Dear Sirs:
Re: Paragraph 20(1)(aa) of the Income Tax Act (the "Act") - Landscaping costs
This is in reply to your letter of July 15, 1991, concerning the Department's position on the deductibility of landscaping costs in the following hypothetical fact situation:
1. A limited partnership is formed for the purpose of acquiring residential real property.
2. The limited partnership enters into an agreement with a developer for the purchase of either:
a) a fully completed property; or
b) a property to be completed.
The limited partnership will not obtain title to the property until the building is complete and partially occupied, say 75%.
3. The agreement of purchase and sale specifically allocates the purchase for the property among land, building and landscaping.
It is your view that there has been a change in the Department's policy as it appears that in the Legislation Branch Addendum to the Branch letter 79-12, the Department acknowledged the price allocated to landscaping would be deductible to the limited partnership assuming the allocation was reasonable, while IT-296 indicates that the amount would qualify as landscaping only if the taxpayer is the owner of the property at the time the landscaping is done. You seek our confirmation of such a change in policy and if so would the following, course of action allow the partnership to claim the current deduction on the payment of landscaping costs:
1. The land and building would be purchased in one separate agreement
2. The partnership would enter into a second agreement with the developer for the landscaping. The second agreement would specify that such landscaping would be completed only after the closing of the first agreement. The landscaping would not commence until the closing of the first agreement.
Our Comments
There has been no change in Department policy. In order for an expenditure to be deductible by virtue of paragraph 20(1)(aa) the taxpayer must be an owner of the building or other structure at the time the landscaping is being done and the building or other structure is used by the taxpayer primarily for the purpose of gaining or producing income from it or from a business, and the deduction is made in the year in which the amount is paid.
Prior to 1982, it was common for investors to enter into a contract with a developer under which the investors acquired land and were to be provided with services by the developer. The effect of such an arrangement was that investors could deduct certain or so-called "soft costs" incurred during the construction of a building rather than capitalize them. A very important feature of this type of arrangement was that the investors acquired land prior to the construction of the building so that they could incur soft costs as construction was progressing. On the other hand, if investors did not acquire property until construction was complete, they acquired the building with the result that the developer incurred the soft costs rather than the investors. The requirement that a taxpayer be an "owner" of the property and able to deduct soft costs including landscaping is discussed in Schneider v M.N.R. (89 DTC 198).
Accordingly, the deductibility of landscaping expenses depends on whether the property is owned by the investors at the time the expenses are incurred.
We trust our comments will be of assistance to you
Yours truly,
G. Thornley for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch