7 May 2002 Ministerial Correspondence 2002-0129824 - LEAKY CONDO-CAPITAL IMPROVEMENT

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 CCRA.

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

Principal Issues: Basis for considering expenditures incurred in respect of remediation work done on "leaky condominiums" as being on capital account rather than current repairs or maintenance.

Position: Remediation involves improvement to the property beyond its original condition.

Reasons: Guidelines provided in par. 4 of IT-128R. Consistent with previous positions.

May 7, 2002

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Elinor Caplan, Minister of National Revenue, has asked me to reply to your correspondence of March 11, 2002, concerning the tax treatment of expenditures incurred for remediation work done on the building envelope of a leaky condominium.

The Canada Customs and Revenue Agency is responsible for administering the Income Tax Act and strives to carry out this goal fairly and uniformly for all taxpayers.

The Act and its Regulations do not deal specifically with the leaky condominium situation in British Columbia. Moreover, the Act does not define what constitutes a capital expenditure or a repair of a current nature. However, the courts have identified certain factors that should be considered in making such determinations. These factors are explained in Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property. I am attaching a copy of the Bulletin, for your information.

Whether an expenditure is on account of capital, where capital cost allowance may be deducted over the useful life of the property, or income, which is deductible as a current expense, is a determination that can only be made after all the relevant facts of each particular case have been considered. In addition, in order to be entitled to a deduction in respect of capital cost allowance or current expenses, the property must be used in an activity that has a reasonable expectation of profit.

Generally, as indicated in paragraph 4 of the Bulletin, where the result of the expenditure is to materially improve a property beyond its original condition, such as when a new floor or a new roof is replaced by one that clearly is of better quality and greater durability, then the expenditure is regarded as capital in nature. Whether or not the market value of the property is increased as a result of the expenditure is not a major factor in reaching a decision. These guidelines have been thoroughly examined and historically supported by the courts in Canada.

In the case of remediation work done on the building envelope of a leaky condominium, I understand that this would generally involve relying on different construction strategies for the exterior walls of the building in order to control rain penetration in a more effective manner. Such work would result in a material improvement to the property beyond its original condition and would be considered a capital expenditure. However, I would like to mention that the cost of repairing damage to the internal components of a building such as mouldy insulation and rotted framing as a result of water penetration, could generally be considered currently deductible if the repair restores them to their original condition using identical or equivalent quality materials, and does not improve them beyond their original condition.

I trust that the above information will be of assistance.

							Yours sincerely,

							Bill McCloskey
							Assistant Commissioner
							Policy and Legislation Branch

Attachment

Patrick Massicotte
957-9232