What is the characterization of pre-Final Investment Decision (“FID”) expenses, i.e., are expenses incurred prior to the approval of a project generally deductible? CRA responded:
FID is dependent on many things including a particular taxpayer’s circumstances, critical time path, availability of equipment, and resources. Additionally, the extent of work done prior to making a FID will generally depend on the taxpayer’s policies respecting capital projects and may not necessarily be the same for all taxpayers. Consequently, the 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. In determining the correct classification of expenses incurred for each activity, the CRA ascertains the purpose of the expenditure and whether the expenditure brings into existence an asset or advantage that has an enduring benefit. If so, it is denied current deduction … .
… The postponement or cancellation of a project does not alter the nature of an expense incurred in connection with such project.