Schedule II

Regarding the classification of a septic tank on a campground, the Directorate referred to Superior Pre-Kast Septic Tanks ([1978] 2 S.C.R. 612), and stated:

[S]eptic tanks on a campground are "structures" for the purposes of the Act. Based on a reading of depreciation classes 1, 3, 6 and 8, we believe that such property should be included in either Class 1 or Class 3, depending on when it was acquired.

As for swimming pools that may be found at campgrounds, we are of the view that they are depreciable property included in Class 6(e) of Schedule II to the ITR. In this regard, we refer you to the decision in Amelia Podhorn v. Minister of National Revenue, 66 DTC 223 (T.A.B.) - which was based on Oriole Park Fairways Limited v. M.N.R. 56 DTC 537 (I.T.B.A.) - to conclude that a swimming pool in a hotel complex was a water storage tank for the purposes of Class 6(e).

Underground conduit which carries wire or cable referred to in paragraph (j) of Class 3 is a Class 3 rather than a Class 8 asset.

Into what class does a railway system acquired before 1958 by a corporation with a railway business fall? After assuming that the corporation was a “common carrier” (as referenced in Reg. 1104(2)), which CRA described as “a person who carries on the business of providing, for consideration, a service of transporting property or persons from one place to another and who generally offers its services to the public,” CRA stated:

[P]roperty described in subparagraph (h)(ii) of Class 1 …, that is, property acquired after May 25, 1976, may be included in a railway system.

By virtue of paragraph (a) of Class 4 … property that would otherwise be included in another class in Schedule II, consisting of a railway system or part thereof, except automotive equipment not designed to run on rails or tracks, that was acquired after the end of the taxpayer’s 1958 taxation year and before May 26, 1976, is to be included in that class.

After reviewing the history and overall context of the regulatory provisions dealing with the capital cost allowance of assets in the railway industry, it is our opinion that the post-1958 year-end acquisition test in paragraph (a) of Class 4 … should relate only to non-railway automotive equipment.

… [Thus] a railway system acquired prior to 1958 is depreciable property that falls within Class 4 … .

Following Oriole Fair Parkways (56 DTC 537), the costs of constructing an artificial pond for use in irrigating a cranberry farm would be in respect of a Class 6 property (para. (e)).

Regarding the classification of a swimming pools in a campground, the Directorate stated:

As for swimming pools that may be found at campgrounds, we are of the view that they are depreciable property included in Class 6(e) … . Amelia Podhorn v. Minister of National Revenue, 66 DTC 223 (T.A.B.) - which was based on Oriole Park Fairways Limited v. M.N.R. 56 DTC 537 (I.T.B.A.) - … conclude[d] that a swimming pool in a hotel complex was a water storage tank for the purposes of Class 6(e).

What is the applicable class for a floating home or "houseboat" (on a large pontoon with an outboard motor) that is rented out for navigation of a large lake, e.g., for a day or weekend at a time? After noting that the Canada Shipping Act, 2001 defines a "vessel" by reference to being used at least in part for navigation in water without regard to method or lack of propulsion and with there being no prescribed exceptions, CRA indicated that the floating home would generally be included in Class 7 except to the extent it was a "Canadian" ship prescribed by Reg. 1101(2a) as eligible for accelerated CCA under Reg. 1100(1)(v).

CRA stated that zoo animals:

are capital assets and cannot be expensed. In addition, no capital cost allowance may be deducted under paragraph 20(1)(a) of the Act as animals are specifically excluded from Class 8 of Schedule II...and not included in any other class.

In converting lands to a cranberry farm, there would need to be a reasonable allocation of the relevant costs between the cost of installing a drainage system, which would be deductible under s. 30, and the costs of an irrigation system, which would be the cost of a Class 8 asset. The costs of constructing sand-bottomed basins surrounded by dikes would be the cost of a Class 17 property ("similar surface construction," following Mont-Sutton).

A developer acquired Land 1 from a Canadian-controlled private corporation (the “Corporation”) in exchange for cash and for land which the Corporation would use in its mobile home rental operation (Land 2), with the developer being required to first perform work so as to provide Land 2 to the Corporation in a serviced state. CRA stated:

With respect to the costs of water and sewer lines connecting mobile home units, they could constitute properties distinct from Land 2 and thus be included in Class 8… .

A company incurred costs of studio fees, mixing, song writing, and musicians' fees in producing a music CD. If these are capital expenditures, what class do they fall in? CRA stated:

[P]aragraph 15 of IT-283R2 [states]:

"The capital cost of a master recording medium (e.g., a tape or disk) used in the music industry for the making of records, tapes and compact disks is considered to include the costs related to the production of the master recording medium. Such costs would include applicable overhead plus expenditures for

(a) scripts, musical arrangements and materials,

(b) remuneration of writers, producers, directors, musicians, performers and technicians, and

(c) the rental or other costs of a studio and of sound recording and other equipment."

While IT-283R2 has been archived … the above statement … is still valid. …

In regard to the CCA class, paragraph 8 of IT-472 [states]:

" … The Department considers the following property to be so included in Class 8:

... (q) A master audio-tape or a master disc used in the phonograph record industry. However, a master die (stamper) for processing records is a Class 12;"

Laser hair removal equipment (the “Device”) did not constitutes “general-purpose electronic data processing equipment” included in Class 10(j) and instead was a Class 8 asset give that a user of the Device could not change the computer program or programs underlying the software used in the Device.

A rapid transit car that is a railway car will not fall within Class 8(k) but, rather, within Class 35 (if acquired after 25 May 1976).

18-litre bottles used to hold water delivered to customers' premises until returned to the taxpayer for refilling by it belong to Class 8 rather than Class 12.

A desktop publishing system did not constitute general-purpose electronic data processing equipment and system software therefor and therefore is included in Class 8 rather than Class 10(f).

An electronic safe for the storage and protection of investment papers qualifies as a Class 8 asset.

A taxpayer in the real estate business uses an aerial drone to take photographs of houses for sale. How should it be classified? CRA responded:

[A]erial drones are considered to be a type of unmanned aircraft. For instance, Merriam-Webster’s Dictionary defines drone as an unmanned aircraft or ship guided by remote control or onboard computers. The Canadian Aviation Regulations… also describes aerial drones as a type of aircraft. …[A]n aerial drone would generally be included in Class 9(g)…which has a CCA rate of 25%.

Motorhomes are designed primarily as recreational vehicles and do not qualify for inclusion under either Class 10.1 or Class 16 since they do not constitute automobiles within the meaning of s. 248(1).

Regulation 1104(3), which defines mining to include the harvesting of peat, does not apply to an operation of cleaning, compressing and baking peat in a separate building. Accordingly, such a building is not described in Class 10(g).

Re whether a limestone quarry was a mine for purposes of paragraph 10(k).

If the film was not completed at the year end and will not be completed in a subsequent year, it cannot be included in Class 10.

A desktop publishing system did not constitute general-purpose electronic data processing equipment and system software therefor and therefore is included in Class 8 rather than Class 10(f).

CRA considers that the CCA deduction for the motor vehicle of a self-employed worker that is used for both business and personal use can be computed by determining the amount of CCA in respect of the motor vehicle as if it were used entirely for business purposes, while deducting annually only the proportion of CCA corresponding to the business use in the particular year. However, CRA effectively indicated that the individual had the choice between the above simplified administrative method and the method actually contemplated by ss. 13(7)(c) and (d) (e.g., recording a capital cost increase of the business-use portion if the business-use percentage increased).

Determining whether website costs are in the nature of income or capital should entail an analysis of each component of the site. The determination depends predominantly on the expected useful life of the website, although "some components of the development costs are likely capital in nature."

To the extent that expenses are in the nature of capital, they may be added to the capital cost of "applications software" as described in Class 12 of Schedule II. Such costs include the labour costs incurred to design and develop software to carry out the website functions. Some components may instead be "data network infrastructure equipment" or "systems software" described in Class 46.

A particular capital expenditure that is not a depreciable property may instead be an "eligible capital expenditure" described in s. 14(5) or the Act.

CRA indicated that the costs of application software purchased from third parties to develop a web page, and the labour costs of development, would likely constitute "applications software" under Class 12 of Schedule II, rather than "systems software."

Bookplates created for the printing of books would not qualify as a "pattern, mould or die", and instead would be property described in Class 8, with the result that the property would qualify as a Class 39 or Class 40 property. (The Department noted an exception, "that where the useful life of an asset is one year or less, generally accepted accounting principles would require that the cost of the asset be written off in the year in which the cost was incurred").

When the assets of a computer software business are purchased for a lump sum purchase price, the amounts allocated to Class 12 would include not only the portion applicable to the purchase of applications software, including all rights attached thereto, but also special technology, know-how and copyrights.

Re whether components of a specialized electronic point-of-sale inventory system for a retail application will qualify under paragraph 12(s).

Most computer software acquired for use internally in a business is included in Class 12(o). However, a contractual right or licence of a capital nature to buy and resell, to sublet or to otherwise market computer software is either a Class 14 asset or an eligible capital property.

A contractual right or licence of a capital nature to buy and resell, to sublet or to otherwise market computer software is not a right or licence to use computer software (Class 12) but, rather, a franchise, concession or licence and, therefore, is included in Class 14 if it is for a limited period.

18-litre bottles used to hold water delivered to customers' premises until returned to the taxpayer for refilling by it belong to Class 8 rather than Class 12.

Videotape cassettes may be depreciated under Class 12(r) if the owner acquires them for the purpose of renting and the cassettes are not expected to be rented to any one person for more than seven days in any 30-day period.

Re meaning of "consumers" in Class 12(s).

A "right or licence to use computer software" can include the right to reproduce computer software, the right to use it internally, the right to lease, licence or sublicence, the right to copyright protection or the right to use a trademark in respect of computer software. However, the right must be granted to the licencee specifically under a licencing agreement.

If the Minister revokes a certification, the revocation is effective as of the date of issue of the film certificate and the asset is removed from Class 12 effective on the date of acquisition. An amount invested in an uncompleted and uncertified film or videotape is not eligible to be included in Class 10(s). If such property subsequently is disposed of, a capital loss could result.

After noting that different licence, lease and permit fees may be imposed under the applicable provincial law in connection with a geothermal project, CRA stated:

The fees paid for renewals and extensions of a licence could also be included in Class 14. Generally, where the renewals or extensions are automatic or within the control of the taxpayer, the overall term of the licence includes such additional periods. However, if there is a requirement for any further negotiations with, or the concurrence or consent of, the grantor of the licence, the new period would not be considered to be an automatic renewal but rather it could be a separate property eligible for inclusion in Class 14.

Government permits granted to the taxpayer are renewable each year on the payment of $X. In finding that the permits were eligible capital property rather than Class 14 properties, CRA referred to IT-477, paras. 15-17 stating (TaxInterpretations translation):

Where…renewals or extensions are automatic or within the control of the taxpayer, that is they do not require any further negotiation with or the concurrence or consent of the grantor, the life of the property includes such additional periods. On the other hand, where the taxpayer has the option to renew or extend the term only if certain conditions are met, for instance meeting certain performance or sales criteria, the circumstances of the particular case must be examined to determine whether or not, when the property was acquired, it was reasonably certain that these conditions would be met. If so, the additional periods are included in the life of the property. …

The classification of the permits in this case must be made in accordance with their actual life established under the above criteria. Accordingly, it appears that the … permits acquired by the taxpayer represent eligible capital properties and not property which can be added to Class 14.

The query noted that para. 12 of 2006-0218781R3 stated:

In return for the grant of the Concession, the Partnership will agree to construct the Facility and operate it during the Operating Period at its own expenses except for the amount of $XX that the Minister will pay to the Partnership during the Construction Period.

Would CRA's treatment of a particular concession or licence as a Class 14 asset be the same if the particular concession agreement did not specifically state that the particular entity will agree to incur the costs to construct and operate the facilities during the term of the agreement in consideration for the grant of a concession? CRA stated:

The determination of whether an entity has agreed to construct and operate a facility at its own expense in return for the granting of a concession or licence for a particular period remains a question of fact. ... Based on our experience with projects of this nature, it would be somewhat unusual for the particular agreement to be silent on such an important matter; however, it is possible that some other evidence (as yet unspecified) might be used as support that such a concession or licence was granted.

A taxpayer purchased the right to cut, over a period of 10 years, Christmas trees on another taxpayer's land for a lump sum payable over 4 years. After finding that this cutting right was not a timber resource property, nor a property referred to in Reg. 1100(1)(e), CRA found that it was a Class 14 property, stating:

[T]he right to cut Christmas trees could qualify as rights or privileges that allow the holder to carry on its business of selling Christmas trees or to facilitate that operation. Indeed, this right to cut allows the holder to obtain the raw material, the fir tree. In addition, according to the information you provided, we understand that this right to cut is not renewable. It seems to have a limited duration of 10 years.

Amounts that the taxpayer was required to reimburse a school board for in respect of a licensed space in a school that was constructed by the Board constituted the capital cost of a Class 14 rather than a Class 13 property given that the arrangement was intended to be a licence rather than a lease.

A Canadian public corporation ("Z Co"), as LP, and newly-incorporated CBCA grandchild subsidiary ("GP") of Z Co, as GP, form the Partnership. The Partnership enters into a "Concession Agreement" with the Province respecting the financing, construction and operation by the Partnership of the Facility for the specified Contract Period and respecting the granting by the Province to the Partnership of the "Concession", i.e., the right to use and access the Facility and related site for the purpose of constructing the Facility, and operating it during the "Operating Period," i.e., the portion of the Contract Period following substantial completion. The Province will be the owner of the Facility at all times so that title to property will pass to it as the construction work occurs.

In return for the grant of the Concession, the Partnership will agree to construct the Facility and operate it during the Operating Period at its own expenses except for the amount of $XX that the Minister will pay to the Partnership during the Construction Period.

For the purposes of apportioning the capital cost of the Concession over the remaining period of the Concession in accordance with Reg. 1100(1)(c), the Partnership will aggregate its total capital expenditures incurred with respect to the Concession (including capital repairs and alterations once operations commence, but as reduced by the construction payments received from the Province) on a quarterly basis and amortize that quarterly amount over the remaining period of the Concession.

Rulings that the Concession will be included in Class 14 with a capital cost including the design and net construction costs.

A corporation operated, under lease, a residential and long-term care centre pursuant to (i) a licence issued by the Quebec Ministry of Health and Social Services licences the operation of a specific number of beds at a specific location, and (ii) an operating contract and a facility use contract with the Regional Board and the Minister for a term of 13 years, including an automatic five-year renewal period, with there being no guarantee of renewal thereafter. The corporation expects to dispose of its assets including the licence and such contracts. Regarding whether the licence and agreements were Class 14 assets or eligible capital property (“ECP”), now Class 14.1, CCRA indicated:

• Given that a licence could be used whether or not the centre had also entered into such agreements, “there would be arguments to say that the licence represents a separate asset that is dissociable from any agreement entered into with the Regional Board or the Ministry.”
• Under the governing legislation, a licence was valid until it was cancelled so that there was no limit to its duration.
• Nonetheless, if the licence was attached to a specific facility and ceased to be valid when the establishment was no longer operated in that facility, it would have a time-limited duration – but that was not the case here as the licence would continue to be valid upon a change, approved by the Regional Board, in the location of the facility, so that it appeared that the licence had an open-ended duration and would be ECP.
• Regarding the facility operation and use contracts, they were not indefinitely renewable “even if there [was] a good probability that the contracts will be renewed at the end of the periods set out in the contracts” and they also constituted a “concession or licence,” so that they constituted Class 14 property if not a leasehold interest coming within Class 13.

Even though it may be likely that a CRTC licence issued for a period of five years will be extended or renewed following the expiration of that period, there is no basis for assuming that the current licence is for anything but a limited period of five years, with the result that it should qualify as a Class 14 property for that period.

Rights granted pursuant to the Breeders Act do not constitute a franchise, concession or licence for the purposes of Class 14 because the effect of the Breeders Act is to give to the holder of a plant variety the exclusive rights in respect of certain activities described under s. 5(1) of the Breeders Act which could nevertheless be carried on (but without the exclusion of the other parties) by the holder without the granting of plant breeder rights.

Most computer software acquired for use internally in a business is included in Class 12(o). However, a contractual right or licence of a capital nature to buy and resell, to sublet or to otherwise market computer software is either a Class 14 asset or an eligible capital property.

A contractual right or licence of a capital nature to buy and resell, to sublet or to otherwise market computer software is not a right or licence to use computer software (Class 12) but, rather, a franchise, concession or licence and, therefore, is included in Class 14 if it is for a limited period.

A payment made by a public company to acquire a contractual right to a 50% share in a partnership's net proceeds from the purchase, processing and sale of natural gas and the construction of gas transportation pipelines for a specified period of time did not constitute a "licence" or a "concession". The Directorate stated:

[A] licence does not alter or transfer property but only makes an action lawful which, without it, would be unlawful. Accordingly, in our view the NRI acquired by Company B would not constitute a licence for purposes of Class 14.

A "concession" contemplates a right to use or occupy a property for a limited time as, for example, a right of way....[T]he conspicuous feature of a franchise in....Capital Management Ltd. vs M.N.R., [[1968] C.T.C. 29] 68 DTC 5041 (S.C.C.) and Mandrell Industries, Inc. vs M.N.R., [[1965] C.T.C. 233] 65 DTC 5142 (Ex. Ct.), is that franchise, concession or licence refer to some right, privilege or monopoly to enable the franchise holder to carry on his business or that facilitates the carrying on of his business....[T]he NRI, which is a bare right to income, does not fall within the meaning of a property that is a franchise, concession of licence for purposes of Class 14

Class 14.1 depreciable property references “property” of the taxpayer. CRA confirmed that this does not have the effect of disqualifying capital expenditures that did not give rise to property rights (such as legal costs of an aborted acquisition , see 2017-0727041E5). The reason is that s. 13(35) provides that such expenditures incurred for the purpose of gaining or producing income from a business are deemed to be the cost of property that is goodwill, and the s. 248(1) definition of “property” has been amended to clarify that goodwill is property.

Does the position in 2002-0151405, respecting an aborted attempt to acquire shares, that “these fees qualify as eligible capital expenditures if the taxpayer can demonstrate that the taxpayer intended to make the business of the target corporation part of a similar business that the taxpayer already operated,” still apply following the repeal of the eligible capital property system? CRA responded:

…CRA has applied … IT-143R3 [para. 23]:

“Since an outlay or expense is an eligible capital expenditure only if it is incurred for the purpose of gaining or producing income from a business, legal and accounting fees incurred in an abortive attempt to acquire shares of a corporation would normally not qualify. Where, however, the taxpayer can demonstrate that he or she proposed to make the business of the corporation part of a similar business which the taxpayer already operated, the fees may qualify as eligible capital expenditures.”

Effective January 1, 2017, the Eligible Capital Property system was repealed and replaced with a new capital cost allowance class, Class 14.1. We confirm that the CRA will continue the position as outlined in paragraph 23 of IT-143R3 under the new Class 14.1 rules.

On a sale of a residential care facility, the taxpayer allocated substantially all of the sale price to operating agreements with the Quebec Ministry, and took the position that the election under s. 14(1.01) (which at the time had provided that the election could be made regarding eligible capital property other than goodwill) was available as the operating agreements represented ECP other than goodwill. Before noting that the distinction would cease to matter as a result of a proposed retroactive amendment to s. 14(1.01), the Directorate accepted that the agreements represented goodwill stating:

[A] private institution under contract must also sign an operating agreement with the MSSS [Quebec Ministry] under which the institution undertakes to provide services as a CHSLD [care facility] … . In return, the MSSS provides the necessary funding for the operation of the institution.

… [T]he operating agreements constitute goodwill … since the acquisition of one or more operating agreements by a purchaser can only be made if the Minister … has approved the assignment of the underlying licence. In other words, the transfer of operating agreements by one institution under contract to another must be preceded by the transfer of the underlying licence. Thus, since the transfer of the operating agreements cannot be made without the transfer of the business to the new purchaser, we are of the view that the operating agreements constitute goodwill … .

CCRA indicated that on the purchase of an existing website, the purchaser “may acquire a clientele and goodwill relating to the site, which are not deductible from income but are instead considered as eligible capital expenditures.”

The costs of a temporary access road to a quarry would not be considered to be in respect of a "specified temporary access road" as defined in Reg. 1104(2), and would qualify under Class 17. CRA noted:

[P]aragraph 13(7.5)(b) provides a presumption, for taxation years ending after March 6, 1996, in respect of certain costs incurred by a taxpayer on account of capital for the building of, for the right to use or in respect of a property to which subsection 1102(14.3) of the Regulations applies, including a road, other than a specified temporary access road, that would not be considered depreciable property if that provision did not apply. By virtue of that legislative presumption, the taxpayer is deemed to have acquired the prescribed property at that time at a capital cost equal to the amount of the cost incurred by the taxpayer on account of capital for the building of, for the right to use or in respect of, the property.

Discussion of criteria to be satisfied in order for ski trails to qualify as surface construction for purposes of paragraph (c) of Class 17.

The creation of greens, tees and fairways for a golf course would constitute "surface construction" and, therefore, would qualify for inclusion in Class 17. The cost of creating greens, tees and fairways for a golf course on leased land would be included in Class 13.

The Minister of the Environment has the authority only to make the determination referred to in paragraph (b)(iv).

Most modern refinery catalysts have a useful life of 1 to 3 years and are disposed of at the end of this period. Is CRA still of the view that the costs incurred on the acquisition of new catalysts qualify as property of Class 26 (depreciable at 5%, declining balance method)? CRA stated:

Our position remains that the cost of catalysts is properly classified as Class 26, deductible on a declining basis at 5% per year. … We suggest you make a submission to the Department of Finance.

Whether equipment acquired by the taxpayer qualified for the Atlantic investment tax credit (AITC) turned, in part, on whether its use in the production or processing of fuel could be considered to be the manufacturing or processing of goods for sale in the context of the description of a Class 29 property (and as required by the definition of “qualified property” in s. 127(9).) After referring to the meaning accorded to “processing” in Tenneco and Repsol, CRA stated that “in our view the production or processing of a fuel could be considered to be the manufacturing or processing of a good for sale for purposes of the AITC depending on the particular circumstances.”

Equipment was acquired by a corporation (“Aco”), wholly-owned by a dental surgeon, to manufacture dental restorative products for use as part of its dental services.

Alternatively, the surgeon incorporated and wholly-owned a second corporation (“Bco”), which acquired the equipment and sold, to Aco, the dental restorative products it manufactured using the equipment.

CRA indicated that the first alternative did not satisfy the requirement in the Class 29 description (which was required in order for the equipment to qualify as Class 53 equipment) that the equipment be property used directly or indirectly in Canada primarily in the manufacturing or processing of goods for sale or lease. In particular, the equipment would not be Class 53 property since Aco used the dental restorative products, that it manufactured using the equipment, in the course of providing a dental service.

Under the second alternative, assuming that there indeed was a sale of the manufactured products by Bco to Aco under the governing provincial law (here, Quebec), the equipment could qualify as Class 53 property to Bco assuming that the other Class 53 requirements were satisfied.

In light of the accelerated CCA rules under Reg. 1100(2), what are examples of manufacturing or processing properties in the oil and gas context? CRA responded:

Properties used in manufacturing or processing activities are included in Class 29, 43 or 53. The enhanced first year allowance for qualifying property does not affect the depreciable class of a property.

Examples of the activities in the oil and gas context that are considered manufacturing or processing include:

• the processing of natural gas at a straddle plant in Canada; and
• the processing of natural gas in a plant in Canada that is devoted primarily to the recovery of ethane.

… S4-F15-C1 … lists the following activities in the oil and gas context that are [excluded]:

• operating an oil or gas well or extracting petroleum or natural gas from a natural accumulation of petroleum or natural gas;
• processing natural gas as part of the business of selling or distributing gas in the course of operating a public utility;
• processing heavy crude oil recovered from a natural reservoir in Canada to a stage that is not beyond the crude oil stage or its equivalent; and
• “Canadian field processing” as defined in subsection 248(1).

9406917 F indicated that:

photocopying activities from a photocopier equipped with a computer and the activities of assembling photocopies with a flange constitute the manufacturing or processing of goods for sale.

However, this position relied in part on the analogous activities of a commercial printer (including publisher) which, in IT-145R, para. 42, were considered to constitute manufacturing or processing. This position was not carried forward when IT-145R was replaced by Folio S4-F15-C1.

After also referring to Will-Kare, CRA stated:

Consequently, considering the new case law, the cancellation of IT-145R and the technological progress of the last 25 years in the field of photocopying, we cannot confirm or deny that the position taken in the Interpretation continues to reflect the position of the CRA. If we had a specific file under study, we would have to do a complete re-analysis before making a decision.

In the course of a general discussion as to whether equipment used in coating steel rods with metal alloys were includible in Class 29, CRA stated:

In order for a property to be included in Class 29, it must also have been acquired or manufactured by the taxpayer for use directly or indirectly in Canada primarily for the manufacture or processing of goods for sale or lease. IT-147R3 states that the term "primarily" means "principally" or "chiefly". The factor that generally determines whether a particular good is used primarily in manufacturing or processing is the fraction of the time it is used in these activities.

The taxpayer acquired a machine which it used as part of SR&ED to create a prototype, which in turn was used in eventually commercializing a product for sale. Would the machine qualify under Class 29?

CRA stated (TaxInterpretations translation):

SR&ED is not listed [in Reg. 1104(9)]… . [S]ection 5202 of the Regulations lists "qualified activities", which includes, in paragraph (c), "SR&ED activities" ... . Subparagraph (c) of that definition refers to experimental development, which includes in paragraph (d) work (engineering, design, operations research, data collection, testing, etc.) undertaken in Canada commensurate with the needs of experimental development. ...

We are therefore of the view that an SR&ED activity could be a qualifying activity for Class 29 CCA purposes. Consequently, since the machinery used to create a prototype was property used in experimental development, it would constitute M&P property which is depreciable under Class 29. ...

[W]here a corporation carries out SR&ED, its SR&ED activities generally constitute M or P on condition that it also produces a commercial product as a result.

Overview of Class 29 rules.

The taxpayer in 2013-0503311E5 carried on a wine-making business that involved both farming activities (i.e., growing grapes) and non-farming activities (i.e., producing wine for sale). Its fermentation tanks and barrels were considered to likely qualify for class 29 purposes as property used primarily in the manufacturing or processing of goods for sale. In clarifying that the exclusion in Reg. 1104(9)(a) of "farming" from "manufacturing or processing" did not apply, CRA stated:

[G]enerally where a farmer or farming corporation separates the activities of farming and the processing of farm products, the CRA will essentially consider the processing activity to be a distinct business from that of farming provided that there is a clear delineation of the income from each business activity, and that the income from the processing business is properly calculated and is not eligible for any of the special sections in the Act dealing with income from a farming business (such as the cash method of computing income in section 28…).

A CCPC wine producer whose activities include growing and purchasing, and then pressing, grapes, fermenting and aging wine, and bottling and corking or capping for distribution, owns steel tanks and oak barrels, which it acquired after March 18, 2007 and are used in fermenting and aging the wines before they are sold by it. Before concluding that "it appears that the steel tanks and oak barrels would be used primarily in the manufacturing or processing of goods for sale and would be assets included in class 29," CRA stated:

[P]rocessing of goods usually refers to a technique of preparation, handling or other activity designed to effect a physical and/or chemical change in an article or substance, other than natural growth. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods and homogenizing and pasteurizing dairy products.

In 2011, a taxpayer who recycles metal acquired a new container and excavator with a shear to cut the metal, which was placed in containers without wheels and sent to the press to make blocks. They were acquired by the taxpayer to be used directly or indirectly in Canada primarily in the manufacturing or processing of goods for sale or lease. After providing a general discussion of the relevant parts of Classes 43, 29 and 8, CRA stated:

[C]onsidering their date of acquisition, we are of the view that the container and shearing machine are property that could be included in Class 29 if they were acquired by the taxpayer to be used directly or indirectly by the taxpayer in Canada primarily for the manufacture and processing of goods for sale or lease.

Would moulds be included in Class 43 even though they are specifically described in para. (d) of Class 12? CRA responded:

Although moulds are specifically described in paragraph (d) of Class 12, it is our view that they could be included in Class 29 or Class 43, depending on when they were acquired and the facts of each particular situation. In order to be included in Class 29 or 43, as the case may be, the moulds must satisfy all the conditions, including having been acquired by the taxpayer for use directly or indirectly by the taxpayer in Canada primarily in the manufacture and processing of goods for sale or lease and normally be included in Class 8. Moulds could be considered to be structures that are manufacturing or processing machinery or equipment within the meaning of paragraph (a) of Class 8 depending on the facts of each particular situation.

An operation of the taxpayer consists of taking products, received in bulk in boxes, and dividing them up by category according to specific customer instructions, such as size, colour and quantity, then packaging the products for sale and distribution to consumers. After noting its position in IT-145R that “the execution of orders from bulk stock is not considered a processing activity where the activities involved consist solely of counting or measuring and repackaging” and the position in Tenneco that “the goods must undergo a change in form, appearance or nature” in order for there to be processing, CRA stated:

[A]lthough the taxpayer's processing activities have the effect of making … [the] products more marketable, we do not believe that there has been any change in the form, appearance or other characteristics of the products. .... [C]apital property used by the taxpayer in carrying on its business cannot be classified under Class 29 ... .

RC does not consider additions of machinery and equipment to a plant under a continual expansion to meet long-term capacity objectives as qualifying such machinery and equipment for purposes of Class 29 as being "under construction".

A wind turbine installed by Company A on its own property and used to displace electricity which would otherwise be purchased from a utility could qualify under subparagraph (e)(v) of Class 34 provided a certificate is obtained from the Minister of Natural Resources. If company A were to purchase a wind turbine and install it at company B's site and sell the electricity to company B, the wind turbine could qualify for inclusion in Class 34 as described above, provided it was considered to be owned by company A.

Property described in Regulation 1102(9) must be included in Class 41 and cannot be included in Class 34.

General discussion as to potential qualification of moulds, overhead crane and crane for inclusion in Class 43 or 29, whereas a forklift truck is specifically excluded in para. (a) of Class 43 by reference to subparagraph (b)(iii) of Class 29.

A company specializing in the manufacture of PVC profiles and the design of door and window systems, sold its profiles and window and door manufacturing concepts to manufacturers which, in order to be able to manufacture the doors and windows, used a hydraulic punch that they do not own but which is manufactured for the company by a third party and lent to them.

The hydraulic punch was included in Class 43.

The taxpayer, which operated a sawmill, made alterations after February 25, 1992 to a lumber kiln that it had acquired before that date, in order to change the kiln's ventilation ducts and control system, including adding a new computer control system. CRA found that because these changes did not constitute a major renovation, they did not constitute a Class 43 addition after the above date.

Under the Feed-in Tariff and microFIT programs (the “FIT/micro-FIT Programs”) administered by the Ontario Power Authority (the “OPA”), a participant contracts with the OPA to supply the electricity generated from approved renewable energy project to the provincial electricity distribution system at a charge for each kWh of electricity generated regardless of whether electricity is subsequently consumed by the participant. CRA stated:

Generally, costs associated with the purchase and installation of renewable energy property eligible for the FIT/microFIT Programs are considered to be the capital cost of depreciable property. A participant would include the capital cost of a renewable energy property in Class 43.1 or 43.2 for CCA purposes, provided that the property meets all of the requirements of these classes.

Essentially the same conclusion applied to renewable energy property acquired for use in the Ontario Net Metering Program provided that the electricity generated was not used for personal consumption.

New aluminum shingles with an electric cable (the “Equipment”) will be attached over existing asphalt shingles on the portion of a roof immediately beneath existing solar panels (which satisfy the conditions of s. (d)(vi) of Class 43.1)), so as to melt snow accumulations, which otherwise would hinder the functioning of the solar panels.. Would the cost of the Equipment be eligible for inclusion in Class 43.2?

After noting other more general requirements for the claiming of capital cost allowance, CRA stated:

Generally, if something is “related to” a particular subject it concerns that subject. … Thus, if the Equipment is necessary for the proper functioning of the existing photovoltaic equipment, it would likely be considered to be “related equipment”… .

…The test [of whether the Equipment is a fixture] asks whether an article is attached to another property to effect a permanent and substantial improvement of that other property or to enable more complete enjoyment and use of the first article. … In a situation where there is a dual or multiple purposes, the courts have considered what the dominant purpose of the annexation is [citing Hansen, 1998 ABQB 1103].

Here, the intention to install the Equipment is to resolve a problem caused by the deficient operation of the solar panels. Thus, the fact that the Equipment is necessary for the proper operation of the photovoltaic equipment during the winter period and that its main function is to support the solar panels (with any benefits to the building being negligible), may support the inclusion of its capital cost to Class 43.2… .

General discussion respecting a general biomass-fuelled electricity generating facility, which would be described in Class 43.1 and therefore would be eligible to be included in Class 43.2 if acquired before 2020.

"[I]t has been our longstanding view that wood pellets manufactured from inputs meeting the definition of 'wood waste' in subsection 1104(13) of the Regulations would be considered an 'eligible waste fuel' for property described in subparagraph (d)(ix) of Class 43.1...."

Waste water treatment equipment is not eligible under subparagraphs (a)(i) to (a)(v) or Class 43.1, and consequently is not eligible for inclusion under Classes 43.1 or 43.2.

A wood waste fuelled heat production system and ground source heat pump likely could qualify for inclusion in Class 43.2. CRA stated:

in general, a biomass heating system acquired by a Taxpayer could be included in Class 43.2 of Schedule II if the following conditions are satisfied:

1) The biomass heating system is fuelled only by an "eligible waste fuel" (such as wood pellets), a "fossil fuel" or a combination of those.

2) The heating system is used by the Taxpayer primarily to produce thermal energy through the consumption of an "eligible waste fuel" i.e., for example, wood pellets must be the main fuel producing the thermal energy used for eligible purposes.

3) The thermal energy produced by such biomass heating system must be used directly in an industrial process or a greenhouse, operated either by the Taxpayer or by the Taxpayer's customers.

4) The biomass heating system must be located in Canada.

5) The Taxpayer acquired the biomass heating system for use in the course of earning income from a business carried on in Canada or income from property situated in Canada.

…

[T]he NRCan Guide indicates that expenses for eligible property incorporated into a ground source heat pump system that qualifies for Class 43.2 treatment (by virtue of subparagraph (d)(i) of Class 43.1), include:

• The purchase and installation of heat pumps, pumps complete with controls and regulators.
• Pressure test piping and flushing systems.
• Purchase and installation of heat exchangers and thermal storage systems.
• The purchase and installation of a network of horizontal underground collectors.

For vertical well systems with a depth of less than 10 metres

• Purchase and installation of thermal storage systems (including extraction and reinjection wells, complete with wellhead equipment, piping and controls).

For vertical well systems with a depth of more than 10 metres

• The manufacture and installation of support structures: foundations, anchors, fixing brackets, other structures.
• The purchase and installation of thermal storage systems (including extraction and reinjection wells, complete with wellhead equipment, piping and controls).

Opco, which utilizes biomass through anaerobic digestion processes in order to produce biogas (containing significant methane) will install a "digester" which, in order to increase its performance, will use a "co-digestion" process, i.e. a process that provides for the addition of, for example, organic waste to the manure, to increase biogas equivalent. Some of the biogas would be produced into electricity, for use by Opco or sale, and some would be purified into methane which would be marketed to industrial businesses to produce heat for use in an industrial process or to produce electricity.

CRA stated:

[T]he "digester" could not be included in Class 43.1 of Annex II if the biogas production from the digester does not originate exclusively from the anaerobic digestion of manure.

Regarding the methane sales it stated:

[T]he sale of methane is not in itself an eligible use of biogas for the purpose of determining whether property that is part of a biogas production system can be included in Class 43.1 … .

[T]he sale by Opco of methane from the biogas produced by the Project, in and of itself, would not prevent the property that is part of Opco's biogas production system from being included in Class 43.1 of Schedule II of the Regulations provided that less than 50 percent of the biogas produced by the Project is converted into methane for sale and more than 50 percent of the biogas produced by the Project is used for Eligible Uses.

An employer acquired charging stations, which were used only to recharge the employer's electric vehicles that were used by its employees for travel to customers. It added the charging stations to Class 43.1. Was that correct?

After summarizing the requirements for Classes 43.1 and 43.2 (which it described as “designed to encourage corporations to invest in clean energy production and energy conservation equipment,”) CRA stated:

[T]he charging stations… should not be included in Class 43.1. Given the absence of a specific class for this type of property… they should be included in Class 8….

General discussion of the considerations applicable to claiming CCA on solar photovoltaic systems.

Regarding anaerobic digesters (machines for extracting methane from manure, a byproduct of which is fertilizer), CRA stated:

Property of a taxpayer, including an anaerobic digester, that is used by the taxpayer primarily to produce and store "biogas", as that term is defined under subsection 1104(13) of the Regulations, will qualify for inclusion under subparagraph (d)(xiii) of Class 43.1 and paragraph (b) of Class 43.2. Generally, the word "primarily" means more than 50%. Accordingly, where your client's anaerobic digester meets the requirements of Class 43.2, it would qualify as a PEGCP and would meet the definition of QP for purposes of the ITC.

Discussion of CCA rules applicable to solar photovoltaic equipment.

(a) The questioner pointed out that equipment manufacturers often sell products at a minimum price and charge a premium for supplies (e.g. computer printers), and asked whether such equipment costs are a running expense. CRA stated that pricing is not, in itself, determinative of whether an expense is a capital cost or running expense.

(b) A printer would only be included in Class 45 to the extent that it constitutes general-purpose electronic data processing equipment. If the bulk of the value rests in its mechanical components, it should be included in Class 8 instead.

(c) The type of connection a device uses (i.e. wired vs. wireless) does not determine whether it is ancillary data processing equipment.

(d)-(f) Comments in (b) also apply to scanners, multifunction printers, and modern photocopiers.

(g) Internet fax and fax modems are excluded from Class 45 because para. 45(b) excludes electronic communications control equipment. Internet fax is also excluded from Class 46 because the Reg. 1104(2) definition of "data network infrastructure equipment", para. (d), excludes facsimile transmission devices.

(h) Comments in (g) also apply to Internet telephone equipment (i.e. VoIP phones).

Determining whether website costs are in the nature of income or capital should entail an analysis of each component of the site. The determination depends predominantly on the expected useful life of the website, although "some components of the development costs are likely capital in nature."

To the extent that expenses are in the nature of capital, they may be added to the capital cost of "applications software" as described in Class 12 of Schedule II. Such costs include the labour costs incurred to design and develop software to carry out the website functions. Some components may instead be "data network infrastructure equipment" or "systems software" described in Class 46.

A particular capital expenditure that is not a depreciable property may instead be an "eligible capital expenditure" described in s. 14(5) or the Act.

CRA noted that, as per IT-482, an attachment to a pipeline is not an integral and component part of the pipeline, and is considered to be separate equipment from that of the pipeline (a "pipeline appendage"). When asked how costs should be allocated between pipelines (Class 49) and other classes, CRA stated that although IT-482 provided no “guidance as to how costs are allocated between pipelines included in class 49 and equipment included in class 7”:

However, it is our understanding that there is sufficient information at the disposal of taxpayers, such as detailed engineering documents, progress reports, authorizations for expenditures and invoices, to enable a reasonable allocation of costs, including general contractor costs.

Commercial crypto-asset mining operations often involve the use of several graphics processing units (GPUs) or application-specific integrated circuit (ASIC) miners to generate computing power (hash power). CRA noted that Class 50 refers to general-purpose electronic data processing equipment, and includes desktop and laptop computers, and that the GPU and ASIC mining rigs could meet the detailed conditions set out in Class 50.

After noting that some computer equipment would qualify for inclusion in Class 29 if acquired before 2016, CRA stated:

[C]omputer equipment is property that could be included in Class 50 if it was acquired by the taxpayer after February 2011.

Equipment was acquired by a corporation (“Aco”), wholly-owned by a dental surgeon, to manufacture dental restorative products for use as part of its dental services.

Alternatively, the surgeon could incorporated a second wholly-owned corporation (“Bco”) to acquire the equipment and sell, to Aco, the dental restorative products it manufactured using the equipment.

CRA indicated that the first alternative did not satisfy the requirement, for the equipment to qualify as Class 53 property, that it be used in the manufacturing or processing of goods for sale – as the goods (the dental restorative products) instead were used in providing a dental service.

Under the second alternative, assuming that there indeed was a sale of the manufactured products by Bco to Aco under the governing provincial law, the equipment could qualify as Class 53 property to Bco assuming that the other Class 53 requirements were satisfied.