| April 27, 1990 | |
| VANCOUVER DISTRICT OFFICE | HEAD OFFICE |
| B.V. Westerlund | Specialty Rulings |
| Section 198-12 | Directorate |
| R.B. Day | |
| (613) 957-2136 | |
| File No. 7-4587 |
Subject: 24(1) Company Contribution to Registered Pension Plan (RPP) as Capital Cost of Self Constructed Building
We are writing in reply to your memorandum of December 13, 1989, wherein you requested our views as to whether or not paragraph 20(1)(q) would permit the deduction of RPP costs in the situation described below. We apologize for the long delay in replying to your enquiry.
24(1)
You presume paragraph 20(1)(q) was specifically brought into the Act to limit the employer's contribution to pension plans to a limit of $3,500 per employee. It is your position that the capital cost of property should include pension contributions that fall within the limitation imposed by paragraph 20(1)(q). The reasons for your view, are as follows:
24(1)
The Exchequer Court of Canada case in Sherritt Gordon Mines Ltd. 1968, held that, notwithstanding that paragraph 20(1)(c) is a specific provision permitting deduction of interest only as a current expense in the year it is incurred or paid, before the starting of the business it was in accordance with generally accepted and commercial principles (at least where the amount is significant in relation to the taxpayer's business) to capitalize payments of interest during the construction period.
The constraint inherent in this decision (that section 20 does not apply before business commences) may have been removed by the Federal Court of Appeal decision in Qualico Development Ltd. ("Qualico") (84 DTC 6119). Although the Qualico decision held that, notwithstanding paragraph 20(1)(aa), landscaping costs were to be treated as forming part of the costs of inventory, it is your view that the same line of reasoning could be applied to treat pension costs as forming part of the capital cost of self-constructed assets.
Our Comments
We have reviewed your submission in conjunction with the Qualico decision referred to above. It is our opinion that this decision does not support the disallowance of the paragraph 20(1)(q) amounts claimed by 24(1). The reasons for our position are as follows:
In the Qualico decision, their was no dispute as to the deductible nature of the landscaping expenses, the dispute related to whether the costs of landscaping land around a building, which is an inventory item would be deductible on a current basis under paragraph 20(1)(aa) because the building was used primarily for earning income from a business. In rejecting the taxpayers appeal, the Judge made the following comments, at page 6123, regarding the interaction of the relevant provisions in the Act.
"With respect to such costs there is no need for a provision overriding subsections 18(1)(a), (b) and (h) to make them deductible, in computing profit from the appellant's business. The only effect of the paragraph 20(1)(aa) on which the appellant relies, if it applies at all to such costs, is to allow the deduction in a year that might be a different year from that in which it would be allowed under the system of section 10, that is to say, the year the costs were paid, which would not necessarily be the year the dwelling in respect of which the costs were incurred was sold."
In the 24(1) Since specific provisions in the Act take precedence over general provisions 24(1) This position is, in our view, supported in part by the comments cited from the Qualico decision.
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch