5 June 2006 Internal T.I. 2006-0167321I7 - Demolition Costs

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.

Principal Issues: Whether costs to demolish an old building that had been used by the taxpayer for many years to earn income are deductible in the year or whether these costs must be added by virtue of subsection 18(3.1), to the cost of the new building that the taxpayer plans to use to earn rental income.

Position: Question of fact. In this particular case the costs of demolition of the old building would be deductible.

Reasons: Par. 11 of IT-285R2

							June 5, 2006

	Gerard Poirier				HEADQUARTERS
	Team Leader, Audit			Tim Fitzgerald, CGA
	Québec TSO					(519) 973-7999 ext. 6509

							2006-016732

Deductibility of costs of demolition

We are responding to your email message of December 29, 2005 wherein you requested clarification regarding comments made in CRA interpretation letter 2004-008220. We apologize for the delay in replying to you.

In your email you cite the following sentence from CRA interpretation letter 2004-0082201:

"The cost of demolition and any costs attributable to the period of the construction of the new building, such as interest paid on borrowed money used for the period of construction, must be added to the cost base of the property pursuant to subsections 18(3.1) and 18(3.2) of the Act."

You also cite in your email, our comments in paragraph 11 of IT-285R2 - Capital Cost Allowance General Comments, which reads as follows:

"If an old building used by a taxpayer for a long time to earn income is demolished to build a new one, the cost of demolition is not considered to be part of the capital cost of the new building (unless the taxpayer so desires), but may be deducted as an expense in the year."

From your email, we understand that the taxpayer's situation is as follows:

The taxpayer is a private corporation resident in Canada. For several years, the taxpayer owned and operated a XXXXXXXXXX and owned an adjoining XXXXXXXXXX that was operated by a subsidiary, which leased it from the taxpayer.

In XXXXXXXXXX, the taxpayer demolished the old XXXXXXXXXX and adjoining XXXXXXXXXX and had a new building constructed at the site. The new building is rented out to an unrelated party, which runs a XXXXXXXXXX business there.

The taxpayer deducted the costs of demolition of the old buildings in computing its income for tax purposes for the year XXXXXXXXXX.

Your Question:

You have asked whether in this situation, our comments in CRA interpretation letter 2004-0082201 or our comments in paragraph 11 of IT-285R2 would apply in respect of the taxpayer.

Our Comments:

The tax treatment of demolition costs, whether on income or capital account, would depend on the circumstances of the particular case under review.

As indicated in paragraph 8 of IT-285R2, if subsections 18(3.1) to (3.7) of the Income Tax Act are applicable in a given situation, then certain costs (generally referred to as "soft costs") attributable to the period of, and relating to, the construction of a new building, such as interest paid on borrowed money used for the period of construction, must be added to the cost of the building. However, if as described in paragraph 11 of IT-285R2, the actual facts and circumstances are such that an old building that was used by a taxpayer for a long time to earn income is demolished to build a new one, the cost of demolition is not considered to be part of the capital cost of the new building (unless the taxpayer so desires), but may be deducted as an expense in the year.

Although few details are available regarding the case you are reviewing, based on the facts listed above, in particular the fact that the taxpayer used the building for "several years" for the purpose of earning income, we conclude that the building was demolished when it was old. If in fact so, it would appear that paragraph 11 of IT-285R2 would apply to the taxpayer in your case; accordingly, the taxpayer may, in computing its income for the year, deduct costs incurred in the year to demolish the old XXXXXXXXXX and the old XXXXXXXXXX .

We trust these comments are of assistance.

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch