discussed in Interpretation Bulletin IT-464R. 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 respective class of Schedule II usually 1, 3 or 6. All other capital costs respecting leasehold interests would be included in Class 13.

b)     It is generally understood that if a chattel becomes fixed to land, and thus becomes a "fixture", that fixture becomes part of the land and is therefore owned by the owner of the land. The person leasing the land would only have a leasehold interest in such fixtures or chattels. Thus where a gas station operator (operating under a lease) installs an underground gas storage tank and paves or installs a driveway on leased land they would be leasehold improvements to the operator for purposes of paragraph 1100(1)(b) of the Income Tax Regulations.

c)     As an underground storage tank or a paved driveway is not "a building or structure" neither would be included in Class 1 by virtue of Regulation 1102(5).

d)     As the in-ground gas storage tank and parking lot in question are affixed to the land, they are considered leasehold improvements as discussed in b) above and would be included in the same Class 13.

We trust our comments will prove helpful.

Yours     truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch