Principal Issues: 1) Scenario 1: In a situation where two separate additions are made in two consecutive taxation years to a building included in class 1 that is not an eligible non-residential building, as defined in subsection 1104(2), would the capital cost of the two additions be included in one separate class pursuant to subsection 1101(5b.1)?
2) Scenario 2: In a situation where one addition is made over the course of two consecutive taxation years, would our position be different? 3) Whether a letter for the election pursuant to subsection 1101(5b.1) should be attached to the return of income of the taxpayer for each taxation year? 4) Whether the answers to the preceding questions would be the same if paragraph 1100(1)(a.2) applies instead of paragraph 1100(1)(a.1)?
Position: 1) No if the second addition is an addition to the building. 2) Yes, the capital cost of the addition would be included in one separate class. 3) In Scenario 1, a letter for the election under subsection 1101(5b.1) would need to be provided for each taxation year. However in Scenario 2, a letter for the election under subsection 1101(5b.1) is only needed for the first taxation year. 4) Yes.
Reasons: 1) The second addition would be deemed to be a separate building under subsection 1102(23) since the second addition is made to a building that is not included in a separate class under subsection 1101(5b.1). 2) The capital cost of the addition to the building at the end of the first taxation year would be deemed to be a separate building under subsection 1102(23) since the addition is made to a building that is not included in a separate class under subsection 1101(5b.1). The capital cost incurred in the second year would not be deemed to be a separate building under subsection 1102(23) since it is part of the same addition which is included in a separate class under subsection 1101(5b.1). 3) Wording of subsections 1102(23) and 1101(5b.1). 4) Wording of paragraphs 1100(1)(a.1) and 1100(1)(a.2). The provision of subsection 1101(5b.1) apply to both paragraphs 1101(1)(a.1) and 1101(1)(a.2).
XXXXXXXXXX 2016-062664 Lucie Allaire, LL.B CPA, CGA, D. Fisc. March 13, 2017
Dear Sir,
Subject: Election under subsection 1101(5b.1) of the Income Tax Regulations (the "Regulations")
This letter is in response to your letter of January 12, 2016, in which you raised various issues relating to an election under subsection 1101(5b.1) of the Regulations (the "Election").
Unless otherwise indicated, all section references are to the provisions of the Regulations.
You described a situation where two additions were made in two consecutive taxation years to a building held by a corporation. The building was included in Class 1 of Schedule II and did not qualify as an "eligible non-residential building" within the meaning of subsection 1104(2), as it was acquired before March 19, 2007. You indicated that the corporation made the Election in order for the first addition to the main building ("Addition 1") to be included in a separate class, and to be a separate building in accordance with subsection 1102(23) that was an eligible non-residential building.
You wish to know if the corporation can include the second addition ("Addition 2") in the same separate class as the one in which Addition 1 was included. You asked if our position would be different in the situation of an addition that was commenced in one taxation year and continued into the next taxation year.
In addition, you asked whether subsection 1101(5b.1) requires a letter to be attached to the taxpayer's income tax return for the taxation year in which a further addition, such as Addition 2, was made. Finally, you asked whether the answers to the previous questions would be the same if paragraph 1100(1)(a.2) applied rather than paragraph 1100(1)(a.1).
Our Comments
This technical interpretation provides general comments on the provisions of the Income Tax Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Paragraphs 1100(1)(a.1) and 1100(1)(a.2) generally provide for additional capital cost allowance ("CCA") for certain buildings acquired after March 18, 2007 and included in Class 1 of Schedule II.
Paragraph 1100(1)(a.1) refers to property of a taxpayer that is a building included in a separate class prescribed by subsection 1101(5b.1), where at least 90% of its floor space is used at the end of the taxation year for the manufacturing or processing in Canada of goods for sale or lease. Such a property can be eligible for CCA at a rate of 10% of the undepreciated capital cost ("UCC"), i.e., a rate that is 6% higher than the rate normally provided for Class 1 of Schedule II.
Paragraph 1100(1)(a.2) refers to property of a taxpayer that is a building included in a separate class prescribed by subsection 1101(5b.1) and that does not qualify for the additional CCA provided under paragraph 1100(1)(a.1), where at least 90% of its floor space is used at the end of the taxation year for non-residential use in Canada. Such a property can be eligible for CCA at a rate of 6% of the UCC, i.e., a rate that is 2% higher than the rate normally provided for Class 1 of Schedule II.
Under the terms of subsection 1101(5b.1), a taxpayer may elect to include, in a separate class, any building that is an eligible non-residential building, other than an "eligible liquefaction building," as defined in subsection 1104(2). A taxpayer who makes the election must do so in respect of each eligible non-residential building by letter attached to the return of income of the taxpayer filed with the Minister in accordance with section 150 for the taxation year in which the building is acquired.
Furthermore, subsection 1102(23) applies to additions to and alterations of a building if the building to which the addition or alteration was made is not included in a separate class under subsection 1101(5b.1). This rule provides that the capital cost of an addition to or an alteration of a taxpayer’s building is deemed to be the capital cost to the taxpayer of a separate building in applying the additional CCA rate provided for under paragraph 1100(1)(a.1) or paragraph 1100(1)(a.2) and subsection 1101(5b.1).
In the situation described, Addition 1 was deemed to be a separate building under subsection 1102(23) since the main building was not included in a separate class by virtue of subsection 1101(5b.1). Thus, if Addition 2 was not an addition to Addition 1, Addition 2 would be deemed to be a separate building under subsection 1102(23) since Addition 2 was made to the main building, which was not included in a separate class by virtue of subsection 1101(5b.1). Consequently, the taxpayer may make the Election in respect of Addition 2 if it wishes to benefit from additional CCA under paragraph 1100(1)(a.1) or paragraph 1100(1)(a.2). Addition 2 would therefore be included in a class separate from Addition 1.
Where the work on an addition to the main building begins in a taxation year and ends in the following taxation year, we are generally of the view that the taxpayer is considered to have acquired the addition at the end of the first taxation year and that subsection 1102(23) will apply at that time to deem the capital cost of the addition on that date to be a separate building. Consequently, if all of the requirements of subsection 1101(5b.1) are otherwise met, the Election can be made for the first taxation year in which the acquired addition is deemed to be a separate building by virtue of subsection 1102(23).
However, we are of the view that the capital cost incurred in the second year does not constitute an addition deemed to be a separate building under subsection 1102(23), since the addition in the first year was a separate building under subsection 1102(23) that was included in a separate class by virtue of subsection 1101(5b.1). As a result, the capital cost incurred in the second year would be included in the same class as for the addition in the first year and no Election would be required in the second taxation year.
Notwithstanding the foregoing, in order for the corporation to qualify for additional CCA, the other requirements of paragraph 1100(1)(a.1) or paragraph 1100(1)(a.2), as the case may be, must be complied with. In addition, the corporation will only be entitled to claim additional CCA in respect of the addition from the time that the addition is considered to be available for use.
We hope that our comments will be of assistance.
Louise J. Roy, CPA, CGA
Manager
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch