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: Application of subsections 248(20) and (21) of the Income Tax Act to different hypothetical scenarios - whether one property or multiple properties.
Position: Depends on provincial property laws. Also question of fact.
Reasons: Where more than one property is acquired under one deed, it is our view that such properties would be considered to be one property for purposes of the partitioning rules even if the properties were not adjacent. This issue depends upon the property laws governing the particular jurisdiction. Alternatively, paragraph 248(21)(c) of the Act was intended to allow for a parcel of land being assembled or consolidated and then subdivided in contemplation of a partition. It is a question of fact whether this provision would apply in any given situation. This issue also depends upon the property laws governing the particular jurisdiction.
XXXXXXXXXX
2009-033864
André Gallant
(613) 957-8961
September 1, 2010
Dear XXXXXXXXXX :
Re: Partition of property
This is in response to your letter of August 27, 2009, regarding the potential application of subsections 248(20) and (21) of the Income Tax Act (the "Act") to different hypothetical scenarios. We apologize for the delay in responding to your request.
XXXXXXXXXX . These issues are also addressed in previous CRA documents, such as 9230665, 9730823 and 2000-0038595. You now wish to know how we would apply our positions with respect to the scenarios, XXXXXXXXXX .
You described seven scenarios which essentially involve two or more adjacent or non-adjacent properties (land) that may or may not be consolidated under one deed. XXXXXXXXXX .
In the first scenario, Mr. A and Mr. B each own an undivided 1/2 interest in a quarter section of land. The quarter section is subdivided to form two separate properties, following which Mr. A exchanges his undivided 1/2 interest in one of the new properties for Mr. B's undivided 1/2 interest in the other new property. The two new properties have the same fair market value.
In the second scenario, Mr. A and Mr. B each own an undivided 1/2 interest in two separate quarter sections of land which are equal in value, and which share a common border. The two quarter sections are consolidated onto one title to form a new property, which is then subdivided to form two separate properties of equal value. Following the consolidation and the subsequent subdivision, Mr. A exchanges his undivided 1/2 interest in one of the newly subdivided properties for Mr. B's undivided 1/2 interest in the other newly subdivided property.
The third scenario is similar to the second scenario, except there is no consolidation and subsequent subdivision.
The fourth scenario is similar to the first scenario, except the quarter section of land is bisected by a stream running from east to west. The bed of the stream is vested in the Crown pursuant to the relevant provincial legislation.
The fifth and sixth scenarios are similar to the third scenario, except that there is no consolidation and subsequent subdivision because the consolidation is impossible under the relevant provincial legislation.
In the seventh scenario, Mr. A and Mr. B each own an undivided 1/2 interest in two separate quarter sections of land, the respective fair market value of which are equal. The two quarter sections do not share any common borders and are separated by an intervening quarter section of land that is owned by a different land owner. Due to the intervening quarter section of land, it is not possible to consolidate the two separate quarter sections of land onto one title. Mr. A exchanges his undivded 1/2 interest in one of the quarter sections for Mr. B's undivided 1/2 interest in the other quarter section.
As we understand it, your question concerns whether the various scenarios would satisfy the single property and partition requirements referred to in the preamble of subsection 248(21) of the Act.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following general comments, which may be of assistance.
Subsection 248(20) of the Act applies 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. Where the value is less, the co-owner is deemed to have disposed of the part of the interest in the property attributable to the shortfall. An amount received by such a co-owner because of an unequal partition could result in a gain or loss from the disposition. Where the value is greater, the co-owner is deemed to have acquired an interest in the property attributable to such excess. Subsection 248(20) does not apply if the requirements in subsection 248(21) are met. Subsection 248(21) of the Act applies where a co-owner receives, upon 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. Since the term "a property" is used, this means a singular property or one property. However, paragraph 248(21)(c) provides an exception to the single property rule for purposes of subsection 248(21) and modifies the meaning of the term "a property" so that subdivisions of land established in the course of, or in contemplation of, a partition shall be regarded as one property.
Paragraph 248(21)(c) of the Act allows for a parcel of land being assembled or consolidated and then subdivided in contemplation of a partition. It is a question of fact whether paragraph 248(21)(c) would apply in any given situation.
Whether or not the single property requirement referred to in the preamble of subsection 248(21) is met in a particular case is also a question of fact. Where more than one property is acquired under one deed, it is our general view that such properties would be considered to be one property.
Partition occurs where persons who have joint interests in property divide the property such that the persons acquire undivided interests in separate properties. It is a question of fact whether a particular transaction will be considered a partition of property.
As indicated above, whether the single property and partition requirements in the preamble of subsection 248(1) are met is a question of fact, the resolution of which also depends on a review of the property laws governing the particular jurisdiction where the land is located. If you have a specific case in mind, we would be prepared to consider it on an advance income tax rulings basis.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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