Category Archives: CCA

020(1)(a), CCA, Income Tax Act, Income Tax Regulations, Tax Court of Canada, Tax Deduction

Capital Cost Allowance Limit Leasing Business – Sas Ansari

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Capital Cost Allowance Limit: Leasing Business OR Income From Property?

Thibeault v The Queen, 2015 TCC 271

At issue was whether the revenue from the Taxpayer’s activities was income from a leasing business or income from property, and therefore whether the limit in ITA Regulations 1100(15) applied to limit the Capital Cost Allowance (CCA) deductible to net leasing revenues.

ANALYSIS

The Income Tax Act does not permit a deduction for capital costs (s 18(1)(b)) other than when calculating income from business or property, in which case such part of the cost as allowed by the regulations is deductible (s 20(1)(a)).

In the ITA Regulations, subsection 1100(1) sets out the permissible deductions for purposes of ITA 20(1)(a), while 1100(15) limits the total deduction for property that is “leasing property” to net revenues from the lease of that property.

“Leasing property” is defined in ITA Regulations 1100(17) as depreciable property (with some exceptions) used primarily to earn gross revenue consisting of rent, royalty, or leasing revenue.  The definition of rent is expanded by 1100(17.2) to include gross revenue from (i) the right to use or occupy property, and (ii) services ancillary to use or occupation of a person of the said property.   This extended definition does not apply where the individual uses the property in a business operated where the person supervises the business personally and continuously (1100(17.3(b)).

The issue, therefore, was whether the individual has a source of income that is a business or property as per the test set out in Stewart v Canada, 2002 SCC 46.

The Federal Court of Appeal in Oke v Canada, 2010 FCA 350, considered the concept of operating a business in subsection 1100(17.3) of the ITA Regulations. The following principles were set out in distinguishing between income from business or property where the revenue generated is by allowing access or use of property:

  • Business income is distinguished from property income on the basis of the level of activity in earning revenues by the taxpayer; Wertman v. M.N.R., [1964] C.T.C. 252, 64 D.T.C. 5158 (Ex. Ct.); Walsh v. M.N.R., [1965] C.T.C. 478, 65 D.T.C. 5293 (Ex. Ct.); Burri v. The Queen, [1985] 2 C.T.C. 42, 85 D.T.C. 5287 (F.C.T.D.) – and the case Canadian Marconi Co. v. The Queen, [1986] 2 S.C.R. 522.
  • The level of activity, to render a source of income business and not property, must be one that goes beyond that which customarily relate to the rental or use of that particular property;

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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079.1, CCA, Definitions, Income Tax Act, Tax Court of Canada

Definition of “Beneficial Owner” In Income Tax

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Definition of “beneficial owner” in Income Tax

568864 BC Ltd v The Queen, 2014 TCC 373

At issue was the time when beneficial ownership of patents was transferred to the Appellant under a security agreement, as required by ITA 79.1(2).

The Appellants lent money and obtained security over patents as part of the loan. The borrower filed for bankruptcy and the appellant seized the patents – which occurs for ITA purposes when the beneficial ownership of all the property is transferred (ITA 79.1(2)).

ANALYSIS

The TCC noted that the phrase “beneficial ownership” is not defined in dictionaries, but that the words are separately defined in The Shorter Oxford English Dictionary:

  • “owner” includes “one who has the right to claim or title to a thing”; and
  • “beneficial” is defined as “of, pertaining to, or having the use of benefit of property, etc”.

The SCC in Covert v Nova Scotia (Minister of Finance), [1980] 2 SCR 774, stated that:

It seems to me that the plain ordinary meaning of the expression “beneficial owner” is the real or true owner of the property. The property may be registered in another name or held in trust for the real owner, but the “beneficial owner” is the one who can ultimately exercise the rights of ownership in the property.

For purposes of Undepreciated Capital Cost, in Wardean Drilling Ltd v MNR, 69 DTC 5194 (Exc. Ct.), the court opined that:

[…] the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk […] although legal title may remain in the vendor as security for the purpose price or as in the commercial practice under conditional sales agreements.

The “incidents of title” test was confirmed by the FCA in Wardean Drilling Co v MNR, [1978] F.C.J. No. 50 (QL); Hewlett Packard (Canada) Ltd v R, 2004 FCA 240; and Morin v R, 2006 FCA 25. See also Prevost Car Inc. v. The Queen, 2008 TCC 231.

The TCC summarized its analysis by stating:

[92] A beneficial owner of property therefore, is someone who is the real owner of the property, a person who is in possession of the property, a person who could derive income from the property or otherwise use it and who is the person who suffers any loss if the property is damaged or destroyed. The beneficial owner is the only person who can dispose of the property in his or her sole discretion without interference.

Therefore, where the person claiming ownership for CCA and UCC purposes exercised the attributes of a true owner, as indicated by the indicia of title and the person’s actions in relation to the property, the person obtains sufficient interest so that the property becomes depreciable property to that person.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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