9 June 1999 External T.I. 9913805 - MOVING AND PRE BUSINESS EXPENSES

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:

An accountant has requested an interpretation of the deductibility and/or capital treatment of costs incurred prior to purchase of a farming business.

Position TAKEN:

Not enough information, but from what is provided and from IT-364 the business has not commenced. Also based on sections 62 and 64.1, the individual is not eligible to deduct moving expenses.

Reasons FOR POSITION TAKEN:

Question of fact when the business operations commence. General guidelines are in IT-364.

XXXXXXXXXX 5-991380
D. Miller
Attention: XXXXXXXXXX

June 9, 1999

Dear XXXXXXXXXX:

Re: Deductibility and/or Capital Treatment of Certain Items

This is in reply to your letter of May 13, 1999, regarding an interpretation of the treatment of certain expenditures incurred by an individual in acquiring a farming operation based on two distinct fact situations.

In the first situation, an individual, a resident of the Netherlands, makes two preliminary visits to Canada with a real estate agent with the objective of purchasing a farm. In the process, a number of expenses (air fare, car rental, accommodation) are incurred. A third and final flight and other costs of moving (container, immigration) are incurred. All costs are incurred in the farm’s initial fiscal year.

In the second situation, all the facts are the same except the preliminary visits take place in years other than the initial filing of the farming operation.

Our Comments

The situation described in your letter appears to involve actual completed transactions with identifiable taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.

Generally, in order for amounts expended to be eligible as moving expenses, they must relate to a move or moves within Canada and not to a move from outside of Canada to Canada (exceptions to this rule include certain students and deemed residents pursuant to section 250 of the Income Tax Act). As you do not appear to meet the exceptions just described, we are of the view that the amounts expended cannot qualify as eligible moving expenses.

The determination of when a business commences is a question of fact that can only be determined after reviewing all the relevant facts and information. Paragraph 2 of Interpretation Bulletin IT-364, Commencement of Business Operations, provides general comments on when a contemplated business becomes an actual business. It states that “Where an activity consists merely of a review of various business possibilities in the expectation or hope that information will be obtained to justify going into business of some kind, such an activity does not represent the commencement of a business”. It also states that “it is the Department’s view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations”.

Paragraph 6 of IT-364 provides comments regarding the Department’s treatment of expenditures prior to the commencement of operations. It states that “Expenses in respect of a proposed business that are incurred prior to the commencement of the business do not constitute a business loss or a non-capital loss and thus cannot be applied against income in the year the expenses were incurred, and cannot be carried back to be applied against income of the preceding year or forward to be applied against income of any subsequent year. If capital assets are acquired for a business before the business commenced, are later used in the business and are not used for some other purpose in the meantime, the capital cost of the assets is the amount that it would have been had the business been operating when the assets were acquired.”

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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