Principal Issues: [TaxInterpretations translation] 1. Can the cost of acquiring and installing an oil separator in a garage be deducted 100% as a current expense or should it be amortized over a number of years? 2. In the event that expenditures have to be depreciated, in what depreciation class would an oil separator be placed?
Position: 1. Current [sic] expenditures. 2. To the extent that an oil separator is a component part of a building (sufficiently attached to the building) or can be considered as a constituent part of a building, the oil separator may be included in Class 1. If that is not the case, the oil separator can be included in Class 8.
Reasons: The ITA and ITR, as well as the jurisprudence.
XXXXXXXXXX 2012-043210 André Gallant
March 16, 2012
Dear Madam,
Subject: Acquisition of an oil separator
This is in response to your e-mails of December 16 and 22, 2011 in which you asked for our comments regarding the deductibility of the purchase and installation expenses of an oil separator that has been acquired by a garage in order to meet a government requirement (the expenses being approximately $XXXXXXXXXX). We have assumed that the oil separator was acquired after 1990.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
You wish to know if those expenses can be deducted as to100% as current expenses or if they must be amortized over a number of years as capital expenditures. In the case where the expenses have to be depreciated, you asked us in which class of depreciable property an oil separator would be placed.
Our Comments
Principles established by the jurisprudence to determine whether this is a current expense or a capital expenditure have been included in paragraph 4 of Interpretation Bulletin IT-128, Capital Cost Allowance - Depreciable Property. Based on those principles, and despite the fact that the expenses were incurred solely because of a government requirement, we are of the view that expenses related to the addition of an oil separator in a garage are generally capital expenditures. Interpretation Bulletins are available on the Canada Revenue Agency ("CRA") Web site at: http://www.cra-arc.gc.ca/menu/ITSC- e.html.
Paragraph 18(1)(b) provides that capital expenditures are not deductible in computing income except as expressly permitted by Part I, including, for example, paragraph 20(1)(a) which refers to different classes for depreciation in Schedule II of the Income Tax Regulations.
To the extent that an oil separator is an integral part of a building (sufficiently attached to the building) or can be considered as a component part of a building, we are of the view that the oil separator could be included in the description of Class 1. The CRA elaborates on the concept of a component part in paragraph 15 of Interpretation Bulletin IT-79R3, Capital Cost Allowance - Buildings or Other Structures, which reads in part as follows:
For greater certainty, classes 1, 3 and 6 of Schedule II specify that buildings or other structures that fall into those classes also include component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures, elevators and escalators. The particular items cited, however, are not regarded as being an all-inclusive description of component parts of a building. There are other component parts of a building that ordinarily go with the building when it is bought or sold, or that may be purchased separately from the building, but which relate to the functioning of a building. Examples are storm doors and windows, automatic stokers, sump pumps, combination heating and cooling units, and complex fire alarm systems. Such items are included in Class 1, 3 or 6, depending on the type of building and the date of acquisition. …
In the case where the oil separator does not meet the criteria set out above and does not fall into Class 1, it could be included in Class 8.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Trusts Section
Business and Trusts Division
Income Tax Rulings Directorate