| March 23, 1990 | |
| TO - G. Claerhout | FROM - Head Office |
| Acting Chief of Audit | Specialty Rulings |
| London District Office | D. Turner |
| (613) 957-2094 | |
| Attention: Brian Deacon | File No. 7-4647 |
SUBJECT: 24(1)
We are writing in reply to your memorandum of January 11, 1990, concerning the accounting treatment of assets acquired for specific construction projects.
24(1)
TAXPAYER'S COMMENTS
The taxpayer offered the following comments:
a) Generally Accepted Accounting Principles ("GAAP") require the matching of costs and revenues and court cases, such as Metropolitan Properties Co. Limited, 85 DTC 5128, have held that GAAP should normally be applied for income tax purposes. As the cost of the equipment is recovered in the billings, a requirement to capitalize job costs would result in a mismatching of costs and revenues.
b) The equipment required to complete a project is a critical element in determining construction costs and the nature of the business should be considered in determining whether equipment purchase costs are income or capital expenditures.
c) The cost of the equipment should be inventoried as a contract cost together with all other job costs.
d) Office equipment has a small dollar value (often less than $250 per item) and is not controlled through equipment numbers. The defective old furnishings are scrapped while salvageable items are traded in and their useful life is relatively short.
DISTRICT OFFICE COMMENTS
The District Office has made the following comments related to the equipment purchases:
a) Subparagraph 54(b)(i) and paragraph 18(1)(b) of the Income Tax Act (the "Act") support the position that the equipment is capital property and can not be deducted as a current expenditure.
b) The taxpayer should be required to capitalize the items in question and claim capital cost allowance as permitted by the Act.
The District Office has requested our opinions related to the following questions:
1) Would a construction job of the above type qualify as a special circumstance that requires special treatment administratively?
2) Would it be appropriate for the taxpayer to inventory, these equipment expenditures and write them off to income over the term of the job or at the end of the job?
OUR COMMENTS
We offer the following comments related to the above:
1) Subsection 9(1) of the Act states that a taxpayer's income for a taxation year from a business is his profit therefrom for the year. Subsection 18(1)(b) of the Act states that in computing the income of a taxpayer from a business no deduction shall be made in respect of a capital outlay, except as permitted. Capital property is defined in subsection 248(1) of the Act as having the definition contained in paragraph 54(b) of the Act which states that "capital property" of a taxpayer means any depreciable property of the taxpayer, any property, any gain or loss from the disposition of which would be a capital gain or a capital loss, as the case may be, of the taxpayer. In our opinion, the taxpayer's equipment is both depreciable property as defined in paragraph 13(21)(b) of the Act and property any gain from the disposition of which would be a capital gain. As such, no deduction may be made related to the equipment purchases when computing income for income tax purposes except as allowed by paragraph 20(1)(a) of the Act.
2) In the Metropolitan Properties Co. Limited case the Justice states that a taxpayer should normally apply GAAP in determining his profit UNLESS a section of the Act requires a departure from GAAP. In the above situation, it is our opinion that the Act requires a departure from GAAP in that it specifically restricts the deduction of capital expenditures, defines what is considered to be capital property and provides specific rules for calculating capital cost allowance deductions related to capital property.
3) The taxpayer's statement that the equipment is a critical element in determining construction costs does not justify special treatment as the costs of equipment are of critical importance in determining the cost of products produced in many businesses and those businesses receive no special treatment.
4) In our opinion, the cost of the equipment should not be inventoried and charged as a contract cost. The nature of the equipment purchased is not that of inventory, it is not for later use or resale. It is being used throughout the term of the job in the same manner as any other company would use its equipment.
5) In our opinion, there are no provisions in the Act which would allow office furniture which has a life span which extends over more than one accounting period to be created as a current expenditure. In addition, minimum dollar requirements of $100 and $200 are generally only of concern for Class 12 assets.
We trust that our comments will be of assistance.
R.E. ThompsonChiefMerchandising, Manufacturing and Construction SectionBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch