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:
CLEAN-UP COSTS SUBJECT TO 18(1)(A) OR 18(1)(B)
Position TAKEN:
18(1)(B) APPLIES
Reasons FOR POSITION TAKEN:
CLEAN-UP TO PRESERVE OR PROTECT PROPERTY OR BUSINESS IS CAPITAL
May 23, 1995
Calgary District Office Resource Industries
G. Hoard Section
Assistant Director, Audit B. Rankin
(613) 957-8974
Attention: Roger Sanson
7-951033
Reclamation and Environmental Clean-up Costs
This is in reply to your memorandum of April 10, 1995 concerning XXXXXXXXXX for environmental clean-up expenditures incurred in the period 1990 - 1991.
Facts
XXXXXXXXXX
XXXXXXXXXX Views
As summarized in the submission, XXXXXXXXXX is of the view that the clean-up costs are an expense in determining income. The decisions for Gold Bar Developments Ltd. v. Her Majesty The Queen, 87 DTC 5152 (FC-TD) and Oxford Shopping Centres Ltd. v. Her Majesty The Queen, 79 DTC 5458 (FC-TD) are given as support for the business expense character of the clean-up and as support of the contention that Generally Accepted Accounting Principles are not applicable to require that the costs be treated as capital for tax purposes, respectively.
XXXXXXXXXX argues that the clean-up costs were incurred as an expense of "running" the business.
XXXXXXXXXX
In addition it was suggested that as a matter of policy, the Department treats reclamation expenditures as being current expense.
XXXXXXXXXX also argues that according to IT-128R paragraph 4(b) expenditures made to restore property to its original condition are considered to be current expense.
Audit's Position
1.Gold Bar Developments Ltd. v. Her Majesty The Queen, 87 DTC 5152 (FC-TD) and IT-128 can be distinguished from the XXXXXXXXXX clean-up in that Gold Bar and IT-128 each address matters related to depreciable property. The clean-up expenditures considered at the present time are incurred in respect of
XXXXXXXXXX
2. XXXXXXXXXX
3. XXXXXXXXXX
4.IT-200 paragraph 5 states that payments in respect of damage to land used in farming are capital.
5.Paragraph 53(2)(m) and IT-350R paragraph 4 require that a cost to investigate a site which may be considered to be deductible under paragraph 20(1)(dd) of the Act and also included as a cost of land is excluded from the adjusted cost base for the land under 53(2)(m) of the Act. This suggests that if the expenditure does not qualify under paragraph 20(1)(dd) of the Act, it should be treated as a capital cost of the land.
6.The Income Tax Act includes specific provisions regarding the deductibility of expenditures concerning vacant land. For example, subsection 18(2) requires acquisition interest and property taxes on vacant land, that exceeds the gross revenue from the land, to be capitalized. Paragraph 20(1)(aa) which provides a deduction for certain landscaping costs is a second example.
7.IT-467R paragraph 6 states that a payment on account of damages is generally considered to be capital if the payment represents the acquisition of a capital asset, an enduring benefit is created or the payment was made to preserve of protect a capital asset.
8. XXXXXXXXXX
9.Revenue Canada has determined that a landlord's costs to remove asbestos are considered capital in nature rather than current expense. The apparent grounds for this position were that removing the asbestos bettered the host building and avoided future litigation.
10.Generally Accepted Accounting Principles, in the absence of an over-riding provision in the Income Tax Act apply to determine the treatment for an expenditure for tax purposes. Her Majesty the Queen v. Metropolitan Properties Co. Ltd., 85 DTC 5128 (FC-TD) supports following the GAAP treatment of the costs.
11.A distinction should be made between the context of the 1993 comments made by the Minister of Finance. Reclamation costs are the costs directly attributed to an earnings process and such costs are considered to be expense because the business activity that caused the environmental damage was carried on by the same party that incurred the clean-up costs.
12. XXXXXXXXXX
13.Paragraph 18(1)(b) is applicable to the clean-up and removal costs
XXXXXXXXXX
14.The fact that the costs were not discretionary does not affect their character as capital.
We agree with your proposal to treat the 1990 and 1991 XXXXXXXXXX property clean-up costs as capital and are substantially in agreement with your stated reasons. The following additional comments may be of some assistance to you.
A.The costs considered in Gold Bar Developments Ltd. v. Her Majesty The Queen, 87 DTC 5152 (FC-TD) and comments in IT-128 paragraph 4 regarding capital or expense treatment of costs incurred in respect of depreciable property both relate to depreciable property, as you correctly pointed out. One other distinction between the above and the
XXXXXXXXXX
the test in paragraph 18(1)(a) that the cost must be incurred for the purpose of gaining income from XXXXXXXXXX business or property may be satisfied. Please see the commentary in "D" regarding the clean-up costs as an amount incurred to preserve the land or the rental business.
Please see our comments in (A) starting on page 4 of our April 13, 1995 memorandum to the North York District Office (attached) concerning reclamation cost incurred for the purpose of earning income from business.
IT-128 paragraph 6 states that when a building is demolished without having been used to earn income, it is not normally considered to qualify as depreciable property and the cost of the building is not depreciated. IT-485 paragraph 6 comments that costs incurred to demolish buildings that are incidentally acquired with land will form part of the cost of the land.
XXXXXXXXXX
In Sutson Limited v. Minister of National Revenue, 53 DTC 108 (TAB) an amount paid to satisfy the unpaid expenses incurred by the previous owner of a newly acquired business were found to be capital. This decision supports the view that the clean-up of a pre-existing condition is capital under paragraph 18(1)(b) of the Act even in circumstances where the business continues under the new owner.
B.IT-350R paragraph 6 states that certain site investigation costs that do not qualify for the paragraph 20(1)(dd) deduction may be deductible as ordinary and recurring business costs. Costs with respect to vacant land are primarily capital unless they qualify for deduction under a specific provision of the Income Tax Act. Whether the cost was incurred as a direct result of or incidental to a business operation of the taxpayer would have to be determined from the circumstances.
C.Our April 13, 1995 response to the North York District Office may include additional support for the assertion that
XXXXXXXXXX
the removal and clean-up costs would have been considered to be capital. In particular, Ounsworth (Surveyor of Taxes) v. Vickers, Limited (1915) 3 K.B. 267 comments that the character of channel dredging costs is not affected by their having been deferred for a substantial period of time.
XXXXXXXXXX
D.IT-476R paragraph 6 states that a payment on account of damages is considered to be capital in nature if the expenditure is made to preserve or protect a capital asset. Also see Freda Hoffman v. Minister of National Revenue, 92 DTC 2290 (TCC) pages 2291 and 2292, Dominion Natural Gas Co. Ltd. v. Minister of National Revenue, 1 DTC 499-133 (S.C.C. 1947), Farmers Mutual Petroleums Ltd. v. Minister of National Revenue, 67 DTC 5277 (S.C.C.), and Strassburger Insulation Limited v. Minister of National Revenue, 88 DTC 1356 (TCC) by analogy, as support for the position that clean-up costs incurred to preserve or protect an asset are considered to be capital.
It is arguable that the clean-up cost is related to XXXXXXXXXX business or property such that paragraph 18(1)(a) of the Act does not apply. However, paragraph 18(1)(b) of the Act will apply to deny the 1990 and 1991 deductions because the clean-up was a once and for all expenditure, on account of capital, that was made to preserve or protect the asset or business.
If you have any questions or would like to discuss the above questions in more detail, please contact the writer.
Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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