7-910306
Re: Construction Holdbacks
The present memorandum is in reply to yours' dated January 29, 1991, concerning the above noted subject matter.
You asked our opinion if, under a certain set of circumstances the decision delivered by the Federal Court, Appeal Division in Newfoundland Light & Power Co Ltd v The Queen, 90 DTC 6166 altered Revenue Canada, Taxation's (RCT) interpretation of income tax legislation regarding construction holdbacks.
After further discussions with D. Joy, it is our understanding that the following scenario is the one you wish us to consider:
The Taxpayer, the owner of the asset being constructed, engaged a General Contractor to build the asset, who has in turn hired a Sub-Contractor The Sub-Contractor has performed certain work and the Taxpayer has retained a specified percentage (the "Holdback") of the amount he was invoiced by the Contractor. The invoiced amount relates to work performed and completed by the Sub-Contractor, therefore, the expenses relating to the Holdback have been incurred, the full amount has been determined, and is due and payable, however the Taxpayer has not paid the Holdback amount because of certain stipulations in the Provinces' Mechanic's Lien Legislation which creates doubts as to who the Taxpayer is supposed to pay, i.e. the General Contractor or the SubContractor. You asked us whether RCT would permit the Holdback to be included in the capital cost of the asset for capital cost allowance purposes?
With regards to the above noted case, we do not anticipate any change in our interpretation of the income tax legislation regarding construction holdbacks Newfoundland Light & Power Co Ltd v The Queen only reaffirms the Department's position, in that the Appeal Division of the Federal Court stated in the written decision of Justice Desjardins, that the decision followed the reasoning of the Supreme Court of Canada in J.L. Guay Ltée v M N.R , 71 DTC 5423, and in M.N.R. v John Colford Contracting Co. Ltd , 60 DTC 1131, which cases guided the Department in adopting its position with regards to Holdbacks.
Concerning the scenario you presented us with, it is our opinion that the amount being withheld by the Taxpayer is a liability, the amount is determinable, due and payable and as such may be included in the capital cost of the asset for CCA purposes
The Newfoundland Light & Power Co Ltd v. The Queen facts were a little different than those you presented to us. In that case, there was an uncertainty as to whether the full amount if any would be paid by the debtor i e. the owner of the asset. It would only be at the time the certificate was issued that the full cost of the work would be known by the Taxpayer. Under these set of facts, the Court found that "... they were not expenses 'incurred' by the taxpayer ... and hence could neither be deducted nor made the subject matter of a claim for capital cost allowance "
B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch