19 August 1993 External T.I. 9322075 F - Capitalization of Interest

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Capitalization of Interest

We are writing in response to your letters of June 29 and August 4, 1993 in which you requested our comments in respect to the application of section 21 of the Income Tax Act Canada (the "Act") to certain situations. In this regard we offer the following general comments.

Where interest expense has been incurred in a year in respect of borrowed money and an amount in respect of that borrowed money is expended in a subsequent year to acquire depreciable property and an election is made in that subsequent year pursuant to either 21(1) or 21(2), as the case may be, in respect of the interest on the borrowed money, subsection 21(5) of the Act will have application to require that any such reassessments of tax, interest or penalties shall be made as are necessary to give effect to the decrease in the interest deduction claimed in those previous years by virtue of that interest being capitalized.

In a situation where monies are borrowed to repay accrued interest on outstanding debt it is our opinion, that interest on borrowed money used to pay the accrued interest would not qualify as being in respect of, borrowed money used to acquire the depreciable property or in respect an amount payable for the depreciable property for purposes of subsection 21(1) of the Act, or borrowed money used for the exploration, development or acquisition of property, as the case may be, for purposes of subsection 21(2) of the Act.

Where an election was made in a year and no election is made in the immediately following year or an election is made, but for an amount less than the total amount of the costs incurred in the preceding year in respect of the borrowings used to acquire the depreciable property in that preceding year, no election may be made in future years in respect of that portion of the borrowing expended in that preceding year.

Where an amount is expended, in respect of borrowed money, to acquire depreciable property in a year and an amount is also expended in the following year to acquire additional depreciable property and an election is made in respect of that initial year pursuant to subsection 21(1) of the Act, the failure to elect under subsection 21(1) with respect to the second year expenditures should not preclude an election under subsection 21(3) of the Act for years subsequent to the initial year, subject to above comments.

A taxpayer may elect pursuant to subsection 21(1) of the Act to capitalize whatever portion of the eligible costs of borrowed money he chooses. Once the election is made, paragraphs 20(1)(c), (d), (e) and (e.1) do not apply to the amount or to part of the amount specified in the election. Therefore separate elections can be made for each amount deductible under paragraph 20(1)(c), (d), (e) or (e.1), as the case may be.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch