21 April 2004 External T.I. 2004-0061651E5 - Interest deductibility; inventory

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 land developers can add interest to the cost of the land

Position: yes

Reasons: longstanding position

		2004-006165
XXXXXXXXXX 	Denise Dalphy, LL.B.
(613) 941-1722
April 21, 2004

Dear XXXXXXXXXX:

Re: Interest Deductibility and Subsection 18(2) of the Income Tax Act (the "Act")

We are writing in reply to your letter dated February 4, 2004 wherein you asked whether a land developer who holds land as inventory and is subject to, but not restricted in deducting an amount by, subsection 18(2) of the Act (because the amount of interest paid or payable in the year is less than the taxpayer's base level deduction for the year) may choose to follow generally accepted accounting principles and add the amount of interest to the cost of the land instead of deducting the interest pursuant to paragraph 20(1)(c) of the Act.

Our Comments

Written confirmation of the consequences inherent in particular transactions are 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. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following general comments.

Interest is not a permissive deduction that may be carried in a pool (like capital cost allowance or certain research and development expenditures) and claimed in years subsequent to when it was paid or payable (depending on the method regularly followed by the taxpayer in computing income) [see, for example, MNR v. Mid-West Abrasive Co Ltd, [1973] C.T.C. 548 (FCTD)]. Thus, if a taxpayer does not deduct an amount of interest in the appropriate year, it may not be claimed in a subsequent year.

Paragraph 5 of Interpretation Bulletin IT-153R3, Land Developers - Subdivision and Development Costs and Carrying Charges on Land, dated October 7, 1991 (the "IT Bulletin") describes the Canada Revenue Agency's (the "CRA") position with respect to the income tax treatment of carrying charges (including interest) by taxpayers who hold vacant land as inventory:

"5. Where the carrying charges on vacant land held as inventory are not limited as a result of the application of subsection 18(2), they nevertheless are subject to other requirements of the Act for deductibility (such as subsection 18(9) or paragraph 18(1)(a) or 20(1)(c)). However, the taxpayer may defer the deduction otherwise permitted for these carrying charges by adding them to the cost of inventory of land, provided this is done on a consistent basis."

Technical interpretation #920018, dated March 31, 1992, provides that the CRA's position described in the aforementioned IT Bulletin also applies to land developers:

"The comments in paragraph 5 of IT-153R3, permitting a taxpayer to add interest otherwise deductible to the cost of vacant land inventory, would also apply to otherwise deductible interest relating to other types of inventory (not only vacant land)."

The foregoing comments represent our general views with respect to the subject matter and they would not apply in cases such as Alberta Wheat Pool and Saskatchewan Wheat Pool v. The Queen (99 DTC 5198). As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate