Section 13quin of the Income Tax Act provides for an allowance on any new and unused buildings or improvements that are used by a taxpayer in the course of a trade. While the heading to section 13quin refers to “commercial buildings” that term is not used in the section itself and is just a useful description for buildings that are used in the course of trade, and could include office buildings, retail stores, warehouses, etc.
To qualify for the allowance the building or improvement must be:
- constructed on or after 1 April 2007;
- new and unused;
- owned by the taxpayer; and
- wholly or mainly used by the taxpayer during the year of assessment for purposes of producing income in the course of the taxpayer’s trade, other than the provision of residential accommodation.
All these requirements must be met to qualify for the deduction.
Not only new and unused buildings qualify but also improvements to any building. For an improvement to qualify it will have to be physically attached, connected or structurally integrated with the building.
The building or improvement must be new which means it must be recently built. It must also be unused. If an allowance is claimed on only an improvement, only that improvement needs to be new and unused.
The taxpayer claiming the allowance must also be an owner of the land on which the building or improvement is constructed. In the case of sectional title, the taxpayer must own a unit in the sectional title scheme.
The building or improvement must be “wholly or mainly used” in producing income in the course of trade. Reference to the word “mainly” means used more than 50% during the year of assessment for the purpose of producing income.
Having met all the requirements, a taxpayer is entitled to an allowance calculated at 5% a year of the cost of the building or improvement. The “cost” is the actual cost to the taxpayer or the arms length direct cost, whichever is less. It does not include the land cost on which the building is erected.
Naturally, the aggregate deductions allowed under section 13quin cannot exceed the cost, and nor can a deduction for a cost be claimed if that cost qualified for a deduction of expenditure under any other provision of the Income Tax Act. When a taxpayer sells the building, the allowance can no longer be claimed.