Principal Issues: [TaxInterpretations translation] 1. May a second addition made in 2009 to a building that is not an eligible non-residential building under subsection 1102(4) of the Income Tax Regulations (the "Regulations") be included in a separate class from a first addition made in 2008 to the same building?
2. Is a letter indicating the election for a separate class for the addition made in 2009 required to be attached to the 2009 income tax return or can it be attached to the 2008 return?
Position: 1. Yes. The addition made to the building in 2009 may be included in a separate class from the 2008 addition if all the conditions of subsection 1101(5b.1) of the Regulations are satisfied.
2. The taxpayer will be required to attach a letter indicating the election to apply subsection 1101(5b.1) of the Regulations in respect of the second 2009 addition to the taxpayer's return of income for the 2009 taxation year before the filing due date of the return.
Reasons: 1. Interaction of subsection 1102(23) and subsection 1101 (5b.1) of the Regulations.
2. Application of subsection 1101(5b.1) of the Regulations.
2009-034841 XXXXXXXXXX Lucie Allaire, Advocate, CGA, D. Fisc. March 4, 2010
Dear Madam,
Subject: Second addition to a building that is not an eligible non-residential building
This is in response to your email dated April 7, 2009, which we received on November 18, 2009, in which you requested our opinion regarding the separate class election for a building addition.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
You first referred to a building (the "main building"), acquired in 2005, that is included in Class 1 of Schedule II to the Income Tax Regulations (the "Regulations"), and that is not an eligible non-residential building as defined in subsection 1104(2) of the Regulations because it was acquired before March 19, 2007. In this regard, we understand that the main building is not included in a separate class because of subsection 1101(5b.1) of the Regulations.
You also indicated that two additions to the main building were made in the 2008 and 2009 taxation years respectively.
Finally, we have assumed that each of these additions constitutes an eligible non-residential building and that the second addition made to the main building in 2009 is not related to the first addition made in 2008.
Your Questions
You wish to know if the addition made to the main building in 2009 should be placed in a separate class from the class that includes the addition made in 2008. Second, you wish to know if, in order to benefit from subsection 1101(5b.1) of the Regulations, a letter electing a separate class in respect of the 2009 addition must be attached to the 2008 tax return or if not, must be attached to the 2009 tax return.
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
Paragraph 1100(1)(a.2) of the Regulations refers to a property of the taxpayer that is a building included in a separate class because of subsection 1101(5b.1) and at least 90% of the floor space of which is used at the end of the taxation year for a non-residential use in Canada. Such a property is eligible for a capital cost allowance ("CCA") rate of 6%, which is 2% in addition to the rate usually provided for in Class 1 of Schedule II.
Under subsection 1101(5b.1) of the Regulations, a taxpayer may elect to include in a separate class any building that is an "eligible non-residential building" as defined in subsection 1104(2) of the Regulations. 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 of the Act for the taxation year in which the building is acquired.
In addition, subsection 1102(23) of the Regulations provides a special rule that applies to additions to and alterations of a building that is neither an eligible non-residential building, as defined in subsection 1104(2), nor included in a separate class because of subsection 1101(5b.1) of the Regulations. 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 for the purposes of the additional CCA under paragraph 1100(1)(a.1) or paragraph 1100(1)(a.2) and the election under subsection 1101(5b.1) of the Regulations. Similarly, under subsection 1102(24) of the Regulations, if an addition or an alteration is deemed to be a separate building under subsection 1102(23), the reference in paragraphs 1100(1)(a.1) and (a.2) of the Regulations to “the floor space of the building” are to be read as references to “the total floor space of the separate building and the building to which the addition or alteration was made”.
Consequently, we are of the view that a taxpayer must make the election under subsection 1101(5b.1) of the Regulations for each eligible non-residential building for which the taxpayer wishes to claim the additional CCA under subsection 1101(1)(a.2) of the Regulations. In your situation, therefore, the 2009 addition will be classified in a separate class from the 2008 addition. In this regard, the election to include the 2009 addition in a separate class must be made by attaching a letter to the 2009 income tax return by the filing due date for the return since this is the year in which the 2009 addition was acquired.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate