DATE: May 21, 1985
SUBJECT: INCOME TAX ACT
Capital Cost Allowance - Depreciable Property
REFERENCE: Paragraphs 20(1)(a) and 13(21)(b) (also Regulations 1102(1))
This Bulletin replaces and cancels Interpretation Bulletin IT-128 issued on October 29, 1973. Revisions of substance are designated by vertical lines.
1. The classes of property described in Part XI of the Regulations and in Schedule II in respect of which capital cost allowances are deductible under paragraph 20(1)(a) in computing income do not include property that was not in fact acquired by the taxpayer or property listed in Regulation 1102(1), a partial list of which includes
(a) property the cost of which is deductible in computing the taxpayer's income.
(b) property that is described in the taxpayer's inventory.
(c) property that was not acquired for the purpose of gaining or producing income.
(d) property that was acquired by an expenditure in respect of which the taxpayer is allowed a deduction under section 37.
(e) property that was acquired after November 12, 1981 that is
(i) a print, etching, drawing, painting, sculpture, or other similar work of art, the cost of which to the taxpayer was not less than $200,
(ii) a hand-woven tapestry or carpet or a handmade appliqué, the cost of which to the taxpayer was not less than $215 per square metre,
(iii) an engraving, etching, lithograph, woodcut, map or chart, made before 1900, or
(iv) antique furniture, or any other antique object, produced more than 100 years before the date it was acquired, the cost of which to the taxpayer was not less than $1,000,
other than property that was acquired from a person with whom the taxpayer was not dealing at arm's length (otherwise than by virtue of a right referred to in paragraph 251(5)(b)) at the time the property was acquired if the property was acquired in circumstances where the provisions of Regulation 1102(14) were applicable, and other than property described in (i) or (ii) above that was created by an individual who was a Canadian, as defined by Regulation 1104(10)(a), at the time the property was created.
(f) property that is a camp, yacht, lodge or golf course or facility acquired after December 31, 1974 (subject to the transitional rules in Regulation 1102(17)) if any outlay or expense for the use or maintenance of that property is not deductible by virtue of paragraph 18(1)(l) (also see IT-148R2).
(g) property in respect of which a capital cost allowance for the purposes of paragraph 20(1)(a) is claimed and permitted under Part XVII of the Regulations by a farmer or fisherman.
2. Capital cost allowance may only be claimed in respect of capital expenditures made in respect of property owned by the taxpayer or in which the taxpayer has a leasehold interest. In this connection it is important to note that in computing the income of a partnership, subsection 96(1) and Regulations 1102(1a) require that partnership property (including depreciable property) be accounted for as if it were owned at the partnership level.
3. In most instances, where a taxpayer incurs a cost in respect of a capital asset, ownership of or a lease to that asset will be obtained either at the time the cost was incurred or at a later date. However, there may be circumstances in which neither a freehold nor a leasehold interest in the property is acquired. If a taxpayer constructs and incurs the cost of a structure on land owned by another person, or otherwise incorporates an asset into property owned by another as an integral part thereof, and does not have a leasehold interest in or ownership of the asset, capital cost allowance may not be claimed in respect of such property. This will be the case where a road providing access to a taxpayer's plant is built at the taxpayer's expense on land owned by a municipality. Also, capital expenditures for architectural and engineering services in preparing plans and estimates for new plants, or for additions to existing plants or other construction work of a capital nature, are not subject to capital cost allowance if the work for which the plans and estimates were prepared is not carried out. However, an expenditure of this nature may be an eligible capital expenditure (defined in paragraph 14(5)(b)) for which an allowance is permitted by virtue of paragraph 20(1)(b) of the Act (see IT-143R2).
4. The following guidelines may be used in determining whether an expenditure is capital in nature because depreciable property was acquired or improved, or whether it is currently deductible because it is in respect of the maintenance or repair of a property:
(a) Enduring Benefit - Decisions of the courts indicate that when an expenditure on a tangible depreciable property is made "with a view to bringing into existence an asset or advantage forthe enduring benefit of a trade", then that expenditure normally is looked upon as being of a capital nature. Where, however, it is likely that there will be recurring expenditures for replacement or renewal of a specific item because its useful life will not exceed a relatively short time, this fact is one indication that the expenditures are of a current nature.
(b) Maintenance or Betterment - Where an expenditure made in respect of a property serves only to restore it to its original condition, that fact is one indication that the expenditure is of a current nature. This is often the case where a floor or a roofis replaced. Where, however, the result of the expenditure is to materially improve the property beyond its original condition, such as when a new floor or a new roof clearly is of better quality and greater durability than the replaced one, then the expenditure is regarded as capital in nature. Whether or not the market value of the property is increased as a result of the expenditure is not a major factor in reaching a decision. In the event that the expenditure includes both current and capital elements and these can be identified, an appropriate allocation of the expenditure is necessary. Where only a minor part of the expenditure is of a capital nature, the Department is prepared to treat the whole as being of a current nature.
(c) Integral Part or Separate Asset - Another point may have to be considered is whether the expenditure is to repair a part of a property or whether it is to acquire a property that is itself a separate asset. In the former case the expenditure is likely to be a current expense and in the latter case it is likely to be a capital outlay. For example, the cost of replacing the rudder or propellor of a ship is regarded as a current expense because it is an integral part of the ship and there is no betterment; but the cost of replacing a lathe in a factory is regarded as a capital expenditure because the lathe is not an integral part of the factory but is a separate marketable asset. Between such clear-cut cases there are others where a replaced item may be an essential part of a whole property yet not an integral part of it. Where this is so, other factors such as relative values must be taken into account.
(d) Relative Value - The amount of the expenditure in relation to the value of the whole property or in relation to previous average maintenance and repair costs often may have to be weighed. This is particularly so when the replacement itself could be regarded as a separate, marketable asset. While a spark plug in an engine may be such an asset, one would never regard the cost of replacing it as anything but an expense; but where the engine itself is replaced, the expenditure not only is for a separate marketable asset but also is apt to be very substantial in relation to the total value of the property of which the engine forms a part, and, if so, the expenditure likely would be regarded as capital in nature. On the other hand, the relationship of the amount of the expenditure to the value of the whole property is not, in itself, necessarily decisive in other circumstances, particularly where a major repair job is done which is an accumulation of lesser jobs that would have been classified as current expense if each had been done at the time the need for it first arose; the fact that they were not done earlier does not change the nature of the work when it is done, regardless of its total cost.
(e) Acquisition of Used Property - Where used property is acquired by a taxpayer and at the time of acquisition it requires repairs or replacements to put it in suitable condition for use, the cost of such work is regarded as capital in nature even though, in other circumstances, it would be treated as current expense.
(f) Anticipation of Sale - Repairs made in anticipation of the sale of a property or as a condition of the sale are regarded as capital in nature. On the other hand, where the repairs would have been made in any event and the sale was negotiated during the course of the repairs, or after their completion, the cost should be classified as though no sale was contemplated.
5. The Department's practice with respect to a taxpayer who deals in a particular kind of property and who also uses that kind of property for some other purpose is discussed in IT-102R2.
6. Where a taxpayer purchases real estate including a building and the building is torn down within a relatively short time after purchase, the question arises as to whether the building should be classed as depreciable property. If the building is demolished by the purchaser without having been used to earn income, the building cannot be regarded as depreciable property. Also, where the building is used to earn income for only a short time prior to demolition, it is not regarded as depreciable property unless the taxpayer can clearly establish that the prime intention on acquiring the building was for the purpose of gaining or producing income. The Department's practice with respect to the costs of demolishing a building incidentally acquired on obtaining a site is discussed in IT-485.