Regulation 1102 - Property Not Included

Subsection 1102(1)

Paragraph 1102(1)(a)

Administrative Policy

92 CPTJ - Q.13

Where a "mothballed" facility is transferred by a parent to a subsidiary, is held by the subsidiary as in adventure of the nature of trade and then sold by it, both ss.1102(1)(a) and 1102(14) apply, but s. 1102(1)(a) will take precedence. Accordingly, the subsidiary will not be entitled to CCA.

Paragraph 1102(1)(b)

Cases

C.A.E. Inc. v. Canada, 2013 DTC 5084 [at 5944], 2013 FCA 92

The taxpayer leased or entered into leases by it of flight simulators it had manufactured. For financing reasons, it entered into sale and leaseback transactions under which the simulators were sold to a bank, leased to the taxpayer, and subleased to an airline.

In finding that the gains realized on the sale to the bank were on capital account, Noël JA first noted (at para. 34) the taxpayer's submission that "it could never have made a profit from these sale-and-leaseback arrangements, since the leasing costs it agreed to pay always exceed the proceeds from the disposition of the simulators"), and then stated (at para. 69):

[T]he leasing component of the sale-and-leaseback arrangements extended over a period of twenty and twenty-one years and allowed the appellant to carry on its leasing/service business. The fact that sale-and-leaseback arrangements make no business sense unless the rental/service fees that the appellant planned to collect are taken into account shows that the transactions were concluded on the basis of the ongoing operation of the simulators over the life of the lease. ... It follows that the sale-and-leaseback transactions were not part of the appellant's trading operations.

In the case of simulators which had already been leased to Air Canada under agreements which gave Air Canada a right to purchase "upon mutually acceptable terms," this merely created an invitation to negotiate, without the effect of putting those simulators up for sale, so that they retained their character as capital property. However, an option on another simulator granted to United Airlines (and a similar option granted to Airbus) "was a real option as it could be exercised for a preset price" (para. 107) had the effect of making the simulators inventory, so that they did not qualify as depreciable property by virtue of Reg. 1102(1)(b). Noël JA stated (at para. 108):

Property put up for sale in the course of a business carried on for that purpose is no less for sale because circumstances make a sale unlikely.

The Court affirmed the trial judge's finding that the characterization of property as inventory or capital property is to be done year-by-year (para. 72).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property characterization of depreciable property or inventory done on annual basis 355
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) change in use on depreciable property conversion to inventory 120
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) applied to conversion of depreciable property into inventory 120
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Machinery and Equipment 355

See Also

Sivasubramaniam v. The Queen, 2008 DTC 3886, 2008 TCC 261 (Informal Procedure)

The taxpayer argued that his rental condominium units were not rental properties because they had been acquired by him with a view to their resale at a capital gain. Bowman C.J. noted that such an intention would be inconsistent with claiming capital cost allowance. He also noted (at para. 9) that although property held for sale might not be "described" in the taxpayer's inventory, "the short answer, I believe, is that paragraph 1102(1)(c) is probably unnecessary" given that property that was inventory, whether or not described in a list called an inventory, would not be eligible for a capital cost allowance as it would not have a capital cost.

Administrative Policy

20 July 2000 Internal T.I. 2000-0035017 - Conversion Capital Property to Inventory

When trucks of a leasing company reach the termination of the respective leases at the three-year point, there is a conversion of capital property to inventory, and capital cost allowance may not be claimed. "While a truck rental company would not be seen as having converted capital property to inventory when the leased trucks are being replaced only when worn out or obsolete ... where leased vehicles are withdrawn from leasing part prior to that time and are sold as an integral part of the taxpayer's normal business operations, a conversion of the trucks to inventory is considered to occur prior to their sale."

Paragraph 1102(1)(c)

Cases

Hickman Motors Ltd. v. Canada, 97 DTC 5363, [1997] 2 S.C.R. 336

generation of revenue for a short time was sufficient

The taxpayer received equipment on the winding-up of the wholly-owned subsidiary and, five days later, transferred the same assets to another subsidiary.

In connection with finding that the equipment qualified in the taxpayer's hands as depreciable property, McLachlin J. stated (at para. 7):

The fact that the assets produced revenue, as the reasons of L’Heureux-Dubé J. demonstrate, establishes that they continued to be used for the purpose of producing income, avoiding the effect of s. 13(7)(a) and the exclusion under Regulation 1102(1)(c). The fact that the revenue was small or earned over a short period of time does not take them out of this category. We need not decide whether a different result might flow if the evidence viewed as a whole showed that the assets possessed a non-revenue function: see Clapham v. M.N.R., 70 D.T.C. 1012 (T.A.B.); Bolus-Revelas-Bolus Ltd. v. M.N.R., 71 D.T.C. 5153 (Ex. Ct.). Nor is the case of assets held for such a short period of time that the revenue produced was too small to calculate (e.g., the case of the instantaneous or same day rollover) before us. Here the assets served only one function, to produce income.

L’Heureux‑Dubé J in her concurring reasons stated (at paras. 63-65):

[T]o avoid absurdity in the context of the present case, s. 20(1)(a) must be understood as follows:

...there may be deducted…such part of the capital cost . . . of [income-producing] property [or, alternatively, property acquired for the purpose of producing income]….

…[T]o satisfy this first part of the test, it is sufficient to presume that if the property produces revenue, it indeed meets the requirements of Regulation 1102(1)(c). …

The second part of the test… determined by an objective evaluation of the specific facts and circumstances of each case in relation to appropriate jurisprudence, having regard to whether the taxpayer acted in accordance with reasonably acceptable principles of commerce and business practices.

Interprovincial Co-operative Ltd. v. The Queen, 87 DTC 5115, [1987] 1 CTC 222 (FCTD)

property acquired only because parent so directed

A manufacturing plant which had been shut down and foreclosed upon several years previously was reacquired by the taxpayer because its parent had so directed it to do so in order to access capital cost allowance and interest deductions, and not for the purpose of gaining or producing income. It accordingly was unnecessary for Martin J to determine whether it was sufficient for purposes of Reg. 1102(1)(c) for a property to be acquired for the purpose of gaining or producing income generally (in contra-distinction to income from the specific property.)

Roywood Investments Ltd. v. The Queen, 79 DTC 5451, [1980] CTC 19 (FCTD), aff'd 81 DTC 5148, [1981] CTC 206 (FCA)

land with building was acquired only for purpose of generating capital gain

The sole purpose of the taxpayer in purchasing land with a building was to realize a substantial capital gain from the property when the opportunity to do so arose. The building accordingly was not acquired for the purpose of gaining or producing income, as required by regulation 1102(1)(c).

Bureau et Bureau Inc. v. The Queen, 78 DTC 6562, [1978] CTC 695 (FCTD)

building acquired only with a view to business expansion

It was found that several old residential and commercial buildings had been purchased by the appellant with the intention of eventually demolishing them, in order to permit it to construct larger premises in which to carry on its furniture business, rather than to produce rental revenues. The buildings accordingly had not been acquired "for the purpose of gaining or producing income" as required by Regulation 1102(1)(c).

Ben’s Ltd. v. MNR, 55 DTC 1152 (Ex Ct)

incidenta short-term rent not a purpose

In order to expand its factory, the taxpayer acquired three adjoining properties comprising land and three dwelling houses. In finding that the dwellings did not qualify as depreciable property, Cameron J stated (pp. 1156-7):

There was only one purpose, namely, to secure a site for the extension. I regard the reeipt of a few months’ rent as a merely fortuitous event.

See Also

568864 B.C. Ltd. v. The Queen, 2014 TCC 373

patents were acquired for future joint venture use

The taxpayer - which was a member of group of companies that included a producer of exterior trim boards for construction ("W.L.") – earned management fees and rental fees from W.L. In 2003, the taxpayer lent $3.5 million to an arm's length supplier of specially prepared boards ("Interact") secured by patents held by Interact's principal ("Cable").

Following the bankruptcy of Interact and Cable earlier in 2005, the trustee in bankruptcy for Cable assigned the beneficial ownership of the patents to the taxpayer, so that it was deemed under s. 79.1 (6) to have acquired them at a cost of $3.5 million plus $0.4 million of relevant legal costs. The taxpayer claimed a terminal loss of $3.9 million when it sold its beneficial interest in the patents for $1 in 2007 to a related corporation.

In finding that the patents satisfied Reg. 1102(1)(c), Rip J noted that the taxpayer had made the $3.5 million loan in order to assist a financially strapped supplier (Interact) to supply it with the wood sizes it wanted, and that it acquired the beneficial ownership in 2005 with the objective (which was not realized) of exploiting the patents in a future joint venture so that the taxpayer could derive licensing revenues from them.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership beneficial ownership in patents 414
Tax Topics - Income Tax Act - Section 79.1 - Subsection 79.1(2) beneficial ownership in patents 414

Garber v. The Queen, 2014 DTC 1045 [at 2812], 2014 TCC 1

asset was mere window-dressing

The taxpayer bought units in a limited partnership, which was to acquire a large yacht to be used for catered vacation charters. The general partner ("OCGC") purchased a smaller yacht (the S/Y Garbo) to be used for the provisioning of supplies to an envisaged fleet of yachts for the partnership in question and 35 others, which were never acquired. The purported business plan for the 36 partnerships represented a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344, see also 356).

In finding that no capital cost allowance could be claimed by the partnership in question in respect of the S/Y Garbo, Rossiter ACJ found (at para. 402) that the test in Reg. 1102(1)(c) was not satisfied as "the yacht was only used by OCGC as window-dressing to perpetuate the fraud and was never acquired by the ... LP for income gaining or earning purposes."

Jolly Farmer Products Inc. v. The Queen, 2008 DTC 4396, 2008 TCC 409

In finding that the taxpayer was entitled to deduct capital cost allowance in respect of houses situate close to the taxpayer's greenhouse operation and occupied by employee-shareholders of the corporation (all of whom had similar religious beliefs), Bowman, C.J. stated (at para. 23-24):

"Once I conclude that it is a business decision to house the employees in company-owned houses and to provide other facilities in the Commons it is not up to me or the Minister to question that decision, even if I were to disagree with it, which I do not ... . This case is an excellent example of the CRA seeking to substitute its business judgment for that of the taxpayer."

Sivasubramaniam v. The Queen, 2008 DTC 3886, 2008 TCC 261 (Informal Procedure)

capital gains from resale not a permitted purpose

Bowman C.J. indicated that if the taxpayer's submission, that he acquired condominium rental units for the purpose of the resale thereof at a capital gain rather than as rental properties, were accepted, then the taxpayer would not be entitled to capital cost allowance by virtue of Regulation 1102(1)(c), given that subsection 9(3) excluded taxable capital gains from income from a property.

Sherman v. The Queen, 2008 DTC 3069, 2008 TCC 186, aff'd 2009 DTC 5681, 2009 FCA 9

The taxpayers were found to have acquired rights in respect of computer software solely for tax-motivated reasons, with no ancillary income-earning purpose.

McCoy v. The Queen, 2003 DTC 660, 2003 TCC 332

Before going on to find that a limited partnership had acquired software for the purpose of gaining or producing income, Bowman A.C.J. stated (at p. 678):

"Intention is subjective. Purpose, while it may involve a subjective element, must be largely determined on the basis of objective considerations. It is impossible if one looks at the material that was presented to the investors to conclude that the earning of income was not a purpose of the partnership."

Brown v. The Queen, 2001 DTC 1094 (TCC), aff'd supra 2003 DTC 5298 (FCA)

The word "income" in Regulation 1102(1)(c) means an amount that would be subject to tax, not net income. That requirement was satisfied with respect to the acquisition of software game "engines" by a partnership notwithstanding that the partners may have invested to save tax. They reasonably expected to make a profit from the programs.

Gascho Farms Ltd. v. The Queen, 97 DTC 808 (TCC)

A residential property that the taxpayer received as partial consideration for the sale by it of substantially all its properties and that it rented out for a brief period before selling it, was found not to have been acquired for the purpose of gaining or producing income given the lack of real estate experience of its principal, the reason for receiving the property, and the low rents received on the property.

Malatest v. The Queen, 94 DTC 1779 (TCC), briefly aff'd 96 DTC 6377 (FCA)

The taxpayers, were unsuccessful in their initial attempts to sell their Toronto condominium unit after purchasing a Toronto house and commenced advertising the condominium as a rental apartment while also continuing in their attempts to sell the condominium. The unit ultimately was sold in the following year.

In finding that the condominium unit during this period was not a depreciable property (with the result that the taxpayers were not able to deduct a terminal loss based on its decline in value during the period). Christie A.C.J. stated (p. 1782) that:

"Their over-riding purpose was to sell the apartment" and "the notion of renting was ... really related to the hope of somehow cutting their losses rather than for the purpose of producing income".

Moldaver v. MNR, 92 DTC 1564 (TCC)

intention to rent for 8 months

The taxpayer was found to have acquired a 12-year old building, containing two vacant small offices and a third office being used by a practising dentist, for the purpose of gaining or producing rental income therefrom notwithstanding that he entered into a contract to demolish the building eight months later.

Administrative Policy

13 July 2012 External T.I. 2012-0443281E5 F - DPA- véhicule dans le cadre d'un bien locatif

CCA could be claimable on motor vehicle used to earn rental income

CRA indicated that there was no particular reason to consider that capital cost allowance (CCA) for a motor vehicle that is used by a taxpayer to earn rental income from rental properties could not be deducted in computing that income subject to the Reg. 1100(11) limitation, irrespective of whether the rental income was property income or business income.

22 March 2012 External T.I. 2011-0425571E5 F - Avantage imposable - maison habitée sans frais

CCA can be claimed on asset made available to employee-shareholder qua employee

Can a corporation claim capital cost allowance ("CCA") on a house it owns, but which is made available for habitation by an employee-shareholder that such individual can respond to the needs of the corporation’s farming business. CRA responded:

[W]here a person who is both a shareholder and an employee of a corporation receives a benefit from that corporation that is not available to other employees, … [CRA] generally considers that there is a presumption that the person has received that benefit as a shareholder. …

CCA … could not be claimed for a capital expenditure related to a shareholder benefit because the property in question was not acquired for the purpose of gaining or producing income … .

[F]or CCA purposes, the property made available to an employee-shareholder as an employee would be considered to be acquired by the corporation for the purpose of gaining or producing income.

23 January 2012 External T.I. 2011-0409671E5 F - Propriété superficiaire

individual shareholder not entitled to claim CCA on building constructed by the corporation for use in its business even if where taxpayer owns it

Corporation A erected, at its expense and for exclusive use in its transport business, a detached garage on the land on which the principal residence of its individual shareholder (the “Taxpayer”) is located. The land subjacent to the garage is leased to it by the Taxpayer. After indicating that Corporation A would be entitled to claim capital cost allowance ("CCA") only if it held the right of superficies to the garage (i.e., by deed it was agreed that the Taxpayer would have no right of accession to the garage), CRA went on to state:

On the other hand, if the taxpayer owns the garage, the taxpayer would not be entitled to CCA because the facts do not allow us to conclude that the taxpayer uses it for the purpose of earning income. Indeed, under paragraph 1102(1)(c) … depreciation is deductible only if the property was acquired for the purpose of gaining or producing income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (e) land leased to corporation for business use not part of principal residence 152
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) benefit if building constructed at corporation’s expense for business purposes becomes shareholder’s property by accession 148
Tax Topics - General Concepts - Ownership whether tenant had Quebec right of superficies to garage erected by it determined whether it was its property 89
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property building erected by corporation on shareholder’s land not depreciable property unless shareholder renounces right of accession 213

S3-F4-C1 - General Discussion of Capital Cost Allowance

Demolished building

1.56 [A] taxpayer might purchase real estate that includes a building and tear down the building relatively soon after the purchase. ... [W]here the building is used to earn income for only a short time prior to demolition, it is likely that the building will not be regarded as depreciable property unless the taxpayer can clearly establish that the prime intention on acquiring the building was for the purpose of gaining or producing income. …

Capital loss on demolished building

1.83 If a building is demolished without being used for the purpose of gaining or producing income, it would likely not be depreciable property in the purchaser's hands by reason of paragraph 1102(1)(c) of the Regulations. Accordingly, the purchaser would not be entitled to CCA or a terminal loss. Instead, the demolition of the building would be considered a disposition and may result in a capital loss in the purchaser's hands.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

Income Tax Regulation News, Release No. 3, 30 January, 1995 under "Use of a Partner's Assets by a Partnership"

Where a property is acquired by a partner for the purpose of making it available to the partnership to be used in carrying on the business of the partnership, that property will be considered to have been acquired by the partner for the purpose of earning income if the partnership business is carried on with a view to profit, notwithstanding that the partner does not charge rent to the partnership.

