Sura – Court of Quebec finds that the conversion of apartment buildings to condo units did not trigger a change of use – and that CAE rather than IT-218R would apply re change of use

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”.

Regarding the purported application by Revenue Quebec of the CRA position in IT-218R (which now 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).

Neal Armstrong. Summary of Sura v. Agence du revenu du Québec, 2025 QCCQ 1127 under s. 45(1).