21 May 1992 Internal T.I. 9210827 F - Pre-Production Expenses & 24(1)

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.

May 21, 1992

S. McKenzie,Business and General DivisionChief of AuditVancouver District Office

Attention: Heather Johnson

Business Audit Section 144 14 Pre-production Expenses

This is in reply to your memorandum of March 30, 1992 (no attachments received) concerning the correct treatment of the pre-production expenses of a 24(1) You ask if GAAP allows the taxpayer to defer their pre-production expenses in this manner and thereby extend the life of loss carry forwards.

Our Comments

The Department's position with respect to pre-production or start-up costs is set forth in paragraph 6 of Interpretation Bulletin IT-417R where it states, "Pre-production or start-up costs of a new business, to the extent that they are not capital outlays, must be claimed in the year in which they are incurred." 

Similarly, IT-364 in paragraph 7, states, "After a business has commenced, all expenditures that are recognized for purposes of the Income Tax Act and that were made in respect of the business are to classified in the usual way as being expenses incurred for the purpose of earning income or as outlays on account of capital. Expenses incurred for the purpose of earning income normally are deductible in the year when incurred.....". See also paragraph 5 of IT-417R concerning "deferred charges". Note the reference to expenses providing benefits in subsequent years. It is our view that this is a reference to expenses that generally accepted accounting principles require be claimed in accordance with the matching principle and not to the day-to-day operating expenses of maintaining a 24(1) which would not yield any definite benefit in subsequent years.

24(1)

However, as stated in the paragraph on pre-production costs, actual pre-production costs must be claimed in the year in which they are incurred. In this respect the following items were considered "start-up costs" when they were incurred prior to an official opening (i.e. prior to actual income earning production): Management fees, Stenographic services, Professional fees - accounting, Legal fees and disbursements not related to the acquisition of land or other assets, Interest on loans for construction purposes, Insurance and taxes, Printing and stationery, Travel and promotion, Employee training prior to start-up. See also, the comments in the old Assessing Guide at page 12-102 under heading (c) relating to activities that necessarily must be carried on if operations are to ensue.

In addition to the foregoing, it is the Department's position that the initial cost of the 24(1) is considered to be a capital expenditure that is added to the cost of land. The cost of replacement plants is, of course, considered to be a deductible expense. In closing we note that the Tower case referred to in your memo is an example of a deferred charge as described in paragraph 5 of IT-417R and the Canadian Glassline case appears to deal with a non-deductible capital outlay.

We trust these comments are of assistance.

E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch