| December 27, 1990 | |
| OTTAWA DISTRICT OFFICE | HEAD OFFICE |
| Audit Review | Rulings Directorate |
| A.Y. Ho | |
| (613) 957-2094 | |
| Attention: G. Roy-Chevalier | |
| 902480 |
SUBJECT: Class 17 - Cost of Land
We are writing in reply to your memorandum of September 9, 1990 concerning the classification of berms in a shooting range and the capitalization of repairs and maintenance to this asset.
Facts
24(1) Berms could be described as artificial hills of soil used as sound barriers and for protection from shooting hazards.
District Office position
24(1)
- This case would be similar to the situation described in paragraph 7 of IT-485, where construction of greens, tees and fairways in a golf course are added to the cost of land (see also 86 DTC 6513, Hampton Golf Club). Berms (or earth walls) cannot be distinguished from land. Therefore the cost should be capitalized as is the case with levelling of land.
- Berms are not surface construction similar to a road, sidewalk, airplane runway, parking area or storage area.
- The berms increase the resale value of the land if it is sold for the same purpose.
Taxpayer's Representations
Due to the unique character of the business, repairs to berms can be quite high if done every 3-4 years. However, this is the most cost efficient way of doing repairs. Since those expenses do not relate to the construction of any income producing assets 24(1) they should not be capitalized. Land is normally not subject to depreciation allowance for tax purposes since it has an unlimited useful life. Earth walls, as used in shooting ranges, however, do have limited useful life due to natural settling, erosion and breakdown due to the impact of ammunition on the soil.
Our Comments
A berm is not a class 17 asset because it is not a surface construction similar to road, sidewalk or runway. A road is usually constructed upon a very heavy foundation with layers of crushed stone, sand etc. As we understand it, a berm is only a pile of soil with no foundation.
Berms are made up of earth and become part of land on which they are placed. In our view, they are very similar to greens and tees even though they may have a more limited life due to natural settling, erosion, breakdown due to the impact of the ammunition and the absence of any ongoing maintenance program. The subsequent repairs and maintenance to periodically restore a berm to its original condition would be deductible as an essential expenditure in this type of business (see 85 DTC 5373, Johns-Manville Canada Inc. v. Her Majesty the Queen). The moving of a berm due to the requirement of a regulatory authority could be currently deductible since it would seem to be incurred to preserve the income earning capacity of the business, did not involve an increase in value of the business and could be seen to relate to a rather standard hazard in the particular type of business. However, it is also arguable that the relocated berm should be treated in the same way as a newly constructed one, i.e., capitalized as part of land, since the work involved is essentially the same for both. If the relocated berm is constructed from the new earth rather than the earth from the old berm, i.e., leaving the old berm intact, then capitalization seems more appropriate. Therefore, the treatment would largely depend on the facts. If assistance is required as to which treatment is proper in the particular circumstances, please let us know.
Yours truly,
for DirectorBusiness and General DivisionRuling DirectorateLegislative and IntergovernmentalAffairs Branch