Income Tax Regulation News, Release No. 3, 30 January 1995, under "Loss Utilization within a Corporate Group"

Whether the reasoning in Hickman Motors (93 DTC 5040, [1993] 1 CTC 36) applies to a particular loss-consolidation scheme "will depend on all of the relevant circumstances, including the length of time over which the asset is held by the transferee, the use to which the asset is put by the transferee and the income earned by the transferee with the asset".

Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films C.C.A.")

Favourable income tax rulings will not be given where there is a probability that a partnership acquiring a film will not make an economic profit but will rely on tax deductions.

21 November 1990 Memorandum (Tax Window, Prelim. No. 2, p. 8, ¶1074)

A partner is not permitted to deduct any CCA on assets owned by the partner and used in the partnership business unless a fair market value rent is charged to the partnership.

81 CR - Q.23

Where a partnership uses assets of a partner, the partner is entitled to claim CCA provided that a fair market value rental is charged to the partnership.

Paragraph 1102(1)(e)

See Also

Roger Dubois Inc. v. The Queen, 2014 DTC 1094 [3167], 2013 TCC 409, briefly aff'd 2015 CAF 235

"antique" means "non-recent"

The taxpayer purchased violins and violin bows, which had been fabricated between 1705 and 1844, for purchase prices aggregating $1.4 million. It also purchased (for $0.56 million) the "Sartory bow" in 2002, whose fabrication date was unknown other than that it had been anonymously estimated to be "about 1900." The taxpayer leased these items to a subsidiary, which provided them to performing musicians for promotional purposes. The taxpayer's capital cost allowance claims were denied on the basis that each instrument, although not "antique furniture," was "any other antique object, produced more than 100 years before [acquisition]."

The taxpayer unsuccessfully argued that Reg. 1102(1)(e)(iv) referred "to decorative objects and not objects that are used, as is the case with the musical instruments in question" (para. 25). Jorré J found (at para. 19) that "antique" merely referred to the "non-recent past" and that "the context of the provision does not suggest a limitation other than objects that are more than 100 years old" (para. 33); and noted (at para. 37) that, unlike the Budget papers, "antique object" rather than an "antique" was referred to.

The appeal was dismissed except with respect to the Sartory bow, which the Minister had not established to have been over 100 years old. Its tendency to appreciate over time was irrelevant (para. 24).

Words and Phrases
antique object
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions "deems" has several meanings 104
Tax Topics - Statutory Interpretation - Noscitur a Sociis no implied similarity requirement 140

Administrative Policy

18 June 2015 External T.I. 2015-0580391E5 F - Achat et location d'oeuvres d'art

Class 8 treatment of works of art for Canadians

Can a taxpayer claim capital cost allowance respecting amounts paid for the acquisition of works of art for the interior decoration of offices or the common areas of its place of business? In the course of a general response, CRA noted the exception in Reg. 1102(1)(e), and stated:

If it is the work of a Canadian for which CCA is allowed, it will be included in Class 8….

12 October 1994 External T.I. 5-942004 -

Property that is jointly created by a Canadian and a non-Canadian artist will not qualify for the exception for property created by an individual Canadian.

Regulation 1102(2)

Administrative Policy

7 October 2016 APFF Financial Strategies and Financial Instruments Roundtable Q. 2, 2016-0651711C6 F - RRIF, Transfer of designated benefit

Reg. 1102(2) deems building to be separate from land and does not bifurcate the land

Before indicating that, if a duplex property is used more than 50% for rental use, so that it is not personal-use property, a capital loss realized on a sale of the property and relating to all of the non-depreciable component can be recognized (subject to s. 13(21.1)) as a capital loss notwithstanding its partial personal use, CRA stated:

[A] building and the land on which the building is located are a single property under the private law applicable in Québec.

[Reg.] 1102(2)… constitutes an exception to this rule in the tax context, but only for the purposes of certain provisions of the Income Tax Act. Indeed, subsection 1102(2) I.T.R. provides that the classes of property described in Schedule II shall be deemed not to include the land upon which a property described therein was constructed or is situated. Subject to subsection 13(21.1) of the Act, this provision, however, applies only for the purposes of calculating capital cost allowance, and recapture or terminal loss.

Words and Phrases
land
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Personal-Use Property land underlying duplex used 40% personally is not personal-use property 214
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(iii) capital loss recognition on land underlying duplex used 40% personally 71
Tax Topics - Income Tax Act - Section 146.3 - Subsection 146.3(6.11) computation of eligible amount following year of death 285

Subsection 1102(4) - Improvements or Alterations to Leased Properties

Administrative Policy

IT-464R "Capital Cost Allowance - Leasehold Interests"

Subsection 1102(5) - Buildings on Leased Properties

Administrative Policy

7 August 2014 External T.I. 2014-0528841E5 F - Changement à une résidence principale

Reg. 1102(5) not applicable where door added by tenant to basement rental property

A taxpayer renovates the basement of his home by adding a separate door, permitting access from the outside, in order to establish offices there of a wholly-owned corporation. The renovations are paid for by the corporation and the corporation pays rent to the taxpayer. Can the corporation claim depreciation on the leasehold improvements? CRA responded:

[T]he capital cost of a leasehold interest of class 13 property includes an amount that a tenant expends in respect of improvements or alterations to a leased property that are capital in nature, other than improvements or alterations that are included as a building or structure pursuant to subsection 1102(5).

In this case, we are of the view that the requirements of subsections 1102(4) and (5) of the Regulations are not applicable and that there is no need to apportion the capital cost of the leasehold interest among several prescribed categories. That being said, we are of the view that certain capital expenditures incurred are capital in nature and, therefore, are an integral part of the capital cost of the leasehold.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c) addition of a door to an exterior wall could be considered a structural change triggering a change of use 128
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) taxable benefit if renovations paid for by tenant-corporation increase the FMV of property to owner-shareholder 90

2015 Ruling 2014-0552291R3 - Paragraph 1102(5)(a) of the Regulations

applied to finishing, not erecting, building
Funding and erection of Apartment Base.

Two arm's length corporations (ACo and ALP PartnerCo) and a GP jointly owned by them (RealLPGPCo) jointly form an LP (RealLP) by ACo transferring land zoned for residential use to RealLP and by ALP PartnerCo contributing cash over time, equal to the fair market value of the land when it was contributed to RealLP, for its LP interest (with cash contributions occurring thereafter on a pro rata basis). RealLP will erect the shell of a large apartment building (including the land, the "Apartment Base") including elevators but not interior plumbing, wiring or drywall.

Construciton of Apartment Finishes and leasing

RealLP will lease the Apartment Base to a general partnership of which ACo and ALP PartnerCo are equal partners ("OpGP") under a net lease bearing a fair market value rent and with the lease specifying that OpGP is solely responsible for the cost of completing the constructing of the residential apartment complex ("Apartment Finishes") including common areas as well as the apartment units. OpGP will lease the completed units and manage operations.

Ruling

: "Paragraph 1102(5)(a)… will apply to the capital costs that are incurred by OpGP for the completion of the construction of the… Apartment Finishes…, with the effect that such costs will be included in Class 1… ."

17 August 1994 External T.I. 5-941523 -

Because Regulation 1102(5) is considered to apply to any building referred to in Schedule II which is either a building or a structure, and is not restricted to structures referred to in Classes 1, 3 and 8, Regulation 1102(5) would permit classification of a building that is constructed on leased land as a Class 37 property.

Revenue Canada Round Table CTF-1992 Conference, Q. 70 No. 922851 (Not Included in Final Report)

Regulation 1102(5) is restricted to references made in Schedule II to a building or other structure and does not deem the leasehold interest to be a building for the general purposes of the Act. It is the Department's position that leasehold improvement are property (other than a building or part thereof) acquired by the taxpayer within the meaning of s. 13(27).

IT-464R "Capital Cost Allowance - Leasehold Interests"

Subsection 1102(14) - Property Acquired by Transfer, Amalgamation or Winding-Up

Cases

Hickman Motors Ltd. v. Canada, 97 DTC 5363, [1997] 2 S.C.R. 336

deemed property to be acquired for an income-producing purpose

Regulation 1102(14) deemed the taxpayer to have acquired assets for the purpose of gaining or producing income because it received those assets as a result of the winding-up of its subsidiary under s. 88(1) of the Act.

Administrative Policy

22 June 2015 Internal T.I. 2014-0553731I7 - Deduction of Terminal Loss - Wind-up

depreciable property of sub deemed to be depreciable property when acquired by parent

On the winding-up of Subco into Parentco (which had held only investments) under s. 88(1), Parentco received the "Property," which had been depreciable property owned by Subco and used in its business. Parentco did not acquire the Property for the purpose of earning income and never received income from the Property, and it was held idle for XX years before being disposed of to an arm's-length purchaser for proceeds of disposition less than its UCC, with the result that Parentco no longer owned any property of the relevant prescribed classes. Was the terminal loss claimed by Parentco deductible under s. 20(16)? In responding affirmatively, the Directorate stated:

Because the definition of UCC and Part XI of the Regulations are intertwined, it appears contrived to conclude that the presumptions in paragraph 1102(14)(d) of the Regulations are restricted to Part XI of the Regulations and cannot inform our reading of the definition of UCC in subsection 13(21). The same comments could be extended to subsection 20(16).

In Hickman Motors…[w]riting for 3 out of the 4 majority Justices, Justice McLachlin wrote:

Hickman Motors Ltd. is deemed to have acquired the assets for the purpose of gaining or producing income under Regulation 1102(14)… . So long as Hickman Motors Ltd. did not commence to use the property for some purpose other than the production of income (s. 13(7)(a)), the property remains eligible for a capital cost allowance deduction.

…[T]he discussion by Justice L'Heureux-Dubé… does not contradict the views of Justice McLachlin…[respecting] the preservation of the classification as depreciable property of a prescribed class on the wind-up.

… Justice L'Heureux-Dubé seemed to suggest that Mara Properties stands for the proposition that subsection 88(1) deems the parent to have received property of the same character from its subsidiary upon the subsidiary's wind-up.

Based on a TCP interpretation of paragraph 88(1)(f), on the application of the presumption in subsection 1102(14) of the Regulations and on the comment by Justice L'Heureux-Dubé regarding Mara Properties, it seems reasonable to conclude that the Property received from Subco on the Wind-up initially retains its character as depreciable property of a prescribed class in Parentco.

CRA went on to find that keeping the property idle did not constitute a change of use under s. 13(7)(a), so that the terminal loss was not realized until the year of the sale, and that, in the meantime, as Parentco did not satisfy the income-producing source test in the preamble to s. 20(1), it was prohibited from claiming capital cost allowance on the property.

See summaries under s. 13(7)(a) and s. 20(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) property remaining idle after deemed acquisition as depreciable property not a change of use 166
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) deemed depreciable property in fact not used for income-producing purpose 183

S4-F7-C1 - Amalgamations of Canadian Corporations

class continuity on non-arm's length amalgamation

1.33 …[W]here a predecessor corporation was not dealing at arm's length (otherwise than because of a right referred to in paragraph 251(5)(b)) with the new corporation immediately before the amalgamation, subsection 1102(14) of the Regulations deems property of a prescribed class or separate prescribed class of the predecessor corporation immediately before the amalgamation to be property of that same prescribed class or separate prescribed class of the new corporation. For instance, where a property of a predecessor corporation is a timber limit which subsection 1101(3) of the Regulations prescribes to be a separate class of property, the property will be of that same separate prescribed class following the amalgamation and will not be a timber resource property as defined in subsection 13(21). The new corporation is not, however, relieved from any conditions that must be met for the property of a class to be eligible for enhanced capital cost allowance. For example, a property that was included in a separate class by virtue of an election under subsection 1101(5b.1) of the Regulations will continue to be included in that class following the amalgamation without a further election but will be eligible for the enhanced rate of capital cost allowance in paragraph 1100(1)(a.1) of the Regulations only if the property meets the requirements of that Regulation at the end of the particular year.

1.34 Subsection 1102(20) of the Regulations is an anti-avoidance rule which deems the new corporation and a predecessor corporation to be dealing at arm's length for, among other things, the purposes of subsections 1100(2.2) and 1102(14) of the Regulations. This anti-avoidance provision will apply where a new corporation would be considered not to deal at arm's length with a predecessor corporation as a result of a transaction or series of transactions the principal purpose of which may reasonably be considered to have been to cause subsection 1100(2.2) or 1102(14) of the Regulations to apply to a given amalgamation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(2.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 111 - Subsection 111(12) application following amalgamation 103
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1) deemed tcp following amalgamation 155
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5.1) continuity of s. 13(5.1) on amalgamation 126
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1) Amalco can continue objection and receive refunds 145
Tax Topics - Income Tax Act - Section 169 Amalco can continue objection 97
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder shareholder need not hold shares 82
Tax Topics - Income Tax Act - Section 251 - Subsection 251(3.1) deemed non-arm's length relationship on amalgamation 164
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) realted party, majority and 50% group exceptions 448
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(iii) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(7) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 69 - Subsection 69(13) no disposition of predecessor property on general principles 103
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.4) s. 87(5) not applicable 104
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3) non-87 amalgamation/no FX gain 159
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) no deemed dividend to dissenter on amalgamation 81
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) election filing by Amalco 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.1) s. 87(1.1) qualifies for all s. 87 purposes 60
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.2) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 87 - Subsection 87(10) deemed listing of temporary Amalco shares 114
Tax Topics - Income Tax Act - Section 87 - Subsection 87(11) gain if high PUC is sub shares 47
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) presumptive satisfaction of s. 87(1)(a)/dissent and squeeze-outs onside 260
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a) new corp/deemed year end coinciding or not with acquisition of control 0
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(b) Amalco must follow predecessor's valuation method subject to truer picture doctrine 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(c) reserve after amalgamation 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(d) cost amount carryover 135
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(e.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(o) no continuity rule for non-security options 133
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(q) pre-amalgamation services 96
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11) loss-carry back to parent 159
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1) dovetailing with s. 88(1.1) 38
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3.1) 328
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3) PUC shifts 181
Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) fractional share cash/ACB or value shift/implied non-recognition for predecessor shares 247
Tax Topics - Income Tax Act - Section 87 - Subsection 87(7) dovetailing with s. 78 and 112(12) 171
Tax Topics - Income Tax Act - Section 87 - Subsection 87(9) allocation of s. 87(9)(c)(ii) excess as parent chooses 218
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) late designation 106
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) dovetailing with s. 87(2.1) 56
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) partnership dissolution on amalgamation 123
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) deemed non-arm's length relationship on amalgamation 415
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) deemed non-arm's length relationship on amalgamation 323
Tax Topics - Income Tax Regulations - Regulation 8503 - Subsection 8503(3) - Paragraph 8503(3)(b) pre-amalgamation services 96

10 April 1997 T.I. 970422

A building was transferred to a company in a non-arm's length transaction (so that Regulation 1102(14)(d) applied) and the company thereupon commenced to use the building for rental purposes. At the time the building commenced to be used for rental purposes it would be reclassified into a separate prescribed class in accordance with Regulation 1101(1ac) and s. 13(5) of the Act.

90 C.R. - Q38

Where s. 251(3.1) deems Amalco and the predecessors to be related persons, s. 1102(14) will deem the property acquired by Amalco from the predecessors to be property of the same class.

Subsection 1102(23)

Administrative Policy

13 March 2017 External T.I. 2016-0626641E5 F - Election - Subsection 1101(5b.1) Reg.

further work on an addition does not fall into a separate class

CRA considered that if there are two separate additions to a pre-2007 non-residential building, an election under Reg. 1101(5b.1) must be made on each separately and each addition will fall into a separate class – whereas if the work on a single addition extends over more than one year (or there is a subsequent second addition to further extend the first addition), the election can be made at the end of the first year with respect to the work done to date (although this might have no immediate impact under the available-for-use rules) and the subsequent work will fall into the same separate deemed new class without any need to make a second election.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 1101 - Subsection 1101(5b.1) only one Reg. 1101(5b.1) election is required where work on an addition to a non-residential building extends over more than one year 329

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