ARCHIVED - Pipelines
DATE: September 2, 2003
SUBJECT: INCOME TAX ACT
REFERENCE: Classes 1, 8, 17, 41, 43 and 43.1 of Schedule II to the Income Tax Regulations (the "Regulations") (also subsection 10(1), the definition of "eligible capital expenditure" in subsection 14(5) and paragraph 20(1)(ee) of the Income Tax Act (the "Act"))
Notice to the reader:
This bulletin replaces and cancels Interpretation Bulletin IT-482 dated November 30, 1981 entitled Capital Cost Allowance - Pipelines and the Special Release to that bulletin dated February 28, 1986. While some of the comments are applicable to pipelines in general, regardless of the type of liquid or gas being conveyed, the current version of Interpretation Bulletin IT-476, Capital Cost Allowance-Equipment Used in Petroleum and Natural Gas Activities, should be referred to for information on the capital cost allowance (CCA) classification of pipelines and attachments thereto used in petroleum and natural gas activities.
The effective date of a particular legislative provision discussed in the bulletin may be indicated in the Discussion and Interpretation section of the bulletin. However, where the bulletin is silent with respect to the effective date of a particular provision, such date can be obtained from the legislation itself. Unless otherwise stated, all statutory references throughout the bulletin are to the Act.
This bulletin outlines the various income tax treatments that may be applicable to pipelines and attachments thereto except, as noted above, for those dealt with in the current version of Interpretation Bulletin IT-476, Capital Cost Allowance-Equipment Used in Petroleum and Natural Gas Activities. It also discusses the types of costs that are included in the capital cost of a pipeline.
Generally, pipelines and certain attachments thereto that are depreciable property of a taxpayer are included in Class 1(l). However, in some cases, such property may qualify for inclusion in other classes. Pipes that are a component part of a building, structure or equipment will usually be included in the same CCA class as that of the building, structure or equipment. Attachments to a pipeline that are not considered to be an integral part of the pipeline are included in another class—such as Class 1(n), (o), or (p); or Class 8(i).
In addition, comments on the tax treatment of the cost of a) sewers and water mains for land developers, and b) utilities service connections made by a taxpayer have been also included.
Discussion and Interpretation
Meaning of Pipeline
¶ 1. Although the word "pipeline" is not defined in the Act, it is considered to mean the physical facilities through which liquids (e.g., water and slurry) or gases (e.g., natural gas, nitrogen, oxygen and carbon dioxide) are conveyed. This would include the pipe, valves, control devices and other attachments to the pipe that are considered to be an integral and component part of the pipeline (e.g., its branches, extensions and racks).
¶ 2. Where an attachment to a pipeline is not an integral and component part of the pipeline, it is considered to be separate equipment from that of the pipeline (a "pipeline appendage"). This position is based on the decisions in the court cases British Columbia Forest Products Limited, 71 DTC 5178,  CTC 270 (S.C.C.); Northern and Central Gas Corporation Limited, 87 DTC 5439,  2 CTC 241 (F.C.A.); Nova, an Alberta Corporation, 88 DTC 6386,  2 CTC 167 (F.C.A.); and Pacific Northern Gas Limited, 91 DTC 5287,  1 CTC 469 (F.C.A.). Pipeline appendages generally include equipment such as compressor stations, regulating stations, liquefying and storage facilities, meters, metering stations, hydrants, pumping equipment (e.g., engines, motors, pumps and costs of installation, such as wiring, transformers and special foundations) and pumping stations.
Capital Cost of a Pipeline
¶ 3. The capital cost of a pipeline will include the cost to the taxpayer of the pipeline itself (including the attachments thereto referred to in ¶ 1), as well as the costs of
- clearing, filling and levelling rights of way, and
- excavating and back-filling trenches for the installation of the pipe.
Paragraph (k) of subsection 1102(1) of the Regulations deems that linefill contained in a pipeline cannot be included in any class of depreciable property.
¶ 4. When a pipeline is to be constructed on land owned by another person, it is often necessary to obtain an easement or right of way from the owner of the land, in order to obtain right of access. The cost incurred by a taxpayer to acquire such an easement or right of way will qualify as an "eligible capital expenditure" if the requirements of that definition in subsection 14(5) are met (see the current version of Interpretation Bulletin IT-143, Meaning of Eligible Capital Expenditure). A lump sum one-time payment for damages to crops or property is generally considered to be part of the capital cost of a pipeline.
¶ 5. Subject to the comments in ¶s 6-8, a pipeline that is depreciable property of a taxpayer is generally included in Class 1 by virtue of paragraph (l) thereof. Attachments to a pipeline referred to in ¶ 1 will be included in the same CCA class as that of the pipeline.
Pipeline appendages (see ¶ 2) that are part of the distributing equipment and plant of a distributor of water are included in Class 1(o), whereas those that are part of the production and distributing equipment and plant of a distributor of heat are included in Class 1(p). Pipeline appendages that are part of manufacturing and distributing equipment and plant acquired primarily for the production and distribution of gas will be in Class 1(n) except if they are part of manufacturing and distributing equipment and plant acquired for the purpose of
- producing oxygen or nitrogen, or
- producing or distributing gas that is normally distributed in portable containers.
Pipeline appendages that are not included in Classes 1(n) to (p) will be included in another class—such as Class 8 under paragraph (i) thereof, or Class 43—manufacturing and processing equipment—(if the requirements of that class are met). However, property that qualifies for inclusion in Class 1 cannot be included in Class 43.
¶ 6. Because the preamble of Class 43.1 specifically includes property that would otherwise be included in Class 1 (see ¶ 5), such property that is used in renewable energy and energy conservation activities may be included in Class 43.1 as long as it meets the other requirements of that class.
¶ 7. Subparagraph (l)(i) of Class 10 describes certain property including water pipelines, water pumping stations, water systems, sewers and natural gas pipelines that are acquired for the purpose of gaining or producing income from a mine and providing services to the mine or to a community where a substantial proportion of the persons who ordinarily work at the mine reside. Such property acquired after 1987 will be included in Class 41 rather than Class 10. However, other pipelines acquired for the purpose of gaining or producing income from a mine will be included in Class 1(l) (subject to the comments in ¶ 8).
¶ 8. Pipes for plumbing, heating and air-conditioning equipment which are integral and component parts of a building are included with the cost of the building as property of the same CCA class as that of the building. Similarly, short lines of pipe which form an integral and component part of a structure will be included in the same CCA class as that of the structure (i.e., Class 1(q), 41, 43, 43.1 or 8). In addition, provided that they may reasonably be considered an integral and component part of the equipment, short lines of pipes running between pieces of equipment may be capitalized as part of the cost of the particular equipment. As a result, these short pipes will qualify for inclusion in the same CCA class as that of the equipment. Examples of possible CCA classes that equipment (including short pipes) may qualify for inclusion in, depending on whether the requirements of the class are met, are: Class 41, 43, 43.1 or 8.
Pipelines installed and owned by a taxpayer that run from a building to the boundary of the taxpayer's property, or pipelines which are not an integral part of a building, structure, machinery or equipment, will (subject to the comments in ¶s 6 and 7) usually be included in Class 1(l). However, where the costs of such lines are insignificant, the CCRA will accept their inclusion as component parts of the building.
For a discussion of the CCA classes applicable to buildings including component parts thereof, refer to the current version of Interpretation Bulletin IT-79, Capital Cost Allowance - Buildings or Other Structures.
Note: Appendix C of the Explanatory Notes Relating to Income Tax issued by the Department of Finance with the Notice of Ways and Means Motion tabled in the House of Commons on March 16, 2001 proposes to add a new paragraph (a.1) to Class 17. If this addition is enacted as proposed, production and distribution equipment (other than buildings and other structures) of a distributor of water or steam used for heating or cooling will be included in Class 17 (8% CCA rate) rather than in Class 1 (4% CCA rate). Such equipment includes pipe used to collect or distribute an energy transfer medium, but excludes equipment or pipe used to distribute water that is for consumption, disposal or treatment. The new paragraph will apply to equipment acquired after February 27, 2000 that has not been used or acquired for use prior that date. It is also proposed that a consequential amendment will be made to the preamble in Class 8 to exclude property included in Class 17.
¶ 9. For land developers, the costs of sewers and water mains constitute a component of the cost of the inventory of land for the purposes of subsection 10(1) (see the current version of Interpretation Bulletin IT-153, Land Developers - Subdivision and developments costs and carrying charges on land).
Utilities Service Connections
¶ 10. An amount paid by a taxpayer for pipes that will supply gas, water or sewers to the taxpayer's place of business may be a deduction from the taxpayer's income from a business under paragraph 20(1)(ee), depreciable property included in Class 1(l), or an "eligible capital expenditure", as the case may be.
Paragraph 20(1)(ee) cannot apply if a taxpayer owns or will own the pipe that is used in making the service connection. Title to the pipe sometimes vests in the taxpayer if it is within the boundaries of the taxpayer's property and, if this is the case, the pipe will usually be included in Class 1(l) as depreciable property (see ¶ 8). Where a service connection is made and title to part of it passes to the taxpayer, for example—where a service connection is laid both inside and outside the boundaries of the taxpayer's land and the taxpayer has title only to that part of the pipe which is within the boundaries of the taxpayer's land, a reasonable apportionment of the cost is required and only the portion attributable to the part of the pipe for which title has not passed will be deductible under paragraph 20(1)(ee) (if the other requirements of that provision are met).
Where a taxpayer owns a rental property to which service connections are made, it is a question of fact whether the rental income can be considered to be income from property or income from business (see the current version of Interpretation Bulletin IT-434, Rental of Real Property by Individual). Only if the income is from a business will the costs of the service connection qualify for a deduction under paragraph 20(1)(ee) (if the other requirements of that provision are met).
In addition, the amount paid for a service connection must be made to a person with whom the taxpayer deals at arm's length and that person must also supply the goods or services for which the service connection has been made (although no amount is deductible under paragraph 20(1)(ee) for the cost of supplying those goods or services). Where the cost of a service connection does not qualify for a deduction under paragraph 20(1)(ee), or as depreciable property or inventory (see ¶ 9), the cost may qualify as an "eligible capital expenditure". For further information, see the current version of Interpretation Bulletin IT-143, Meaning of Eligible Capital Expenditure.
Explanation of Changes
The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised interpretations.
Reasons for the Revision
We have revised the bulletin to reflect various amendments to Classes 1, 2, 10, 24 and 28 that have been enacted since the date of the last bulletin and before the date of this bulletin, as well as to include the new Classes 41, 43 and 43.1 and new paragraph (k) in subsection 1102(1) of the Regulations. The proposed addition of paragraph (a.1) to Class 17 as announced by the Department of Finance on March 16, 2001 is also indicated.
Legislative and Other Changes
Since the bulletin has been expanded to discuss various tax treatments that may be applicable to pipelines, its title has been changed accordingly.
Classes 2, 10, and 28 referred to in the former bulletin have been updated to reflect the current applicable CCA classes. Comments in ¶s 2, 5, 6, and 8 of the former bulletin dealing with the CCA classification of pipelines and pipeline appendages used in petroleum and natural gas activities have been deleted as they are discussed in the current version of Interpretation Bulletin IT-476, Capital Cost Allowance -Equipment Used in Petroleum and Natural Gas Activities.
An Index, Application Section (part of former ¶ 1) and Summary Section (part of former ¶ 1) have been added to the bulletin.
In ¶ 2 (part of former ¶ 3), references to court cases have been added which support the position that an attachment to a pipeline that is not an integral and component part of the pipeline will be considered as separate equipment from that of the pipeline.
¶ 3 (formerly ¶s 4 and 7) has been changed to indicate that, because of a legislative amendment, linefill in a pipeline can no longer be treated as depreciable property.
New ¶ 4 contains comments on the tax treatment of payments made to obtain an easement or right of way on land owned by another person.
In ¶ 5 (parts of former ¶s 2 and 3), a discussion has been added on the inclusion of pipeline appendages in Classes 1(n), (o) and (p), and on property that can and cannot be included in Class 43.
New ¶ 6 indicates that property which qualifies for inclusion in Class 1 may be included in Class 43.1 if the other requirements of that class are met.
¶ 8 (parts of former ¶s 3 and 9) no longer includes the CCA classes for buildings, but instead refers the reader to Interpretation Bulletin IT-79, Capital Cost Allowance - Buildings or Other Structures for that information. The treatment of pipes forming a component part of a building and equipment has been extended to pipes forming a component part of a structure. The proposed addition of paragraph (a.1) to Class 17 is indicated in the italicized note below ¶ 8.
New ¶ 10 provides a discussion on the tax treatment of pipes that are used to provide utility service connections.
Throughout the bulletin, we have made minor changes for clarification or readability purposes and deleted comments that are no longer applicable.
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