12 September 1989 Income Tax Severed Letter AC74075 - Cost of Additions to Property

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.

September 12, 1989

Toronto District Office                 Head Office
R. Widner                               John Shaw
Large File Case Manager                 (613) 957-8953
1 98-1-2

19(1)

Further to our memorandum of July 13, 1989, and in reply to your
memorandum of June 29, we have examined the arguments supplied by 
19(1)19(1)   on the above and obtained a legal opinion on the
matter                              24(1)                         
                      from the Department of Justice which
examined both    19(1)   comments and the material you had
previously supplied on the matter.

We remain of the view expressed in our November 22, 1988 memorandum to you, the summary of which remains:

24(1)

23

21(1)(b)

In the event 19(1) asks you for our views of his arguments, our reaction to them was as follows.

24(1)

To 19(1) comment in the first complete sentence on page four of his opinion - that once 24(1) has an interest in the property it need not acquire additional property to have a cost with respect to improvements, we do not disagree. We do disagree with his suggestion that all of the costs paid for by 24(1) represent its cost of additions to the property.

21(1)(b)

The decision in Besney v. The Queen 73 DTC 5592, seems to us to have little to do with the matter at issue. In the Besney matter, the issue was whether a Mr. Besney was entitled to capital cost allowance on the full cost or on 50% of the cost of a building. The court found Mr. Besney's capital cost of the building to be half of rather than all of the cost of the building, based on evidence that Mr. Besney and his co-venturer considered their respective contributions to the cost thereof as being equal. We would have concluded from the documentation that, in the matter at hand,

24(1)

The decisions in George T. Davey and Sons Ltd. v. M.N.R. 61 DTC 109, Lions Equipment Ltd. v. M.N.R. 64 DTC 35 and MHL Holdings Ltd. v. The Queen, 88 DTC 6292 have, in our view, nothing to do with the matter at issue. We are not arguing that no asset was created, or, more precisely, that there was no addition to the cost of an existing asset but, rather, are disputing what portion of the cost represents an addition to the cost of an asset for the taxpayers involved.

The balance of the opinion provided on 24(1) behalf suggests that 24(1) and 24(1) have conclusively established the amount paid by 24(1) for its interest in the mill as evidenced by Article 4 of the Mill Purchase Agreement. In our view, the amount paid by 24(1) for the interest in the mill, and consequently the nature of a portion of the expenditures by 24(1) for upgrading the mill can only be established by reference to the agreements in their entirety.

24(1)               21(1)(b)

At this point, 19(1) may request a meeting. In anticipation of such a request, we wish to make the following comments:

1.        We do not consider that a meeting with us would be very
          useful, but would meet with   19(1)   provided you
          office requests our attendance and also attends the
          meeting.

2.        No Justice Department representative will attend such a
          meeting.

We do not mean to imply that we want a meeting on the matter, but are setting out the basis on which one may be held in the probable event one is requested.

Chief Resource Industries Section Bilingual Services & Resource Industries Division