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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [Tax Interpretations translation] In a given situation, can a special assessment be deductible in computing a taxpayer's income?
Position: It can be deducted or capitalized, depending on the facts, only when the expense has been incurred by a syndicate of co-owners.
Reasons: Legislative analysis.
XXXXXXXXXX
2010-039059
I. Landry, M.Fisc.March 30, 2011
Dear XXXXXXXXXX,
Subject: Special assessment
This is in response to your email of December 15, 2010 in which you requested our comments regarding the deductibility of a special assessment in the situation described below.
You described a situation in which you own a unit in a condominium complex that operates a high-end commercial accommodation business in XXXXXXXXXX. We understand from the facts that you have submitted to us that you do not make any personal use of this unit. You and all of the condominium complex owners have signed a lease agreement with a management corporation operating the condominium complex. In accordance with this lease, all the owners transferred their right to use their unit for a 50% share of the rental income. All other income generated by the condominium complex is for the exclusive benefit of the management corporation. The co-owners, however, remain responsible to the condominium syndicate for the condominium fees for common services of the condominium complex and for payments related to their unit such as municipal and school taxes.
After several years of operation, the management corporation ceased operation of the condominium complex. The syndicate of co-owners considered it to be prudent to take over the operation of the condominium complex. However, having no working capital to operate such a condominium complex, the syndicate retained for a period of 120 days all the revenues generated by the operation of the condominium complex. The amount representing your share of rental income for those 120 days was approximately $7,000. In order to regularize this delay in the payments of the co-owners' share of rental income, the syndicate of co-owners raised a special assessment, corresponding to the amount of the payments of the shares of rental income that were overdue, to serve as working capital for the operation of the commercial accommodation business.
You wish to know if you can deduct that special assessment in computing your income.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Our Comments
It appears to us that the situation described in your letter and hereinafter summarized could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we are able to offer the following general comments that may be helpful to you. It should be noted that the application of one or more provisions of the Act generally requires the analysis of all facts relating to a particular situation. Accordingly, and in light of the fact that your letter only briefly describes a particular hypothetical situation, our comments below may not be fully applicable in a particular situation.
By virtue of article 1672 of the Civil Code of Québec, where two persons are reciprocally debtor and creditor of each other, the debts for which they are liable are extinguished by compensation. Our position in such a situation is to consider that the amount thus compensated does constitute a payment. Consequently, the two taxpayers involved in the compensation are deemed to have made the payment of their respective debts, even if, in fact, no movement of funds has taken place.
In your situation, the syndicate would therefore be considered to have paid to you the amount of $7,000 in payment as your share of the rental income, which should be included in your income as such, regardless of whether or not that amount was paid to you. For your part, you would be deemed to have paid the amount of $7,000 as a special assessment. However, all or a portion of that amount may be deductible in computing your income from property in certain situations.
Usually, a portion of the condominium fees paid by a unit owner are allocated to the condominium corporation's reserve fund for maintenance, repairs, improvements or additions to the common elements. An owner of a unit may also be subject to a special assessment by the syndicate of co-owners for part of the costs of repairs or renovations to the common elements or, as in your situation, for raising funds for working capital. In either case, the expense could be deducted from the owner's income as a current expense or capitalized to the cost of the unit, depending on the nature of the expense. However, no deduction or capitalization of the expense is allowed before the amount is expended by the syndicate of co-owners. As explained in the latest version of Interpretation Bulletin IT-417R2, Prepaid Expenses and Deferred Charges, (available on our website at the following address: http://www.cra-arc.gc.ca/E/pub/tp/it417r2/it417r2-e.html), prepaid expenses or expenses that are paid before they are actually incurred are not deductible in computing a taxpayer's income.
The goods and services tax ("GST") paid or payable in respect of a current expenditure is generally deductible in computing income for the purposes of the Act where the expenditure was incurred for the purpose of earning business or property income. GST paid or payable in respect of inventory or capital property is added to the cost of inventory or capital property, as the case may be. If the input tax credit was claimed in the return filed for the reporting period in which the tax was paid or became payable, that credit would generally be included in income because of subparagraph 248(16)(a)(i) or reduce the cost of capital property acquired under subparagraph 248(16)(a)(i), subsection 13(7.1), paragraph 53(2)(k) and paragraph 12(1)(x)(vi), as the case may be, at the same time as the tax paid or payable in respect of the expenditure or capital property. You will find details on this subject in Interpretation Bulletin IT-273R2, - Government Assistance - General Comments, which you can consult on our website at the following address:
http://www.cra-arc.gc.ca/E/pub/tp/it273r2/273r2-e.pdf.
The question of whether an expense is a current expense or a capital expenditure is, however, one of fact upon which we cannot make a determination. We invite you to consult the Tax Services Office in your area, which will provide you with more information.
Best regards,
Guy Goulet CA, M. Fisc.
for the Director
Ontario Corporate Income Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
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