ARCHIVED - Investigation of Site

What the "Archived Content" notice means for interpretation bulletins

NO: IT-350R

DATE: June 6, 1977

SUBJECT: INCOME TAX ACT
Investigation of Site

REFERENCE: Paragraph 20(1)(dd) (also paragraph 53(2)(m) and Regulation 1102(1)(a))

This Bulletin replaces and cancels Interpretation Bulletin IT-350 dated November 15, 1976. Current revisions are designated by vertical lines.

1. The deduction authorized by paragraph 20(1)(dd) relates to certain expenditures made by a taxpayer in investigating a building site, which would otherwise not be deductible because they are capital outlays whose deduction is prohibited under paragraph 18(1)(b). To qualify for a deduction under paragraph 20(1)(dd), an expenditure must meet the following three requirements:

(a) the expenditure must be made in the year the deduction is claimed;

(b) the purpose of the expenditure must be the investigation of a site to ascertain its suitability for a planned building or other structure; and

(c) the building or other structure referred to in (b) above must be intended for use in a business carried on by the taxpayer.

2. For purposes of paragraph 20(1)(dd), it is immaterial whether the site is land owned by the taxpayer or land being considered for possible purchase by him. It is also immaterial whether, following the investigation of the site, the proposed building or other structure is proceeded with or abandoned. The taxpayer claiming a deduction under paragraph 20(1)(dd) may be the owner or potential owner of the site or may be a person who, as a possible tenant, is considering the construction of a building or other structure on the site under a lease granted by the owner of the land.

TYPES OF EXPENDITURES THAT QUALIFY

3. The purpose of the investigation of a site may be to determine whether the land is physically suited for the planned building or other structure or whether such a building or structure would be economically viable on that site, or it may be a combination of those two objectives. Certain expenditures that qualify as having such a purpose are noted hereunder:

(a) Costs of surveying, soil testing, and architects' or engineers' reports on substrata, water levels, and the like.

(b) Fees or other expenses incurred in establishing the relevant municipal by-laws and other regulations governing the permitted use of the site, including building restrictions or requirements.

(c) Fees to ascertain the limitations on use of the land created by registered instruments.

(d) Costs of conducting a financial feasibility study in respect of the planned use of the building or other structure, including estimates of revenue potential, probable competition, etc.

4. Where a cost incurred in respect of land is deductible under paragraph 20(1)(dd) and also may be viewed as part of the adjusted cost base of the land, paragraph 53(2)(m) requires that the adjusted cost base of the land must exclude the amount that is deductible under paragraph 20(1)(dd). Where a cost incurred in respect of a building or other structure is deductible under paragraph 20(1)(dd) and also may be viewed as part of the capital cost of the building or other structure, or of a leasehold interest that is classed by Regulation 1102(5) as a building or other structure, the amount deductible under paragraph 20(1)(dd) must be excluded from the capital cost in order that the property will not be disqualified for purposes of capital cost allowance pursuant to Regulation 1102(1)(a).

TYPES OF EXPENDITURES THAT DO NOT QUALIFY

5. The following types of expenditures are not considered to be incurred for the purpose of investigating the suitability of a site for a proposed building or other structure and thus do not qualify for a deduction under paragraph 20(1)(dd):

(a) Expenses incurred to persuade potential tenants to lease space in a proposed building or to induce investors to invest in it.

(b) Fees or other expenses incurred in an attempt to enhance the suitability of a site, e.g. efforts to have zoning or building regulations or restrictions altered.

(c) Fees paid to public relations or advertising firms in an attempt to create a receptive climate for the proposed development of the site.

(d) Amounts expended as part of the process of construction rather than site investigation, e.g. architectural, engineering, or other professional fees paid for the design of a building in order to meet the objectives of the taxpayer or to comply with the requirements of a prospective tenant.

(e) Amounts paid to contractors for drilling on the site in preparation for the excavation.

(f) Expenses incurred in the acquisition of the site, e.g. legal fees paid for verification of title and conveyancing of the land.

6. That a certain expense does not qualify for a deduction under paragraph 20(1)(dd), as indicated in 5 above, does not necessarily mean that it is not deductible in computing income for the taxation year in which it was incurred or paid. Depending on the nature of the taxpayer's business, certain of these expenses may be deductible as ordinary and recurring business expenses. Costs incurred in making representations to a municipal body may be deductible under paragraph 20(1)(cc). Other costs may form part of the cost of the land or of the building constructed on the land or may, in the case of an abandoned project, be an eligible capital expenditure within the meaning of paragraph 14(5)(b).

BUSINESS CARRIED ON BY TAXPAYER

7. The requirement in paragraph 20(1)(dd) that the planned building or other structure must be for use in a business carried on by a taxpayer makes it clear that a taxpayer is not entitled to a deduction under the paragraph if the property, when completed, is not a business asset of the taxpayer. It is not necessary that the taxpayer occupy the building as a place where business is carried on by him. If the taxpayer's business consists of or includes the renting of property, the property would be used in his business when it was rented by him. Whether, in the case of an individual, the renting of a building or other structure constitutes the carrying on of a business is always a question of fact to be determined primarily by the nature and extent of services provided to the tenant or tenants, over and above normal maintenance. In the case of a corporation, the renting of property normally is viewed as a business activity.

8. The date that a contemplated business actually commences (if it ever does) is a critical factor in determining the tax treatment of payments made for the investigation of a site for that contemplated business by a taxpayer. Determination of the commencement date of a business is discussed in some detail in Interpretation Bulletin IT-364 and does not necessarily coincide with commencement of normal business operations. The undertaking of essential preliminary steps (including the investigation of a site) leading to the start of normal business operations may be sufficient to indicate that a business has commenced. Thus, it is possible for a business to commence even if normal operations never ensue. Only payments that are made on or after the date of commencement of business qualify for deduction under paragraph 20(1)(dd). Payments made before that date do not qualify for the deduction under paragraph 20(1)(dd) nor do they qualify as eligible capital expenditures for the purposes of paragraph 14(5)(b).