Principal Issues: [TaxInterpretations translation] Do additions or alterations made to a kiln in XXXXXXXXXX qualify for the investment tax credit (ITC) given that the kiln was acquired before 1975? If so, do they fall within subsection (1) or (2) of Regulation 4600?
Position: Not eligible for the ITC.
Reasons: CRA's long-standing position. As the kiln is not a qualifying property for ITC purposes, additions or alterations to a used property must otherwise be a substantial renovation to qualify.
June 23, 2005
XXXXXXXXXX Tax Services Office Headquarters
Danielle Bouffard
(613) 957-8953
Attention: XXXXXXXXXX
2005-011819
Investment tax credit - Improvements to a wood kiln
This is in response to your email of February 17, 2005 in which you requested our opinion on the above subject. We have taken into account the information provided to us by XXXXXXXXXX during our telephone conversations. We apologize for the delay in responding to your request.
The Facts
The relevant facts as we understand them are as follows:
1. A taxpayer operates a sawmill and has owned a kiln since XXXXXXXXXX.
2. In XXXXXXXXXX, the taxpayer incurred capital expenditures to change the lumber kiln's ventilation ducts and control system ("the additions or alterations"). The additions or alterations totaled approximately $XXXXXXXXXX of which $XXXXXXXXXX was for the control system (the computer controlling temperature, ventilation etc.) The additions or alterations to the kiln were not substantial renovations within the meaning of paragraph 24 of former Interpretation Bulletin IT-331R.
3. The additions or alterations to the kiln were used directly or indirectly by the taxpayer in Canada primarily in the manufacturing or processing of goods for sale.
Questions
Did the additions or modifications to the kiln qualify for the investment tax credit (ITC) on the basis that the kiln was acquired before 1975? If so, did they come within the scope of subsection 4600(1) or subsection 4600(2) of the Income Tax Regulations (the "Regulations")?
Your Comments
It is your opinion that the additions or alterations qualified as property in paragraph (c) of Class 8 of Schedule II to the Regulations. Paragraph (c) of Class 8 refers to real property that is, inter alia, a kiln acquired for manufacturing or processing purposes. Taking into account that the kiln otherwise qualifies as property of Class 29 in Schedule II and that the additions or alterations were made in XXXXXXXXXX, it should be classified as Class 43 in Schedule II to the Regulations.
Since the additions or alterations initially qualified under Class 8(c) of Schedule II, you are of the opinion that they came within subsection 4600(1) of the Regulations and are eligible for the ITC.
Our Comments
Classification of additions or alterations to the kiln
We agree that additions or alterations acquired after February 25, 1992, that are integral to the Class 29 kiln are deemed to be Class 43 property in Schedule II to the Regulations by virtue of subsection 1102(19) of the Regulations. Generally, Class 43 includes, inter alia, property acquired after February 25, 1992 is not included in Class 29, but that would otherwise be included in that Class if that Class were read without reference to subparagraphs (b)(iii) and (v) and paragraph (c) of that Class. That property is essentially property used primarily in manufacturing or processing activities and is generally property described in Class 8 of Schedule II to the Regulations.
Eligibility of additions or alterations for ITC computation purposes
The term "qualified property" is defined in subsection 127(9) of the Income Tax Act (the "Act") and includes a prescribed building or prescribed machinery or equipment acquired after June 23, 1975.
Paragraphs 1 and 2 of Regulation 4600 specify what is meant by prescribed buildings and prescribed machinery, respectively. Subsection 4600(2) of the Regulations states that "the following depreciable property that is not already described in subsection (1) is prescribed machinery or equipment for the purposes of the definition "qualified property" in subsection 127(9) of the Act
... (k) a property included in any of Classes 21, 24, 27, 29, 34, 39, 40 and 43 in Schedule II; (our emphasis)
Under paragraph 4600(1)(a) of the Regulations, a property is a prescribed building if it is included in either Class 1 or paragraph (c) of Class 8 of Schedule II. Since additions or alterations are "included" in Class 43 and not Class 8(c), subsection 4600(1) of the Regulations does not apply.
In your situation, additions or alterations were made to a lumber kiln that was acquired before 1975. The kiln is therefore not a qualifying property for ITC purposes. Given that additions or alterations have been made to property that does not qualify for ITCs, it must be determined whether those additions or alterations otherwise qualify for ITCs. Although Interpretation Bulletin IT-331R was rescinded in 1994, we believe that the comments in paragraphs 22 to 24 of the Bulletin still represent our position on additions or alterations.
Since the property included in Class 43 is, inter alia, prescribed machinery and equipment prescribed in subsection 4600(2) of the Regulations for the purposes of the definition of "qualified property" in subsection 127(9) of the Act, we are of the view that the additions or alterations to the kiln will qualify for ITCs if they otherwise satisfy the criteria described in paragraph 24 of IT-331R. In particular, the last sentence of that subsection is relevant to your case and reads as follows: However, where, subsequent to the acquisition of used equipment, a taxpayer carries out major renovations only the costs of the renovations may qualify.
It stated facts that indicate that the additions or alterations to the kiln do not constitute a substantial renovation. Consequently, we are of the view that the taxpayer cannot claim an ITC on the capital expenditures it incurred in XXXXXXXXXX.
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 you find these comments of assistance. Should you require any additional information regarding the content of this document, please do not hesitate to contact us.
Milled Azzi, CA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning