Principal Issues: (1) Whether television monitors installed on properties leased by the taxpayer fall within Class 13.
Position: (1) Generally, no.
Reasons: (1) It appears that the television monitors are chattels as they are removed and replaced within the term of lease and are installed for the better use of monitor as a monitor and not for the improvement of the freehold.
2006-017561 XXXXXXXXXX S. Lewis (613) 941-7239 June 6, 2006
Dear XXXXXXXXXX:
Re: Television Monitors
This is in response to your letter of March 9, 2006 inquiring about whether television monitors that are installed in places where the taxpayer rents advertising space could be classified as Class 13 property.
We have the following understanding of the facts:
1. the taxpayer is in the advertising sign business;
2. the taxpayer acquired a number of television monitors and installed them in major public places, such as railways stations and other transit terminals;
3. the taxpayer pays rent to the owners of the public places for the use of their space pursuant to lease agreements whereby the owners lease wall space to the taxpayer that in turn re-leases it to its customers for advertisements;
4. the lease agreements are usually for a period of 5 to 10 years;
5. each television monitor has a mini computer installed which enables the taxpayer to display the desired advertisements during desired times;
6. the taxpayer earns revenue from its customers whose products and services are advertised on the monitors; and
7. the life of the monitors is usually two to three years.
You would like to know if the television monitor acquisition and installation costs can be classified as Class 13 property.
Our Comments:
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Interpretation Bulletin IT-464R provides a general discussion of capital cost allowance for leasehold interests.
A leasehold interest is the interest of a tenant in any leased tangible property. Leasehold interests which are in the nature of a building or structure pursuant to subsection 1102(5) of the Regulations are required to be included in the respective class of Schedule II. All other capital costs respecting leasehold interests would be included in Class 13.
It is generally understood that when a chattel becomes affixed to a building and becomes a fixture, that fixture becomes part of the building and is therefore owned by the owner of the building. The person leasing the building, or part thereof, would only have a leasehold interest in such fixtures or chattels. If modifications were made and chattels were affixed to the building, they would be considered to be leasehold improvements and would be included in Class 13. Subsection 1102(4) of the Regulations provides that the "capital cost" of a leasehold interest includes any amount expended for an improvement or alternation to a leased property.
Whether or not a particular property remains a chattel or becomes a fixture must be determined on a case-by-case basis. Relevant factors include the degree of affixation1 ; whether the affixation was done for the better enjoyment of the chattel as a chattel and not with the intent in improving the freehold2 ; and the intention of the parties3 .
In the situation described above, the televisions, which are removed and replaced within the term of the lease, would appear to be minimally affixed. The installation of a monitor would generally be considered to be for the better enjoyment of the television as a monitor and not for the improvement of the freehold. Given the fact that the taxpayer will often replace the monitors, whether or not there is a lease agreement that specifically allows the tenant to remove the monitors at the end of the lease, it would appear that the parties intend for the monitor to remain the property of the taxpayer. As such, it is our view that, based on the facts provided, the television acquisition and installation costs would not fall within Class 13 of the Regulations.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
Manager
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 Paulin Refrigeration Ltd. v. Royal Bank of Canada [1997] NBJ. No. 344 and Fas Gas Oil Ltd. V. J.H. Automotive Ltd. [2003] A.J. No. 705;
2 See note 1 and Blower v. WCB (1984), A.J. No. 976 (C.A.)
3 White Holding Ltd. v. Bolus-Revelas-Bolus Ltd. [1980] O.J. no. 865; Bergh v. Herring-Hall-Mervin Safe Co. (1905), &0 L.R.A. 756.