ARCHIVED - Leasing Property - Capital Cost Allowance Restrictions

What the "Archived Content" notice means for interpretation bulletins

NO: IT-443

DATE: March 14, 1980

SUBJECT: INCOME TAX ACT
Leasing Property - Capital Cost Allowance Restrictions

REFERENCE: Regulation 1100(15) (and Regulations 1100(16) to (20) and 1101(5c))

1. Regulation 1100(15) limits the amount of capital cost allowance (CCA) that can be claimed on leasing property owned by a taxpayer, other than a taxpayer described in 8 below, so as to prevent him from creating or increasing a loss to shelter non-leasing income. Any comment in this bulletin with reference to leasing property of a taxpayer also applies to leasing property of a partnership.

Leasing Property

2. The term "leasing property" is defined in Regulation 1100(17). Certain properties commented on in paragraphs 11 to 15 below are specifically excluded from the definition of leasing property. Leasing property of a taxpayer is depreciable property of a prescribed class other than

(a) rental property as defined in Regulation 1100(14) (See also IT-195R2),

(b) multiple-unit residential buildings of class 31 or 32 and furniture, fixtures or equipment located within and ancillary to them, or

(c) class 12(n) property, e.g. a certified feature film.

The depreciable property must be used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue. Leasing property does not include a property leased in the ordinary course of selling goods or rendering services under an agreement by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale of the taxpayer's goods or services (e.g. display equipment leased by a manufacturer to a dealer for promoting the sale of the manufacturer's goods is not leasing property).

Paragraph 1100(17.1) of the Regulations was added effective March 10, 1982 to provide that property is leasing property in the year acquired, even though it is not used for any purpose in that year, if the first use of that property was principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue.

3. The word "principally" in the definition of leasing property in Regulation 1100(17) means "primarily" or "chiefly". In establishing whether a depreciable property is used principally for a given purpose, the determining factor is the proportion of time that the property is used for that purpose. Property used more than 50% of the time for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue is considered to be used principally for that purpose. Such revenue includes charter fees and other revenue for the use of a vessel leased to an operator on a "bare-boat" basis.

Separate Class

4. Leasing properties which would otherwise be described in the same class as non-leasing properties are required to be included in a separate class by virtue of Regulation 1101(5c). Regulation 1101(5c) does not apply however to leasing property of a taxpayer exempted from the CCA limitation under Regulation 1100(16). Where the conditions of Regulation 1100(16) are met throughout one year but not in another year it will be necessary to transfer the leasing property into or out of the separate class.

5. The restriction in Regulation 1100(15) does not apply to individual classes of leasing properties if a taxpayer has more than one class, but to the total CCA that may be claimed against all the leasing properties. In determining the maximum CCA that may be claimed on leasing properties, the taxpayer is required to compute separately the aggregate of his income and the aggregate of his losses for the year from renting, leasing or earning royalties from leasing properties and properties that would be leasing properties and properties were it not for Regulations 1100(18) to (20). Such aggregates are computed without regard to paragraph 20(1)(a) so that any recapture of CCA from such properties is included but terminal losses are excluded. The maximum CCA that may be claimed on all the leasing properties cannot exceed the amount by which the aggregate of such income exceeds the aggregate of such losses.

6. A partnership that is subject to the provisions of Regulation 1100(15) calculates the amount of CCA that it can claim under the above rules and allocates the resulting net leasing income or loss among the partners. Where one of the partners also holds leasing property as a proprietor, the CCA limitation will apply in a similar way to his own leasing property. His total income or loss (after expenses but before CCA) on his own leasing property will be combined with his share of partnership leasing income or loss. The partner may then claim CCA on his own leasing properties to the extent of the "combined" leasing income (net of losses), if any.



7. Where a taxpayer acquires a rental property as defined in Regulation 1100(14) and leasing property that is located within or is ancillary to the rental property (e.g. furniture and fixtures or appliances in units of a rental property) for purposes of calculating the amount of CCA limitations under Regulations 1100(15) and (11), an allocation of income between leasing and rental property is necessary where

(a) there are separate and significant rental charges for the use of the leasing property in the lease or rental agreement,

(b) the rent charged to tenants using the leasing property is markedly higher than that charged to other tenants not using such property, or

(c) the capital cost of the leasing property is significant in relation to the capital cost of the rental property.

Generally an allocation of income is not necessary for a tenant's use of kitchen appliances included in all units of a rental property, other appliances or facilities provided for the common use of all tenants, or indoor or outdoor parking areas. Where a flat amount is charged for the use of rental property and leasing property combined, and no allocation of income is considered necessary, CCA may be claimed in respect of either or both properties provided the aggregate CCA claimed does not exceed the combined rental and leasing income.

Principal Business

8. Regulation 1100(15) does not apply, by virtue of Regulation 1100(16), to certain corporations whose principal businesses are renting or leasing of leasing property including property that would be leasing property were it not excluded under Regulations 1100(18), (19) or (20), or the renting or leasing of such property combined with the sale and service of property of the same general type and description. Such a corporation will qualify for exclusion if its gross revenue for the year from such a principal business was not less than 90% of its gross revenue from all sources. The above also applies to a partnership each member of which was a corporation, provided each such partner can meet the above criteria. Interpretation Bulletin IT-371 provides some comments on the meaning of principal business.

9. A corporation or each partner of a corporate partnership must meet the requirements of Regulation 1100(16) for each taxation year in respect of which it claims to be exempted from the CCA limitation. Moreover, these requirements must be met throughout a taxation year and not merely during part of that year.

10. The term "gross revenue" is defined in subsection 248(1). The Department considers that for purposes of Regulation 1100(16)(a) "gross revenue" from the principal business referred to therein includes:

(a) gross revenue from renting or leasing of property described in that Regulation or from the servicing of property of the same general type and description as well as royalty income from all such property;

(b) proceeds from the sale of property described in that Regulation or property of the same general type and description;

(c) interest and other financing charges incidental to the taxpayer's activities set out in (a) and (b) above, other than a money-lending business, and earned in the course of selling or leasing property.

For purposes of the gross revenue test of a corporation where the corporation has an interest in a partnership, it is considered that the gross revenue of the partnership, to the extent of the corporation's profit sharing percentage thereof, flows through to the gross revenue of the corporation. Therefore, the gross revenue of the partnership from a particular source will be included in the gross revenue of the corporation from that source to the extent of the profit sharing ratio.

Property excluded from Leasing Property

11. Property that meets the requirements of Regulations 1100(18), (19) or (20) is excluded from leasing property. Regulation 1100(18) provides the transitional rules since the concept of leasing property and CCA limitation thereon became law on May 26, 1976. It should be noted that Regulation 1100(18) does not apply, however, to property acquired after May 25, 1976 that is an addition or improvement to property excluded from leasing property by virtue of Regulation 1100(18), so that the addition itself may be leasing property. 12. Regulations 1100(19) and (20) deem depreciable property acquired after May 25, 1976 which would otherwise be leasing property not to be leasing property under certain conditions. Regulation 1100(19) deems property not to be leasing property if the property was acquired by "rollover" in the following circumstances:

(a) property disposed of to a Canadian corporation by a shareholder under subsection 85(1) or by a partnership under subsection 85(2),

(b) property transferred under subsection 97(2) to a Canadian partnership by a partner (see Interpretation Bulletin IT-413 entitled "Partnership as "Person" or "Taxpayer" for subsection 97(2)") or property distributed under subsection 98(3) to partners on the dissolution of a Canadian partnership;

(c) property acquired by amalgamation under section 87; or

(d) property acquired under subsection 88(1) by a Canadian corporation on the winding-up of its wholly-owned Canadian subsidiary corporation and the property acquired was, by virtue of Regulation 1100(18), (19), or (20), not a leasing property of the vendor.

13. Regulation 1100(20) deems property not to be leasing property if it is a "replacement property" for property that is lost, destroyed or expropriated or that was a former business property as referred to in paragraphs 13(4)(a) and (b) of the Act and the property replaced was, by virtue of Regulation 1100(18) or (19), not a leasing property.

14. Technically the exemptions provided for in Regulations 1100(19) and (20) are limited to a first "rollover" and a first acquisition of "replacement property". Administratively, however, it is the Department's practice to accept the application of Regulations 1100(19) and (20) to a second and subsequent "rollover" or second and subsequent acquisition of "replacement property" provided all other requirements are met.

15. Where property was excluded from leasing property by virtue of Regulation 1100(18), it is the Department's view that Regulation 1100(19) could apply whether or not the property meets the criteria of a leasing property under Regulation 1100(17). For example, where property acquired prior to May 26, 1976 and not used principally for the purpose of producing leasing revenue is later disposed of to a Canadian corporation under subsection 85(1) which uses it principally for the purpose of producing leasing revenue, the property will not become leasing property to the Canadian corporation by virtue of Regulation 1100(19).

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