In 2012-0455081I7, the Canada Revenue Agency (CRA) considered costs of constructing a commercial building in circumstances where the land was owned by one company in a corporate group (A Co) and leased to another company in the group (B Co). A Co had engaged an arm’s length contractor to construct the building. B Co paid, and deducted as ordinary expenses, some of the construction costs under a commercial lease agreement with A Co. The Rulings Division of the CRA advised the Audit Division that B Co’s costs would not be deductible expenses, but rather capital outlays governed by the capital cost allowance (CCA) system. The Rulings Division further said that these capital costs would not be included in Class 13 – the general CCA class applicable to “leasehold interests” – if such costs were instead governed by the rule in Reg. 1102(5). The latter essentially deems “a leasehold interest in a building” to be “a building” if the company acquires the leasehold interest because it (i) erected a building or structure on leased land, (ii) made an addition to a leased building or structure, or (iii) made alterations to a leased building or structure that substantially changed the nature of the property. If Reg. 1102(5) is engaged, the associated capital costs are treated not as the cost of “a leasehold interest” (Class 13) but rather as the cost of “a building” (Class 1 in this case).