Principal Issues: Is the fact of classifying a qualifying non-residential building in a separate class 1(a) or 1(b) sufficient for the taxpayer to be considered to have made the election provided for in subsection 1101(5b.1) ITR.?
Position: No.
Reasons: Given this legislative requirement under paragraph 1101(5b.1) ITR, categorizing a qualifying non-residential building separately on the appropriate schedule of its tax return is not sufficient on its own to allow a taxpayer to avail itself of the election provided for in paragraph 1101(5b.1) ITR. The taxpayer must therefore send to the tax center that serves him, a letter attached to his income tax return in which he indicates that he makes an election with respect to each eligible non-residential building for the year of taxation in which the building subject to the election is acquired.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2022
APFF CONFERENCE 2022
4. Separate Class 1
Under the current capital cost allowance ("CCA") rules, Class 1 buildings may be eligible for additional capital cost allowance (CCA) of 6% on eligible non-residential buildings used for manufacturing and processing in Canada, resulting in a combined CCA rate of 10%. There may be eligibility to an additional 2% of CCA on other eligible non-residential buildings, resulting in a combined CCA rate of 6%.
The taxpayer must file an election for each eligible non-residential building in respect of which the taxpayer intends to claim additional CCA. The election is set out in subsection 1101(5b.1) of the Income Tax Regulations (footnote 1).
Question to the CRA
Is the classification of an eligible non-residential building as a separate class 1(a) or 1(b) asset sufficient for the taxpayer to be considered to have made the election provided under subsection 1101(5b.1)?
CRA Response
The referenced rules are found in I.T.R. paragraphs 1100(1)(a.1) and 1100(1)(a.2), respectively. They provide, where certain conditions are satisfied, for additional CCA in respect of certain buildings acquired after March 18, 2007 that are included in Class 1 of I.T.R. Schedule II.
Among the conditions that must be met in order to benefit from this additional CCA is that a taxpayer must, under I.T.R. subsection 1101(5b.1), elect to include in a separate class any building that is an eligible non-residential building, as defined in I.T.R. subsection 1104(2). The text of I.T.R. subsection 1101(5b.1) states that a separate class is prescribed for each eligible non-residential building of a taxpayer in respect of which the taxpayer has (by letter attached to the return of income of the taxpayer filed with the Minister in accordance with section 150 of the Act for the taxation year in which the building is acquired) elected that the subsection apply.
Because of this prescribed requirement, the categorization of an eligible non-residential building as a separate class on the appropriate schedule of a taxpayer's income tax return is not sufficient, in and of itself, to allow a taxpayer to access the election provided for in I.T.R. subsection 1101(5b.1). The taxpayer must, therefore, send to the Tax Centre serving the taxpayer a letter attached to the taxpayer's income tax return stating the taxpayer's election for each eligible non-residential building for the taxation year in which the subject building is acquired.
For information purposes, where a taxpayer is a corporation that files its income tax return over the Internet, it is possible for the taxpayer to make the election under subsection 1101(5b.1) I.T.R. over the Internet using either of the following methods:
- by using the "T2 Attach-a-doc" service
- indicating this election in the notes to the financial statements in the General Index of Financial Information (GIFI) of the tax return.
The electronic services offered by the CRA are constantly evolving. With this in mind, we refer you to the T2 Guide (footnote 2) which contains annually updated information on how to electronically file elections that may be required of taxpayers, including the election under I.T.R. subsection 1101(5b.1).
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 C.R.C., c. 945 (“I.T.R.”).
2 CANADA REVENUE AGENCY, T4012 "T2 Corporation - Income Tax Guide".