27 May 2004 Internal T.I. 2004-0069771I7 - Personal-use Property-land vs building

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.

Principal Issues: Whether land and a building (or other structure) thereon should considered two (2) separate properties where they are used for personal purposes.

Position: No.

Reasons: Under property law, any property attached to land becomes part of the land. Nothing in the Act provides that land and buildings (or other structures) thereon that are used for personal purposes should be considered two (2) separate properties. Subsection 1102(2) of the Regulations does not apply to a property that is not "depreciable property".

		May 27, 2004

	XXXXXXXXXX 	HEADQUARTERS
	Verification and Enforcement Division	P. Massicotte, CA, M.Fisc.
	Technical Advisor	(613) 590-1116
	XXXXXXXXXX  TSO
		2004-006977

Taxable Capital Gain on Personal-use Property

This is in response to your letter of March 31, 2004, in which you seek our comments in connection with a reassessment you propose to issue regarding the calculation of a taxable capital gain on the disposition of "personal-use property", as defined in section 54 of the Income Tax Act (the "Act"). Specifically, you ask whether land and a building thereon (such as in the case of a cottage) should be considered two (2) separate properties for the purposes of calculating any capital gain when sold.

Facts

The essential facts as we understand them are the following:

1. Mrs. F acquired vacant land in XXXXXXXXXX at a cost of approximately $XXXXXXXXXX.

2. Mrs. F began plans for the building of a personal residence on the land. During the years XXXXXXXXXX additional costs of approximately $XXXXXXXXXX were incurred for the preparation of land (blasting, clearing and leveling) and construction of reinforced foundations for the house. The total cost of the land with its improvements (the "Property") was approximately $XXXXXXXXXX.

3. The construction was abandoned in XXXXXXXXXX, shortly after the concrete foundations were poured for the house. Other than adding fill inside the foundations for public safety, the Property remained in that state until it was sold in the year XXXXXXXXXX for proceeds of disposition of $XXXXXXXXXX.

4. As the Property was a "personal-use property", Mrs. F considered the loss of approximately $XXXXXXXXXX ($XXXXXXXXXX - $XXXXXXXXXX ) resulting from the disposition as a non-deductible capital loss for the taxation year XXXXXXXXXX.

The taxpayer's comments

In the opinion of Mrs. F's representatives, only one property has been disposed of, namely land. They submit that the footings and foundations were attached to the land and that together they formed only one "personal-use property". They suggest that as the term "land" is not defined in the Act, reference should be made to common dictionaries, which define "land" as including structures affixed thereto. Reference is also made to the Land Transfer Tax Act of Ontario which they suggest defines "land" to include all buildings and structures attached thereto. As a result, it is Mrs. F's position that the costs associated with the improvements to the land, as well as those associated with the construction of the footings and foundations attached to the land, and forming a fixed and integral part of it, should not be allocated between the various components but should all be added to the cost of "land" disposed of in the year XXXXXXXXXX , thereby resulting in a loss for purposes of subparagraph 40(2)(g)(iii) of the Act.

Your comments

You disagree with Mrs. F's position and argue that Mrs. F has disposed of two (2) separate properties, the bare land and the building or other structure built thereon. You refer to section 1102 of the Income Tax Regulations (the "Regulations") as support for the proposition that, for the purposes of the Act, land should be treated separately from buildings or other structures located on the land.

As a result, you submit that a reasonable allocation of the proceeds of disposition of the property should be made between the land and the building or other structure. In addition, you submit that the total costs should also be allocated on a reasonable basis between the bare land and the building or other structure, and that a capital gain (loss) should be calculated separately on each part of the Property.

You had a valuation of the Property prepared by your office's Valuation Services, which indicates that the fair market value of the bare land, based on comparables sites, is in the range of $XXXXXXXXXX to $XXXXXXXXXX. You also have been informed that the value of the existing foundations was considered immaterial to the purchaser. Given the above information, you have considered that the entire proceeds of disposition of $XXXXXXXXXX was attributable to the bare land and that no portion was attributable to the building or other structure thereon. In addition, upon review of the costs incurred by Mrs. F, you determined that an amount of approximately $XXXXXXXXXX represents the cost of the bare land, while the cost of the building or other structure was determined to be approximately $XXXXXXXXXX. Consequently, you have concluded that a capital gain of approximately $XXXXXXXXXX ($XXXXXXXXXX - $XXXXXXXXXX ) was realized by Mrs. F upon the disposition of the bare land, while a capital loss of approximately $XXXXXXXXXX resulted from the disposition of the building or other structure. Given that in your view the building or other structure was a separate "personal-use property", as defined in section 54 of the Act, it is your opinion that the capital loss on its disposition should be deemed to be nil pursuant to subparagraph 40(2)(g)(iii) of the Act.

Our Comments

The Act does not define the term "land", except for specific purposes, such as in subsection 18(3) of the Act. In that case, "land" is defined for the purposes of subsection 18(2) of the Act, in part, to exclude any property that is a building or other structure affixed to land (see also paragraph 7 of Interpretation Bulletin IT-153R3). Absent this provision, a building or other structure affixed to land would therefore generally be considered part of the land. This is consistent with the settled meaning of the term "land" in property law, which provides that any property attached to the land becomes part of it.

In Megarry's Manual of the Law of Real Property (6th edition) on pages 19-21, the author indicates that the general rule in law is "quicquid plantatur solo, solo cedit", which means: "whatever is attached to the soil becomes part of it". Thus the author observes that if a building is erected on land and objects are attached to the building, the word "land" would prima facie include the soil, the building and the objects affixed to it, and that the term "fixtures" is applied to anything which has become so attached to land as to form in law part of the land. The determination of whether or not an object has become a fixture requires consideration of the degree of annexation and the purpose of annexation. The author goes on to discuss these elements as follows:

"1. Degree of annexation. In general, for an article to be considered a fixture, some substantial connection with the land or a building on it must be shown. An article which merely rests on the ground by its own weight, such as a cistern or a 'Dutch barn' which rests upon timber laid on the ground, is prima facie not a fixture. (See Wiltsheare v. Cottrell (1853) 1 E.&B. 674). On the other hand, a chattel attached to the land or a building on it will prima facie be a fixture even if it would not be very difficult to remove it. (See Buckland v. Butterfield (1820) 2 Brod. & B. 54 and Jordan v. May (1947) K.B. 427).

2. Purpose of annexation. The degree of annexation is useful as showing upon whom the onus of proof lies (See Holland v. Hodgson (1872) L.R. 7 C.P. 328 at p. 335); thus if the article is securely fixed, the burden of proof lies on the party contending that it is not a fixture. The purpose of the annexation, however, is the main factor: the modern tendency is to regard the degree of annexation as being chiefly of importance as evidence of the purpose of annexation. (See Leigh v. Taylor (1902) A.C. 157 at p. 162). The more securely an object is affixed and the more damage that would be caused by its removal, the more likely it is that the object was intended to form a permanent part of the land. (See Spyer v. Phillipson (1931) 2 Ch. 183 at pp. 209; 210.)

In determining the purpose of annexation, the question to be asked is: 'Was the intention to effect a permanent improvement of the land or building as such; or was it merely to effect a temporary improvement or to enjoy the chattel?' (See Hellawell v. Eastwood (1851) 6 Exch. 295 at p. 312.). In the first case, the chattel is a fixture, in the second it is not."

The legal principles above have been recognised in various publications of the CRA. For instance, the last sentence of paragraph 20 in IT-120R6, Principal Residence, states: "It should be noted that the reference to 'land' in paragraph 40(2)(c) includes buildings thereon." Similarly, the last sentence of parargaph 8 of IT-154R, Special Reserves, states: "'Land' includes any buildings or other structures thereon...".

As indicated by the Supreme Court of Canada in the case of Will-Kare Paving & Contracting Limited v. The Queen, 2000 DTC 6467 (at page 6473), absent express direction in the Act that a meaning other than that ascribed by settled law be applied, it would be inappropriate to do so.

You made reference in your comments to subsection 1102(2) of the Regulations, which provides that any property described in Schedule II of the Regulations will not include the land upon which the property described therein was constructed or is situated. Although this is express direction to separate land from the buildings or other structures thereon, we note that this provision applies only in respect of "depreciable property", as defined in subsections 248(1) and 13(21) of the Act, that is, where capital cost allowance can be deducted in respect of a building or other structure constructed or situated on a piece of land. In those situations, the land would not considered to be "depreciable property" for the purposes of the Act but rather would generally be "capital property" (other than depreciable property) pursuant to subsection 248(1) and section 54 of the Act.

Where a building or other structure constructed or situated on a piece of land does not constitute "depreciable property", it is our opinion that generally no other provision of the Act provides for it to be treated as a property separate from the land on which it is situated. As a result, where personal-use property consisting of land and a building or other structure thereon is disposed of, it is our opinion that together they should be considered the disposition of only one property, namely "land", unless the facts indicate that, under property law, the objects on the land constitute chattels and not fixtures (see in particular our documents #F2002-0122607 and #E51655, and more generally, our documents #E2003-0015107, #E9629865 and #EC2404. Reference may also be made to the decision in the case of British Columbia Forest Products Limited v. MNR, 69 DTC 5127 (Ex. Ct; affirmed by the SCC, 71 DTC 5178)).

In the situation described above, it would therefore be our opinion that, based on the facts provided, Mrs. F has disposed of a single "personal-use property", namely land, and that she realised a loss of approximately $XXXXXXXXXX as a result thereof, which is deemed to be nil pursuant to subparagraph 40(2)(g)(iii) of the Act.

We trust you will find the above to be of assistance. If you have any questions regarding the above, please do not hesitate to contact us.

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