19 October 2005 External T.I. 2005-0114241E5 - Costs incurred in unsuccessful asset acquisition

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Can the costs incurred on an unsuccessful acquisition attempt of an investment property be claimed as a capital loss, business investment loss or eligible capital expenditure.

Position: No

Reasons: There is no capital asset to which to add the cost to the adjusted cost base of the capital property. The amounts were not incurred in respect of a share or a debt of a small business corporation. The amounts were not incurred for the purpose of earning income from a business

2005-011424
XXXXXXXXXX Robert Ferrari
(613) 957-2138
October 19, 2005

Dear XXXXXXXXXX:

Re: Costs Incurred on an Unsuccessful Asset Acquisition Attempt

This is reply to your letter of February 02, 2005, in respect of the above noted matter.

Our understanding of the facts are as follows:

You entered into an agreement to purchase a real estate rental property in order to earn income from property, however, the attempted acquisition of the property was not consummated. You ask whether the legal and professional costs you incurred on the attempted acquisition of the investment property may represent a "capital loss or an investment loss" for income tax purposes.

Our Comments

Written confirmation of the tax implications inherent in a particular set of facts is given by this Directorate only where the facts relate to a proposed transaction that is the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Accordingly, our comments are of a general nature, which we hope may be of assistance.

Paragraph 39(1)(b) of the Income Tax Act (the "Act") defines a taxpayer's capital loss for a taxation year as the loss resulting from the disposition of any property. The loss is calculated under paragraph 40(1)(b) of the Act as the amount by which the total of the adjusted cost base of the property exceeds the taxpayer's proceeds of disposition. However, as your attempted acquisition of the rental property was not successful, there is no property to capitalize these costs to in order to claim a capital loss.

By virtue of paragraph 39(1)(c) or subsection 50(1) of the Act, a taxpayer's "business investment loss" may arise from the loss on the disposition or deemed disposition of shares or debts of a small business corporation. However, as the costs you incurred were not from the loss on the disposition or deemed disposition of shares or debts of a small business corporation, they do not represent a business investment loss.

As explained in paragraph 2 of Interpretation Bulletin IT-143R3, an "eligible capital expenditure", which is defined in subsection 14(5), may be broadly described as an outlay or expense made or incurred by a taxpayer:

(a) in respect of a business,

(b) as a result of a transaction occurring after 1971,

(c) on account of capital, and

(d) for the purpose of gaining or producing income from the business

The costs you incurred were not in respect of a business or for the purpose of gaining or producing income from a business and therefore, they are not eligible capital expenditures.

We hope the above will be of assistance to you.

Yours truly,

Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch