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 the conversion of an apartment building into condo units for resale would be on account of capital or inventory.
Position: It is a question of fact.
Reasons: Jurisprudence. Dependent on the intention of the taxpayer.
XXXXXXXXXX
John Parker CMA
2011-043041
March 28, 2012
Attention: XXXXXXXXXX
Dear XXXXXXXXXX :
Re: Conversion of an apartment building into condominium units.
We are writing in response to your correspondence dated December 7th 2011 wherein you asked our opinion as to whether the conversion of an apartment building into condominium units, for resale, would be on account of capital or would be inventory disposed of in the course of a business.
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. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.
If a taxpayer holds an apartment building as capital property but then decides to convert it to condominiums and sell them, there is a conversion of the property to an income property when the decision is made to follow that course of action. The action of conversion does not constitute a disposition within the meaning of subsection 248(1) of the Income Tax Act (the "Act"). It is, however, recognized that the ultimate disposition of a property that was so converted may give rise to a gain or loss on capital account, a gain or loss on income account or a gain or loss that is partly capital and partly income. Accordingly, with respect to capital property that has been converted to inventory, taxpayers may calculate capital gains or losses, if any, on the basis that a notional disposition of such property occurred on the date when the taxpayer's intention, in regard to the property, had changed.
The amount of such a notionally determined capital gain or loss in respect of a property will be the difference between its adjusted cost base and its fair market value on the date when the taxpayer's intention changed. These notionally determined capital gains or losses will be considered to give rise to taxable capital gains or allowable capital losses for the taxation year during which the actual disposition of the relevant property occurs and will be required to be so reported in that same year. The amount of any income gain or loss arising on actual disposition of the converted property will be determined in accordance with the Act, on the basis that its initial inventory value is its fair market value on the date of conversion. See Interpretation Bulletin IT-218R, entitled "Profit, capital gains and losses from the sale of real estate, including farmland and inherited land and conversion of real estate from capital property to inventory and visa versa" (A copy of IT-218R can be found on CRA's website: http://www.cra-arc.gc.ca )
The decision in Dorothy May Hughes v. HMQ, 84 DTC 6110, is instructive. This case dealt with a situation similar to the hypothetical situation you outlined in your letter. In the Hughes case, the taxpayer purchased an apartment building. About 6 months after the purchase, the taxpayer got approval for and converted the apartment building to strata title. The taxpayer then sold the units individually. The Court was satisfied that the taxpayer purchased the property as an investment but that she changed her intention when she applied for strata title approval six months after the purchase. The increase in value prior to her application for approval was found to be on capital account while the balance of the taxpayer's profit was on account of income.
Based on a review of the limited facts in your hypothetical situation, it is our view that a conversion to inventory occurred when the taxpayer sought out, or signed an agreement with the purchaser of the apartment building.
We trust the foregoing comments are of assistance.
Yours truly,
Doug Watson
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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