Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: tax treatment of municipal taxes, including road upgrade assessments, on cottage
Position: non-deductible as no income earning purpose, and not added to ACB of cottage, as road upgrades are publicly owned
Reasons:
August 17, 1998
XXXXXXXXXX
Dear XXXXXXXXXX:
I am writing to assist you in responding to the March 12, 1998 letter you received from XXXXXXXXXX, one of your constituents, concerning the income tax treatment of municipal tax expenditures on a cottage property. You had forwarded the letter to my office on June 10, 1998.
Specifically, XXXXXXXXXX is concerned with municipal tax expenditures and the calculation of the capital gain subject to income tax on the disposition of his cottage property. He advised that his property is assessed municipal taxes for maintenance purposes and for municipal improvements. He feels that the municipal improvement portion of the assessment results in an increase in the value of his property. At the same time, he is not able to add this cost to the cost base of his cottage in computing any gain subject to tax.
The Income Tax Act provides for the annual computation of profit from a property in the determination of what expenses are currently deductible.
XXXXXXXXXX correspondence does not suggest any income earning purpose to this property. As a personal use property, with no income being generated, no current deduction could be made in computing his taxable income for any municipal taxes assessed on this property.
XXXXXXXXXX advised that a portion of the municipal taxes relate to an improvement assessment to be expended by the municipality for upgrades to municipally owned property. In his letter, he used an example of the upgrading of a road from gravel to pavement. While these upgrades may affect the value of his property favorably, these expenditures are made on publicly owned lands. The improvements are not to any property that XXXXXXXXXX owns. Accordingly, there is no provision to add these to the cost base of his cottage. These costs cannot be accounted for in the calculation of the cost of his cottage property at the time of disposition.
I do wish to point out, however, that capital gains are subject to a reduced rate of tax, as only seventy-five percent of the gain is included in taxable income. Further, there is provision for exemption from taxation for the capital gain on one personal use property for each family within the principal residence rules. I would refer XXXXXXXXXX to Interpretation Bulletin IT-120R4, Principal Residence, for a more complete discussion of the application of these rules. I have enclosed a copy of this Interpretation Bulletin.
An amendment to the Act would be necessary to accommodate XXXXXXXXXX request. Such amendments are the responsibility of the Honourable Paul Martin, Minister of Finance. I note that his letter has previously been forwarded to the Department of Finance for their consideration.
Thank you for bringing the concerns of your constituent to my attention.
Yours truly,
Herb Dhaliwal, P.C., M.P.
Encl.
Nancy Graham
957-2136
July 7, 1998