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.
Principal Issues:
Are deferred leasing costs and leasehold inducement expenses deductible to the parent in the year, the related asset is sold to the subsidiary?
Position:
No, deductible over the years the expenses relate
Reasons:
Inappropriate to allow expenses to be accelerated
961173
XXXXXXXXXX C. Tremblay
Attention: XXXXXXXXXX
May 10, 1996
Dear Sirs:
Re: Deferred Leasing Costs
This is in reply to your letter of March 29, 1996, wherein you requested our opinion on a hypothetical fact situation involving the transfer of a shopping centre from a corporation to a subsidiary corporation at a time when the seller has unamortized lease inducement costs, deferred finance charges and had incurred costs capitalized under subsection 18(3.1) of the Income Tax (the "Act") during the period of construction of the shopping centre.
The situation that is described appears to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.
In our view, it would be inappropriate to allow deferred finance charges and unamortized lease inducement expenses to be accelerated in a non-arm's length sale. Accordingly, the provisions of section 245 may apply to redetermine the tax effects sought.
Although the related leases themselves may be property, the lease inducements and deferred finance charges are not property capable of being transferred under section 85 of the Act. Therefore, they would remain with the transferor corporation and be deducted in the year the amounts would have been deductible had the shopping centre not been transferred to the subsidiary.
Consequently, in our view, lease inducement expenses should be amortized over the years those expenses relate to and the deferred finance charges should be deducted in accordance with the provisions of 20(1)(e) of the Act. Further, in our view, if the provisions of subsection 18(3.1) of the Act applied because certain costs were incurred during the period of construction, such outlay or expense would be included in computing the cost of the building and should have been transferred to the subsidiary corporation.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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