ARCHIVED - Capital Cost Allowance - Buildings or Other Structures

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NO.: IT-79R3

DATE: May 24, 1991

SUBJECT: INCOME TAX ACT
Capital Cost Allowance - Buildings or Other Structures

REFERENCE: Paragraph 20(1)(a) and Classes 1, 3, 6 and 8 in Schedule II to the Regulations (also subsections 1102(5) and (19) of the Regulations)


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Application

This bulletin cancels and replaces Interpretation Bulletin IT-79R2 issued on January 10, 1980 and the Special Release dated January 29, 1982. Current revisions are designated by vertical lines.

Summary

This bulletin deals with buildings and structures for capital cost allowance purposes. Generally, buildings or other structures acquired after 1987 are included in Class 1 (4%) instead of Class 3 (5%). This bulletin defines "building" and "structure" and deals with Classes 1, 3, 6, and 8 in Schedule II of the Regulations to the extent those classes pertain to buildings and structures. It also discusses component parts of buildings or other structures.

Discussion and Interpretation

Meaning of "Building" and "Structure"

1. "Building" is a term of wide range covering any structure with walls and a roof affording protection and shelter. The word "structure" includes anything of substantial size that is built up from component parts and intended to remain permanently on a permanent foundation. This definition of "structure" was considered by the Supreme Court of Canada in British Columbia Forest Products Ltd v. Minister of National Revenue 71 DTC 5178 - {1971} CTC 270 which also concluded that the word "structure" when used in the context of "building or other structure" does not mean only a structure in the nature of a building. Bridges or hydro-electric transmission towers, for example, while clearly not buildings, are structures.

2. Portable shelters such as housing, office and other service units are regarded as buildings if they are installed and intended to remain in a particular location. Such things as tents, canvas marquees and air-supported fabric domes that are not part of a rigid structure are not considered to be buildings or structures.

3. A building or other structure erected on leased land is, by reason of subsection 1102(5) of the Regulations, included in the class that describes the structure and not in Class 13 as a leasehold interest. For example, a bridge built on leased land would fall within Class 1. Subsection 1102(5) of the Regulations is considered to apply to any property referred to in Schedule II of the Regulations which is either a "building" or a "structure", and not just to a "building or other structure" as referred to in Classes 1, 3, and 8.

Class 1 (4%)

4. Ordinarily, buildings or other structures, or parts thereof, acquired after 1987 (except to the extent included in Class 3 where 6(a), (b) or (c) below apply) are included in Class 1 for capital cost allowance purposes. Exceptions to this general rule are structures and buildings specifically included in other classes such as a structure that is manufacturing or processing machinery or equipment (Class 8), a building of frame construction that has no footings or other base support below ground level (Class 6), certain buildings acquired for use in a resource industry (Class 41) or portable camp buildings (Class 10).

5. An addition or alteration to a building is to be included in Class 1 if it is

(a) an addition or alteration to a building included in Class 1, or

(b) an addition or alteration to a building of another class made after 1987 where subsection 1102(19) of the Regulations applies.

Generally, subsection 1102(19) applies to an addition or alteration made to a property that would have been in a different class if the property had been acquired at the time the addition or alteration was made. For example, an addition or alteration made after 1987 to a Class 3 building is included in Class 1 where the building would have been included in Class 1 if it had been acquired at the time of the addition or alteration. However, subsection 1102(19) of the Regulations does not apply to the extent that an addition or alteration is subject to a specific provision in Schedule II of the Regulations such as those described in 7(c) and 9(d) below. Also, see the example in 10 below.

Class 3 (5%)

6. A building or other structure, or part thereof, that is not specifically included in another class is included in Class 3 if acquired (see the current version of IT-50) by the taxpayer before 1988, or before 1990

(a) pursuant to an obligation in writing entered into by the taxpayer before June 18, 1987,

(b) that was under construction by or on behalf of the taxpayer on June 18, 1987, or

(c) that is a component part of a building that was under construction by or on behalf of the taxpayer on June 18, 1987.

7. An addition or alteration to a building is to be included in Class 3 if it is:

(a) an addition or alteration to a building that was included in Class 20 and that would otherwise have been included in Class 3, made during the period that is after March 31, 1967 and before 1988,

(b) an addition or alteration to a building of another class made after December 26, 1978 and before 1988 where subsection 1102(19) of the Regulations applies (see 5 above),

(c) an addition or alteration made after 1987 to a building included, in whole or in part, in

(i) Class 3,

(ii) Class 6 by virtue of subparagraph (a)(viii) of Class 6, or

(iii) Class 20.

The amount included in Class 3 in (c) above is restricted to the total cost of all such additions or alterations to the building (except to the extent included in paragraph (k) of Class 6 (see 9(d) below)) that does not exceed the lesser of

(d) $500,000, and

(e) 25 percent of the capital cost of the building and any addition or alterations made thereto prior to 1988 included in Class 3, 6 or 20.

Any amount that exceeds the lesser of (d) and (e) above falls within Class 1 (see 5(b) above and the example in 10 below).

Class 6 (10%)

8. A building of frame, log, stucco on frame or galvanized or corrugated iron construction is included in Class 6, provided the building meets one of the following criteria:

(a) it was acquired by the taxpayer before 1979,

(b) it is used by the taxpayer for the purpose of gaining or producing income from farming or fishing,

(c) it has no footings or any other base support below ground level,

(d) it was acquired by the taxpayer after 1978 under circumstances where

(i) the taxpayer was obligated to acquire the building under the terms of an agreement in writing entered into before 1979, and

ii) the installation of footings or any other base support of the building was commenced before 1979, or

(e) it was acquired by the taxpayer after 1978 under circumstances where

(i) the taxpayer commenced construction of the building before 1979 and the installation of footings or any other base support of the building was commenced before 1979, or

(ii) the construction of the building was commenced under the terms of an agreement in writing entered into by the taxpayer before 1979 and the installation of footings or any other base support of the building was commenced before 1979.

9. An addition or alteration to a building of frame, log, stucco on frame or galvanized or corrugated iron construction as described in paragraph (a) of Class 6 is included in Class 6 if it is an addition or alteration

a) made before 1979,

(b) to a building used by the taxpayer for the purpose of gaining or producing income from farming or fishing,

(c) to a building that has no footings or any other base support below ground level, or

(d) made after 1978 to a building described in paragraph (a) of Class 6 (other than to a building described in (b) or (c) above) acquired before 1979 to the extent that the aggregate cost of all such additions or alterations to the building does not exceed $100,000 (see the example in 10 below).

If an addition or alteration was made in part in 1978 and in part after that year, the costs incurred after 1978 will not be considered to be made before 1979 for purposes of (a) above. The year that costs will be considered to form part of the cost of the building is discussed in the current version of IT-50.

With regard to the requirements in (d) above, where the cost of an addition or alteration, or the aggregate of costs of additions or alterations to a building exceeds $100,000, the amount that qualifies for inclusion in Class 6 is $100,000. The $100,000 aggregate is the total for all years and is not an annual amount. Where the addition or alteration is made prior to 1988, any amount exceeding $100,000 is included in Class 3 (see 7(b) above). Where an addition or alteration is made after 1987, any amount exceeding $100,000 is included in Class 3, to the extent permitted by paragraph (k) of Class 3 (see 7(c) above) and any amount not included in either Class 6 or Class 3 is included in Class 1 (see 5(b) above).

10. The application of 9(d), 7(c) and 5(b) above is illustrated in the following example:

In 1978 a taxpayer purchased a building of frame construction with base support below ground level for $250,000. The building is used by the taxpayer to earn income from a business that is not farming or fishing. Alterations costing $60,000 were made to the building in 1983. In 1988, an addition costing $150,000 was made to the building.

1978      
Class 6
     
Capital cost of building (see 8(a) above)
    $250,000
1983      
Class 6
     
Alteration to building that falls within paragraph (k) of Class 6 (see 9(d) above)
    $60,000
1988      
Class 6
     
Portion of addition to building that falls within paragraph (k) of Class 6 (see 9(d) above):
     
Maximum of total additions and alterations that falls within Class 6
  $100,000  
Less: alteration made in 1983
  $60,000 $40,000
Class 3
     
Portion of addition to building that falls within paragraph (k) of Class 3 (see 7(c) above):
     
Total cost of addition
  $150,000  
Less: cost allocated to Class 6
  $40,000  
Cost of addition available for Class 3
  $110,000  
The cost of the addition available may only be included in Class 3 to the extent it does not exceed the lesser of:
     
a)$500,000, and
     
b)25% * $350,000 ($250,000 + 60,000 + 40,000)
    $87,500
Class 1
     
Portion of addition to building that falls within Class 1 (see 5 (b) above):
     
Total cost of Addition:
  $150,000  
Less: Cost allocated to Class 6
$40,000    
Cost allocated to Class 3
$87,500 $127,500 $22,500

11. An addition or alteration to a building that is included in Class 20 and that would otherwise have been included in Class 6, made

(a) during the period that is after March 31, 1967 and before 1979 or

(b) after 1978 if the taxpayer was obligated to have it made under the terms of an agreement in writing entered into before 1979

is also to be included in Class 6 by virtue of paragraph (i) of Class 6.

12. A building that has a basic or main supporting structure of wood or wooden timbers is regarded as a building of frame construction. This is so whether its outer sheathing is brick veneer, shingles, clapboard, featheredge, asbestos shingles, aluminum siding, plywood, fiberglass, prefabricated panelling, galvanized, painted or corrugated iron or steel, and whether these materials form the outer walls alone or in combination with insulation and an inner wall, provided that the sheathing material does not form the basic structural support of the building.

13. A building made of logs is considered to be a building of logs regardless of its framework (if any).

14. A building of galvanized iron or corrugated iron construction is one whose exterior construction, including the roof, consists chiefly of galvanized or corrugated iron or steel. Such a building may have a framework of steel girders, be lined with insulation or have interior walls and still qualify. The terms galvanized iron and corrugated iron do not include galvanized or corrugated panels made of any material other than iron or steel; in particular they do not include corrugated aluminum nor do they include a composite type of panel even though it is faced with a thin covering of corrugated steel.

Component Parts

15. For greater certainty, classes 1, 3 and 6 of Schedule II specify that buildings or other structures that fall into those classes also include component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures, elevators and escalators. The particular items cited, however, are not regarded as being an all-inclusive description of component parts of a building. There are other component parts of a building that ordinarily go with the building when it is bought or sold, or that may be purchased separately from the building, but which relate to the functioning of a building. Examples are storm doors and windows, automatic stokers, sump pumps, combination heating and cooling units, and complex fire alarm systems. Such items are included in Class 1, 3 or 6, depending on the type of building and the date of acquisition. Other properties which may be component parts and which are specifically included in other classes, such as certain electrical generating equipment (also see comments in 18 below) fall within the class in which they are specifically included.

16. The term "component parts" as used in Classes 1, 3 and 6 should be interpreted as referring only to those component parts owned by the taxpayer who is the owner of the building of which they are part. It is common practice for one taxpayer to lease to another items which, when installed, become component parts of a building or other structure owned by the lessee but with the lease providing that the leased property remains the property of the lessor. Where this situation exists, the lessor ordinarily is permitted to claim capital cost allowance for the leased property on its own merits (in most cases, under Class 8), rather than as component parts. Where the purported lease of component parts is considered to be a sale, (see the current version of IT-233), component parts are considered to be owned by the lessee and are included in the same class as the building or other structure.

Class 8 (20%)

17. Tanks, vats and hoppers when located outside a plant building but erected on a steel framework or other permanent foundation, although structures, are included in Class 8 if acquired for use in manufacturing or processing. Similarly, the housing and framework for outdoor conveyor systems acquired for use in manufacturing or processing operations are included in Class 8.

18. Property that is attached to a building, however firmly, is included in Class 8 if it is acquired exclusively for those purposes stated in Class 8. For example, concrete footings, foundations and structural steel exclusively for the support of machinery are regarded as Class 8 assets. Stairs and platforms, the sole purpose of which is to provide access to machinery, also fall within Class 8, whether they are attached to the building or the machinery.

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