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: How are the costs incurred for planning, clearing and maintaining a cross country ski trail treated for tax purposes?
Position: Question of Fact. Some costs will likely qualify for inclusion in Class 17 of Schedule II of the Regulations in this case.
Reasons: The tests laid out in the Mont-Sutton case will determine the appropriate tax treatment. The criteria in Mont-Sutton are satisfied with respect to the planning and clearing activities and these costs will qualify as "surface construction" within paragraph (c) of Class 17 in Schedule II of the Regulations.
2005-011130
XXXXXXXXXX Luisa A. Majerus, CA
(613) 957-2138
February 14, 2005
Dear XXXXXXXXXX:
Re: Treatment of Expenses - Cross Country Ski Trails
This is in reply to your email dated January 13, 2005, in which you requested our views concerning the tax treatment of amounts incurred in respect of planning, clearing and maintaining land to be used as cross-country ski trails. You indicated that much of the expenditures involve labour costs.
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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following general comments.
Subject to specific exceptions, the cost of clearing, levelling or draining land is an outlay on account of capital.
Class 17 of Schedule II of the Income Tax Regulations (the "Regulations") provides a deduction, pursuant to paragraph 20(1)(a) of the Income Tax Act (the "Act"), for that part of the capital cost of land that meets the requirements of that class. Paragraph (c) of Class 17 of Schedule II of the Regulations includes property that would otherwise be included in another class that is, amongst other things, a sidewalk, a parking area, certain types of roads or any "similar surface construction".
In the case of Mont-Sutton vs. The Queen (99 DTC 5733), the Federal Court of Appeal considered the issue of "similar surface construction" in the context of Class 17 and concluded that "similar surface construction" occurred in any situation where the following three criteria are satisfied:
1. The land or property, which, as a result of the transformations or work performed, should display a clearly discernable change in configuration. This change in configuration should go beyond a mere clearing or levelling and should be readily distinguishable from another property in its natural state.
2. The land or property must occupy a circumscribed space, identifiable as such, and the surface construction must be visible and, to varying degrees, require the addition of some material in order to fulfil the function for which they were intended.
3. The land or property is subject to wear and tear such that they have a recurring need for and cost of maintenance to retain their identity and purpose.
In the Mont-Sutton case, it was determined that the ski slopes built by the taxpayer met these criteria, and that the work required to build the ski slopes, including the demarcation of the slope and the elimination of natural obstacles, went beyond the clearing and levelling stage, such that the ski slopes were "surface construction" similar to those enumerated in paragraph (c) of Class 17 of Schedule II of the Regulations.
Whether the construction of a cross-country ski trail or the construction of a particular ski slope is included in paragraph (c) of Class 17 of Schedule II of the Regulations will be determined after reviewing all of the facts applicable to the particular situation. Generally, where the criteria enumerated above can be satisfied, the amount will be amortized as permitted by paragraph 20(1)(a) of the Act.
It is our view that the labour costs incurred to plan and clear the cross-country ski trails may likely satisfy the three criteria set out in Mont-Sutton, supra, to be included in Class 17 of Schedule II of the Regulations. However, unless the Act requires otherwise, generally, the on-going maintenance costs are running expenses that can be deducted against business income in the year incurred.
We trust this information is helpful.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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