CAE – Federal Court of Appeal, rejecting IT–218R, finds that conversion from rental property to inventory gives rise to a deemed disposition under s. 45(1)

In IT-218R, CRA states that the conversion of property from income-producing capital property to inventory is not governed by the change-of-use rules in ss. 45(1)(a) and 13(7)(a), because the property is used for an income-producing purposes both before and after.

Noël JA disagreed.  Where manufactured equipment was used in a leasing activity, so that it was depreciable property, its subsequent offering for sale (or, it would appear, the granting of a contingent option to acquire it) would cause a conversion at that point into inventory, so that there would be a deemed disposition under ss. 45(1)(a) and 13(7)(a).

This finding will be problematic for CRA.  For example, in reporting real estate sales, taxpayers on further reflection might conclude that there had been a basis step-up on a change of use in a statute-barred year.

Neal Armstrong.  Summaries of CAE Inc. v. The Queen, 2013 FCA 92 under ss. 45(1)(a) and s. 9 – Capital Gain v. Profit – Machinery and Equipment.