2 April 1996 External T.I. 9611025 - EXPENSES - DISPOSITION OF PROPERTY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether expenses incurred in disposing of real property can be deducted.

Position:

Not deductible.

Reasons:

Not deductible, but by virtue of subsection 40(1), any expenses incurred for purposes of making a disposition of capital property are added to the acb in calculating the capital gain.

									5-961102
XXXXXXXXXX							C. Chouinard

April 2, 1996

Dear Sir:

Re: Expenses - Disposition of Property

We are writing in reply to your letter of March 22, 1996, wherein you requested our comments regarding the tax treatment of certain expenses you incurred in connection with the disposition of a property you own in Poland.

As we indicated in a telephone conversation (Chouinard/XXXXXXXXXX), the Income Tax Rulings and Interpretations Directorate provides advance income tax rulings to taxpayers where proposed transactions are involved and gives technical interpretations of the various provisions of the Income Tax Act and the Income Tax Regulations in respect of hypothetical situations. A request for a written opinion on a completed transaction is generally considered by a taxpayer's local Tax Services Office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following general comments.

Our Comments

Generally, where a taxpayer disposes of capital property, their capital gain is equal to the excess of the proceeds of disposition (i.e., the selling price) over the adjusted cost base (i.e., the cost of the property and any outlays or expenses to the extent they were incurred for the purpose of making the disposition). Since most of the expenses you incurred appear to relate to legal fees, we are enclosing a copy of Interpretation Bulletin IT-99R4 which discusses the tax treatment of legal and accounting fees. As indicated in paragraph 13 of IT-99R4, any outlay or expense, including legal fees, incurred for the purpose of disposing of property is added to the adjusted cost base of the property in calculating the amount of the capital gain or loss arising from the disposition.

As regards the cost of the property, you indicated in your letter that you inherited the property in 1943, but that, in 1946, you lost control over the property. In a telephone conversation (Chouinard/XXXXXXXXXX), you indicated that, in 1946, you were compelled to leave Poland and the communist government appointed an administrator to manage your property. In 1989, the communist regime in Poland came to an end and in 1990 you began to make inquiries to recover and dispose of your property. Therefore, for purposes of determining the cost of the property, if, during the period from 1946 to 1990, you did not have the rights associated with the ownership of property (i.e., the right to possession, the right to collect rents, the right to transfer title by sale or by will, the obligation to repair, the obligation to pay property taxes), until control of the property was returned to you under the new government which came into power in 1989, it is our view that the cost of the property for purposes of the Income Tax Act would be its fair market value at the date you reacquired or could have reacquired control over the property. Any appreciation in the value of the property attributable to the period prior to such date would not be taxable under the Act, since such amount would be considered a windfall.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.