3 December 1990 External T.I. 901475 F - Treatment of Soft 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.

19(1)

December 3, 1990

Dear Sirs:

This is in reply to your letter dated June 26, 1990 in which you asked for our comments on the interaction of subsection 18(3.4) and paragraph 20(1)(e) of the Income Tax Act (the "Act"). We apologize for the delay in replying your letter.

To illustrate your question, you have provided us with the following hypothetical facts:

-        a principal business real estate corporation (the "Corporation") borrows fund for use in construction of an apartment building;

-         the Corporation is required to pay a set up fee (the "fee") of 1% of the total borrowing;

-         after paying the fee and drawing down the loan, construction begins.

You requested our comments on whether the fee would be subject to the specified percentage deduction contained in subsection 18(3.4) of the Act or to the 20% deduction limit found in paragraph 20(1)(e) of the Act. You also asked whether the answer would be different in a situation where the fee is paid after the construction commences.

Our comments

Before looking at subsection 18(3.4) and paragraph 20(1)(e) of the Act, it is necessary to refer to subsection 18(3.1). Paragraph 18(3.1)(a) requires an expense to be capitalized if it is reasonably regarded as a cost attributable to the period of the construction and relating to the construction. As stated in the 1989 Corporate Management Tax Conference, the Department takes the position that a taxpayer is not required to capitalize pre-construction period costs unless such costs may be considered to be attributable to the construction period and related to the construction activity. Because the Fee is attributable to the loan, and the loan appears to be attributable to the construction period and related to the construction activity, the Fee in this case, even though it is paid before the construction begins, can reasonably be regarded as being attributable to the construction period and related to the construction activity. Under this reasoning, the fee is subject to subsection 18(3.1) of the Act. Since this subsection is an overriding provision, when this subsection applies, paragraph 20(1)(e) does not apply. However, subsection 18(3.4) provides a temporary and limited exception for a principal business corporation, as defined under paragraph 18(3.4)(a). Thus, subsection 18(3.4) applies to a principal business corporation in respect of such a fee and paragraph 20(1)(e) does not apply. Our comments would not differ when such a fee is paid after the construction commences.

We hope the above comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch