Principal Issues: [TaxInterpretations translation] (1) In which class of Schedule II of the Income Tax Regulations should campgrounds and improvements to them be included?
(2) Do the rental property rules apply to campgrounds so as to limit the amount that can be deducted as capital cost allowance?
(3) Should other assets found on a campground be included in their respective classes?
Position: (1) Question of fact but most likely Class 17(c);
(2) If the operation of the campsite represents the carrying on of a business, no.
(3) Yes, except for the water system if it is an integral part of the campsite.
January 8, 2008
The Estrie-Mauricie Tax Services Office Headquarters Business and Partnerships Division Attention: Lucie Bouchard François Bordeleau, Advocate
2007-025488
Depreciation of campgrounds
This is further to your email of 4 October 2007 requesting our opinion on the capital cost allowance ("CCA") regime applicable to campgrounds.
More specifically, you asked the following questions:
(1) Is a campground a depreciable property and if so, in which depreciation class should it be placed?
(2) Do the CCA restrictions that apply to rental and leasing property apply to campgrounds?
(3) In which depreciation class(es) should the depreciable property (e.g., water supply systems, septic systems, buildings, and swimming pools) situated on a campground be placed?
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Our Opinion
1. Depreciation Class for Campgrounds
Under subsection 1102(2) of the Income Tax Regulations ("ITR"), the classes of property described in Schedule II are deemed not to include the land upon which they are constructed or situated. Thus, as a general rule, land will not qualify for a CCA deduction. However, Class 17 of the ITR allows CCA for surface structures.
ITR Class 17(c) reads as follows:
Property that would otherwise be included in another class in this Schedule that is […] and property not included in any other class, acquired after May 25, 1976, that is:
[...]
(c) a road (other than a specified temporary access road of the taxpayer), sidewalk, airplane runway, parking area, storage area or similar surface construction.
In Mont-Sutton Inc. v. Canada, [1999] F.C.A. No. 1061, the Federal Court of Appeal had to determine whether ski slopes constituted surface construction similar to the other structures listed in Class 17(c) of Schedule II of the ITR. In making this determination, the Federal Court of Appeal listed the following three criteria:
- The land or property which becomes a surface construction should display a clearly discernable change in configuration;
- The surface construction must occupy a circumscribed space identifiable as such and to varying degrees require the addition of some materials in order to fulfill the function for which it was intended;
- The surface construction has a recurring need for and cost of maintenance to retain its identity and purpose.
The question of whether a campground should be included in Class 17(c) of the ITR is one of fact that can only be answered following a thorough analysis of all the relevant elements. In Interpretation 2000-0029597, the Canada Revenue Agency ("CRA"), in light of the Mont-Sutton decision, determined that the greens, tees and fairways of a golf course represented a surface construction.
To the extent that the development of a campground goes beyond the mere clearing and levelling of land, the CRA is of the view that the campground is a surface construction eligible for CCA based on the cost of the campground, including the costs of clearing and levelling.
We note that the recurring maintenance costs of a campground are current expenses to be deducted in the computation of the taxpayer's net income.
2. Restrictions on rental and leasing properties
As indicated in Interpretation Bulletin IT-434R, Rental of Real Property by Individual, in order to determine whether a rental of real property gives rise to income from a business or income from property, it is necessary to consider various criteria, including the following:
- Is the renting of real property incidental to, or part of the fabric of, the taxpayer's business operations?
- Does the taxpayer provide any services to the lessees that make the rental operation go beyond the mere rental of real property?
In paragraph 7 of this Bulletin, the CRA states that “The operation of a trailer court or campground where all services are provided, e.g., laundromat, cafeteria, swimming pool, showers, playgrounds, etc. … would be a business, but not a rental business due to the magnitude of services provided.”
The ITR limits the deduction a taxpayer can take for CCA in respect of rental and leasing property. For a property to be a rental property, the taxpayer must use the property in the year principally for the purpose of gaining or producing gross revenue that is rent.
Similarly, a leasing property is defined in subsection 1100(17) of the ITR. A leasing property is, inter alia, a property that is to be used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue.
In the situation you raised, if a taxpayer's operation of a campground constitutes a business - which remains a question of fact - it is the CRA's view that the taxpayer carrying on such a business is not restricted in the amount of the CCA deduction.
3. Other depreciable property on a campground
Generally, where an amount is incurred to acquire depreciable property, the capital cost of the property is added to one of the classes in Schedule II of the ITR. However, where a capital expenditure is for the acquisition of a depreciable property that is an integral part of another existing depreciable property, the amount of the expenditure is added to the capital cost of the existing property.1
With respect to the water system, the CRA is of the view that the cost of the water system can probably be added to the cost of the campground since such a system appears to be an integral part of the land where it is installed.2
In addition to the water system, we believe that the depreciable assets you refer to - pools, buildings and septic systems - are separate assets from the campground to which they relate. As such, those assets must be capitalized in their respective classes in Schedule II of the ITR.
With respect to buildings and septic tanks, classes 1, 3, 6 and 8 of the ITR include buildings or other structures erected on land. Interpretation Bulletin IT-79R3 defines a "building" as any structure with walls and a roof affording protection and shelter. The word "structure" is to be interpreted to include anything of substantial size that is built up from component parts and intended to remain permanently on a permanent foundation.
In Superior Pre-Kast Septic Tanks Ltd. v. Canada, [1978] 2 S.C.R. 612, Martland J. was asked to determine whether sceptic tanks were structures for the purposes of subsection 26(4) of the Excise Tax Act ("ETA"). In concluding that such tanks were structures, Martland J. relied on the following criteria:
- It must be built or constructed;
- It must rest on or in the ground;
- It must not be "a part" of another structure.
Although the Superior Pre-Kast decision deals with an interpretation of subsection 26(4) of the ETA, the CRA has previously applied that decision to conclude that certain structures are structures for CCA purposes. In this regard, you are referred to Technical Interpretation 2002-01231815.
Consequently, we are of the view that septic 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).
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Randy Hewlett
Manager
Business and Partnerships Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 See Rainbow Pipeline Company Ltd. v. Her Majesty the Queen, 99 DTC 1081
2 See Technical Interpretation F2M01650.