1 December 2010 External T.I. 2010-0382041E5 - Capital or Current Expenditure

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.

Principal Issues: Whether expenditures incurred by a taxpayer to put a new roof on a Heritage building would be a capital or current expense.

Position: General comments were provided.

Reasons: The determination of the issue involves a question of fact.

XXXXXXXXXX
							2010-038204
							Charles Rafuse
      						613-247-9237
December 1, 2010

Dear XXXXXXXXXX :

Re: Capital Expenditures or Repairs of a Current Nature

This is in response to your email of September 29, 2010, wherein you requested our opinion with respect to whether expenditures incurred for a new roof would be a capital or current expense.

You have indicated that you own a building designated under the Ontario Heritage Act and are in the process of putting a new flat roof on the building. It is your understanding that a new roof would normally be considered a capital expense, however, you remember reading about a ruling some time ago that replacing the flat roof on a heritage building can be claimed as current expense. Accordingly, you have asked for an opinion of whether the expenditure incurred for a new roof is capital or current expense.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.

There are no fixed rules when determining whether an expenditure is on account of income or on account of capital. The courts often look to what, from a practical and business perspective was the purpose of the expenditure. The jurisprudence suggests a number of guidelines that may be relevant, but also suggests that no one guideline is determinative. The main four guidelines that the courts have identified as being relevant to the determination are "enduring benefit", "maintenance or betterment", "integral part or separate asset" and "relative value". These guidelines, along with some others, are explained in the Canada Revenue Agency's (the "CRA") Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property, at paragraph 4.

Of particular importance to your situation may be the guideline in paragraph 4(b) of IT-128R which gives the example of a roof and provides a discussion on whether the expenditure involves maintenance or a betterment. If a new roof clearly is of better quality and greater durability than the replaced roof, then the expenditure would generally be regarded as capital in nature. On the other hand, if an expenditure only restores the roof to its original condition using identical or equivalent quality materials, this would be an indication that it is current in nature.

In addition, it is mentioned in paragraph 4(b) of IT-128R that in the event that expenditures include both current and capital elements and these can be identified, an appropriate allocation of the expenditures is necessary. Where only a minor part of the expenditures is of a capital nature, the CRA is prepared to treat the whole as being of a current nature.

We have not been provided with sufficient information to comment on whether the expenditures referred to in your letter would be current or capital in nature. However, we would note that you are replacing a roof on a heritage building which leaves the impression that the new roof would not be a betterment, which may be an indication that expenditures relating to the new roof are current in nature.

The above mentioned publications are available on the CRA website at www.cra-rc.gc.ca.

We trust that these comments will be of assistance.

Yours sincerely,

S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch