8 November 1994 External T.I. 9426975 - DEDUCTIBILITY OF TENNANT IMPROVEMENTS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		942697
XXXXXXXXXX					Cal Brown

Attention: XXXXXXXXXX

November 8, 1994

Dear Sirs:

Re: Deductibility of Tenant Improvements

We are writing in reply to your letter of September 29, 1994 regarding the nature of certain expenditures that are incurred by a corporate taxpayer that owns and leases commercial premises to tenants.

We understand that a taxpayer systematically carries out maintenance and repairs and improvement to the taxpayer's building for the purpose of inducing tenants to lease such premises from the taxpayer. You have identified the following as some of the expenditures incurred:

• remove and replace carpets
• replace wiring and electrical outlets, switches etc.
• repair or replace heating ventilation and air conditioning
• remove or install partitions
• replace doors and locks and paint premises

You have asked us to comment on the nature of these expenditures as capital or current expenses and whether or not they may be considered alterations for the purpose of subsection 18(3.1) of the Income Tax Act (the "Act").

The determination of whether an expenditure is capital in nature or is current must be based on the specific facts and circumstances. The aforementioned expenditures which you identified in your letter can, depending on the circumstances, be capital in nature and properly added to the cost of a building or leasehold improvement. It is also possible for such expenditures to be current expenses usually identified as normal repair and maintenance. Generally, it is the Departments auditors who review all the facts and circumstances and make such a determination. However, paragraph 4 of Interpretation Bulletin IT- 128R Capital Cost Allowance - Depreciable Property provides some comments which may be of assistance. This Interpretation Bulletin sets out some of the factors that are to be taken into consideration in the determination of the nature of such expenditures.

Should further assistance be required, you may wish to consult with officials of the local Revenue Canada office concerning the facts and circumstances of a particular case.

With respect to subsection 18(3.1) of the Act, it is our understanding that this subsection was intend to apply to require taxpayers to capitalize so-called "soft costs" during the construction, renovation or alteration of a building. The most common "soft costs" are property taxes and interest. In our view, it is unlikely that this subsection would apply to any of the expenditures that you have identified in your letter, since usually these expenditures would either be normal maintenance and repairs or expenditures that must be capitalized as a part of the building or as a leasehold improvement. There are comments in the 1989 Canadian Management Tax Conference journal at pages 8:11 to 8:17 which discusses Revenue Canada's interpretation of subsection 18(3.1) of the Act.

While the above, in our view, reflects the most likely treatment of the expenditures that you have identified, there can be no assurance that the circumstances in a particular case would not dictate a different treatment, for purposes of the Act, than those set out above.

We trust these comments will be of assistance.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch