The taxpayer, which subleased premises containing “Shells” consisting essentially of foundations, walls and roofs, installed wall and floor coverings and performed electrical, ventilation and plumbing work to make the premises suitable for use in its manufacturing and processing (“M&P”) operations. It took the position that the costs of the property added to the Shells for this work should be included in Class 29 rather than Class 13. Regarding whether the costs of such work should be added to the cost of the taxpayer’s Class 13 leasehold interest pursuant to Reg. 1102(4) before regard was had to Reg. 1102(5), CRA stated:
[A]n amount expended is for the making of improvements or alterations to a leased property within the meaning of subsection 1102(4) where such expended amount relates to property that is incorporated into the leased property and becomes the property of the lessor. …
Generally, the owner of a building owns everything that is joined to the building. Consequently, a tenant generally only acquires a leasehold interest in a property owned by another person when the improvements or alterations made by the tenant to that property are incorporated into it. However, the contract between the parties may provide otherwise. An analysis of each contract is therefore necessary in determining the ownership of a Particular Property in a particular situation.