E. Mikhail (613) 957-2095
JAN 23 1989
Dear Sirs:
Re: Amortization of Leasehold Improvements
This is in reply to your letter of November 16, 1988 in which you enquired about the proper amortization of leasehold improvements in the following situation:
In year one, Company A entered into an agreement to lease office space from Company B. The agreement provided that the lease term would run for a period of five years with an option to renew it for ten years. During year one, Company A incurred $150,000 of leasehold improvement costs which were capitalized as Class 13 property. Ignoring the effects of the half-year rule, during the first and second year, Company A claimed capital cost allowance of 1/15th of $150,000 or $10,000 per year. At the end of year two the undepreciated capital cost of Class 13 was $130,000.
At the beginning of year three, Company A and Company B decided to amend the lease agreement by reducing the period for renewal from 10 to 5 years. You wondered what would be the appropriate amount of capital cost allowance Company A may claim for year three as calculated in accordance with Schedule III for purposes of Regulation 1100(l)(b) of the Income Tax Act.
Our Opinion
It is our view that beginning with year three the amount of capital cost allowance calculated under paragraph 2(b) of Schedule III is 1/10th of the original capital cost of the leasehold improvements, namely $15,000. A terminal loss may be claimed at the end of year ten provided the conditions of subsection 20(16) are met.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978 this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch