10....where real estate is converted from capital property to inventory...for real estate that is used for the purpose of gaining or producing income from a business or property, its conversion to inventory will not constitute a change in use...and the proceeds from its ultimate sale will be treated in accordance with 15 below....
12. Vacant land that is capital property used by its owner for the purpose of gaining or producing income will be considered to have been converted to inventory at the earlier of
(a) the time when the owner commences or causes the commencement of improvements thereto with a view to selling it, and
(b) the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale, provided that the taxpayer proceeds with the development of the subdivision.
Conversion to strata title
13. The units in a multi-unit residential apartment, or an office, warehouse storage building or any similar structure that is held as capital property by the owner will be considered to have been converted to inventory at the time when application is made to the relevant authority for approval to change the title to any such building to strata title, provided that the owner proceeds with the sale of the units.
Computation where capital property converted to inventory
15. Where real estate that is used for the purpose of gaining or producing income from a business or property is converted from capital property to inventory, the action of conversion does not constitute a disposition within the meaning of paragraphs 13(21)(c) and 54(c). It is, however, recognized that the ultimate sale of real estate that was so converted may give rise to a gain or loss on capital account, a gain or loss on income account or a gain or loss that is partly capital and partly income. Accordingly, where such real estate has been converted to inventory, capital gains or losses, if any, will be calculated on the basis that a notional disposition of such property occurred on the date of conversion. The amount of such a notionally determined capital gain or loss in respect of the real estate will be the difference between its adjusted cost base, as defined in paragraph 54(a), (subject to the ITAR rules for property held on December 31, 1971) and its fair market value on the date of conversion. These notional capital gains or losses will be considered to give rise to taxable capital gains or allowable capital losses for the taxation year during which the actual sale of the real estate occurs and will be required to be so reported in that same year. The amount of any income gain or loss arising on actual sale of the converted real estate will be determined in accordance with generally accepted accounting principles on the basis that its initial inventory value is its fair market value on the date of conversion. …
Computation where depreciable property converted to inventory
18. The Act provides rules governing the treatment of proceeds arising on the disposition of depreciable capital property but it does not envisage the possibility that such property may be converted to inventory before its disposition. Accordingly, where, in situations such as those described in 13 above, depreciable real estate is converted to inventory, it is the Department's position that
(a) the initial cost of the real estate for inventory valuation purposes will be its fair market value as at the time of conversion, and
(b) the ultimate sale of the real estate may give rise to results similar to those described in 15 above.
Subdivision of farm land
24. Parcels of farming or inherited land referred to in 23 above may be difficult to sell en bloc and the land may be sold by subdividing it and selling the lots individually. It is the Department's view that the filing of a subdivision plan and selling lots thereunder does not in itself affect the status of the gain notwithstanding that such subdivision may enhance the value of such land.
