Dear Sirs:
Re: 24(1)
This is in reply to your letters dated October 29, 1990 and January 22, 1991, requesting the Department's opinion on the appropriate capital cost allowance classification for a modular wiring system.
You have described the modular wiring system as follows:
"The components are completely interchangeable and may be installed, changed or removed without power interruption as often as desired. The MWS may be installed in new buildings, renovations of buildings, or maintenance situations. Because the interconnect system does not start until after the outlet box, it is our opinion that it is not a part of the cost of a building but rather a harness as described in class 10 or class 8 property not included in any other class."
The Department's position on this subject is found in paragraph 14 of Interpretation Bulletin IT-79R2, that is, the component parts of a building are to be included in the class in which the building itself is included. However the term "component parts" should be interpreted as referring only to those component parts owned by a taxpayer who is also the owner of the building of which they are a part.
The fact that the modular wiring system units are interchangeable and moveable is not by itself sufficient to exclude it as a component part of a building. It is our view that where the modular wiring system is owned by a taxpayer who also owned the building, the modular wiring system would be considered an integral part of the building necessary for effective functioning and should be included in either Class 1, 3 or 6 of Schedule II of the Income Tax Regulations (the Regulations). This would also be the case where the building is a leasehold interest of the taxpayer, in which case subsection 1102(5) of the Regulations would have application.
Where the system is not readily removable or it becomes the property of the lessor upon installation, the cost of the modular wiring system, to a lessee, would be included in Class 13 of Schedule II of the Regulations.
On the other hand, where a taxpayer acquires the modular wiring system for use in a building that is being leased by him and this system does not constitute a component part of the building because it will not become the property of the lessor, it is our view that the cost of the modular wiring system should be included in Class 8 as "tangible capital property that is not included in another class". The reference to harness in paragraph c) of Class 10, Schedule II, is part of the phrase "harness or stable equipment" and relates, ejusdem generis, to horses' equipment and not to electrical equipment.
The class 10 category that you believe this equipment falls into is found in paragraph b):
"a portable tool acquired after May 25, 1976 for the purpose of earning rental income for short terms such as hourly, daily, weekly or monthly, except a property described in Class 12".
The Concise Oxford Dictionary (seventh edition) defines a tool as "a mechanical implement, usually held in hand, for working upon something (carpenter's, gardener's, mason's, tools)". In our opinion, the components you have described do not meet the dictionary definition of a tool. The system parts are not used to work upon something, therefore would not qualify as class 10 assets.
In summary, the capital cost allowance class that these products belong in depends entirely upon who owns the product and what the product is used for.
We trust that these comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
c. c 19(1)