3 April 2003 External T.I. 2003-0008655 - BARE LAND STRATA PLAN-PARTITION

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Does the conversion of an existing strata plan to a bare land strata plan result in tax consequences?

Position: Question of Fact

Reasons: It is a question of fact whether the conversion will result in a partition of property. Where the conversion results in a partition, subsections 248(20) or (21) may be applicable.

		2003-000865
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
April 3, 2003

Dear XXXXXXXXXX:

Re: Conversion of a Strata Plan to a Bare Land Strata Plan

We are writing in reply to your letter of March 13, 2003, requesting a ruling on whether the conversion of an existing strata plan to a bare land strata plan will result in a tax liability.

You described a situation in which strata owners of an existing strata plan wish to commence renovations and additions to their residences. Under the existing strata plan, no renovations or additions may be undertaken unless 75% of the strata owners approve the designation of a portion of land as limited common property, thereby permitting an increase in the "footprint" of a residence. In order to circumvent this approval requirement, and as the designation may be removed by a 75% vote, the strata council is investigating the possibility of converting the existing strata plan to a bare land strata plan (the "Conversion"). Should the Conversion result in a tax liability, the strata owners would not proceed with the Conversion.

Our Comments

An advance income tax ruling, for which a fee is charged, is a written statement given by the Canada Customs and Revenue Agency (the "CCRA") stating how it will interpret specific provisions of the Income Tax Act (the Act). The interpretation is binding on the CCRA. An advance income tax ruling is only given in respect of proposed transactions and only in the context of an advance ruling request submitted in the manner set out in Information Circular 70-6R5 (copy enclosed). Although we are unable to provide an advance tax ruling, we can provide you with our general comments that may be of assistance.

It should also be noted that the situation described in your letter involves a number of legal issues which must be resolved to establish the tax consequences of the Conversion. For example, a review of all relevant provincial legislation and facts in the above situation would be required to determine whether the Conversion results in a disposition for purposes of the Act. A disposition may occur if, for instance, the above transactions result in a partition of property. The term partition is not defined in the Act. Black's Law Dictionary defines "partition" as the division of real property held jointly or in common by two or more persons into individually owned interests. It is a question of fact whether a particular transaction will be considered a partition of property. From the limited facts provided, it appears that the Conversion may result in a partition, as it appears that by virtue of the Conversion, each strata owner acquires an individually owned interest in (former) common property. Considering the complexity of the legal and tax issues involved with respect to this matter, you may want to consider consulting with a legal and/or tax professional.

Subsections 248(20) and 248(21) of the Act specifically deal with the partition of property. In general terms, subsection 248(21) applies where a co-owner receives, upon the subdivision and the partition of a property, title to a separate piece of property whose fair market value equals the fair market value of the co-owner's previous interest. In such a situation, paragraph 248(21)(b) of the Act deems the co-owner's new interest to be a continuation of the co-owner's undivided interest in the property immediately before the partition. In other words, the co-owner will have neither disposed of nor acquired any property and, as a result, there is no capital gain or loss upon the partition of the property.

Subsection 248(20) of the Act would apply where the fair market value of the separate piece of property received by a co-owner upon partition is less or greater than the fair market value of the co-owner's previous interest and will result in an acquisition and disposition of property.

In closing, we also note that should a disposition occur in the above circumstances, it does not necessarily result in a tax liability. For example, the capital gain on a taxpayer's principal residence may be eliminated or reduced by the principal residence exemption. We have enclosed a copy of Interpretation Bulletin IT-120R5 which provides additional information on the principal residence exemption.

We trust our comments will be of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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