1 December 1989 Ruling 74291 F - Repairs to Property Capital vs. Expense

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.

Subject 24(1)

Before addressing your specific situation set out in your memorandum of August 29, 1989, we note that since our memorandum of January 13, 1989, we have had opportunity to review the Goyer case (1987 R.D.F.Q. 159) in greater depth in relation to our general comments in IT-128R.  Additional comments have therefore been set out below which may be of assistance to you.

In the Goyer case, the court specified that property must mean property complete in itself and not its integral components.  We are of the view that this comment is consistent with comments in paragraph 4(c) of IT-128R in which it is stated "Another point that may have to be considered is whether the expenditure is to repair a part of the property or whether it is to acquire a property that is itself a separate asset".  The making of a repair to a part of a property is consistent with the comments relating to the integral components.  In addition, certain criteria were outlined in the case and they have been set out in an interpretation prepared by Revenue Quebec (IMP 128-4/R1) which has been enclosed for your reverence.

In our view, the four criteria set out in Interpretation number IMP 128-4/R1 are comparable to the guidelines outlined in IT 128R.  The comments which follow compare the comments in IT-128R with the four criteria:

(a)     Increase the normal value of the property:

     In paragraph 4(b) of IT-128R, it is stated that "where, however, the result of the expenditure is to materially improve the property beyond its original condition", this will have the effect of increasing the normal value of the property and the expenditure should be capitalized.  The increase in the market value of a property is not an important factor in making this decision.

(b)      Replace property which no longer exists;

     Paragraph 4(c) covers situations where the effect of an expenditure is "to acquire a property that is itself a separate asset".  Where property which no longer exists is replaced, the expenditure will be capital in nature.

(c)      The creation of a new asset;

     Reference should be made to the comments in the preceding paragraph.

(d)      Restore the property to its normal value, i.e., the value which the property would have if it were in very good condition;

     In paragraph 4(d), we mention that the relative value of an expense is not in itself decisive and that it is necessary to consider other circumstances, "particularly where a major repair job is done which is an accumulation of lesser jobs that would have been classified as current expense if each had been done at the time the need for it arose".  This expense will be deductible when it has the effect of bringing the property to its original condition of the repair work had been normally done.

We note that the term "restore to its original condition" in paragraph 4(b) of IT-128R is not to be strictly construed.  In order to determine if an expense brings an asset to its original condition, it is necessary to take technological changes into account and the reasons a particular material was used.  It is our view that this term is used in a general sense referring to the operating condition of property by using similar materials serving as a substitute for obsolete materials which are no longer used for the same purpose.  While we do not feel that it is necessary to revise IT-128R at this time, a memo has been sent to Publications Division for the purpose of considering the term "original condition" in the next revision of the Bulletin.

24(1)

2.

24(1)

District Office Position

24(1)

Taxpayer's Position

24(1)

Our Comments

24(1) With respect to such payments, we would refer you to the Department's response to question 49:26 set out in the 1985 Tax Conference Report which is constituent with the comments in the article from CA magazine which you enclosed.

For your further information, we note that lease inducement payments to non-anchor tenants relating to the initial lease of space in a building are t be deferred and amortized to income over the term of the related lease while payments made to facilitate the releasing of that space, whether to the same tenant or a new tenant, may either be deducted in the year in which the expense is incurred or deferred and amortized to income over the term of the related lease.  Since in 24(1)

21(1)(b)

24(1)   21(1)(b)

We hope the foregoing comments are of assistance to you.

Chief,Services, Public Utilities andExempt Corporations SectionLegislative and IntergovernmentalAffairs Branch