Sura v. Agence du revenu du Québec, 2025 QCCQ 1127

In 1981, the taxpayers (10 individuals), acquired as co-owners two adjoining rental buildings containing a total of 82 apartments, with their respective undivided interests in such properties ranging from 2.27% to 29.2%.

In 2006, in order to make their interests more marketable, they converted their undivided interests into 82 separate condominium units while continuing to rent them out. Between 2010 and 2013 (the taxation years under appeal), they disposed of 12 of the condo units, which they treated as giving rise to capital gains.

Revenue Quebec applied the position in IT-218R on change of use and treated such gains as consisting of a capital gain, computed on the basis of a notional disposition of the properties for their FMV at the time of their change of use from capital property to inventory (in 2005, when the decision to convert was taken) and, as to the balance (representing post-2005 appreciation), as business income from the disposition of inventory.

In confirming the taxpayers' position that all of their gains were capital gains, Bourgeois, JCQ, indicated that:

• The units continued to be used only as rental properties both before and after the alleged change of use.
• The initial intention of the taxpayers had remained unchanged, namely to realize rental revenue from the time of the acquisition of the real estate and with the anticipation of an appreciation in value over time.
• The decision to sell units was closely related to their advanced ages at that time.
• The Latulippe decision, where the Quebec Court of Appeal found that simply transforming from undivided to divided ownership in order to sell at a better price did not have the effect of converting capital property into inventory, “was quite similar” (par. 84), whereas the Gagliano case (2023 QCCQ 7958) was to be distinguished on various bases, including that the taxpayers there had effected a substantial renovation to the properties at issue and used significant leverage.

Regarding the purported application by Revenue Quebec of the CRA position in IT-218R (which was not relevant given his finding of no change of use), Bourgeois JCQ noted that this approach had been overruled in the CAE case, which found that gain would be realized in the taxation year of change of use pursuant to ITA ss. 13(7) and 45(1).

In 1981, 10 individuals acquired as co-owners two adjoining rental buildings containing a total of 82 apartments. In 2006, in order to make their interests more marketable, they converted their undivided interests into 82 separate condominium units while continuing to rent them out. Between 2010 and 2013 (the taxation years under appeal), they disposed of 12 of the condo units, and reported capital gains.

Revenue Quebec applied the position in IT-218R on change of use and treated such gains as consisting of a capital gain, computed on the basis of a notional disposition of the properties for their FMV the time of their change of use from capital property to inventory (in 2005, when the decision to convert was taken) and, as to the balance (representing post-2005 appreciation), as business income from the disposition of inventory.

In confirming the taxpayers' position that all of their gains were capital gains, Bourgeois, JCQ, indicated inter alia that the Latulippe decision, where the Quebec Court of Appeal found that simply transforming from undivided to divided ownership in order to sell at a better price did not have the effect of converting capital property into inventory, “was quite similar” (par. 84).

Regarding the purported application by Revenue Quebec of the CRA position in IT-218R (which was not relevant given his finding of no change of use), Bourgeois JCQ noted that this approach had been overruled in the CAE case, which found that gain would be realized in the taxation year of change of use pursuant to ITA ss. 13(7) and 45(1).