3-910967
Dear Sir:
Re: Advance Income Tax Ruling Request 24(1)
As confirmed in our telephone conversation on May 22, 1991 with the ruling requested on behalf of 24(1) dated April 5 and amended April 23, 1991 is withdrawn. 24(1)
As indicated in our telephone conversation of May 16, 1991, in accordance with paragraph 14(e) of Information Circular 70-6R2, we will not provide advance rulings where the major issue is whether a transaction should be viewed as being of an income nature or a capital nature. This includes the determination of whether an expenditure is capital in nature because depreciable property was acquired or improved, or whether it is currently deductible because it is respect of the maintenance or repair of a property.
In our May 16 conversation we also advised that
24(1)
As discussed, we offer the following general comments which may be of assistance to you.
Lease cancellation payments are deductible for income tax purposes only in accordance with paragraphs 20(1)(z) and (z.1) of the Income Tax Act (the "Act" In our opinion, in a situation where a lessee has constructed a building on land leased under a long-term lease and the lease provides that the building becomes part of the land, possession of which reverts to the lessor upon the termination of the lease, a payment made by the lessor to cancel the lease may appropriately be viewed as in part a payment to cancel the lease of the land (the property that is the subject of the lease) and in part a payment for early possession of the building. In our opinion, it would be appropriate to apportion the payment into its two components on the basis of the relative values of the land and the building. Accordingly, that portion which relates to the cancellation of the lease of the land would be deductible in accordance with the provisions set out in paragraph 20(1)(z) of the Act. That portion which relates to obtaining early possession of the building (the "Amount") would either be an eligible capital expenditure ("ECE") or a cost of acquiring the building.
If the amount is determined to be an ECE as defined in paragraph 14(5)(b) of the Act (i.e., an outlay made or incurred for the purpose of gaining or producing income from a business that is not part of the cost of tangible property of the taxpayer), 3/4 of the Amount would be added to the taxpayers cumulative eligible capital (as defined in paragraph 14(5)(a) of the Act ) and deducted in accordance. With paragraph 20(1)(b) of the Act - up to a maximum of 7% of the cumulative eligible capital at the end of the year.
Alternatively, if the Amount is determined to be a cost of acquiring the building and assuming that the building is a depreciable property, the Amount would be added to the appropriate capital cost allowance class in accordance with Schedule II of the Income Tax Regulations and deducted in accordance with paragraph 20(1)(a) of the Act and the rate allowed by regulation.
Under either characterization, no terminal loss would arise in the year a portion of the building is demolished so that it may be reconstructed and used to generate rental income. The Amount would simply continue to be deducted in accordance with the provisions of either paragraph 20(1)(a) or paragraph 20(1)(b) of the Act as indicated above.
We hope our comments are of assistance to you. We have also enclosed copies of various interpretation bulletins which comment on the issues raised in your ruling request.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate