18 July 1990 Administrative Letter 900816 F - Legal/Accounting Expenses Relative to 21-Year Deemed Realization Rule of Trust

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.

SUBJECT:  Legal and accounting expenses incurred relative to the 21 year deemed disposition rules of a trust

This is in reply to your memorandum of May 10, 1990, concerning legal and accounting expenses deducted by the taxpayer Trust during the 1987 and 1988 taxation years.  The aim of the legal and accounting discussions were to formulate plans to minimize the potential tax on the capital gains that could arise as a result of the 21 year deemed realization rules pursuant to subparagraph 104(4)(b) of the Income Tax Act (the "Act") on the January 1, 1993.

District Office Position

The District Office is of the opinion that the outlays are of a capital nature and are therefore not deductible as provided by paragraph 18(1)(a) and (b) of the Act, and by Interpretation Bulletin IT-99R3.

Taxpayer's position

The taxpayer contends that the accounting and legal fees incurred provided the Trust with tax planning alternatives and advice and assistance regarding distributions by the Trust.  The taxpayer also noted that accounting and legal fees are deductible if made in the ordinary course of business or for the purpose of preserving or maintaining an asset used in the business.  In their view, even though the expenses were not incurred for that purpose, this principle makes it clear that if they were, that the costs incurred to maintain or preserve a capital asset would be deductible.

Our Comments

In the case at hand, the legal and accounting fees expended were not incurred to preserve, acquire or dispose of capital but rather to minimize the tax effect of the 21 year deemed realization rule.   Moreover, the expenditures in question relate to tax planning discussions concerning the minimizing of income taxes and do not relate to any business activity.  Generally, where accounting or legal consultations regarding a deemed disposal of fixed assets are incurred these expenditures are capital in nature. Indeed, unless the tax rules concerning the 21 year deemed disposal of capital property of a trust change, a disposal of fixed assets will occur on January 1, 1993.

Furthermore, the entire planning scheme involves creating new entities and "freezing" the value of the assets currently held by the Trust.  As noted in paragraph 6 of Interpretation Bulletin IT-99R3, legal and accounting fees and other consultation fees relating to the structuring of the transaction are deductible depending on the nature of the underlying transaction (as income or capital).  In our view, since the transactions proposed involve:

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We trust our comments are of assistance

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