Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: The proper classification of computer hardware and software comprising a building automation system.

Position: Question of fact, generally Class 1(q) or Class 8(b)(i).

Reasons: The type of property and the use of the property will be relevant in the determination of whether it meets the requirements of a specific class.

									November 10, 1999

XXXXXXXXXX  TSO						Resource Industries Section
XXXXXXXXXX 						A. Seidel
XXXXXXXXXX 					(613) 957-8974

									992263

Classification of Building Automation System

This is in reply to your memorandum dated August 16, 1999 in which you requested our views with respect to the classification of a building automation system for capital cost allowance ("CCA") purposes.

Background

XXXXXXXXXX

Issue

For CCA purposes, is the computer operated BAS included in Class 1(q) or Class 8(b) of Schedule II of the Regulations?

TSO's Position

The new BAS is a component part of the building that is included in Class 1(q) of Schedule II of the Regulations for CCA purposes and not included in Class 8(b) of Schedule II of the Regulations as "tangible property attached to a building and acquired solely for the purpose of servicing, supporting, or providing access to or egress from, machinery or equipment". The TSO's position is based on the following:

(a) Interpretation Bulletin IT-79R3 ("IT-79R3") indicates that certain component parts such as electrical wiring, plumbing, sprinkler systems, air conditioning equipment, heating equipment, lighting fixtures, elevators and escalators are considered to be part of a building and that this list should not be regarded as being an all-inclusive description of component parts of a building. IT-79R3 also indicates that this list should not be 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.

(b) In a February, 1991 opinion, the Department indicated that "[T]he fact that the modular wiring system units are interchangeable and movable is not by itself sufficient to exclude it as a component of a building. It is our view that where the modular wiring system is owned by the taxpayer who also owned the building, the modular wiring system would be considered an integral part of the building necessary for effective functioning and should be included in Class 1, 3 or 6 ...".

(c) In a November, 1992 opinion, the Department indicated that "[I]n this regard, we would consider a building as consisting of property and components, i.e. electric wiring, plumbing, sprinkler systems, air conditioning, heating equipment, lighting fixtures, etc., that are related to the functioning of the building."

(d) The change in the BAS reflects the increased capabilities of computer systems to monitor and perform a variety of tasks. The fact that what is happening involves computer software and computer boards does not take away from the fact that this is a "component" of a building. The law is a living law that must reflect updated standards. The standards for building automation systems now includes the type of system installed by XXXXXXXXXX.

XXXXXXXXXX Position

XXXXXXXXXX has hired XXXXXXXXXX to review the classification of its fixed assets. They do not agree with the TSO's assertion that the new BAS, notwithstanding that it consists of computer hardware and software, is a component part of the office building. It is their view that the new BAS satisfies the requirements of paragraph (b) of Class 8 of Schedule II of the Regulations for the following reasons:

(i) Paragraph 18 of IT-79R3 states that "[P]roperty 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".

(ii) In our July, 1999 letter to XXXXXXXXXX, it is noted that a situation could arise where an asset could fall into either Class 8 or Class 1 of Schedule II of the Regulations, but only if the property is specifically described in Class 8 (except paragraph (i) thereof). The letter then goes on to state that if a property can fall into both Class 1 and Class 8 (except by virtue of paragraph (i) thereof) of Schedule II of the Regulations, then the taxpayer would have the choice of including the property in either class.

(iii) The new BAS can be included in Class 8 of Schedule II of the Regulations specifically by virtue of either paragraph (b)(i) or (b)(ii) thereof. With respect to paragraph (b)(i), the function and purpose of the BAS is to support the operation and control the operation of the mechanical and electrical equipment in the office building. The tangible property is attached to the building but is acquired solely for the purpose of "servicing, supporting, or providing access to or egress from, machinery or equipment".

(iv) XXXXXXXXXX believes that it is the Department's view that the word "servicing" in paragraph (b)(i) of Class 8 can include property "which was acquired solely to enable the machinery or equipment to function more efficiently". (This is a quote from C. Chouinard's letter to XXXXXXXXXX in August, 1996). It is their view that this is exactly true of the BAS and associated equipment which provides a more energy efficient operation of controlled electrical and mechanical equipment in a building.

(v) XXXXXXXXXX also submits that the BAS can be included in Class 8 of Schedule II of the Regulations by virtue of paragraph (b)(ii) as it is tangible property attached to a building and is an adjunct and ancillary equipment to emergency generators in the building used to produce electricity for use by customers (tenants). This is supported by factual evidence as part of the Appeals Books under the Excise Tax Act, presented to and accepted by the Supreme Court of Canada - viz: Royal Bank of Canada v. Minister of National Revenue - 1981.

(vi) The BAS, or a portion thereof, apparently also qualifies for treatment in Class 43.1(a)(iv) of Schedule II of the Regulations as ancillary equipment to the emergency generators which themselves qualify for inclusion in Class 43.1(a)(i) of Schedule II of the Regulations.

(vii) Notwithstanding the TSO's assertion that the "law is a living law that must reflect updated standards", the law in this instance is very clear as to what goes into Class 1 and what goes into Class 8. It is XXXXXXXXXX XXXXXXXXXX view that what the standards for a BAS are now, as opposed to what they were in the past, is not relevant where the property involved can specifically fit into, in this case, Class 8.

(viii) The BAS under review was acquired long after the building was built. The supplier-installer-contractor advertised it in its literature as a wholly independent asset. The new BAS was sold and installed in the office building as an asset with its own identity separate from the assets which it monitors and/or controls. The elements of the BAS are comprised of programmable microprocessors having all the qualifications comprising the definition of "data processing equipment" in subsection 1104(2) of the Regulations and appears reasonably to qualify for Class 10 treatment, subject to the paragraph (f) exclusion. Accordingly, the BAS could also qualify for inclusion in Class 8 of Schedule II of the Regulations by virtue of paragraph (i).

(ix) The classification of the BAS as a Class 8 asset (at a minimum), also appears to be consistent with Revenue Canada's policies as contained in "Interpretation Bulletin IT-472, Class 8 Property".

Analysis

Generally, the appropriate classification of depreciable property for purposes of Schedule II of the Regulations is determined by reference to the particular property and all of the relevant facts applicable to a specific situation.

On page 2 of your memorandum you indicate that the BAS "works with all the various components of the building feeding information into computer boards located on certain floors of the building. These computer boards update a personal computer located in a control room." You state that these computer boards replaced the central controls previously operated by hand and located on each floor of the office building. You also indicate that the control room could be located away from the building all together and connected to the particular building via modem.

The August 11, 1999 XXXXXXXXXX letter states that the BAS can be included in Class 8(i) or (ii), Class 10 if paragraph (f) does not apply or Class 43.1. They argue that it fits into Class 8(i) because it is tangible property attached to a building that is acquired solely for the purpose of "servicing, supporting, or providing access to or egress from, machinery or equipment", that it fits into Class 8(ii) because it is tangible property attached to a building acquired solely for the purpose of manufacturing and processing "electricity", that it fits into Class 10(f) because the "elements of the BAS are comprised of programmable microprocessors having all the qualifications comprising the definition of "data processing equipment" in Regulation 1104(2), and appears reasonably to qualify for Class 10 treatment, subject to the paragraph (f) exclusion" and that the BAS, or at least a portion thereof, qualifies for Class 43.1 as ancillary equipment to the emergency generators.

It would appear to us that there could be two separate assets, the tangible property attached to the building (the computer boards located on the various floors of the office building) and the computer hardware and software that receive the information from these computer boards in a control room, which may or may not be located in the same building as the remainder of the BAS.

If the computer hardware and software can be treated as a separate asset, and this is a factual determination based on your review of the entire BAS system, then, as stated in our previous correspondence to XXXXXXXXXX, this computer hardware and software may be classified in various classes pursuant to Schedule II of the Regulations. Paragraph (f) of Class 10 includes certain general-purpose electronic data processing equipment, as defined in subsection 1104(2) of the Regulations, and systems software therefor. However, Class 10 also provides that in the situation where the general-purpose data processing equipment is described in any of subparagraphs (f)(i), (ii), (iii), or (iv), then this equipment would be excluded from Class 10. This type of equipment could only be included in Class 8 pursuant to paragraph (i) thereof. Therefore, to the extent that the computer hardware and software can be considered to be a separate asset from the BAS itself, and to the extent that it falls within the exclusion in paragraph (f) of Class 10, the computer hardware and software would be included in Class 8 pursuant to paragraph (i) thereof.

On page 2 of your memorandum you indicate that "[T]he system works with all the various components of the building feeding information into computer boards located on certain floors of the building." If your review of the BAS concludes that the computer hardware and software is not a separate asset from the overall system, then the entire system will be included in the same class for CCA purposes.

Paragraph (iv) of Class 43.1 includes property that is "control, feedwater and condensate systems and other equipment, where that property is ancillary to equipment described in subparagraph (i), (ii) or (iii) ...". In paragraph "5." of the August 11, 1999 letter from XXXXXXXXXX they state that "[T]he BAS, or a portion thereof, apparently also qualifies ... as ancillary equipment to the emergency generators which would themselves qualify as Class 43.1(a)(i) assets." However, paragraph (a)(i) of Class 43.1 requires that the property be "electrical generating equipment .. used primarily for the purpose of producing heat energy to operate the electrical generating equipment". It is our understanding that the emergency generators would not meet the "used primarily" test in paragraph (a) such that none of the BAS would qualify as "ancillary equipment" includable in Class 43.1.

Paragraph (q) of Class 1 includes "a building or other structure, or part thereof, including component parts ...". Class 8 was amended as part of the 1987 tax reform (P.C. 1997-1033, SOR/97-377) to exclude property that is described in Class 1 from qualifying for inclusion in Class 8 applicable to any property acquired after 1987. Therefore, notwithstanding the fact that the BAS may be property described in paragraph (b) of Class 8, if the BAS is a component part of a building as described in paragraph (q) of Class 1, then it is specifically excluded from Class 8.

XXXXXXXXXX

The argument put forth in the XXXXXXXXXX letter is that the function and purpose of the BAS is to support the operation, and control the operation, of the mechanical and electrical equipment in the building. It is also their argument that "servicing" can include property "acquired solely to enable the machinery and equipment to function more efficiently".

Subparagraph (b)(ii) of Class 8 requires that the tangible property be acquired "solely" for the purpose of "manufacturing or processing". The use of the BAS in a rental property would not satisfy this requirement.

Given the examples in paragraph 4 of Interpretation Bulletin IT-472, it is our view that the "support" being referred to is physical support, such as footings and foundations, for machinery or equipment and that the BAS could not be said to provide such physical support for machinery or equipment.

Webster's Ninth New Collegiate Dictionary defines "servicing" as follows: to provide services for; to repair or provide maintenance for; to perform any of the business functions auxiliary to production or distribution. In previous correspondence with the XXXXXXXXXX representative it was also suggested that it could include the acquisition of property "solely to enable the machinery

or equipment to function more efficiently". In the context of the BAS, operating and monitoring the lighting, fire alarm and heating and air conditioning equipment of a rental building is simply a change in the method of operating and monitoring this equipment which may or may not result in an improvement in efficiency. Generally, we would not consider using computers to operate what was previously operated by hand as "servicing" of machinery or equipment within the usual meaning of the word.

Conclusion

If the computer hardware and software can be considered to be a separate asset from the remainder of the BAS then it would appear that it would be included in Class 8 by virtue of paragraph (i). The remainder of the BAS would be included in Class 1 by virtue of paragraph (q) as a component part of the building.

If the entire BAS is determined to be one asset, then the BAS would be a property included in Class 1 by virtue of paragraph (q) as a component part of the building. None of the BAS qualifies for inclusion in Class 8 pursuant to paragraph (b) or Class 43.1 pursuant to subparagraph (a)(iv).

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

If you wish to discuss any of the above, or if we can be of any further assistance, please contact the writer.

Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch