17 October 1997 External T.I. 9719995 - CONSTRUCTION COSTS FOR RAILWAY SIDING

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:

Whether an expenditure is a leasehold improvement or an expenditure subject to subsection 1100(8) of the Regulations.

Position:

The expenditure is subject to subsection 1100(8).

Reasons:

The approval of the construction plans by the operator of the railway system, which approval is necessary to obtain service from the operator of the railway system, would amount to an arrangement between Opco and the operator.

J. Gibbons
XXXXXXXXXX 5-971999

Attention: XXXXXXXXXX

October 17, 1997

Dear XXXXXXXXXX:

We are replying to your letter of July 21, 1997, requesting our comments regarding subsection 1100(8) of the Income Tax Regulations (the "Regulations"). Specifically, you inquire whether a $60,000 expenditure is a "leasehold improvement," in which case it can be written off over the remaining lease term, or an expenditure subject to the rules in subsection 1100(8) of the Regulations, in which case it is restricted to an annual deduction of 4% on a declining-balance basis.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, a request for a written opinion on a completed transaction is generally considered by the taxpayer’s local tax services office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following general comments.

According to your letter, a taxpayer ("Opco") has a contract with an independent construction company to build a railway siding up to its place of business. Opco will not own the railway siding. You also indicate that the railway system, which will be servicing the railway siding, was only involved in the construction project to the extent that it had to approve the construction company’s plans before it would agree to service the sidings.

Subsection 1100(8) of the Regulations applies to a situation where a taxpayer has made a capital expenditure pursuant to a contract or arrangement with an operator of a railway system under which a railway siding that does not become the taxpayer’s property is constructed to provide service to the taxpayer’s place of business. In our view, the approval of the construction plans by the operator of the railway system, which approval is necessary to obtain service from the operator of the railway system, would amount to an arrangement between Opco and the operator. Accordingly, it is our view that Opco’s capital expenditures may be accurately characterized as being made pursuant to an arrangement with the operator of a railway system under which a railway siding is constructed to provide service to the taxpayer’s place of business. Therefore, subsection 1100(8) of the Regulations would apply to restrict the deduction of the expenditure to an annual deduction of 4% on a declining-balance basis.

We trust that these comments will be of assistance.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch