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:
1. What is the income tax treatment when vacant land held for development is sold?
2. What is the income tax treatment when vacant land is donated to a Canadian Registered Charity?
Position:
1. When vacant land held for development is sold, the proceeds are business income.
2. The donor is deemed to have received proceeds of disposition equal to the fair market value of the land. A receipt is issued for the fair market value of the land.
Reasons:
1. The land held for development is held as inventory, which when sold gives rise to business income.
2. When donated, the fair market value of the property is the value of the donation.
XXXXXXXXXX F. S. Gillman, LL.L., C.A.
2000-004634
March 28, 2001
Dear XXXXXXXXXX,
Re: Land held for Development
This is in reply to your letter of September 6, 2000, wherein you requested our opinion as to the tax treatment of vacant land that was purchased with the intent of development but was sold prior to any development activity.
You informed us that your client, a Private Canadian Corporation, has owned a piece of vacant land since 1956. The reason for purchasing the land, that is zoned part commercial and part residential, was to develop and sell it for the construction of residential and commercial buildings. In the past year, part of the residential land has been developed and homes are beginning to be built. You have the following queries.
If the land zoned for commercial purposes, which has not been developed, is:
a. sold, would the gain on sale be capital?
b. donated to a Canadian charity:
i. Would the land be valued at market and produce a capital gain to the donor?
ii What would the income tax implications of this donation have on the donor?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R4 dated December 30, 1996. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Canada Customs and Revenue Agency (CCRA).
Whether a piece of vacant land is considered to be capital property or inventory at a particular time is a question of fact which can only be determined on the basis of all the relevant facts and information at that time. Some factors to consider when making this determination are the taxpayer's intent, the relationship to the other activities of the taxpayer, zoning, etc. Interpretation Bulletin IT-218R discusses some of these factors at paragraphs 3 to 8 inclusive.
Where a piece of vacant land has been purchased for purposes of future development and sale, but is subsequently sold without any development activities, generally the proceeds of sale would be considered business income, since the land was originally purchased with the intent to sell it for a profit. On the other hand, where a taxpayer purchases vacant land to construct a building for its principal place of business but due to an unforeseen event must sell the vacant land, the land would be capital property to the taxpayer and any resulting gain from the sale would be one of capital. Please refer to Interpretation Bulletin IT-218R "Profits, capital gains and losses from the sale of real estate, including farmland and inherited land and conversion of real estate from capital property to inventory and vice versa" for further discussions regarding the sale of real estate and its implications.
With regards to a taxpayer donating vacant land to a Canadian charitable institution, a deduction under subsection 110.1(1) of the Income Tax Act, is permitted in computing the corporation's taxable income, within specified limits, for gifts made to registered charities if supported by official receipts issued in accordance with the Income Tax Regulations. A gift would include a gift in kind. When a gift in kind is the object of a gift inter vivos, the donor is deemed to have received proceeds of disposition equal to the fair market value of the property donated. The subject of "gifts in kind", including the tax treatment of the proceeds of disposition and any resulting gain is explained in IT-297R2.
We trust that our comments will be of assistance.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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