Dear 19(1):
Re: Costs of golf course on leased land
This is in reply to your letter dated October 11, 1991 whereby you requested a technical interpretation in respect of the tax treatment of costs incurred in setting up a golf course on leased land. The facts of the situation follow.
Facts
Your client, a Canadian controlled private corporation commencedoperating a golf driving range in 24(1) on a parcel of land leased from 24(1). In he began operating a golf course on this same parcel of land. The initial term of the lease is 10 years however there are 24(1) consecutive renewal terms of 24(1) years each. During the course of construction, your client incurred substantial costs for the clearing, levelling, drainage and preparation of the land in order to lay out the driving range and the greens, tees, and fairways f the golf course. In particular you enquired whether or not these costs could be classified as leasehold improvements under Class 13 of Schedule II of the Regulations and if so, over what period should they be amortized for capital cost allowance purposes.
The classification of these expenditures can be determined only when all the details of the transactions, including the terms of the lease and the rights and obligations of the lessee and the lessor, have been reviewed. For example, if the lessee has an option to acquire the land, the comments in Interpretation Bulletin IT-233R titled Lease-Option Agreements; Sale-Leaseback Agreements, may be relevant. A determination of the classification of these expenditures could only be achieved upon our review of the actual lease agreement. However, we can provide you with the following general comments which we hope will be of assistance.
Our Comments
Leasehold interests which are in the nature of a building or structure (i.e., construction or reconstruction of a building or structure on leased land) would by virtue of subsection 1102(5) of the Regulations, be required to be included in the respective class of Schedule II usually class 1, 3 or 6. All other capital costs respecting leasehold interests would be included in Class 13.
It is generally understood that if a chattel becomes fixed to land, and thus becomes a "fixture", that fixture becomes part of the land and is therefore owned by the owner of the land. The person leasing the land would only have a leasehold interest in such fixtures or chattels. If modifications made were indeed affixed to the land, they would be considered to be leasehold improvements and would be included in Class 13.
Regulation 1102(4) provides the "capital cost" of a leasehold interest includes any amount expended for an improvement or alteration to a leased property. While Regulation 1102(2) excludes land from the classes of property described in Schedule II, this exclusion relates only to the land upon which such property is "constructed or is situated", it does not in our view exclude amounts expended to improve leased land where the land itself is the subject of the leasehold.
The capital cost allowance that may be claimed for a leasehold interest (class 13) after the first year of ownership is the lesser of:
(a) 1/5 of the capital cost of the leasehold interest; and
(b) the capital cost of the leasehold interest divided by the number of 12-month periods from the beginning of the taxation year in which the cost was incurred to the end of the term of the lease plus the first renewal term not to exceed a total of 40 such 12-month periods.
The first year write-off would be 50% of the above amount.
We trust the preceding comments will be of assistance to you.
Yours truly,
E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch