Principal Issues:
Whether an election under subsection 1103(1) filed by a taxpayer for a property for which a previous election under subsection 1101(5b.1) was filed, will result in the said property to be included in Class 1 of Schedule II?
Position: NO.
Reasons: Subsection 1103(1) does not supersede subsection 1101(5b.1).
XXXXXXXXXX 2022-093482 Olivier Bergeron
February 15, 2023
Dear Mr. XXXXXXXXXX,
Subject: Election under subsection 1103(1) of the Income Tax Regulations
This letter is in response to your email dated November 8, 2021 requesting our opinion regarding the exercise of the election provided for in subsection 1103(1) of the Income Tax Regulations, C.R.C., c. 945 (the "Regulations") in particular hypothetical situations. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein refer to the provisions of the Regulations.
You stated that a general partnership ("SENC"), in addition to holding an initial building included in Class 1 of Schedule II (a depreciation rate of 4%) and property included in Classes 8 to 10 of Schedule II, also holds certain additional property, depending on the scenario.
In the first scenario, SENC holds only one other depreciable asset, consisting of:
- An improvement to the first building (included in Class 1 of Schedule II). This improvement was included in a separate class because of the election pursuant to subsection 1101(5b.1) made by SENC;
In the second scenario, SENC holds the following additional property:
- An improvement to the first building (included in Class 1 of Schedule II). This improvement was included in a separate class because of the election pursuant to subsection 1101(5b.1) made by SENC;
- A second building that was included in a separate class because of the election pursuant to subsection 1101(5b.1) made by SENC.
And finally, in the third scenario, SENC holds the following additional property:
- An improvement to the first building (included in Class 1 of Schedule II). This improvement was included in a separate class because of the election pursuant to subsection 1101(5b.1) made by SENC;
- A second building included in Class 1 of Schedule II (a depreciation rate of 4%);
- An improvement made to this second building. This improvement was included in a separate class because of the election pursuant to subsection 1101(5b.1) made by SENC;
- A third building that was included in a separate class because of the election pursuant to subsection 1101(5b.1) made by SENC.
In addition, as you pointed out, the election pursuant to subsection 1101(5b.1) allows for an additional depreciation rate of 2% pursuant to paragraph 1100(1)(a.2). Had it not been for this election, the property for which the election was made would have been included in Class 1 of Schedule II. We have assumed that all the conditions for making that election, including the definition of "eligible non-residential building" set out in subsection 1104(2), are satisfied, as well as subsections 1102(23) and (24), which provide certain rules regarding additions and alterations to a building.
You specified that SENC holds all of the aforementioned properties, regardless of the scenario, for the purpose of earning income from the same business and that none of these properties is a rental property covered by subsection 1101(1ac).
Your Question
You wish to know whether SENC can make the election provided for in subsection 1103(1) to include all of its depreciable property in Class 1 of Schedule II, taking into account the scenarios described above. In this regard, you inquired as to whether this election will have the effect of including in Class 1 of Schedule II, in addition to the property that would otherwise be included in one of Classes 2 to 10, 11 and 12 of Schedule II, the property covered by the election pursuant to subsection 1101(5b.1).
Your Position
In your view, each property included in a separate class as a result of the subsection 1101(5b.1) election should be eligible for the subsection 1103(1) election.
Briefly, in support of your position, you refer to paragraph 1 of Interpretation Bulletin IT-327 (cancelled) (footnote 1) to explain that the effect of the election provided for in subsection 1103(1) is to allow for a delay in the recapture of capital cost allowance ("CCA") or a terminal loss that would have occurred immediately (footnote 2). That said, in certain cases, you indicated that subsection 1103(1) has certain limitations, in particular because that subsection does not allow subsections 1101(1) and (1ac) to be circumvented. The purpose of those subsections, which prescribe a separate class for certain properties in certain circumstances, would be to limit the deferral of the immediate recapture of CCA. In your opinion, that is not the case for property included in a separate class because of the election set out in subsection 1101(5b.1).
Our Comments
This technical interpretation provides general comments on the provisions of the Regulations. It is not intended to confirm the tax treatment of any particular situation involving any particular taxpayer, but rather to assist you in determining that treatment. Our Directorate will only confirm the tax treatment of a particular taxpayer's transactions in the context of a request for an advance income tax ruling presented in the manner described in Information Circular 70-6R12, Advance Income Tax Rulings and Technical Interpretations. If your situation involves specific taxpayers and one or more transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments which may be of assistance to you.
Regarding the first part of your question, the Canada Revenue Agency ("CRA") has indicated in the past that a partnership may make an election under subsection 1103(1) if all of the relevant conditions are satisfied. This election provides that a taxpayer may elect to include in Class 1 of Schedule II only those properties that would otherwise be included in any of Classes 2 to 10, 11 and 12 of Schedule II that it has acquired for the purpose of earning income from the same business. SENC would therefore not be able to make this election in respect of all its depreciable property since some property is not included in those classes.
In the scenarios you have presented, certain properties have been subject to the election provided for in subsection 1101(5b.1). That subsection stipulates that each "eligible non-residential building" within the meaning of subsection 1104(2) for which an election is duly made by the taxpayer is included in a separate class.
We are of the view that the making of an election under subsection 1103(1) by a taxpayer does not override the election under subsection 1101(5b.1) and will not nullify its effects. In other words, an election under subsection 1103(1) does not permit the transfer of a property covered by an election under subsection 1101(5b.1), which is included in a separate class, to Class 1 of Schedule II. Consequently, in the scenarios you have presented to us, SENC could elect, under subsection 1103(1), to include in Class 1 of Schedule II, the properties in Classes 8 and 10, but could not include those covered by the election under subsection 1101(5b.1). It should be noted that the CRA has stated in the past that the subsection 1103(1) election does not render ineffective certain rules in section 1101.
In closing, we would like to add that, in our view, this result is not inconsistent with Parliament's intent. In particular, paragraph 1100(1)(a.2), which allows for an additional depreciation rate of 2% when certain conditions are satisfied, is a measure whose objective is to better reflect the harmonization of CCA rates with the useful life of the property covered by that provision. That said, in order for paragraph 1100(1)(a.2) to apply, Parliament expressly required that the election provided for in subsection 1101(5b.1) be made so that each property covered by that election is included in a separate class. In our view, Parliament deliberately provided for this requirement and, by the same token, for the consequences that flow from it.
In addition, the Department of Finance Canada has stated in the past (footnote 3) that the use of separate classes could be used both as a relief measure and as a tool to ensure immediate recapture of CCA upon the disposition of a depreciable property, which could be the case in the scenarios presented.
We hope you find our comments of assistance.
Best regards,
Nancy Deslandes, CPA, D. Fisc.
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-327 (Cancelled) "Capital Cost Allowance - Election Under Regulation 1103 (Archives)", July 5, 1976, No. 1.
2 Although this Interpretation Bulletin has been cancelled, this comment can also be found in paragraph 1.132 of Income Tax Folio S3-F4-C1, "General Discussion of Capital Cost Allowance", February 27, 2019.
3 DEPARTMENT OF FINANCE CANADA, Tax reform 1987 - Reform of direct taxation, June 18, 1987, page 113. https://publications.gc.ca/collections/collection_2016/fin/F2-75-1987-2-eng.pdf