10 April 2001 External T.I. 2000-0059165 - PROPERTY TAX ADDED TO ACB OF LAND

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: Whether the cost of property taxes and gravel can be added to the adjusted cost base (ACB) of land that was inherited from a spouse.

Position: Depends on whether land is inventory or a capital property.

Reasons: No provision to allow such costs to be included in ACB of capital property.

XXXXXXXXXX J. Gibbons, CGA
2000-005916
April 10, 2001

Dear XXXXXXXXXX:

We are replying to your letter dated November 16, 2000, in which you enquired whether the cost of property taxes and gravel can be added to the adjusted cost base of land that was inherited from your late husband (the "Land"). We also acknowledge our telephone conversation on January 2, 2001 (Gillman/XXXXXXXXXX) in which you explained that the gravel in question was used on a roadway that was required to be maintained on part of the Land that was previously developed by your late husband.

As indicated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, a request for a written opinion on a completed transaction is generally considered by a taxpayer's local tax services office. Accordingly, you may wish to submit all relevant facts and documentation to the appropriate Tax Services Office for their comments. However, we have provided the following general comments for your benefit.

The income tax treatment of costs incurred with respect to land depends on whether the land was inventory or capital property. In this regard, we refer you to Interpretation Bulletin IT-218R, which describes some of the factors that are used in making this determination. (You can obtain a copy of this publication, as well as other Canada Customs and Revenue Agency (CCRA) publications, from our website at www.ccra-adrc.gc.ca or from a local tax services office.) As stated in paragraph 23 of IT-218R, land inherited by the taxpayer will generally give rise to a capital gain or loss (i.e., will be considered a capital property), as the case may be, to the taxpayer except where, for example, the taxpayer converts such land to a trading property (i.e., inventory). Paragraph 24 of this bulletin states that, where the taxpayer goes beyond mere subdivision of the land into lots and installs improvements such as watermains, sewers or roads, or carries on an extensive advertising campaign to sell the lots, the taxpayer will be considered to have converted the land from a capital property into a trading property.

It is a question of fact whether land is inventory or capital. Accordingly, you may wish to submit all of the facts and documentation to your local tax services office for their comments. However, based on the limited facts provided, it our view that the Land is likely a capital property. Presuming this is the case, it is our view that the cost of gravel and property taxes cannot be added to the adjusted cost base of the Land when determining the capital gain on the sale of it. You should note, however, that only a portion of a capital gain is included in income for income tax purposes as opposed to 100 percent of the gain on the sale of land inventory.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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