25 February 1999 Income Tax Severed Letter e9831807.txt - FLOOD ASSISTANCE

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: Tax treatment of Flood Assistance Payments?

Position: Business assistance - assistance in respect of capital expenditures applied to reduce the capital cost of the property. Assistance in respect of current expenditures netted against expenses incurred or included in income and the expenses incurred deducted.

Assistance re personal expenses not subject to any immediate tax consequences and the expenses not deductible.

Reasons: Paragraph 53(2)(k), subsection 13(7.1).

		February 26, 1999

	Winnipeg Tax Services	HEADQUARTERS
	Client Services Division	Wm. P. Guglich
	Business Enquiries	(613) 957-2102

	Attention: Henry Zerbin
		983180
	Tax Treatment of Flood Assistance Payments

This is in response to your request of December 2, 1998, for our views regarding the tax treatment of flood assistance payments received in the following situations:

Situation # 1

A shareholder leases a portion of his land to his corporation which operates a lodge business thereon. A personal residence is located on the remaining portion of the land.

After the 1997 flood, the shareholder applied for and received assistance of $60,000 for flood proofing the property (including the construction of a dyke). The payment was made directly to the contractor. We assume this assistance was received form a government, municipality or other public authority.

Our Views

The amount of the assistance received will be required to be allocated, on a reasonable basis, between the personal and business portions. The nature of the costs related to the business portion of the assistance received must be determined (i.e., current expenses or capital expenditures).

Personal Assistance

The portion of the assistance received that is related to personal expenses would not ordinarily be subject to any immediate tax consequences and the personal expenses would not be deductible.

Business Assistance

Government assistance received in respect of capital expenditures such as a dyke construction or land improvements must be applied to reduce the cost or capital cost of the property (i.e., the dyke or land improvements). The cost or capital cost of the property would be reduced at the time the government assistance is received.

Similarly, assistance payments received in respect of current expenses are ordinarily netted against the expenses incurred. Alternatively, the taxpayer may include, the assistance that relates to current expenses in income and deduct the expenses incurred.

In our view, a permanent dyke for use in a business is a structure. The capital cost of such a structure is included in class 1 of Schedule II of the Income Tax Regulations, by virtue of paragraph (q) of that class. The capital cost of the dyke would include material, labor (other than the taxpayer’s own labor) and overhead costs reasonably attributable to the property, as well as amounts paid to third party contractors. In this respect, please refer to Interpretation Bulletin IT-285R2, Capital Cost Allowance -General Comments. If the dyke is also used to protect personal property (e.g., a taxpayer's residence and adjacent property), a portion of the cost must be allocated, on a reasonable basis, to the personal property.

Situation # 2

A client inquires whether the adjusted cost base of the property can be reduced, instead of including the amount of the assistance in income, where flood assistance is received in the form of loan payments regarding the purchase of real property.

Our Views

As stated above, government assistance received in respect of, or for the acquisition of property must be applied to reduce the cost or capital cost of the property acquired.

We trust our comments will be of assistance.

J. F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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