1 December 1989 Income Tax Severed Letter AC58905 - Hypothetical - Costs Incurred by a Partnership

19(1)                           5-8905
                                        R.B. Day
                                        (613) 957-2136

DEC 1 1989

19(1)

We are writing in reply to your letter of October 11, 1989, wherein you requested our views regarding the income tax aspects of costs incurred by a partnership in the following scenario.

                       24(1)

Our Comments

                       24(1)

Paragraph 1 of IT-364 "Commencement of Business Operations" (copy attached) states, in part, that

          "For an amount to be deductible on the grounds that it
          was an expense incurred for the purpose of gaining or
          producing income from a business, that taxpayer must
          have been carrying on business in the fiscal period in
          which the expense was incurred."

Paragraph 6 of IT-364 states, in part, that

          "Expenses in respect of a proposed business that are
          incurred prior to the commencement of the business do
          not constitute a business loss or a non-capital loss
          and thus cannot be applied against income in the year
          the expenses were incurred, and cannot be carried back
          to be applied against income of the preceding year or
          forward to be applied against income of any subsequent
          year."

In addition to the above paragraph 6 of IT-417R "Prepaid Expenses or Deferred Charges" (copy attached) states that

          "Pre-production or start-up costs of a new business, to
          the extent they are not capital outlays, must be
          claimed in the year they are incurred."

In view of the foregoing, it is our opinion that paragraphs 18(1)(a) and (b) of the Income Tax Act would deny the deduction of the costs incurred by the partnership, prior to the commencement of its business operations, on either a current or subsequent basis.

We hope these comments are of assistance to you.

Yours truly,

for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch