Canada Tax: Capitalization Of Development Cost Under The Income Tax Act

During the development phase or period of construction, there are many costs that are incurred. The majority of these expenditures are added to the capital cost of property or to the cost of inventory.

Soft costs do not have to be capitalized once the construction is complete or on the day that the building is substantially (at least 90%) used for its intended purpose. An occupancy certificate or completion certificate issued by the municipal building department is sufficient evidence that construction is complete.

Interest incurred during the construction phase should be allocated to capital cost or inventory of a specific project. If a loan or line of credit is used and not related to specific project or property, then interest must still be capitalized. The calculation may be complex, but interest would be allocated to each project. In order to be able to deduct interest as a tax deduction, the corporation must be receiving rental income from property or business income.

Property taxes are capitalized or added to the cost of inventory for real estate until period of construction is complete.

Landscaping costs are exempt from capitalization requirements under the Income Tax Act and are eligible as a deduction in the year they were incurred.

Life insurance may be deductible for a corporation if the policy is assigned as collateral for the loan. However, the eligibility of deductions has to be lower of cost of premiums or the “net cost of pure insurance”.

General and administrative expenses such as office expenses or accounting fees incurred do not have to be capitalized if they do not relate to a specific project. Other soft costs can be claimed as a deduction in the same tax year as incurred if there is income earned from the building or property.

Have a question? Contact Grant Gilmour.

Your comments are always welcome!

Grant has been in the CA business since 1988, starting his own practice in 1994. His tax expertise encompasses tax planning, international tax issues, and Scientific Research and Development tax credits. He is a graduate of the CICA In-Depth Tax Course and in 2012, Grant received the CA Community Service Award and the Scout Leader Medal.

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