Start-Up and Close-Down Expenditures


MNR v. M.P. Drilling Ltd., 76 DTC 6028, [1976] CTC 58 (FCA)

The taxpayer was incorporated in 1963 for the primary purpose of marketing liquified petroleum gases in the Pacific Rim, and incurred substantial losses due to substantial expenditures on feasibility studies done before it was determined, over two years later, that carrying out the original plan would not succeed. The taxpayer then commenced a profitable drilling business.

The expenditures were characterized as being incurred for "doing the normal things that any new business must do to bring its wares to the market place" rather than capital expenditures for the creation of a business structure.

Pigott Investments Ltd. v. The Queen, 73 DTC 5507, [1973] CTC 65 (FCTD)

The taxpayer, which was a construction company, caused its subsidiary ("Wentworth") to enter into a contract with the City of Hamilton respecting a major project for the redevelopment of the downtown. The taxpayer through Wentworth (which Noel J. concluded should be regarded in this regard as an agent of the taxpayer) spent $1.1 million over a period of four years on the planning, architectural and financing aspects of the project before the project fell through due to a failure to obtain financing. The expenses were deductible by the taxpayer when incurred since they were incurred as part of the taxpayer's construction business in order to earn profit from the construction of the proposed complex.

Bowater Power Co. Ltd. v. MNR, 71 DTC 5469 (FCTD)

feasability study costs deductible

The cost of engineering studies commissioned by the taxpayer (an operating hydro-electric company) to determine the feasibility of establishing hydro-electric facilities at various sites within its territory were found to be fully deductible given that its business required a continuous evaluation and appraisal of its power resources and its methods of operation; and expenditures incurred in this connection were part of its current operations.

Williams Brothers Canada Ltd. v. MNR, 62 DTC 1276, [1962] CTC 448 (Ex Ct)

A joint venture consisting of two companies ("Mannix" and "Canadian Pipe") successfully bid for a contract to construct a major pipeline. The taxpayer, which was attempting to enter the business in a substantial way and which had been unsuccessful in the competitive bid, paid $230,000 to Canadian Pipe for an assignment of all its rights in respect of the contract for the construction of the pipeline. Cattanach J. held (p. 1281):

"Had the appellant been successful in its attempt to obtain the prime contract there is no doubt that the expenses incurred in negotiating that contract would not have been a capital outlay. Accordingly, it would follow that expenses incurred to acquire the prime contract or a part thereof from the successful contractor and the right to enter into a novation with the owner would properly be a revenue expenditure rather than a capital outlay."

See Also

Caballero v. The Queen, 2009 DTC 1360, 2009 TCC 390

Various professional expenses that the taxpayer incurred with respect to a proposed venture of providing on-site mobile message therapy services to corporate clients through massage buses were for the creation of a business entity or structure and, therefore, on capital account.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs fledgling business should entail "serious and reasonable continuous efforts to begin normal operations" 120

Robinson v. The Queen, 2019 TCC 181 (Informal Procedure)

pre-incorporation expenses incurred in developing e.g., a patent portfolio for drop down to a corporation were capital expenditures

The taxpayer (with modest success) sought to follow a pattern of first investigating and developing opportunities and then dropping any resulting assets (e.g., a patent portfolio) to a corporation (one for each such venture) for an equity interest therein. In finding that the expenses that he directly incurred prior to any such drop-down transaction were capital expenditures, Monaghan J stated (at paras 52, 53 and 57):

Mr. Robinson’s circumstances are strikingly similar to the circumstances in the Neonex and Firestone cases. In other words, the expenses were not incurred in the course of the operation or running of a business, but as part of the process of creating, or acquiring the assets for a business, the objective of which was to acquire investments in entities engaged in innovation from which he might derive income.

Ikea did not overrule Firestone or Neonex. Rather, it emphasized the purpose test. … The Supreme Court has endorsed the principle that the underlying purpose of an expense must be considered in the context of the taxpayer’s business.

…[T]he expenses … [Mr. Robinson] incurred, put in the most favourable light, are expenditures relating to the acquisition or creation of a business, not the running of a business. Therefore, they are capital expenditures.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 activities of developing assets with a view to their drop-down to corporation likely was a property income source rather than business 242

Wacky Wheatley's TV & Stereo Ltd. v. MNR, 87 DTC 576, [1987] 2 CTC 2311 (TCC)

Expenses incurred by the taxpayer in sending senior offices to Australia to review a potential opportunity to expand its business there were deductible. Brulé T.C.J. stated (at p. 579):

"A major expenditure of many business today is monies expended to maintain or increase market share under increasingly competitive conditions. To this purpose many corporations spend significant amounts each year in advertising, promotions and market surveys. The expenditures in issue in these appeals, in my view, related to such an endeavour."

Unlike the Firestone case (87 DTC 5237) the taxpayer was already carrying on a business and had no plan to acquire or create a new business structure.

RTZ Oil and Gas Ltd. v. Elliss, [1987] BTC 359 (Ch. D.)

The taxpayer, which had a 25% interest in an oil field under the North Sea, was not permitted to deduct a provision for the estimated costs to be incurred at a future date, on completion of production, in order to: restore to their original condition rigs and tankers that it had leased and adapted for use in connection with extracting or transporting the oil; removing a manifold, loading lines and buoy from the area; and capping wells and removing well heads.

The lease contracts were clearly capital assets, and expenditures to reconvert such assets should have the same character as expenditures to initially adapt them for purposes of the trade. The manifold, loading lines and buoy were installed under the authority of the license that required that they be removed when the exploitation of the field was completed and, accordingly, the cost of removal formed part of the cost that had to be incurred or which the consortium had to agree to incur in the future before it could commence its trading operations.

Duthie Estate v. MNR, 92 DTC 1043, [1992] 1 CTC 2099 (TCC)

Various fees including architectural fees and project planning fees paid by the taxpayer in connection with the proposed development of land as a luxury condominium development were incurred "for the purpose of creating a business entity" (p. 1050) and, therefore, on the authority of the Firestone case, were non-deductible capital expenditures.

Administrative Policy

6 June 2019 CPTS Roundtable, 2019-0816111C6

no acceptance that expenses incurred before decision to proceed are thereby on current account

Rio Tinto found that investment dealer fees incurred in connection with an acquisition but before the board determined to make the acquisition were fully deductible. When asked about the deductibility of expenses incurred prior to the approval of a project (pre-Final Investment Decision, or “FID” expenses), CRA stated (without referring to Rio Tinto):

[T]he CRA does not accept that there is bright line test, such as FID, to determine the characterization of expenses for income tax purposes.

… [E]xpenditures in respect of research in determining economic viability may be considered to be on income account … . The economic viability determination of a project may include preliminary designs for tangible assets and estimating capital and operating expenses.

There are a variety of activities undertaken subsequent to the preliminary economic viability study. These may include government approval, equipment specification, contract negotiations, stakeholder consultations, refinement of the economic viability study, etc. [If] … the expenditure brings into existence an asset or advantage that has an enduring benefit ... it is denied current deduction … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 231.2 - Subsection 231.2(1) taxpayers can choose between reasonable alternative formats (e.g. hard or soft) for providing their tax working papers/records 140
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 29 Folio S4-F15-C1 applies for purposes of the new accelerated CCA rules 229
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) extension of M&P guidance to oil and gas sector 61
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Oversight or Investment Management project expenses incurred after determining economic feasibility and before project approval are generally deductible 248
Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - Accelerated Canadian Development Expense - Paragraph (a) - Subparagraph (a)(ii) accelerated CDE deduction can be available for drilling on land acquired from an affiliate 131

21 February 2019 Internal T.I. 2019-0796791I7 - Mining Expenditure Review Table

Rio Tinto approach essentially applied to categorization of mine design studies

Rio Tinto found that expenditures incurred determining whether to proceed with an acquisition on capital account are currently deductible. Although not framed in those terms, CRA has essentially applied the Rio Tinto approach to finding that the costs of mine design and development studies (including those of evaluation of different technically feasible options for processing the ore) are currently deductible under s. 9 (but not as CEE) to the extent that they are incurred before the decision is made to bring the mine into production.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (f) categorization of pre-mining expenditures by ITA treatment 580

27 March 2014 External T.I. 2014-0520941E5 F - Industrial mineral mine and related expenditures

expenditures deductible where incurred prior to acquisition decision

What is the treatment, for taxation purposes, of the expenses incurred by the taxpayer prior to obtaining government authorization to operate a quarry including of: preliminary studies; research; and numerous communications with the Ministry and the municipalities? In the course of a general response, CRA note that IT-475, para. 5 stated:

Expenditures made as part of a taxpayer's ordinary business operations in respect of research to determine whether a capital asset should be created or acquired, but which themselves are not directly linked to the creation or acquisition of a capital asset, are current operating expenses which are deductible in the year incurred. However, once the commitment is made to proceed with the particular project all expenditures which are directly linked to the creation or acquisition of a capital asset form part of the capital cost of that asset unless that asset is not, in fact, created or acquired.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) - Paragraph 13(7.5)(b) access road deemed to have been "acquired" 201
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 17 access road to quarry was Class 17 property notwithstanding that not owned 164
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(1) - Paragraph 1100(1)(g) ordinary meaning of "mineral" 43