Principal Issues: [TaxInterpretations translation] In which class should the costs of construction and digging of an artificial lake used in the operation of an outfitter be charged?
Position: These costs must be capitalized in Class 6 of the Income Tax Regulations.
Reasons: In accordance with the Act and its Regulations and previous interpretations.
XXXXXXXXXX 2007-022012 Nancy Turgeon, CGA July 17, 2007
Dear Sir,
Subject: Costs of constructing and excavating an artificial lake
This is further to your letter of January 10, 2007, in which you requested confirmation of the class into which the costs of construction and excavation of an artificial lake used in the operation of an outfitter and resort should be placed.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
The situation you have indicated in your letter appears to relate to an actual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance tax ruling. However, we can offer the following general comments, which you may find useful.
Classes 6 and 29 of Schedule II of the Income Tax Regulations ("Regulations") refer to an oil or water storage tank. In Oriole Park Fairways Limited v. Minister of National Revenue, 56 DTC 537, the Tax Appeal Board relied on the ordinary meaning of the words "water storage tank" - which includes “a pool or lake, or an artificial reservoir” - to conclude that ponds on a golf course should be capitalized in Class 6 of the Regulations.
On the other hand, we do not believe that the costs of constructing and excavating the artificial lake can be capitalized in Class 29 of Schedule II to the Regulations since property in that class must be excluded in advance by virtue of paragraphs (c) or (d) of Class 41. Since those paragraphs are directed at property that is used primarily, directly or indirectly, by the taxpayer in Canada primarily in Canadian field processing, they cannot place an artificial lake designed for sport fishing in Class 29.
In light of the ordinary meaning of the word "water storage tank", as set out in the Oriole Park case cited above, we are of the view that the costs of construction and excavation of the artificial lake in this case should be capitalized in Class 6 of Schedule II of the Regulations. This conclusion is in line with the observations made in Technical Interpretation 2003-003370.
These opinions are not advance decisions and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, are not binding.
Best regards,
François Bordeleau, Advocate
Interim Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.