Principal Issues: [TaxInterpretations translation] Can or should legal and survey costs incurred to obtain title to land used in the course of a business be deducted or capitalized?
Position: Certain expenses are deductible against business income and others must be capitalized to the adjusted cost base of the land.
Reasons: Facts surrounding the acquisition, the use of the land and the nature of the expenses incurred.
January 6, 2009
XXXXXXXXXX Tax Services Office Headquarters Audit Division Income Tax Rulings Directorate Attention: XXXXXXXXXX Nancy Turgeon, CGA
2008-030172
Legal costs related to a property right
This is further to your email of November 27, 2008 in which you asked for our opinion on the tax treatment of legal costs incurred by a taxpayer.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you indicated that the taxpayer acquired XXXXXXXXXX acres of land (the "land") in XXXXXXXXXX on which he carries on a XXXXXXXXXX business.
XXXXXXXXXX, after incurring legal and survey costs, the manager of the business was able to resume the operation of his business.
You wish to know whether those legal and survey costs, incurred to re-establish ownership rights to the land, are expenses incurred for the purpose of earning business income and are therefore deductible from business income or whether the expenses must be capitalized either to the adjusted cost base of the land or as eligible capital expenditures.
Our Comments
In general, a taxpayer may deduct current expenses reasonably incurred for the purpose of earning business income where they are not otherwise limited. However, paragraph 18(1)(b) prohibits the deduction of expenses of a capital nature. In this case, it appears to us that the expenses incurred can be divided into two components: legal fees and survey fees. XXXXXXXXXXXXXX, it is our view that, in your specific situation, legal fees may be deducted in computing the income of the business. Of course, the portion of the legal fees that relate to the personal use of the land will not be deductible under paragraph 18(1)(h).
Furthermore, given that certain important steps were omitted when the land was acquired, XXXXXXXXXX we are of the view that the survey costs should be added to the adjusted cost base of the land. For the purposes of various provisions of the Act, in particular those providing for the principal residence exemption, which eliminates or reduces a capital gain realized on the disposition of a taxpayer's principal residence, an appropriate allocation of the survey costs will have to be made between the business portion and the personal portion.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.