27 October 2005 External T.I. 2005-0152891E5 - Land Development Costs

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: Whether costs to develop land can be deducted as a business expense.

Position: No

Reasons: These costs are considered to constitute a component of the cost of the inventory of land for the purposes of subsection 10(1).

2005-015289
XXXXXXXXXX Darlene Green
(613) 957-2082
October 27, 2005

Dear XXXXXXXXXX:

Re: Development Charges

This is in response to your facsimile correspondence of September 29, 2005 wherein you asked if the costs to develop a property you are considering purchasing are treated as business expenses that can be deducted from your "regular stream" of income. You describe such costs as management, consulting, and surveyor fees, along with those associated with the installation of roads, sewers, water and hydro services etc.

Further, in a second facsimile of the same date you ask us to review a business proposal and comment on the tax treatment of various transactions concerning the proposed set-up of the business in Europe.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5 dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (the "CRA") with respect to your particular situation.

Subsection 9(1) of the Income Tax Act (the "Act") provides that a taxpayer's income from a business or property is the profit from that business or property subject to the rules in Part I of the Act. For example, paragraph 18(1)(a) of the Act denies a deduction for all outlays and expenses except to the extent that the outlays or expenses are made for the purpose of gaining or producing income from the business or property.

It is the general view of the CRA that before an amount can be considered incurred for the purpose of gaining or producing income from a business, it is first necessary to establish whether a business has in fact commenced. In most cases, 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. After a business has commenced, all expenditures that are recognized for purposes of the Act and that are made in respect of the business are to be classified in the usual way as being expenses incurred for the purpose of earning income or as outlays on account of capital. Such a classification is always a question of fact. Information regarding whether a business has commenced can be found in Information Bulletin IT-364, Commencement of Business Operations.

Generally, where a taxpayer has purchased land for development, and has commenced a business, the land is considered to be held as inventory. As outlined in Interpretation Bulletin IT-153R3, Land developers - Subdivision and development costs and carrying charges on land, costs directly attributable to the development of land, for example, legal, consulting, mortgage, and survey fees, along with costs in respect of installations within the subdivision including the costs of roads, sewers, watermains, street lighting, sidewalks, landscaping, and recreational facilities are considered to constitute a component of the cost of the inventory of land for the purposes of subsection 10(1) of the Act.

With respect to your questions concerning a proposed set-up of a business in Europe, we are unable to provide definitive comments on the types of questions raised in your letter without reviewing all of the facts and documentation in respect of the particular arrangement. Such a review would only be undertaken in the context of an advance income tax ruling submitted in the manner outlined in Information Circular IC 70-6R5. This Circular and the Interpretation Bulletins noted above are available on the CRA website at http://www.cra.gc.ca, or may be obtained by contacting a local tax services office.

We trust that our comments will be of assistance to you.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch