1 December 1989 Income Tax Severed Letter AC74291 - Repairs to Property Capital or Current Expenditures

December 1, 1989

HAMILTON DISTRICT OFFICE                HEAD OFFICE
                                        Specialty Rulings
                                          Directorate
Ms. J. Husack                           M. Eisner
                                        (613) 957-2138

                                        7-4291

Subject 24(1)

Before addressing your specific situation set out in your memorandum of August 29, 1989, we note that since our memorandum of January 13, 1989, we have had opportunity to review the Goyer case (1987 R.D.F.Q. 159) in greater depth in relation to our general comments in IT-128R . Additional comments have therefore been set out below which may be of assistance to you.

In the Goyer case, the court specified that property must mean property compere in itself and not its integral components. We are of the view that this comment is consistent with comments in paragraph 4(c) of IT-128R in which it is stated "Another point that may have to be considered is whether the expenditure is to repair a part of the property or whether it is to acquire a property that is itself a separate asset". The making of a repair to a part of a property is consistent with the comments relating to the integral components. In addition, certain criteria were outlined in the case and they have been set out in an interpretation prepared by Revenue Quebec (IMP 128-4/R1) which has been enclosed for your reverence.

In our view, the four criteria set out in Interpretation number IMP 128-4/R1 are comparable to the guidelines outlined in IT 128R. The comments which follow compare the comments in IT-128R with the four criteria:

(a) Increase the normal value of the property:

          In paragraph 4(b) of  IT-128R
, it is stated that "where,
          however, the result of the expenditure is to materially
          improve the property beyond its original condition",
          this will have the effect of increasing the normal
          value of the property and the expenditure should be
          capitalized.  The increase in the market value of a
          property is not an important factor in making this
          decision.

(b) Replace property which no longer exists;

          Paragraph 4(c) covers situations where the effect of an
          expenditure is "to acquire a property that is itself a
          separate asset".  Where property which no longer exists
          is replaced, the expenditure will be capital in nature.

(c) The creation of a new asset;

          Reference should be made to the comments in the
          preceding paragraph.

(d)       Restor the property to its normal value, i.e., the
          value which the property would have if it were in very
          good condition;

          In paragraph 4(d), we mention that the relative value
          of an expense is not in itself decisive and that it is
          necessary to consider other circumstances,
          "particularly where a major repair job is done which is
          an accumulation of lesser jobs that would have been
          classified as current expense if each had been done at
          the time the need for it arose".  This expense will be
          deductible when it has the effect of bringing the
          property to its original condition of the repair work
          had been normally done.

We note that the term "restor to its original condition" in paragraph 4(b) of IT-128R is not to be strictly construed. In order to determine if an expense brings an asset to its original condition, it is necessary to take technological changes into account and the reasons a particular material was used. It is our view that this term is used in a general sense referring to the operating condition of property by using similar materials serving as a substitute for obsolete materials which are no longer used for the same purpose. While we do not feel that it is necessary to revise IT-128R at this time, a memo has been sent to Publications Division for the purpose of considering the term "original condition" in the next revision of the Bulletin.

                     24(1)

District Office Position

24(1)

Taxpayer's Position

24(1)

Our Comments

24(1)
           With respect to such payments, we would refer you to
the Department's response to question 49:26 set out in the 1985
Tax Conference Report which is constituent with the comments in
the article from CA magazine which you enclosed.

For your further information, we note that lease inducement
payments to non-anchor tenants relating to the initial lease of
space in a building are t be deferred and amortized to income
over the term of the related lease while payments made to
facilitate the releasing of that space, whether to the same
tenant or a new tenant, may either be deducted in the year in
which the expense is incurred or deferred and amortized to income
over the term of the related lease.  Since in
                             24(1)

                             21(1)(b)

                         24(1)   21(1)(b)

We hope the foregoing comments are of assistance to you.

Chief, Services, Public Utilities and Exempt Corporations Section Legislative and intergovernmental Affairs Branch