7 March 2008 External T.I. 2007-0232611E5 - Site Clean-up Costs

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: Are site clean-up costs deductible if the expenses were incurred when the business has not been operated for 7 or 8 years?

Position: General comments - but not likely deductible based on facts.

Reasons: The law.

XXXXXXXXXX  						Michael Cooke
								2007-023261
March 7, 2008

Dear XXXXXXXXXX :

Re: Oil Tank Removal/Clean-up Costs

We are writing in response to your electronic correspondence of April 23, 2007, wherein you requested our interpretation of paragraph 18(1)(a) of the Income Tax Act (the "Act").

In your correspondence you indicate that as a result of an order by the city an individual was required to pay for the cost of removing an oil tank (and cleaning-up any contaminated land) that was part of a building's heating system. The building was formerly used in a retail business operation that was carried on directly or indirectly by the taxpayer. You also indicate that at the time the expenditures were incurred by the individual, the business operations had ceased and in fact no business operations had been carried on for at least seven or eight years.

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. We are, however, prepared to offer the following comments.

It remains a question of fact as to whether costs incurred to clean-up contaminated land would represent a deductible expenditure described in paragraph 18(1)(a) of the Act or a capital expenditure described in paragraph 18(1)(b) of the Act. In order for an expenditure to be deductible pursuant to paragraph 18(1)(a) of the Act, the taxpayer must be considered to have been carrying on the business during the fiscal period in which the amount was expended. Generally speaking, expenditures made (either voluntarily or in compliance with a legal requirement), to clean-up or reclaim land that was contaminated as a direct result of operating a business would be deductible as a current business expense. However, if the particular expenditure contributes to the value of the land beyond what the land would have been worth in an uncontaminated state, such amounts would generally be considered capital in nature (assuming the land is a capital property).

We trust that these comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch