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 the owner of a condominium unit held by the owner as a personal use property can capitalize a portion of payments from special assessment to increase the reserve fund.
Position: No. However, when the condominium corporation actually spends the money, if it can be established that the amount expended was capital in nature then the amount could be added to the adjusted cost base of the unit.
Reasons: The law.
XXXXXXXXXX
N. Pulandiran
2012-047174
January 21, 2013
Dear XXXXXXXXXX
Re: Contribution to a Special Reserve Fund
We are writing in response to your letter of November 21, 2012, wherein you requested our views on whether you can add your portion of a special assessment to increase the reserve fund to the capital cost of a condominium unit you own.
You have indicated that you own a condominium unit solely for personal purposes (i.e., it is not rented or otherwise used by you for any income earning purpose) and that the condominium corporation's board requires a special assessment to be paid by the unit holders to ensure that there are sufficient funds in reserve to cover major repairs to the common areas of the condominium property when the need arises.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.
Notwithstanding the foregoing, we are prepared to provide the following general comments that may be of assistance.
As noted in Interpretation Bulletin IT-304R2, Condominiums ("IT-304R2"), the condominium system of ownership in Canada is governed by the applicable provincial or territorial legislation. According to paragraph 2 of IT-304R2, a condominium unit owner normally owns the unit in fee simple and shares ownership of the common areas of the condominium property with all the other unit owners. Further, where the condominium unit is an income-producing property, paragraph 8 of IT-304R2 states, in part, that no deduction or capitalization of expenses in respect of special levy assessed by condominium corporations for costs relating to common elements will be allowed until the expenses are laid out to earn income.
Where a condominium unit is not held as an income producing property (i.e., it is held as a personal use property), the owner of the unit will not be able to deduct any expenses related to the ownership of his or her unit for Canadian income tax purposes. However, if reserve funds are used to make repairs to the common areas that would clearly be capital in nature, the owner could add his or her portion of such amounts to the adjusted cost base of his or her unit when the amounts have actually been expended by the condominium corporation. If the repairs are of a recurring nature that do not extend the property's useful life and serve only to restore it to its original condition, such repairs would not be considered to be of a capital nature and could not be added to the adjusted cost base of the unit.
Whether a particular expenditure is capital in nature or not remains a question of fact. The guidelines the courts have identified as being relevant to such a determination, as well as other guidelines, are more fully explained in paragraph 4 of Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property.
We trust that these comments have been of assistance.
Yours truly,
Michael Cooke, C.P.A, C.A.
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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