2 May 2007 Internal T.I. 2007-0231881I7 - Clearing and Levelling Land - Farming

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: Does section 30 of the Act, which permits as a current deduction amounts paid for clearing and levelling land in a farming business, override subsection 18(3.1) which otherwise requires such amounts to be capitalized in certain circumstances (i.e., when related to the construction of a building and attributable to that period).

Position: No.

Reasons: The express wording of the preamble to subsection 18(3.1), when read in conjunction with the preamble to section 30, indicates that subsection 18(3.1) takes precedence. Accordingly, amounts that might otherwise be deductible pursuant to section 30 may be restricted, and required to be capitalized, if the circumstances described in paragraph 18(3.1)(a) exist.

								May 2, 2007

	TORONTO WEST TSO					HEADQUARTERS
								Income Tax Rulings
		   						Directorate
	Attention:  Peter Gilkinson			James Atkinson CGA
(519) 457-4832

								2007-023188

Clearing and Levelling Land - Farming

This is in response to your e-mail of April 17, 2007 inquiring about land clearing expenditures incurred in the course of a farming business.

The facts as you have described them are that:

1. The corporate taxpayer raises XXXXXXXXXX on a commercial basis and is engaged in a business of farming as defined in subsection 248(1) of the Income Tax Act ("Act").

2. During XXXXXXXXXX the taxpayer incurred expenditures to clear and level land for the purpose of building XXXXXXXXXX new barns, a residence and a gravel driveway.

3. The taxpayer paid XXXXXXXXXX respectively for the clearing and levelling of land and the construction of the gravel driveway.

4. The XXXXXXXXXX new barns, residence and gravel driveway were constructed over the XXXXXXXXXX period in which the expenditures described in 3 were incurred.

5. A farm manager who is an employee of the business occupies the residence.

6. The taxpayer capitalized the costs for accounting purposes and deducted the clearing and levelling costs for tax purposes relying on section 30 of the Act.

Your question is whether subsection 18(3.1) of the Act, which requires capitalization of certain "soft costs", overrides section 30 which otherwise provides for a current deduction of these expenditures in computing the income of a farming business. In other words, your question concerns whether subsection 18(3.1) can apply to the amounts that are deductible by virtue of section 30.

Our Comments:

Subsection 18(3.1) of the Act provides a general rule, applicable to all taxpayers, that restricts the deduction, and requires the capitalization or inclusion in the cost of a building being constructed, renovated or altered, of certain outlays or expenses, often referred to as "soft costs", that are otherwise deductible in computing income. The outlays or expenses consist of the costs attributable to the period of the construction, renovation or alteration of the building and relating to such construction, renovation or alteration and of the costs attributable to that period and relating to the ownership of associated land described in subparagraphs 18(3.1)(a)(i) and (ii). By way of exception, subsection 18(3.1) does not apply to an amount deductible under paragraph 20(1)(a) (capital cost allowance), (aa) (landscaping of grounds) or (qq) (disability-related modifications to buildings) or subsection 20(29) (generally, amounts offset by rent).

Sections 26 through 37 of the Act provide special rules relating to the computation of income under Part I of the Act. Section 30 of the Act provides a special rule, which permits a taxpayer, who is carrying on the business of farming, to deduct in computing income from that business, amounts paid for clearing or levelling land or installing a land drainage system for the purpose of carrying on such business. Clearing or levelling land for this purpose includes brushing and breaking land, (i.e., clearing the land of brush, trees, roots, stones etc. and the initial ploughing for the purpose of putting the land into productive use). Section 30 of the Act effectively ensures the deductibility of certain costs where such costs would not otherwise be deductible but would generally be considered an integral part of the cost of land. Useful comments regarding section 30 can be found in Interpretation Bulletin IT-485, Cost of Clearing or Levelling Land.

The wording of subsection 18(3.1) and section 30 must be analysed in order to determine which of the two provisions override the other. According to its preamble, section 30 would permit the deduction in computing income from a farming business of certain costs "Notwithstanding paragraphs 18(1)(a) and (b)...". On the other hand, according to its preamble, subsection 18(3.1) would apply to add to the cost of a building constructed, renovated or altered certain soft costs that are otherwise deductible "Notwithstanding any other provision of this Act ... ". In our view, this express wording indicates that subsection 18(3.1) overrides section 30. Accordingly, amounts that would otherwise be deductible under section 30 must be capitalized pursuant to subsection 18(3.1) if the conditions of subsection 18(3.1) are otherwise met and the amounts do not fall within the exceptions noted above (e.g., landscaping costs deductible under paragraph 20(1)(aa)).

In the situation described, the costs incurred relate to three items, namely, (1) the land associated with the construction of the barns, (2) the land associated with the residence, and (3) the gravel driveway. In our view, subsection 18(3.1) may apply to the costs (otherwise deductible) incurred in respect of the land associated with the construction of the barns and residence that were attributable to the period of the construction of those buildings. Similarly, to the extent that the gravel driveway relates to the construction of those buildings and is necessary for the use or the intended use of the buildings, subsection 18(3.1) may apply to amounts expended that were attributable to the period of construction of those properties and that are otherwise deductible.

We trust that these comments will be of assistance.

Yours truly,

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