26 November 1999 Internal T.I. 9929427 - CAPITAL VS. CURRENT EXP.

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: Repair of Leaky Roof Condos in B.C. Whether capital or current expense?

Position: As new roof probably of better quality, to avoid future leaky roof problems, likely to be capital. However any apart that is restored to same quality (e.g., walls) would be current expense.

Reasons: Paragraph 4 of IT-128R.

		November 26, 1999

	Vancouver Tax Services Office	HEADQUARTERS
	Business Hotline	Wm. P. Guglich
(613) 957-2102
	Attention: Gord Brown
		992942

Capital vs. Income Issues

This is in response to your request of November 9, 1999, for our views regarding the following two issues:

1. Many condominium complexes built on the west coast of British Columbia in the last ten years have now started leaking through the roof. It has not been determined whether the problem results from poor construction codes or poor construction practices. The cost of repairing these buildings ranges from $20,000 to $60,000 for each individual condominium owner. The issue is whether this type of outlay is a current expenditure or a capital outlay. You have been making taxpayers aware of the guidelines in IT-128R, but have not provided any further guidance.

2. You have also received queries relating to the tax treatment of outlays for web pages on the Internet.

Our Views

We agree with your approach that inquirers should look to IT-128R for guidance. Where the leaking condominium is used to earn income from a business or property, paragraph 4 of IT-128R sets out guidelines that may be used in determining whether an expenditure is capital in nature because depreciable property was acquired or improved, or whether a current expense was incurred because it is in respect of maintenance or repair of a property.

It would appear that in order to ensure that "leaking roof" problems are prevented in the future, the expenditures related to the roof repairs would be such that the new roof is of better quality and greater durability. If this is the situation in a particular case, such expenditures would likely be capital in nature.

In other situations expenditures may result in a roof of better quality and greater durability, and the walls being restored to their original condition. In such a case, it may be possible to treat the roof expenditures as capital in nature and the wall expenditures as current expenses, and make the appropriate allocation.

Where the amount of the expenditure is very substantial in relation to the total value of the condominium see paragraph 4(d) of IT-128R, which provides comments regarding the amount of the expenditure in relation to the value of the whole property or in relation to previous average maintenance and repair costs.

The determination in a particular case can only be made after all the facts and details have been established and reviewed. This determination cannot be made in advance.

In order that we may respond to your second question regarding the tax treatment of outlays for web pages on the Internet, we would require information and details regarding the specific expenditures incurred, including a breakdown of the costs. In addition, we would need a full description of and the nature of any right or other property acquired.

We trust our comments will be of assistance.

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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