23 October 1991 Internal T.I. 912759 F - Application of Subsection 78(1) to Costs of Contruction Capitalized to Inventory

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.

Dear Sirs:

Re:  Application of Subsection 78(1) to Costs of Construction Capitalized to Inventory

This is in reply to your letter dated September 6, 1991, requesting our interpretation of the applicability of subsection 78(1) of the Income Tax Act (the "Act") to the costs of construction capitalized to inventory in the hypothetical situation outlined below.

The given facts follow:1.

2.      24(1)

3.     24(1)

5.     

Although you have asked for a technical interpretation, the situation presented appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling.  However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including company names and identification numbers) to the appropriate District Office for their comments.  We are however prepared to provide some general comments.

Our Comments

Paragraph 5 of Interpretation Bulletin IT 109R outlines the Department's administrative position that outlays and expenses in respect of inventory are not considered to be deductible outlays or expenses for the purposes of subsections 78(1) and (2).

It is generally conceded that "deductible" means capable of being deducted.  Therefore an amount is considered to be deductible in the year it is capable of being deducted. If an amount is added to the cost of inventory, and the addition is not elective in nature, the outlay or expense is not considered to be "deductible". If the taxpayer has no option as to whether or not to deduct an expense, that is, he must capitalize the outlay, the amount will not be considered to be deductible' and section 78 would not apply. For example, while subsection 18(3.1) may prohibit the deduction of costs relating to the construction of a building, the specified deductions allowed by subsection 18(3.4) would be considered "deductible" for purposes of section 78 even if the taxpayer chose to forgo the deduction and capitalize these costs.

Paragraph 9 of Interpretation Bulletin IT-109R states that in ordinary circumstances, where a debtor and non-resident creditor filed a prescribed agreement within the time limits prescribed by paragraph 78(3)(b) (now paragraph 78(1)(b)(i)) of the Act, the Department will not levy a penalty in respect of withholding tax requirements, provided that the amount withheld is remitted on or before the fifteenth day of the month following the month in which the election is filed.  In ordinary circumstances, this policy would be extended to remittance requirements under section 215 of the Act.

I trust these comments will be of assistance to you.

Yours truly,

E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.: Vancouver District Office J.C. Fitz Clarke Business Enquiries Section 148-13