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 vacant land that was purchased for the construction of a manufacturing facility meets definition of former business property
Position: The property is not former business property.
Reasons: The land was not used prior to its disposition to earn income from a business. The taxpayer's intention changed when a new property was selected for its manufacturing facility. A strong argument can be made that the land was converted to inventory when the company started subdividing and servicing the lots with a view to selling them.
March 20, 2001
XXXXXXXXXX HEADQUARTERS
Business Audit Wayne Antle
Verification and Enforcement Division (613) 957-2102
XXXXXXXXXX Tax Services Office
2001-006394
XXXXXXXXXX ("XXXXXXXXXX" or "the Company")
This is in response to your letter of December 28, 2000 concerning whether the capital gain resulting from the disposition of certain building lots may be deferred in accordance with an election filed under subsection 44(1) of the Income Tax Act (the "Act").
Facts
1. XXXXXXXXXX.
2. XXXXXXXXXX.
3. In an effort to consolidate operations, XXXXXXXXXX started looking for a facility that would meet its needs. The company decided that it would build a state-of-the-art facility, and determined that it would need a site of at least XXXXXXXXXX acres.
4. In XXXXXXXXXX , the company made an offer on a XXXXXXXXXX parcel of land located in XXXXXXXXXX that it felt would meet its needs.
5. It planned to subdivide and service the XXXXXXXXXX land, and sell the excess lots.
6. It undertook development, cost, and geotechnical studies, and purchased the XXXXXXXXXX land on XXXXXXXXXX.
7. The company formed a project team to manage the development of the XXXXXXXXXX land and construction of XXXXXXXXXX new head office. This team took preliminary steps to get the project started, such as arranging financing, and applying for city approval.
8. XXXXXXXXXX became available which would meet the company's needs at a lower cost than the construction of a new facility.
9. XXXXXXXXXX made an offer on this property on XXXXXXXXXX, and completed the purchase on XXXXXXXXXX.
10. XXXXXXXXXX received City approval for the subdivision of the XXXXXXXXXX land on XXXXXXXXXX.
11. XXXXXXXXXX continued with the subdivision and servicing of the XXXXXXXXXX land in order to make the land more marketable, and increase its profits on the lot sales.
12. XXXXXXXXXX.
13. During the fiscal year ended XXXXXXXXXX sold XXXXXXXXXX head office lots and realized capital gains of $XXXXXXXXXX and $XXXXXXXXXX respectively.
14. XXXXXXXXXX elected to defer these gains under subsection 44(1) of the Act and reduced the ACB of the XXXXXXXXXX purchased in XXXXXXXXXX accordingly.
An election under subsection 44(1) of the Act can only be made on the voluntary disposition of property if it is "former business property" as defined in subsection 248(1) of the Act. Paragraph 44(1)(b) requires that the capital property must qualify as a former business property "immediately before the disposition." Subsection 248(1) defines former business property to mean capital property that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, and that was real property or an interest in real property, but does not include rental property of the taxpayer. The words "used...primarily" refer to the use made of the property during the taxation year in which the disposition was made. This means that the principal use of the property was to earn qualified business income (but not rent) during that period.
In our view, the head office lots do not meet the definition of former business property, because they were not capital properties used primarily to earn income from a business immediately prior to their disposition. While we accept that the land was purchased with the intention of constructing a manufacturing facility, the company's intention clearly changed in XXXXXXXXXX, when it made an offer on an alternate location. When XXXXXXXXXX finally received approval for the proposed subdivision from the City of XXXXXXXXXX, it decided to proceed with the subdivision and servicing of the lots to facilitate their sale. The land was not used at any time during the XXXXXXXXXX taxation year to earn income from XXXXXXXXXX business.
Also, in our view, it is questionable whether the head office lots are capital property. After the company made an offer on the XXXXXXXXXX no longer intended to construct a manufacturing facility on the XXXXXXXXXX land. A strong argument can be made that the head office lots were converted from capital property to inventory when the company started servicing and subdividing the property with a view to selling the lots. Paragraph 12 of IT-218R states:
Vacant land that is capital property used by its owner for the purpose of gaining or producing income will be considered to have been converted to inventory at the earlier of
(a) the time when the owner commences or causes the commencement of improvements thereto with a view to selling it, and
(b) the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale, provided that the taxpayer proceeds with the development of the subdivision.
If the value of the property has not increased from the date of conversion to its eventual sale, then the capital gain reported would not be affected. However, at the time of the disposition of the head office lots, they would be inventory, and not capital property. Accordingly, they would not meet the definition of former business property.
We trust that our comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613)957-0682. The severed copy will be sent to you for delivery to the client.
John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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