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: We have been asked about the basis for considering whether expenditures incurred in respect of the replacement of a roof are on account of capital or a current expense (repairs).
Position. General comments were provided
Reasons: The determination of the issue involves a question of fact.
XXXXXXXXXX 2003-003903
M. Eisner, CA
October 29, 2003
Dear XXXXXXXXXX:
Re: Capital Expenditures or Repairs of a Current Nature
This is in reply to your letter dated September 9, 2003, concerning the above-noted subject.
Your concern relates to a situation where a taxpayer replaced a badly deteriorated roof of a building which is used in the course of carrying on a business. You have indicated that, over the years, successive layers of roofing materials were added over the preceding deteriorated layer. During the current year, these were all removed and replaced with two layers of a rubber membrane.
The issue is whether the related costs incurred during the current year should be capitalized as part of the cost of the asset or treated as being deductible as repairs.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Further, as indicated in paragraph 15(e) of the circular, we do not rule where the major issue is whether an amount is on account of income or capital. Where the transactions are completed, as in the above situation, the enquiry, along with the relevant information, should be submitted to your local Tax Services Office for their views. However, we are prepared to provide you with the following general comments which may be of assistance.
Based on relevant case law, the CCRA has outlined its position in paragraph 4 of Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property (enclosed) on the factors that should generally be considered when determining whether an expenditure is capital in nature (where property was acquired or improved) or currently deductible (because it is in respect of the maintenance or repair of a property). Such determinations require a review of all the relevant facts of each particular case.
Of particular importance to your situation may be the guideline in paragraph 4(b) of IT-128R which gives the example of a roof and provides a discussion on whether the expenditure involves maintenance or a betterment. If a new roof clearly is of better quality and greater durability than the original condition of the replaced roof, then the expenditures would generally be regarded as capital in nature. On the other hand, if an expenditure only restores the roof to its original condition using identical or equivalent quality materials, this would be an indication that it is current in nature.
In addition, it is mentioned in paragraph 4(b) of IT-128R that in the event that expenditures include both current and capital elements and these can be identified, an appropriate allocation of the expenditures is necessary. Where only a minor part of the expenditures is of a capital nature, the CCRA is prepared to treat the whole as being of a current nature.
We have not been provided with sufficient information to comment on whether the expenditures referred to in your letter would be current or capital in nature. However, we would note that the last sentence of your letter leaves the impression that "similar new materials" could have been used to replace the roof, which may be an indication that expenditures relating to the new roof are capital in nature.
We trust that our comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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