Principal Issues: [TaxInterpretations translation]
1. What is the tax treatment of expenditures relating to a pit (platform, slurry pit and ramp) other than the installation of the drainage system?
2. Which class should the pit fall into?
Position:
1. We are of the view that the alternative of considering the expenditure as a capital expenditure that is depreciable property of a prescribed class should be preferred to considering the capital expenditure as part of the cost of the land.
2. The cost of components and work, such as excavation, related to the pit (platform, drain and drop) would be a structure and would be included in paragraph (q) of Class 1.
REASONS FOR POSITION ADOPTED:
1. We are of the view that this is an asset other than an addition to the land due to the various components of cement, gravel, small stones and wire mesh that form part of the pit.
2. In our view, the pit (platform, slurry pit and ramp) meets the definition of a structure. It is something built and of substantial size within the ordinary meaning of those terms. It is also made up of constituent parts such as cement, gravel, small stones and wire mesh, even if those constituent parts do not completely cover the pit. The pit is permanently fixed to the ground, which forms a permanent base. In our view, the pit is fixed in such a way as to last for a certain length of time, which gives it a certain permanence.
December 19, 2000
Rouyn-Noranda Tax Services Headquarters Client services Sylvie Labarre, CA 44 Lac Ave. (613) 957-8953 Rouyn-Noranda QC J9X 6Z9
Attention: Ms. Suzanne Carbonneau 2000-000927
Manure processing pit
This is in response to your memo of February 21, 2000, regarding the tax treatment of expenditures incurred by a farmer in 1999 to comply with the Ministry of the Environment's standards for manure processing, and to the additional information you subsequently provided.
You provided us with a plan of the dug-out pit. According to our understanding of this plan, the farmer dug a hole approximately 51 metres deep. One part of this hole is square (about 20 metres by 20 metres) and is used to receive the manure (the “pit platform”). The other part is conical with a radius of approximately 15 metres and is used to receive the liquid from the manure (the “slurry pit”). The platform also contains a ramp measuring 19.5 metres by 9.8 metres (the “ramp”). This ramp is installed from the top of the pit platform to the bottom to allow certain vehicles, such as a tractor, to descend into the pit.
The slurry pit is connected to the pit platform by a cement platform measuring approximately 4 metres by 4 metres, and there is also another cement platform measuring approximately 11 square metres attached to the slurry pit.
In addition to earth, the walls of the pit platform include small cement walls 8 inches high. The floor of the pit platform is made of cement and mesh. There is also erosion control material in the form of small stones. The slope is made of gravel. In some cases, it could be made of cement.
There are no steel tanks or tanks completely covered in cement because the clay soil is impermeable and acts as a reservoir.
A drainage system is installed around the pit to make the clay pit impermeable. For security purposes, the pit is surrounded by a fence.
Expenditures included the cost of the components of the pit platform and ramp, the cost of the drains, the cost of the fence, the cost of excavation work, burying the drains and earthworks.
You asked whether the total expenditures should be included in a single prescribed class for depreciation purposes and, if so, which class. If the expenditures did not fall into a single class, you wish to know which classes they fell into and whether any of those expenditures could be deductible.
Our Comments
In a situation such as the one you have described, we think it is possible to distinguish between several classes of expenditures such as the fence, the installation of the drainage system and the pit. For the purposes of our comments, the pit includes the platform, the slurry pit and the ramp.
In our view, the fence would be a separate asset from the others and would be included in Class 6.
With respect to the tax treatment of expenditures for the installation of the drainage system, section 30 of the Income Tax Act (the “Act”) provides for a deduction in computing the income of a farming business for any amount paid by a farmer before the end of the year for the installation of a drainage system in the course of the farming business.
The other expenditures relate to the components and work, such as excavation, associated with the pit.
For those expenditures, we considered three alternatives:
- consider the expenditures as current expenses deductible from the farmer's income;
- consider the expenditures as capital expenditures that are part of the land and, as such, should be added to the cost of the land;
- consider the expenditure to be a capital expenditure that is depreciable property of a prescribed class.
The pit appears to be built once and for all, or at least for a relatively long period of time. In addition, it provides a lasting benefit to the farmer's business. For those reasons, the components and work related to the pit do not represent current expenses deductible from income.
There may be arguments for accounting for the cost of the pit as part of the land since the pit is part of the land. However, we are of the view that it is an asset other than an addition to the land because of the various components of cement, gravel, small stones and wire mesh that are part of the pit.
We are of the view that, although there could be arguments for recognizing the cost of the pit as part of the land, the third alternative should be preferred, i.e. to consider the components of the pit and the work related to that pit as depreciable property of a prescribed class.
You asked whether the pit could be included in Class 24. Since the property was acquired after 1998, none of the expenditures would be included in Class 24.
The Supreme Court of Canada discussed the word structure in British Columbia Forest Products Limited v. Minister of National Revenue, 71 DTC 5178, which dealt with Class 3, where the words “building or other structure” are used. The Court made the following comment:
A structure is something which is constructed, but not everything which is constructed is a structure. A ship, for instance, is constructed, but is not a structure. A structure is something of substantial size which is built up from component parts and intended to remain permanently on a permanent foundation but it is still a structure even though some of its parts may be movable as for instance about a pivot thus a windmill or a turntable is a structure.
In the light of this definition, a property must have the following characteristics to be a structure:
- it must be something constructed
- it must be of a substantial size;
- it must be built up from component parts
- it must be permanently fixed on a permanent basis.
In our view, the pit is something constructed and of substantial size within the ordinary meaning of those terms. It is also made up of component parts such as cement, gravel, small stone and wire mesh even if these component parts do not completely cover the pit.
We are also of the opinion that the pit is permanently fixed to the ground, which constitutes a permanent foundation. In our view, the pit is fixed in such a way as to endure for a certain period of time, which gives it a certain permanence.
In view of the foregoing, we are of the view that the pit is a structure that falls within paragraph (q) of Class 1.
We hope you find these comments of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Marc Vanasse, CA
for the Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch