Dear Sirs:
Re: Sections, 9, 18 and 20 of the Income Tax Act.
This is in reply to your letter of April 2, 1991 concerning sections 9, 18 and 20 of the Income Tax Act (the "Act").
A principal business corporation carries on a real estate development business, constructing buildings for sale or lease. For accounting purposes the corporation capitalizes as a cost of the building all expenditures relating to construction including the following,
construction period interest costs,
- property taxes during the construction period,
- an allocation of the corporate provincial capital taxes, and
- net rental loss (rental income less expenses) incurred from the date of completion of the building to the earlier of the break-even-point and one year following the completion of the building ("post construction rental loss").
For accounting purposes, the corporation capitalizes to the cost of vacant land the following expenditures,
- interest costs,
- property taxes,
- an allocation of the corporate provincial capital taxes.
For tax purposes the corporation fully expenses interest cost and property taxes incurred during the construction period (subject to the limitations of subsection 18(2), 18(3.1) and 18(3.4) of the Act) and fully expenses the allocation of the corporate provincial capital taxes. The corporation also claims its full "net rental loss" (as referred to above) for tax purposes.
We are in general agreement with the tax treatment referred to above. Assuming that the year the outlay or expenses are made or incurred is 1991 the application of subsections 18(3.1) and 18(3.4) of the Income Tax Act will allow 20% of the interest and property taxes relating to property under construction and the related land to be claimed as a deduction in computing income for tax purposes. Generally, capital taxes are considered a corporate cost and are fully deductible. Assuming the corporation is a principal business corporation as described in subsection 1100(12) of the Income Tax Regulations, the post construction rental loss would be deductible.
Interest expense and property taxes on vacant land not used for gaining or producing income from the land in the year is subject to the provisions of subsection 18(2) of the Act. In the case of a principal business corporation this usually means that the deduction of the related interest and property taxes is restricted to the corporation's base level deduction (subsection 18(2.2) of the Act) for the year.
We trust these comments will be of assistance.
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch